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Edited Transcript of DOKA.S earnings conference call or presentation 12-Sep-19 11:00am GMT

Full Year 2019 Dormakaba Holding AG Earnings Presentation

Zurich Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of dormakaba Holding AG earnings conference call or presentation Thursday, September 12, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernd Brinker

dormakaba Holding AG - CFO

* Riet Cadonau

dormakaba Holding AG - Chairman & CEO

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Conference Call Participants

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* Bernd Pomrehn

Bank Vontobel AG, Research Division - Analyst

* Fabian Haecki

UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Tobias Fahrenholz

MainFirst Bank AG, Research Division - Director

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Presentation

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [1]

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So the financial year 2018-'19 was satisfactory for dormakaba. The achieved business figures are all above the comparable results from the previous year. In particular, profitability increased further, which leads to a higher dividend for the third year in a row.

Good afternoon, ladies and gentlemen, welcome to today's presentation on our annual results. Together with our CFO, Bernd Brinker, I will give you insight into our results for the '18-'19 financial year. We will present according to the following agenda. Afterwards, we will be available for your questions. Our financial year in brief. Consolidated net sales was at CHF 2.8 billion. Organic sales growth was at 1.3%. Currency translation had a negative impact on sales growth of 1.1%. Divestments negatively affected sales growth by 1%. As a result of these effects, we see an overall decrease of 0.8% on net sales. EBITDA improved by 3.9%, which leads to a margin of 15.9%. Notably, all segments made a positive contribution to this improvement in profitability.

In the period under review, we again spent 4% of our sales on R&D, which is above industry average. In addition, as announced last year, we significantly invested in information technology to advance our digital transformation as well as the adjustment of our manufacturing footprint, which will lead to an improved cost base in future. Therefore, we achieved our improvement in profitability despite these considerable investments.

Moreover, our net profit went up by 5.8%. Based on the improved net profit, the Board of Directors proposed an increased dividend of CHF 16 per share. This means we will increase our dividend for the third time in a row.

Before I'm going to talk about the segment performance, I would like to make a few comments on our achievements since the merger. Over the last 4 years, we made real progress. Customer interactions confirm the industrial logic of our merger. We executed the post-merger integration process effectively and have been successful in portfolio management, which contributes positively to our profitability. Our results reflect this. We further increased EBITDA to 15.9% since financial year '14-'15. We are going to propose a higher dividend for the third year in a row, as I already said. We are expecting the final synergies to materialize in the current business year. And in short, with the merger and all other measures taken, we are well positioned for future profitable growth.

Now I would like to give you more insight into the performance of our 5 segments. Let's start with the segment Access Solutions Americas, North and South America. The segment reported total sales of CHF 816.7 million. Organic sales declined 1.1 -- 1.8% compared to the previous year. Sales were negatively impacted by a weak business environment in Latin America and a base effect from the Lodging Systems hotel locks. Lodging Systems project business as a major hotel project was finalized in '17-'18. In addition, at our manual door business Mesker, delivery performance issues had a negative impact in the second half year. Reason was an unsatisfactory ERP rollout.

On the upside, segment AS Americas had a strong growth for Safe Locks and Interior Glass Systems as well as double-digit growth for the Electronic Access & Data and Entrance Systems businesses. Despite the decrease in sales, the segment improved both EBITDA and EBITDA margin. The EBITDA margin improved by notable 90 basis points to now 20.6%. Going forward, this segment will continue to execute initiatives to further improve profitability, including a further optimized production footprint. Business will be further strengthened by the acquisition of Alvarado Manufacturing, on which I will give you a few details later in this presentation.

Access Solutions Asia Pacific continued its profitable growth in '18-'19. The segment achieved organic sales growth of 3.7% and improved EBITDA margin by 80 basis points to 14.9%. The latter results mainly from efficiency improvements and portfolio management. There was continued good growth in India and in China. The segment also saw strong demand for most product clusters with particularly good growth in Mechanical Key Systems, Cylinders, Safe Locks, Entrance Systems and Services. But just like other industries, we saw effects from the ongoing trade conflict between China and United States. The OEM business of Wah Yuet, which produces for the U.S. market was negatively affected in the second half year. Going forward, the segment will continue to focus on profitable growth and will leverage the combined new product portfolio.

Now to Access Solutions DACH, Germany, Austria and Switzerland. The segment achieved organic sales growth of 2.8% and also improved its EBITDA margin to 17.8%. We saw good growth, both in Germany and Switzerland. However, growth was most pronounced in Austria. The product clusters, Door Hardware, mainly door closers, and Services achieved a notable good growth. Entrance Systems contributed as well, for example, with contracts for the equipment of several cruise ships. The segment has achieved its targeted post-merger synergies for the reporting period and expects final cost synergies to materialize in the current business year. AS DACH has also initiated a program to further improve its profitability, part of this means addressing the unsatisfactory profitability contribution of some of our German plants. Measures will include improvement of the whole supply chain as well as the further modernization and automatization of production.

