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Edited Transcript of ASSA.ST earnings conference call or presentation 18-Oct-19 7:30am GMT

Q3 2019 Assa Abloy AB Earnings Call

Stockholm Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Assa Abloy AB earnings conference call or presentation Friday, October 18, 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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* Andre Kukhnin

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

* 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

* 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 ASSA ABLOY's third interim report. My name is Björn Tibell, I'm Head of Investor Relations, and joining me here is our CEO, Nico Delvaux; and our CFO, Erik Pieder. We will stick to our normal structure today, so we'll start with a short presentation of the report before we open up for your questions and then we should find -- round up in about 1 hours’ time.

So with that, I would like to hand over to you, Nico.

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

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Thank you, Björn, and also good morning from my side. Happy to report to you good quarter 3 results for ASSA ABLOY.

For the quarter, we have good organic sales development, 4% and up, a strong growth in Americas and Global Technologies, a good growth in EMEA and Entrance Systems. And an organic growth of 4% complemented with good growth through acquisitions, also up 4%. Also this quarter, the highlight of the quarter are the electromechanical products, up 16% including currency, up 11% excluding currency. A strong EBIT growth of 14% and a stable margin, and EBIT margin of 16.2% despite the fact that we booked SEK 55 million acquisition costs related to the acquisition of agta record. And then I would say a very strong operating cash flow, up 47%. Of course, thanks to a good EBIT performance, but also thanks to a good improvement in our working capital.

So sales of SEK 24 billion, up 13%, 4% organic, 4% acquisitions and 5% currency. And EBITDA margin, 20 basis points up at 16.7%. EBIT margin at 16.2% and then an EBIT of SEK 3.9 billion, 14% up.

If we look a little bit at sales per region, I would say there's perhaps less points that stick out this quarter. A very good North America, 5% organic growth. A good Europe -- West Europe, plus 2%, I would say, despite the economic situation in Europe. A very strong South America, plus 8%, and that's mainly linked to a couple of project orders in Global Technologies. Plus 6% in Africa for the same reason, a couple of projects for Global Technologies. And then plus 2% in Asia and plus 3% in Oceania.

A couple of market highlights. It's good to see that all our efforts we put in, in our specification and in our specification teams continue to pay off in all 3 geographical divisions, also in EMEA, you see here a natural example for EMEA. And then you might have seen that announcement of Apple that they are also now focusing on University verticals. And it's in that collaboration that we got a nice order at the Clemson University for a combined offering of HID technology together with electronic locks of the Americas. We're also one of the founding partners of the FiRa Consortium together with Samsung and a couple of other big multinationals. The idea there is really to promote and provide brand technology in our access control field. And then we launched several new products in our Smart Residential space.

Another quarter with positive organic growth, now 26 consecutive quarters with positive organic growth. It's a very nice track record. And our operating margin, slightly below our bandwidth where we want to be of 16% to 17%. That slide -- slowly getting back into that bandwidth. And then the EBITDA margin right in the middle over that 16% to 17%. So if you can keep operating margins stable on a high level and you can increase your top line, you can accelerate your operating profit, 14% up in the quarter as compared to the same quarter last year, 67% up in the last 5 years.

From the acquisitions have been a very active quarter, with 4 acquisitions completed in the quarter and 10 year-to-date. And there's 10 acquisitions that present and acquire annualized sales of SEK 2.4 billion. We are still working on closing agta record and LUX-IDent. agta record is now expected to close early beginning of next year; and LUX-IDent, we will close this quarter.

Some more information on a couple of the acquisitions we did in the quarter. LifeSafety Power, an American supplier of smart access control power solutions, with a sales of SEK 290 million, 65 employees complementing nicely our access control portfolio and that acquisition of accretive to EPS as of the start. Placard, Australian secure parts manufacturer, with sales of SEK 420 million, 170 employees, announcing our position in the smart car market in Oceania. And also this one will be accretive to EPS from the start. And then LUX-IDent, a Czech RFID component provider, with sales of SEK 180 million, 145 employees, enhancing nicely our RFID component offering and optimizing our ASSA ABLOY operations footprint in the sense that we were very dependent on 1 factory in Asia for this RFID components. Now with this LUX-IDent acquisition, we can leverage operations in a much better way. And this acquisition will be neutral to EPS.