Access Solutions Europe, Middle East and Africa achieved organic sales growth of 1.9% and slightly improved EBITDA margin of 7.3%. Remark, in our business model, most of the margin accrues in the factories, of which AS EMEA only has a few. The segment saw a double-digit growth in Central and Eastern Europe and positive contributions from Benelux and the U.K. Sales in Middle East and Africa were flat. And in Scandinavia, they were below previous year due to a weak performance in Norway. Growth in Southern Europe was below previous year. There was a negative impact in the second half year due to a base effect from project business in Spain as major airport projects were finalized in the second half of financial year '17-'18.

Product clusters: Entrance Systems, Lodging Systems and Electronic Access & Data drove growth. Segment has addressed structural issues in Scandinavia and will implement measures to improve business performance there. Going forward, the segment expects us to see further potential in EMEA through IT investments and efficiency improvements.

Last but not least, the segment Key & Wall Solutions. This segment posted organic sales growth of 2.2% and improved EBITDA margin by 110 basis points to 15.7%. The business unit Key System experienced strong growth in Asia, but lower growth in other regions. The weaker key cutting machine business in Europe as well as a weaker key replacement business in U.S. had an impact on sales. Our 2018 acquisition Klaus in Peru made a positive contribution to growth and increased its profitability in line with our expectations for this acquisition.

At the business unit Movable Walls, very good profitable growth, was particularly driven by North America, where Modernfold and the 2017 acquired Skyfold made strong contributions. There were also a positive contribution from the progress of the measures to increase the automatization of the production site in Ocholt, Germany. Here, the aim is to further improve the cost base and efficiency of the European business.

So much for a short overview on our financial, now I would like to add a few words on our investments. Investments in profitable growth is one cornerstone of our future success. In the financial year '18-'19, we spent more than CHF 100 million on R&D. This represents 4% of our sales, which is above industry level. In addition, we invested another 5% -- 4% of sales in information technology, which is also above industry level. These investments are made to advance the digital transformation of our company and lead also to new products that fit customer needs in a more and more digital world. At the same time, we see profitable growth by active portfolio management. And let me give you some examples.

As you are well aware of, innovation leadership is an inherent part of our strategy. Our long-term goal is to further strengthen dormakaba with respect to innovation and digitalization through targeted investments in R&D and information technology. So there we will continue to invest in innovation as well as to allocate substantial additional funds to digital transformation in the coming years. We are convinced that these investments are vital for a sustainable business development to the benefit of our shareholders, customers and employees. With that in mind, the dormakaba digital incubator was founded in '17-'18. With dormakaba digital, we complement our core business of product clusters, such as Door Hardware, Entrance Systems, Lodging Systems or Electronic Access & Data with digital services or as we call it, connected services. So digital services as a complement to our core business, which are our global product clusters. While dormakaba digital makes good progress in its projects, it will take some time to develop and establish new solutions and services in the market. Take, for example, our Mobile Access Solutions, from time to investment in 2011 to market launch to reporting considerable sales in 2015, it took us 4 years.

Our electronic and digital offering includes product solutions and services for all needs and businesses of all sizes. An example is electronic access control, which is available in 3 different technical setups. First, on component, this application is designed for small enterprises or private homes. The data is stored on the door fitting. Therefore, they work without connection to a network, but you can open the door with a batch, a key fob or with your mobile. Second, on premise. Here, the components are connected in a network, be it cable or wires. The data are stored centrally on a server in the building and communicate with the components. This is a typical approach for commercial building like this one. And third, on demand, the latest platform. In this concept, the components of our locking system communicate via Internet. All data such as access rights are managed in the cloud and transferred to the individual components. An important argument for the cloud is that customers can outsource access control with no need of own specialists. We see attractive market potential there, especially the medium-sized companies. Of course, it depends on customer needs to decide which of these approaches makes most sense. Thanks to our comprehensive offering, we have the ability to respond to all of these customer needs.

Another aspect of our strategy is, as I said, portfolio management. Since 2016-'17, we have successfully executed a remarkable number of transactions, both acquisitions and divestments. The executed acquisitions, such as, for example, Best, Skyfold, both in 2017, and Klaus closed in 2018 confirmed the potential to contribute to profitable growth. Our divestments are in line with our strategy. While it did make sense for the former Dorma to acquire a stake in ISEO, it did not fit for the new dormakaba as former Kaba brought the required offering into the merger. So we sold this minority stake in the financial year '18-'19. In addition, we also divested part of our U.S. Door Hardware Services businesses as it did not match our profitability expectations. Our latest acquisition is Alvarado Manufacturing, which we closed end of July 2019. Going forward, we intend to continue being an active player in the consolidation of our industry.

Our last acquisition is Alvarado Manufacturing based in California, and we have strengthened the Entrance Systems business in the segment Access Solutions Americas. This acquisition matches, again, very well our communicated acquisition criteria. We added an attractive product range in an attractive regional market. And Alvarado is also an attractive with regard to profitability. We expect the acquisition to be accretive to EPS, earnings per share, and EBITDA margin from day 1. Let me close my part of this presentation with some information on the progress we made in sustainability. Sustainability is a central element of our corporate strategy and an important part of our day-to-day work. Since the merger, we have developed and started implementing a sustainability strategy that focusing -- focuses on the 4 areas shown on this slide.