If we then go into the different divisions starting with EMEA, an organic sales growth of 3%. This is a good result if we take into account market conditions in Europe. We have very strong growth in the Middle East, strong growth in East Europe, but negative growth in Finland, U.K. and South Europe. We will remember from Q2 that the -- we're all a bit concerned with Scandinavia that we were not sure if the downturn in Scandinavia was a temporary thing or a more permanent thing. We have seen our -- again, good growth in Scandinavia of course with 1 working day more as compared to the same quarter last year. I would say I was geographically almost right because we have then seen that negative growth in Finland rather than in Scandinavia.

In Finland, definitely, we see market conditions going down. Same is true for U.K. as mentioned earlier with still all the discussions around the Brexit. But on the other hand, we still see good market conditions in other places in EMEA, such as East Europe, Benelux and definitely also the Middle East.

An operating margin of 16.1%, 20 basis points up. We have a very good volume leverage of 40 basis points driven by operational efficiencies. And then the negative currency effect, 40 basis points of course mainly because of the SEK. And then acquisitions, 20 basis points up, that is mainly the shift from our ABLOY business from EMEA to Global Solutions, a kind of internal acquisition, you could say. So overall, a good performance for EMEA.

And the same is definitely true for Americas. The organic sales was up 6%, 6% on top of a 10% organic growth in the same quarter last year, so with a difficult comparison. I would say all business areas in U.S. were performing strongly, with the exception of Perimeter Security, where we saw negative growth and a good growth in Canada and I would say an improving Latin America.

Operating margin of 20.5%, 40 basis points up, with a very strong volume leverage, 50 basis points, of course driven by the good organic growth by the fact that we were able to now fully compensate these price increases and operational efficiency measures for the raw material in cases that we experienced last year. FX flat and M&A 10 basis points dilutive.

Asia Pacific. A negative organic sales growth of minus 1% with strong growth in South Asia but negative growth in China, India, South Korea and Japan. In South Korea, we really see market conditions going down in an important way, whereas on the commercial as it is on the financial side, market is down high double-digit and South Korea is obviously for an important market. We also see still negative development in China when it comes to the market. But I would say in China, we are also now much more selective when we take orders, which orders to take, obviously, we want to take orders where we can make profit and where it will be paid in a reasonable time. So that's another explanation why we see that negative growth in China. And that strategy is also visible in our operating margin, where we are 30 basis points up and where we get a leverage of 10 basis points despite that negative organic growth and that's of course also because of the more selective approach in China.

Currency, 10 basis points up; and also acquisitions, 10 basis points up. We are progressing with our China business plan. I would say we are in line with expectations. But as explained earlier, this is a longer-term project.

If we then go to Global Technologies, another strong performance with an organic sales growth of 6% on top of an organic growth of 12% same quarter last year. We have very strong growth in Global Solutions for all of our verticals and a little bit mixed picture in HID, a very strong growth in Secure Issuance, but only stable growth in Physical Access and then some negative growth in some other business areas.

An operating margin of 20.3% with a negative volume leverage of 20 basis points mainly due to continued investments in R&D as well on HID side, but mainly also on the Global Solutions side and then also the investments in new verticals in Global Solutions.

However, by currency, 30 basis points, and then dilution from acquisitions, 120 basis points. That is 3 reasons. That's one, as I explained earlier, with the shift from our ABLOY business from EMEA to Global Technologies. There is the acquisition of Crossmatch, big acquisition of EUR 100 million where we are performing, I would say, even better than planned. The margin is also improving faster than planned, but of course with an operating margin of more than 20%, that acquisition remains, for the time being, dilutive. And then we had some extra acquisition costs in the acquisition budget in HID. But overall, I think also very good performance for Global Technologies.

And then Entrance Systems, an organic sales growth of 3%. And here in Entrance Systems, the fact that we had 1 working day more in the quarter counts perhaps the most because that is the division that is mostly affected by the working days and also because of the service business. A strong growth in Pedestrian Doors and High Performance Doors; a negative growth in Residential Doors in Europe. And I'm very happy to see our strong accelerated growth in service. I will see that, that strategy really pays off and it's also translated in the operating margin, 13.6%. We have a very strong volume leverage of 60 basis points due to that strong growth in service because we know we make better margins in service than in equipment. Also thanks to operational efficiencies and also thanks partly of course to the mix because we know that we make better margins on Pedestrian Doors and High Performance Doors than we do on Residential Doors.

30 basis points dilution of currency and then 80 basis points dilution of acquisitions but that is mainly, I would say, exclusively the SEK 55 million acquisition cost we booked for agta record there. We have now booked all costs for that acquisition of that project to date.

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

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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, a very good morning.

Our sales grew with 13%, of which the organic part was 4%. As mentioned here before by Nico, it's mainly driven by Americas and Global Technologies. And also as mentioned, we also had 1 working day more in Q3. The acquired growth is also 4%. If we -- sort of what we expect for Q4 is around 3%. The FX was 5% in the quarter. And when we look at it today, that's roughly what we expect also for Q4.

What is very encouraging to see is that we can actually see that the changes that we have 13% in sales. We have a 14% improved EBITDA. We have a 13% better income for taxes. Net income, so you can actually see that it flows through once again on the top line, it actually flows through all the way to the bottom line. The EBITDA margin is 10 basis points better, and the EBIT margin is at the same level as what it was last year.

I mean the highlight once again, I think it's now for the third quarter in a row. As I said, the highlight is the operating cash flow. It was this quarter up with 4% to 7%. Main reason for that is of course that we have a good earnings but also that we have good efficiency in our net working capital management, specifically then if you look in inventory reduced, but also we see good progress also in accounts receivables. Return on capital employed remain on -- at the same level of last year at 17%.

If we then look at more from a bridge perspective for the group, you can see that we had good organic leverage with sort of it improved the result the 30 basis points. If we look on price versus volume, the price here is rounded down to 1%. So it's a little bit higher than that. Where we see the most price coming through is actually in the Americas. Currency is slightly negative with 10 basis points, and that comes from the negative transaction effect that we have within certain divisions. And the -- yes, and a minute to look in total there it would be acquisitions sort of had a negative impact of 10 basis points.

If we then look to a cost breakdown, you can see that now in the quarters before, we had -- I mean the first, we had negative impact of the period due to the higher raw material prices which we couldn't compensate in prices. And in Q2, we were flat. And now we can actually see that in the Q3, we actually overcompensated for the raw material prices. But also I would also say that we have had good work done by our sourcing team in order then to improve our costs on direct material.

Conversion cost is also helping us with 10 basis points. We have had a good traction on the manufacturing footprint program, giving us about SEK 200 million in the quarter but also we have other operational efficiencies which also helps do this.

If we look on SG&A, it's flat. We have had good volume leverage, but then we have also invested quite a lot in R&D, mainly within the Global Technologies division.

All in all, if we exclude acquisitions, we are 20 basis points better than the same quarter last year.

As I said once again, this is the highlight. Operating cash flow improved by 47%. And as you can see, we actually have a better cash flow than earnings before tax, it's worth 104%. Of course, we're very happy with it. But we also know that this is not sustainable, that over time of course it will go down below 100%. But still, as I've mentioned before, that we have done a lot of work on our operational efficiency, part of which flows into the result, but I would say even more flows into our net working capital, specifically then on the inventory.

Looking on the gearing. You can see that debt versus equity is up by 1% versus last year, so it ended at 64%. In actual value, it's up with SEK 5.5 billion. But out of this 3.7% comes out of the IFRS effect of 3.7%. And then you have currency which is another 1.5%. So the net debt versus EBITDA is at the same level at 2.1%.

So I mean our financial situation is stable, so we can continue our acquisition strategy even after we have finalized the acquisition of agta record.

Last but not least, the earnings per share is year-to-date upward, 20% versus last year.

And with that, I hand 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, Erik. So as a summary, a good quarter 3 result with good organic sales development up 4%, complemented with good growth recognitions, also 4%. Also this quarter, higher growth in electromechanical products, up 16%. A strong EBIT growth of 14% with stable EBIT margins despite the SEK 55 million acquisition costs booked for agta record. Very strong operational cash flow.

And then new news for you, we would like to invite you to our Capital Markets Day next year, May 13, and that the Market Day will take place in London.