Last year, we made good progress in our sustainability initiatives. An important milestone, for example, was the development of our statement of commitment on human rights. Further highlights include an increase to 37% in the share of renewable energy sources for electricity and the launch of over 2,000 team action resulting from our employee engagement program, dormakaba dialogue. We also have set ourselves the goals of further reducing our CO2 emissions by 5% by the end of the financial year 2021. For more details, I invite you to read this year's sustainability report online.

And with that, I hand over to our CFO, Bernd Brinker, for more insight in our financial performance. Bernd, please.

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Bernd Brinker, dormakaba Holding AG - CFO [2]

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Thank you, Riet. Ladies and gentlemen, a warm welcome from me too. I would like to start with an overview on our financial results. And later on, I will follow up with the outlook for the financial year '19-'20. We achieved organic sales growth of 1.3% in the '18-'19 financial year. Due to divestments and currency translation effects caused by the stronger Swiss franc, total sales were 0.8% lower than in the previous year. EBITDA rose by disproportionately high 3.9% to reach CHF 448 million. This gives us an improved EBITDA margin of 15.9%, which is 70 basis points higher than in the previous year. The further rise in net profit by 5.8% is driven by 3 factors: First, the higher operating profit; second, by the improved financial result; and thirdly, by the improved income tax rate. Based on our higher net profit after minorities and in accordance with our dividend policy, we are proposing a dividend increase from CHF 15 per share to CHF 16 per share. And now to the details. Despite an organic sales growth of 1.3%, total sales in financial year '18-'19 were CHF 22.7 million lower than in the previous year. This decline was driven by divestments and the strong Swiss franc. CHF 30 million of decline in sales is attributable to the net M&A effect in the year under review, as divestments were bigger than acquisitions in terms of sales and EBITDA impact. Among other things, we sold an unprofitable part of our U.S. Door Hardware Service business, and we dissolved our Indian joint venture, Dorset Kaba. In addition, we divested the Chinese GMT, which we had acquired in the course of the acquisition of Best.

The strength of the Swiss franc delivered a negative currency translation effect of 1% on sales. Why is this? Because of major currencies like the Australian dollar, Canadian dollar, Chinese renminbi, Indian Rupee and Norwegian krone lost value against the Swiss franc, which meant that the sales achieved in these countries when converted into the Swiss franc made lower contribution to overall group sales than last year. Organic growth was lower than we had expected at 1.3%. In addition to reasons that we already reported for the first half of financial year '18-'19, such as the negative base effect in the Lodging business in North America, this is due in particular to lower growth momentum in the second half of the reporting year. So what were the main reasons for the low organic sales growth in the second half? In the AS Americas segment, we experienced unexpected delivery issues for our manual door business, Mesker, following an unsatisfactory migration to a new ERP platform. In the AS APAC segment, the trade dispute between the U.S. and China impacted our OEM business in our Chinese business Wah Yuet with American customers.

In addition, we also experienced the consequences of a very weak economic environment in the region Southeast Asia, countries such as Thailand, Philippines and Indonesia, but also Singapore, which goes down GDP growth-wise to basically 0. And in the AS EMEA segment, sales in Norway, Spain and France did not develop in line with our expectations. In the Key & Wall Solution segment, the business unit Movable Walls by contrast performed very well in addition to strong growth at our established U.S. business Modernfold, the same was reported by Skyfold, which we acquired at the start of financial year '17-'18. After the AS DACH segment had already achieved stable sales growth in the first half, we were even able to slightly accelerate sales growth in the second half of '18-'19. And in India; in China, adjusted for Wah Yuet, obviously; in Eastern and Central Europe as well as in Austria, those countries stood out at country and regional level, all delivering above-average growth rates.

Let's move on with EBITDA development. Despite the decline in sales, we were able to increase both EBITDA and EBITDA margin. EBITDA went up by 3.9% or CHF 17 million, while the EBITDA margin rose by 70 basis points to 15.9%. This is a particularly positive development given that we simultaneously made a substantial increase in our investments in R&D, digitization and IT as announced at the start of financial year '18-'19. The amount of our investment in these areas relative to sales have been and continue to be well above of our main competitors. The positive EBITDA trajectory was driven by our focus on profitable growth in the segments as well as by the progress made on merger-related cost synergies. These effects contributed more than CHF 21 million overall to EBITDA growth. It is worth noting that all segments contributed to this positive trend in EBITDA and EBITDA margin.

The strongest effects came from AS APAC and Key & Wall solutions. As announced already at the beginning of last year, there were no further merger-related integration cost during the reporting year. EBITDA was also negatively impacted by the divestment overhang and the effect of the strong Swiss franc, as described earlier, both negative effects together amounted to almost CHF 5 million for '18-'19, but as explained, this was more than compensated.

Let's take a look at the income statement. The first thing to note is the slightly positive overall effect on the gross margin of our more favorable product mix, cost synergies and pricing efforts. The lower spending on SG&A reflects our ability to consistently manage costs and to realize cost synergies. Despite the lower sales figure, spending on SG&A remains at 25.8% of sales. We have frequently highlighted our continuing high level of spending on R&D. We once again invested more than CHF 100 million in this area in the '18-'19 financial year, equivalent to 4% of sales overall if capitalized R&D projects in the magnitude of CHF 5.4 million are included. The net financial result has improved because it includes the book gain on the sale of our majority stake in ISEO as a onetime positive effect.