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

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

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Thank you, Nico. (Operator Instructions)

Operator, this means that we are ready to start 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) The first question is from Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [2]

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The first one really, Nico, was a little bit more around the language you have in the kind of the comments around the quarter. Are you talking about an underlying growth which has slowed in the quarter? And when you look at the number, I guess it's maybe not so clear for us to see that. And generally speaking, you're talking about market condition becoming more challenging. So I was hoping whether you could give us some color around the trends you are really seeing and how does that compare with the number you reported. That's my first question.

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

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Okay. If we talk about the underlying growth, we of course take the fact into account that we had 1 working day more in the quarter, which, in general, of course, currently, like I mentioned, it comes in the first business [instance] as sort of that Entrance Systems. If we then look a little bit at market conditions, I guess my message is very similar to what I said a quarter ago. We see clearly a general slowdown in the market. We all read newspapers, we all look at the news. So I think there's consensus that there is a general slowdown.

But then if we are a little bit more specific for our business and our market, I mean if I go a bit in the different regions, starting perhaps with the Americas, we clearly see a slowdown on residential new build. As I mentioned earlier, that is not so important for the Americas because we are not so exposed to residential new build. For Americas, it's more a challenge for Entrance Systems because we have an important garage door business in North America, and that is obviously late to new build. But we also start to see KPIs, leading indicators on the commercial side going in the wrong directions. I must say we don't see that yet in our market activity. We still have good, solid market conditions on the commercial side. In North America, we still have good spec business, which is, for us, a little bit a leading indicator. But of course, those KPIs are at least something to look out for.

And then I go to Mexico. I've said also in previous quarter that we are more concerned to Mexico than before, also because of the political situation that has changed. We are perhaps a bit more optimistic in South America in general, countries like Chile, Colombia, but also a little bit on Brazil, a bit more positive than, I would say, 6 months ago.

If I then go to Europe, I think a very mixed picture, where as I mentioned before, Finland, you see definitely market conditions down. We see the same in U.K. Several of our customers also went bankrupt in recent weeks and recent months. We also see France still on a low but perhaps stable level. That being said, I'm the CEO, so I will go for a market that are still going strong, so markets in East Europe, Middle East. Even perhaps a surprise for us, we still see good market momentum in Germany and also in the Benelux, so a little bit of mixed picture in EMEA.

And then in APAC, in Australia, definitely, residential business, very much down. So far, we have been able to compensate that with a very good job done on the commercial side. We will see how that now processes in the coming quarters. And then definitely Korea, where as well on the residential side as with the commercial side, market conditions are down. And like I mentioned earlier, in China, yes, market conditions are still down, but it's more us, ourselves, that have to execute on our new strategy irrespective of the market conditions.

So a little bit the global picture, if you don't look at Entrance Systems, of course we are very manufacturing-related, and I think it's fair to say that the manufacturing in general is down. We are also partly exposed to residential. I've commented on residential before but we are still a bit more positive on retail because we are the only one, that we see that retail, what we see there is that perhaps there's less retail, but the retail is of a higher level. And you see more upgrades which is obviously good for our Pedestrian Door business.

And we should also not forget that in Q4, we'll have 1 working day less and that also for Americas, in particular, the comparison will be very difficult in the sense that we had a big order of Walmart last year that will be 0 this Q4. And then of course that -- also the fact that Google Nest had a big quarter of Q4 last year and that has leveled much more out now on, I would say, normal level.

That was a bit a long answer, Lucie, but...

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [4]

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Just maybe a quick follow-up on the last point around the smart locks. So I understand Elmech, generally speaking, is 11% on an organic basis up in the quarter. Can you maybe just kind of separate or give us some indication on how this model of business has been growing in the quarter? I'm also asking because of course South Korea sounds to be quite on the low side as well.

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

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Yes. So if you take total electromechanical business, so the 31% of our total business, it's true that we were up 16% including currency, 11% excluding currency. And if you don't take out the virtual dollars for residential application, there we saw still the highest growth but on a still a good double-digit growth, but on a lower level than in Q2 and a lower level than Q1. So we see -- we really see that growth rate going down. And then it's partly because of Korea. It's also because, like I mentioned earlier, Google Nest is now more than 12 months in our figures. And of course, you get a big uptick from -- when you start from 0 and then the margin -- the percentage is of course very high. And then once you start to compare Q4, Q5, Q6 and so on, you compare it with a high quarter in the same quarter a year before and therefore, the comparisons become more difficult. I think for Google Nest you should expect that those levels will flatten out over time.

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Operator [6]

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And the next question is from Lars Brorson from Barclays.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [7]

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Nico, my quick follow-up, just on the former question, is on Global Tech. I think I heard you mention a couple of larger contracts swinging the meter for you there. What was the boost specific to growth in GT from that and anything major in the pipeline for Q4 that might similarly swing the meter? And then I'll come back to my primary question after that.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [8]

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Yes. I would say that's the nature of the business of some of our business areas. And in HID, I would say there is nothing dramatic. It's not that we got a very big project every quarter, we get some project of a couple of millions or so. And it was not more outstanding this quarter than previous quarters. It was more on the geographical map, of course, if you get a couple of million more in Africa that moves the needle and shows a nice percentage growth. But overall, I would say that is not a reason why HID or Global Technologies was performing as we presented, normally.

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

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Nico, that's helpful. And then just to -- I wanted to just talk briefly about your EBIT margin range. I think it's fair to say your language has become, shall we say, progressively more cautious on that as you've moved through the year. I think I heard you earlier in the year on the Q1 call talk about getting margin firmly within the range, 16% to 17% for the remainder of the year. I think I heard you on this call earlier talk about being content if you can keep margins flat and still drive top line. I appreciate you've had some greater headwinds maybe from M&A, notably of course from agta this quarter maybe than you anticipated. But what has changed really through the year as far as your assessment of your ability to get in firmly within the margin range is concerned?

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

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Well, perhaps I didn't express myself correctly because I think I said from the beginning of the year that we had the ambition to bring our EBIT margin back within the 16% to 17% bandwidth on the low end toward the end of the year. And I would say we still have that ambition, obviously. The closer we come to the end of the year, the more challenging it will become. I would say there's 2 things that have changed since my previous statements, is of course the fact that we're now booked that SEK 55 million for the agta record acquisition, and that is our cost project to date. We will book some more costs for agta record in Q4 because we will continue to book the cost as they come. So that's 1 negative factor, I would say.

And the second one is of course the extra import tariffs toward the U.S. I've said that it's not a problem for us to compensate by pricing cases, but of course, you always have a small delay between the costs coming and the prices being increased. And that sets us back a little bit.

I think that's the only 2 negative comments I would say. But I reconfirm that we still have that ambition to bring it up to that 16% towards the end of the year. The ambition becomes more challenging, clearly.

Next question, please?

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Operator [11]

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Next question is from Andre Kukhnin from Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [12]

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Just a quick follow-up first, on agta record costs for Q4 that you've just mentioned. How will it compare to Q3 from what you know right now?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [13]

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So we booked, like I mentioned, SEK 55 million. We believe that the total cost -- of course, it depends a bit on how fast the administration will go. It will be more or less double, so SEK 100 million, SEK 110 million. So we still have another SEK 50 million, SEK 55 million to go. Most probably most of that cost will come in Q1 next year. So the cost should be smaller now in Q4.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [14]

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Very helpful. Can we just talk about restructuring a bit more? Obviously, strong quarter in Q3. You're saying that this benefit will fade in Q4 and then on the SEK 300 million for the full year 2020. Firstly, maybe could you help us quantify the Q4? And then thinking about 2020, is that kind of plan set in stone now that SEK 300 million is what you have in the program and that's what you target to deliver and will happen or are there kind of contingencies there that maybe are market-related or are there further programs? I just wanted to get the color whether that's executing fast in the existing program and drawing that out or executing fast and maybe finding further opportunities with maybe potential surprise to the upside in 2020.

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [15]

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I could take that question. I think -- I mean first of all, we're very happy that we actually had better traction in the program than what, let's say, what we had in the original plan. And that's sort of what you see that we have. I mean the highest saving ever from an NFC program now that we had in Q3. What we have done, because I think it's also normal business practice, is also that we have also added new programs within the program in order then to, let's say, also to make sure that we also get benefits coming into next year. This will not add anything to the restructuring provision that we will book in Q4, so it remains on the SEK 300 million level that we will book in Q4.