Thanks to a positive effect from the tax reform in the U.S., which applied for the full year for the first time, we were able to reduce our income tax rate slightly from 24.4% to 24.1%. When we first started the merger, this figure on a normalized level was around 28%, today 24.1%, which I would consider to be also a level going forward.

Overall, net profit rose by CHF 13.8 million to CHF 252.5 million. This 5.8% increase reflects our focus on profitable growth.

The improved cash flow profile for the period under review reflects the growth in operating cash flow. At the same time, our free cash flow was much higher than in the previous year for the following reasons: First, we sold our minority stake in ISEO during the year under review. And second, we carried out some larger acquisitions in the previous year, so Skyfold and Kilargo but only made a few small acquisitions in the reporting year.

After having invested a substantial 4.1% of sales in PP&E and intangibles in the prior year, we again invested 4% of sales in the year under review. Alongside a large number of small measures, the standout investment during the year under review was the expansion of our site in Indianapolis, where we are in the process to establish an American Center of Excellence for Door Hardware and consolidate parts of our U.S. production.

Over the medium term, we want to bring our investments ratio back to around 2.5% of sales, which is the typical level for our profile -- for our business profile as well as in our industry.

Net debt at the -- at 30th of June 2019, our net debt was reduced by around CHF 50 million compared with the end of the previous financial year to now CHF 651.4 million. Dormakaba thus has a solid financial profile, as can also be seen from the ratio of net debt-to-EBITDA for the period under review, which has improved to now 1.5x. We believe we have further financial room for maneuver up to a ratio of 2.5x, allowing us to take an active part in the consolidation of our industry.

We could even push the ratio higher on a temporary basis. We want our shareholders to participate in our '18-'19 earnings growth. According to our dividend policy, the dividend payout ratio should be at least 50% of net profit after minority interests. The Board of Directors are therefore asking the general meeting at October 22, 2019 to approve the CHF 1 increase in the dividend to CHF 16 per share. This represents a payout ratio of 50.3%. The proposed increase fits perfectly with the successful trend of recent years. It is the third consecutive yearly dividend increase.

Now the guidance. We assume that the macroeconomic and geopolitical environment will continue to remain volatile. Various factors such as trade disputes, a potential hard Brexit and intensification of various political crisis could significantly affect the macroeconomic environment and lead to a downturn at the global level or in major regions. Assuming that there is no further escalation in these trade disputes and assuming the world economy doesn't suffer any significant deterioration on any other front, we believe the market environment in North America will offer good growth, while Latin America will remain difficult. We predict mainly moderate growth for Europe and a continuation of the challenging situation in the Middle East as well as in Africa.

We expect stable growth for Asia Pacific as a whole despite some weakness in Australia and still in Southeast Asia. Based on these assumptions, we plan to continue investing just as strongly in innovation during financial year '19-'20. We also plan to channel significant resources into our digital transformation with the aim of further reinforcing our competitive position over coming years with an increasingly digitized environment.

We will continue to concentrate on profitable growth with a focus on increasing profitability still further. Assuming that the economic environment remains largely unchanged, we expect for the financial year '19-'20, an organic growth as well as an EBITDA margin both to be above previous year's level. In other words, organic growth should be more than 1.3% and the EBITDA margin should exceed 15.9%.

To summarize, dormakaba focused on profitable growth during the financial year '18-'19. As a result, we achieved organic growth accompanied by a disproportionately large increase in the EBITDA margin. Together with an improved financial result and lower income tax rate, this led to another rise in net profit. This allows us to raise dividend again by CHF 1 to CHF 16 per share.

In the financial year '15-'16, the dividend was only CHF 12 per share. On this basis, dormakaba believes it is well positioned to play an active role in consolidation and the transformation in our industry and to continue investing in profitable growth. Thank you very much for your attention. And with that, we are now ready to take your questions.

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Questions and Answers

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [1]

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We start with Mr. Flueckiger.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [2]

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Martin Flueckiger from Kepler Cheuvreux. I've got 3 if I may. And starting off with the cash flow statement. I've noticed that a number of key items in the net working capital change line were pretty negative, to be honest. Can you talk a little -- inventories but also receivables, payables. If you could talk a little bit about the reasons for that, that would be very helpful. That's my first question. My second question refers to your organic growth. Just first off, am I right in assuming or calculating that your organic growth was 0.5% in the second half of the financial year? And talking about the reasons here, Mesker -- some of them Mesker, Norway, Spain, France, these are reasons that -- if you look at the construction environment according to national statistics, for instance, in France and also Spain, it's not necessarily intuitive that, that you would perform badly there. If you could talk about the key reasons, but also about your targeted remedies, maybe time lines and particularly with respect to the Lodging Systems business, which has had a one-off in financial year '18-'19? If you could talk a little bit about the future there for the U.S. and globally? That's my second question. My third question would be on the CEO's succession. If I understand -- or if I remember correctly, Mr. Cadonau is supposed to be half year his double mandate for the next 1 or 2 years. If you could refresh my memory there, that would be very helpful. And have you been looking for any internal or external successor. What are your key ideas there?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [3]

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So Bernd will deal with question number one, the cash flow, and I will take over the remaining questions.