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

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I was -- sorry, I know I'm speaking for the third time. I'm sorry. But I was just more wondering about the potential for further savings and for kind of 2020 against that SEK 300 million of savings that you mentioned in the statement, whether there is any room to do more there.

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

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Of course, Andre, you can do the saving only once. We are happy that we got the savings earlier. We have said from the beginning that the payback on this project is around 3 years, a little bit less than 3 years. I think if we do the agta calculation, we will see that it's even a little bit better. But again, you can do the savings only once. That being said, of course, after MFP in February, we will continue with the new MFP 8. I'm confident that, that project will -- project principle will continue as we continue to buy companies. And as we buy companies also with operations on a constant basis, we see then opportunities to further rationalize our operational footprint.

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Operator [18]

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Next question is from Gael de-Bray from Deutsche Bank.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [19]

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Two questions actually. The first one is about the exit rate in September. When you say that the underlying growth slowed in the quarter, so I suspect that the growth rate was a bit slower in September than what it was at the beginning of the quarter. So could you be a bit more specific around that perhaps and perhaps highlight to whether that's merely a question of more limited price ranges or if that's really volume-driven? That's question number one.

And the second question is actually a follow-up on the savings earlier question. Because when you guide for a level of savings equivalent to about SEK 300 million next year, so that's an average of SEK 75 million. So compared to what you achieved in Q3, that's a 50 bps shortfall per quarter. And if indeed growth further slows down next year, you add as well the dilution of agta, how do you intent to make up for that shortfall and remain within the targeted margin range of 16% to 17%?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [20]

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I'll perhaps start with the first question, perhaps you can take the second, Erik. If you look past volume, so we had a 4%. And as Erik explained, we show 1 and 3. That's the way we round off the figures. We should look at price around 1.5% and their volume remaining. We have always said from the beginning that our 2% price that we experienced in the first half of the year would level out again going into the second half of the year to normal level that we have seen historically around that 1% and that's exactly what is happening now. So you should expect now in Q4 and going forward that price effect to level out around that 1%. We were able to increase with 2% because of the high material inflation, of course, last year over the last 18 months. As material indexes have now stabilized on a high level but a more normal level, also pricing comes back in a more normal level.

Yes. And then, okay, we cannot change the market conditions. We can only do -- or only try to do our best in the given market conditions, and I'm glad we can also to outperform the market. And that's what I think we have done in Q3. That's also what we will continue to try to do also in Q4 in going -- going forward.

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [21]

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I think on the margin, remember that MFP is one part of what we're doing. We're also doing other things. I mean, okay, we talked a bit about price. We're also, of course, come with new products out to the market. We're also doing quite a lot of work when it comes to sourcing activities. The MFP as such, yes, we have had a very good traction so far. So for next year, the savings [traction] will go down. But that's also now where we have added new projects into the program in order then to keep, let's say, the savings out of MFP on a higher level. So you shouldn't only focus on MFP because we also do other things when it comes to operational efficiency, when it comes to sourcing, when it comes to new product out to the market, and that will help us then to come back into the 16%, 17% bandwidth.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [22]

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Including the dilution of agta?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [23]

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We have already said before that the agta will have a dilutive effect on the margin.

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Operator [24]

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Next question is from Sébastien Gruter from Redburn.

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

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Two questions, if I may. The first one is just about the outlook for Q4. I know a lot of things can happen, but given your comment on working days, you have the smart locks and pricing leveling out, do you think you can grow organically in Q4, bearing in mind the comps? And I have a follow-up.

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

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Yes. Of course, we don't give forecast, as you know, I think I explained the market momentum. But let me say that, okay, I showed this graph where we have 26 quarters of positive organic growth. I would be very disappointed if we could not show you next quarter -- 27 quarters with positive organic growth. Like I mentioned earlier, there is headwinds in different market, but we still see good opportunities in other markets. And again, the -- we will try and continue to try to outperform the market by doing a good job on new product development and channel management and so.

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

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Okay. And I was surprised by the strength of the Security Door business in the quarter with of course having accelerated despite we've seen some sales waning. How do you expand this good performance?

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

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I don't have a specific answer. I think -- are you specifically...

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [29]

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The Security Door and hardware was at 20% in the quarter.

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

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At the half where you mean, not the doors?

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [31]

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The Security Doors and hardware.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [32]

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In which division?