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Bernd Brinker, dormakaba Holding AG - CFO [4]

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Okay. Martin, I would like to start with the cash flow question. You asked for the reasons for the change in cash flow profile, mainly driven by receivables, inventory and payables. I agree that the impact on year-to-year level is relatively significant, and it was negative as can be seen from the cash flow statement. However, I would have -- I think, I agree, but this is basically something which you could already see at the disclosure of our first half results. So if you compare with our first half results, you will see that, for example, on trade payables, we were already significantly down from prior year level of EUR 166 million to EUR 138 million. So this is basically a continuation on the trade payable front, as we have indicated in the first half. The trade receivables have slightly increased compared to the 31st of December last year, but remain -- day sales outstanding remains basically at a level of 60 days, 6-0. So there's been not really a change in the profile, while inventories have gone up compared to prior year, but have come down compared to half year. So therefore, there is an improvement compared to what we have disclosed at the end of the first half. I continue to say that we are not best-in-class as far as working capital management is concerned, and what we have already indicated earlier that we think that there is cash flow available in our working capital. But we continue to give emphasis to an improvement in our profitability. Second priority is organic growth. And then we focus on working capital. Therefore, it's priority #3 only. But what you can expect is that we will focus more on the potential in the working capital area once we have achieved our mid-term financial targets.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [5]

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So let me talk about organic growth. There were 3 new impacts in the second half of last fiscal year. Number one, Mesker; number two, Norway and number three, trade conflict between U.S. and China. And let me go through in detail so that you see what is behind that. Let me start with AS Americas. 2 topics were already known. Lodging, base effect. So we expect, again, growth in Lodging for this -- for the current fiscal year. Second was also known, Latin America external economical environment. And we don't expect improvement for the current fiscal year. And last but not least, as I said, Mesker, a new issue that we had with regard to a local ERP rollout, local why because we only have interior doors for commercial buildings in the United States only. So that was a new template and not tested as it has to be tested, and we had, as a consequence, delivery issues there. Technically solved in August, and we assume that it will take until December to regain trust from our customers. So we expect normal course of business at Mesker for the second half of the current fiscal year. That is with regard to AS Americas. AS EMEA, 2 topics were known, France and Spain. I don't agree with your statement that France from an external environment is on track neither us -- that's not true, neither for us nor for our competitors. And I also see other companies that deliver into buildings and all of them have issues in France. So from my perspective, it's a clear external issue. Spain, we mentioned that's another base effect because in the year before the reporting year, we had big projects at airport. So we expect Spain back on track in the current fiscal year. New was Norway. Norway was a real disappointment, driven by management issues. And you should know that Norway is one of our top 10 countries. So if a top 10 country suffers, we can, of course, feel that also on group level. We have exchanged the regional manager as of July 1 of this year. And last but not least, AS APAC, known was Southeast Asia. I mean Singapore doesn't have any GDP growth at this moment. Malaysia, Indonesia, Philippines, all suffered economically and we can see that and we say that this is going to continue. This will continue in the current financial year. Last but not least, Wah Yuet that's new. That is our OEM factory that delivers OEM products to the United States. And of course, we had an impact there driven by the tariff conflict. We should keep in mind that Wah Yuet delivers 2% of total group turnover, just to put that into perspective. So that is a clear list of impacts, negative impacts that we had with regard to organic growth.

Let me answer your third question, which is about CEO succession. It's very clear that we do what we said. So I will stay until 2021 at the latest, so that's the max. Okay. That's exactly in line with what we said. So number one statement. Number two statement with regard to CEO succession, we will evaluate internal and external candidate in the first half year of 2020, and the Board expects to communicate my successor as a CEO in the second half of calendar year 2020. So I think that's a very clear plan and a very clear statement. So we go to Mr. Fahrenholz.

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [6]

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Tobias Fahrenholz from MainFirst. 3 questions also on guidance, currency and legislation. First, on guidance, you just quickly wrote in the press release about unchanged midterm margin guidance of 18%. So why didn't you show again your graph in the presentation and is midterm still 2020-2021 or could it potentially be later? Then on currency. Assuming current spot rates, what kind of translation burdens do you see for your top line? And on transaction, you have a certain sales cost mismatch, so especially euro, U.S. dollar, do you -- potentially you can see a positive impact? And if so, how big could it be? And the last one on legislation, we've seen in May some new timekeeping obligations here in Europe. Did you already see an impact here? And what could be your long-term impact?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [7]

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I'll leave that first to you, Bernd, and I can then still add some comments.