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [33]

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In the old division. You break down the sales by product lines. And looking at Security Doors and hardware, it seems that the course has accelerated even on an organic basis quite strongly.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [34]

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When you look at of course the total result and of course we did a couple of acquisitions in that field, we did a acquisition of Spence Doors and we did another acquisition in Australia and New Zealand. And that is most probably one of the explanations for why you see...

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [35]

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They were already there in Q2. So I'm sorry, I'm talking about the acceleration between Q3 and Q2.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [36]

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Yes, of course but -- it cannot look like that in Q2 and Q3 because you will see everything accelerating in Q3 versus Q2 because it is of course also linked to the seasonal layoff [layer] of our business month and of course also to the number of working days that you have in the quarters in total. A more fair comparison is to compare to the same quarter a year ago and there of course that expands to us and the other acquisition because we are not in.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [37]

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And if I may, just a very last question on the tariff increase. I mean you had a 15% duty tax on the locks coming into effect in first half September, and I guess this affects your smart lock business. Are you confident you can pass it through to your channel -- your main channels, Google Nest and [amanzantine] and so on?

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

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Well, of course it affects, I would say, everything that we buy in China and falls in that category and that we sell in U.S. we sold only Smart Residential locks. Also HID to a certain extent and Global Solutions, but also Americas in general are affected by this. And like I mentioned earlier, in general, we can compensate also tariffs by more price increases. There is always a little bit of lag. But if you take that lag out not in consideration, most of it you can compensate up to -- these levels of tariffs, of course.

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Operator [39]

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Next question is from Guillermo Peigneux from UBS.

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

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Guillermo Peigneux from UBS. Just a couple of questions as well. One is -- the first question is on EMEA electromechanical and electronic locks. I wonder what is happening to growth there. I guess it's very lackluster. I understand that the market is growing less but is, if I'm not mistaken, declining to some extent on a year-on-year basis. If so the case, when would you expect some of the trends that we see in all the regions, especially Americas, to start to flow through EMEA, if at all? That's the first question. I'll stay back for the second one.

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [41]

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Perhaps I'll start, Guillermo. I know we make life complicated for you, but in this one, you also need to take into consideration the move of ABLOY from EMEA to Global Technologies. And I think that's sort of -- that's the main reason why you see that it's flat if you look on the electromechanical in EMEA.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [42]

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All right. And what is the underlying growth then if we start basically look that into 2020?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [43]

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I think that what you have -- I think we were still very positive when it comes to the digital locks and especially then if you look on the -- in EMEA, we will also -- beginning of next year also launch new products within the segment, which we think will sort of make sure that we have a good sales improvement also for next year.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [44]

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And when you talk about new products, will you talk about collaborations with Google Nest or Alexa or are we talking about new product basically from your side?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [45]

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I'm talking specifically here about new products.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [46]

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Okay. Then can I ask about the acquisitions? Obviously, I think if you screw that record [skew that directive], that is already SEK 2.3 billion of announced -- acquired growth for next year. I've been thinking about the mix and some of them will be dilutive, some of them will be less dilutive. But is it the case that which we're seeing about some of these acquisitions, especially the ones that fall into the HID division, as broadly less dilutive or even accretive to margins at some point?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [47]

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I didn't make the calculation specifically for HID, but I think in general, you should expect a similar pattern as we experience now. So it will be slightly dilutive also over next year.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [48]

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Okay. So if we are -- if I told -- if I want to -- shall we do some calculations, I guess. If you -- agta record is finally consolidated and you are on top SEK 2.3 billion of other acquisitions, that equates to -- and this is obviously based on 2018 numbers, which is not 2019 numbers, but roughly speaking about 7% to 8% of top line already next year?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [49]

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What we have so far is around 5% to top line, right?

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

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The question of Guillermo in your comparison is of course when agta record, when that acquisition will be finalized. And that's sort of -- that's the unsecured part if you look in your calculation there.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [51]

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All right. And agta record, I think if you look at the release, it's another 5%.

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [52]

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No, no.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [53]

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If you take agta record included under the assumption that we will close some of our -- beginning next year and all the acquisitions we have announced so far that are closed and still have to be closed, all that will get us represent around 5% growth through acquisitions for next year. And when it comes to bottom line, what we say is that if we take everything except agta record, you should count it similar dilution as we have had this year and that 20-basis point type of a level. And then agta record, we have said that depending on the PPI calculation, part of PPI calculation when we closed, they will be around EUR 375 million top line and the bottom line slowly -- slightly above 10% of turnaround.