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Bernd Brinker, dormakaba Holding AG - CFO [8]

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Okay. So let's start with question number one, your question on guidance. This was much more related to the midterm guidance. So as we have stated in our press release, the midterm targets remain unchanged. This is not only true for the target itself, but also for the timing. So still to expect in 2021. The -- we don't provide this time this detailed margin bridge, how we expect to move on. But what you can take with you is that the contribution, which we expect is basically unchanged, so the drivers continue to be operational improvements, PMI effects, remaining cost synergies and at the same time, also the additional investments for IT, which are negative in that EBITDA bridge.

Second question on FX impacts. What you can see in our presentation in the back up there is an overview of our foreign exchange exposure in terms of trends. Hedging risk. First of all, we don't hedge translation risk. We only take transactional risk into consideration. We have basically a very well-balanced natural hedge situation. It is right that we have an overhang as far as euro and dollar is concerned, but what you should also see is there are other currencies in the mix, which are closely related to U.S. dollar, for example, the Canadian dollar or the euro. So therefore, there were times when we had -- when the expectations were a little bit more on the negative side. We didn't mention that too much. It did not really have a significant impact. So therefore, also for the current financial year, we don't expect really a significant benefit from that.

With regards to what you -- I think used the word timekeeping obligation. So this is the question whether the new legislation on European -- in the European Union with regards to time and attendance might have a positive impact. There is an obligation by law now to implement timekeeping measures for all companies. I think this is still early days. There is -- this legislation is now available. It has to be translated into local, so country-by-country law. This hasn't been done yet. And at the same time, we clearly see that there is a resistance within all the countries as well as from the employers to really comply with such an obligation. And while we think that we have a good solution in terms of our product for time and attendance, we don't expect that this will -- will boost our business. However, if there is something, we are ready to offer our products.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [9]

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Just to add, with regard to 18%. Why do we stick to that? First of all, we are of the clear opinion that we have a global comprehensive product portfolio. Not many companies have that. Second, we have a global footprint, not many competitors have that. But third, we also know that we need some tailwind from the economy. We always said that, right, at least a stable environment. And none of us is a profit, none of us. We don't know what's going to happen in the next 24 months, nobody. And that has, of course, an impact. But assuming that there's no further negative development, we believe that 18% within that time frame is possible. Third question, we start here first, ladies first.

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Unidentified Analyst, [10]

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My first question is in your outlook for the AS Americas division, you state that the challenges with the manual door business will have an impact on the Door Hardware product cluster in the first half financial year '19-'20, as the sales management has to shift resources to rebuild customer trust. So I'm just wondering if you can talk about how you expect that impact, maybe if you have any kind of a financial sort of range, where that's going to impact. My second question, it's -- I think at the half year, you expected maybe a bit of a further improvement in Scandinavia from the new ERP system or from improvements there. And is that linked to the issues that you had with the management in Norway? Or is that something separate? And if so, if you could elaborate what it was that happened in Norway, why the management had to be changed? And then I'm wondering about -- so in your financial result, obviously, the interest expense for the bonds is known, but the fluctuation seems to be in the interest expenses for a forward contract. Is there any visibility on how much fluctuation there could be in that one? And I guess, just do you expect -- you're talking about your CapEx-to-sales ratio, and I'm guessing that's incorporating also your intangible assets. If you think that it will already start to head towards the 2.5% of sales in the year-end that we're in now or further ahead?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [11]

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I leave interest expense and CapEx to Bernd. Let me first talk about Mesker. We don't disclose numbers of Mesker. But we know that the first half for Mesker will be rather flattish than growth, and I explained why. I was there, by the way, I've seen, I've talked to customers, so I can give you direct feedback. I'm confident that as of January, we will see normal course of business at Mesker. I mean we have 4 factories when it comes to Mesker and 2 have been impacted. And as I said, technically is solved. In August, 2 of us talked to the local project manager. So we are sure it has been solved technically. But we need until December to regain trust with those particular customers.

You referred to Norway, I would not connect ERP rollout, Norway and management. Of course, it didn't help, right? But it was really driven by management issues. And we, of course, corrected and are confident that the new management is able to fix it fast.

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Bernd Brinker, dormakaba Holding AG - CFO [12]

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With regard to your third question, [Caroline], on financial results. First of all, you mentioned that it's quite obviously, interest expense for our Swiss franc bonds. That's true. However, I think we already explained earlier that while we are funded by Swiss francs, we use those funds to swap that into U.S. dollar in order to finance it. For example, the acquisition of Best and other acquisitions. So therefore, it's -- the majority, basically, 95% of our net debt is U.S. dollar related. So therefore, this needs to be taken into consideration that we have negative impact from the interest difference between Swiss francs and U.S. dollar. And this will continue to be the case. And now, as we've just acquired Alvarado and this will also add another element of our U.S. dollar exposure. And we were obviously able to slightly decrease this element compared to the prior year. This is a result of our cash flow, cash flow in the U.S. So therefore, this is obviously used to reduce debt in the country, and this has a positive impact on the overall financial expenses. But you will see this profile to continue.

Second question on CapEx. The 2.5%, which I would perceive as a normalized level in our industry, I would expect that in 3 to 4 years' time from now. But for the current financial year, it's much more in the magnitude of 3.5%, what you should expect.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [13]

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Further questions?