Perhaps also, well, to help you even further, on the acquisitions that were closed to date, we have the run rate for next year of 1.5%, for the ones that were closed to date. And that could help you I think in your calculation.

I think we need to move over to the next question.

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Operator [54]

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Our next question is from [Christina] from Goldman Sachs.

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Unidentified Analyst, [55]

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I have one question. Can you give any details on how the takeout on any special smart locks in the coming quarters and whether that helps figure '19 and for how much? And also as OSG drop was self-inflicted due to plant closure and whether that continues going forward?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [56]

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I'll start with smart locks. I assume that you are referring to smart locks for residential applications?

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Unidentified Analyst, [57]

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Yes.

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

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So to put that again in the right perspective, that's around EUR 250 million of our total business because -- in our electromechanical business, the total is around 31% of the total business. So in the electromechanical part, it's still a rather small part in the overall picture. But there -- I mean you should expect growth rates definitely to go down because we -- as I mentioned earlier, quarter after quarter, we compare with a more heavy quarter a year ago. And again, the first 4 quarters, if you talk specifically through this, for Google Nest, you compare of course with 0 a year ago and that's a fairly high percentage of growth. Now every quarter, you compare with a strong quarter of Google Nest a year ago, and therefore comparisons are more difficult. And that's an outspoken thing for Google Nest, but it's very similar for our other businesses in digital door locks, there comparisons become more and more difficult. We continue to see an acceleration of the adaptation of consumers moving from mechanical to digital. And therefore, we will continue to grow that business, but clearly at a lower pace or a lower growth rate than we experienced historically. And in that aspect perhaps Q4 is the most difficult one because that is the most difficult plan comparison because of the reasons I mentioned earlier.

And then the second question is...

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

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Can you repeat the second question, please?

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Unidentified Analyst, [60]

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Yes. It's about -- is your organic sales growth, which was good drop, which was self-inflicted due to time closures and also whether that continues going forward?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [61]

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So specifically for APAC, the negative growth of minus 1%. Two main reasons is Korea, where Korea is an important market for us and, like I mentioned earlier, the market in Korea is definitely high double digits down as well on the commercial side as on the residential side. And as being a strong player in that market is of course very difficult to do significantly better than the market.

And the second reason definitely has to do with China, where market conditions are also down, but where we are also much more selective in our approach to which orders and, therefore, which sales we take, where we have been much more selective in taking orders and, therefore, realizing sales in a profitable way and walking away from nonprofitable orders and sales. And that's why you see, I would say, a negative effect on the top line but a positive effect on the bottom line.

And we also show the consolidation of our operations in China, where we closed factories over time has a positive effect. But of course, the first moment when you close a factory, it first has a negative effect because you create some uncertainty, you create some changes. And then over time, you will see only the savings. And as we started this versus a year ago or so, we are still very much in that transition phase.

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Unidentified Analyst, [62]

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One last point, can you also highlight competitive dynamics in U.S. and some pricing outlook, if possible?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [63]

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Yes. On the pricing, like Erik mentioned, we have the strongest price effect in the Americas because we have a significant metal door business in the Americas. And as you remember, 18 months ago, metal prices end up in a very significant way, almost 60% in 18 months. Those metal prices have now leveled out on a lower, stable level, and, therefore, also price increases are coming down. U.S. or the Americas is definitely a market where you can pass through inflation, all kinds of inflation, tariffs through price increases because it's a mature market with mature players. And when it comes to competition, I would say there is not so much difference in the dynamics. It's the similar colleagues, competitors, in the market today that were there a year ago or even longer ago. And they play a similar game in the market. So no real difference in dynamics, I would say.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [64]

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I think we have time for one more question, operator.

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Operator [65]

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There are currently no questions registered. (Operator Instructions)

And no further questions registered, so I hand the call back to the speakers. Please go ahead.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [66]

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Thank you very much. Well, I would like then to round up this conference, and thank you very much for your participation and interest. And we look forward to seeing and speaking with you in the coming weeks. Thank you.