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [14]

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Fabian Haecki, UBS. 3 questions. The first one, when I remember correctly, in H1, you said you had a 1% to 1.5% pricing impact, a positive one, is that also valid for the full year? And do you have any view on next year, if you expect that to continue? My second question is, I also remember you were saying, particularly for the German restructuring, so DACH or EMEA region, a CHF 10 million savings this year and CHF 10 million savings next year. Can you give us an update on where we are, what you did this year and what you expect for next year?

Then also on the corporate EBITDA line, you had minus CHF 62 million costs. I think that was pretty stable versus last year. Is this something particular in relation to your investments in digitalization, is something we can kind of assume it will remain stable? Or will this kind of has some savings potential here mid-term going forward?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [15]

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I leave the answers to Bernd.

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Bernd Brinker, dormakaba Holding AG - CFO [16]

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Okay, thank you. First of all, pricing, yes, the 1% to 1.5% is not only true for the first half, but also for the full financial year, so for the year '18-'19. For the current financial year, which might be next year or your question for the current -- expectation for the current financial year '19-'20, what we see these days is that raw material pricing is a little bit softer. So therefore, the ability also to use this as a trigger to increase prices has lowered slightly. So therefore, we might not achieve the upper end of that pricing range. However, we continue to work on strategic pricing in our business, so more the lower end of the range in the current financial year.

The second question. You asked CHF 10 million in the year '18-'19 and CHF 10 million in the current financial year '19-'20, and this relates to our guidance on the remaining cost synergies from the merger. At the end of '17-'18, we indicated that we have achieved roughly CHF 50 million, so CHF 49 million, CHF 21 million to go. And we said that we expect CHF 10 million in the financial year '18-'19 and CHF 10 million in the year '19-'20. And this is still true. So therefore, what we achieved in the current financial year or in the reporting year '18-'19, we achieved roughly CHF 10 million of cost synergies. They contributed to the improvement of the EBITDA margin. Same is true that we benefited from that there were no further integration costs, which in the past diluted our EBITDA margin. But at the same time, we also spent more on IT and digitization in the '18-'19 financial year. We expect for the current financial year '19-'20 the remaining CHF 10 million to crystallize. Yes, so CHF 10 million cost synergies should be available in the current financial year to support our EBITDA margin.

Then question number three, it's a little bit more tricky, the question and the answer, because what we did in the past, we also changed slightly our company profile, our group setup. So for example, we've transferred more and more IT from regional and segment level to group level and this also had an impact on the cost allocation between group and segments. And at the same time, we now establish -- as we had told at the very beginning, we established our digital unit in our portfolio, which is also allocated to the corporate segment, so -- the corporate costs. So therefore, I would -- I cannot give you a clear answer that this will be stable, but it should be stable on a comparable level. So no changes between different things here and there. So stable on a comparable level.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [17]

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Okay, we go to Mr. Pomrehn.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [18]

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Yes. Bernd Pomrehn from Vontobel. What makes you confidence that -- confident that organic growth will accelerate this year as suggested by your guidance at a time when the outlook for the global construction industry is becoming rather more clouded? I think you mentioned Lodging Systems, which should do better. What do you see specifically for you in Lodging Systems? Why should this business also be stronger than last year?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [19]

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Okay. It's very clear that we are of the opinion that, first of all, those 2 reasons we mentioned that had a base effect from the previous year, not only Lodging, but also Spain will again grow in the current fiscal year. That is number one. Number two, we believe that we are going to fix Mesker, which will come back to growth in particularly the second half of the fiscal year. We also believe that we can do better in Norway than last year, which was really not satisfactory last year. So these are drivers that makes us more confident that we can achieve a better organic growth in the current fiscal year than last year.

Are there further questions? Yes, please.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [20]

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Can I just have a quick look. Additional costs for digitization and IT, I think, Bernd has already talked about it a little bit. How much are we going to see? Is there going to be an incremental step-up, maybe this year compared to last year. If you could provide a little bit of clarity over the next 2 to 3 years, that will be helpful. And also, you've been talking a lot about in your presentation for the individual segments, you've been talking a lot about efficiency improvements and how that's helped your margin improving or rising in 2018-'19. Could you provide some guidance what kind of cost savings you're expecting incrementally forward looking for this year and next? That would be very helpful.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [21]

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I leave that to Bernd.

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Bernd Brinker, dormakaba Holding AG - CFO [22]

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Okay. On digitization and IT, last year, when we met, we indicated that we decided to strengthen our investments, our spending in digitalization and IT. And we indicated that we expect roughly 80 basis points negative as a result of this investment spending. In the current financial year, we don't expect additional dilution from this element. To the contrary, we expect that in the current financial year, digitization will remain on the same level. However, IT spending should go down. So there should be a positive contribution from lower IT spending.

Second -- and this -- as Riet indicated earlier, we spend roughly 4% of sales in IT today, which is significantly above, let's say, benchmark, and this is driven by our requirement to invest into the harmonization of our IT landscape, of our ERP landscape on a global level. And so therefore, we expect relatively high IT spending going forward for the next 4 to 5 years. However, as I said, we expect in the current financial year an improvement from lower IT spending compared to the '18-'19 financial year.

With regard to efficiency improvements, which we have indicated for some -- both of our segments. This goes back to our PMI targets, which we have announced already in 2016. And we -- basically, we continue to have projects available in AS Americas, in AS DACH, in AS EMEA and in Key -- sorry, in Movable Walls. And those areas will also benefit from the CHF 10 million I just indicated to Fabian Haecki when he asked the question on PMI cost synergies, which are still to come. So those segments also benefited in the financial year '18-'19, but the CHF 10 million I indicated as a saving in '18-'19, and they will also benefit in the financial year '19-'20.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [23]

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Just to add, generically, this is a company of 4 years. We are 4 years old. We are -- we have clear potential for further efficiency improvement. This is not yet best-in-class. I mean we should always keep in mind, we're establishing a new company, new operating model, new roles, new processes, new systems, and we are not yet there to say, well, we are really in all areas of our business best-in-class. There is still room for improvement across the globe. Further questions?

Back to Mr. Haecki.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [24]

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Maybe bit of a high-level discussion on your basis model on one-stop shop. So I mean you're saying that you're investing much more than the industry in R&D in digitalization. But since the merger in the last 4 years, you are growing by about 2.5% organically revenues, so this is about half what ASSA ABLOY does. And I know there are some differences in that markets, but still. So you've been clearly growing the Access market. So what are we missing here? Can you here elaborate on this one-stop shop? At the time of the merger, you were saying that this is kind of the power engine will accelerate revenues compared to before. And what I'm hearing a bit from distributors is that those that sell mechanical door closures, they don't want to sell digital solutions and vice versa, except for like airports and other larger projects. So it seems that this one-stop shop business model does not work in all areas. Can you give here an update on that?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [25]

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Yes. So first, let's keep in mind what we did in the last few years. From an international niche play to a global one-stop shop. At the same time, we went from electronic to cloud-based solution. And third, we made us from this #5 a strong #3 in the most attractive market, which is North America. So there was a lot to do in the last couple of years. Therefore, focus with regard to the markets was probably a little bit lower than it should have been, okay? So we know that we have to, again, ensure that our people really focus on markets, on customers. That had certainly -- all these projects had certainly an impact of our -- on our focus, so to say. That's first, a generic answer. Now more specific. And one-stop shop is very different from region to region. It's excellent in Asia, it's very good in Pacific. More and more, we see that in North America, less in Europe, that's true. Our answer on that is more focused on verticals, such as airports, as an example, or health care. There, we can certainly improve this cross-selling by focusing on verticals. To give you a very tangible example, we organized China from a go-to-market perspective along verticals. That was a pilot test, and it works very well. So we'll certainly put more emphasis on verticals also in Europe in order to go for these potentials. So yes, you're right. Europe is not yet there. Our answer is focus on verticals, specifically, and in general, more focus on our customers. While Asia -- APAC already works very well with regard to cross-selling and one-stop shop, and we see improvement in North America more and more. So different from region to region, but that is the current situation. Okay?

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Unidentified Analyst, [26]

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And the corporate costs. You said that's where you put your digital efforts, costs in there. Do you expect those to continue to increase as well? Or I mean I also noticed that the headcount allocated to corporate has also increased. Is that related to IT people? Or maybe you can just give some color on that? And maybe on your expectations for headcount development in general ex M&A?

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Bernd Brinker, dormakaba Holding AG - CFO [27]

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Yes, [Caroline]. So this is basically the same answer I tried to give to earlier. So the CHF 62 million in corporate costs I expect them to remain stable, if we don't change the internal structure. And what we did in the past, we allocated more and more IT people into the group, taking them from the segment level in order to have a more efficient internal structure. Same is true, we allocated the entire digital unit to the headquarter function. On a comparable level, I don't expect higher costs, and I don't expect higher FTEs. So that's my answer. But if there's something where we think it's appropriate to do an internal change, if this is economic -- reasonable, then we will do it, but I don't expect a change on a comparable level.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [28]

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I am not a fan of centralization. Sometimes I have to agree on centralization, sometimes he persuades me that it is right to centralize IT. So we're reducing the segments and added on group level. I also agree, when it comes to digital, we have to take care of that. It's a young plant, so to say, right? But in general, I'm not a fan of centralization. I'm rather a fan of light headquarters. Just to give you my philosophy when it comes to that topic. (foreign language)

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Unidentified Analyst, [29]

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[Mark Purser, VVIG]. Just a quick understanding question concerning these one-off costs in the IT or R&D-related expenses. I understand the ERP-related costs that have a termination someone in 2 or 3, 4 years' time. But the IT and R&D-related expenses. I mean we live in a world where digitization is growing and it's being more of an enabler than anything else. So that might have even to rise furthermore so in future in order to be really ahead and to master all of these challenges out there. Or do I see that wrongly? I mean those 4% R&D spend combined with the IT-related expenses that do not have a one-off character, is that to be regarded as stable at these levels? Or we will see further increases there due to the opportunities that arise?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [30]

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I start because my background is ICT as you know. I do not believe in today's benchmarks for industrial companies of 2.3% in IT spending, okay? But I also believe at the same time that we don't need 4% of turnover in general. So this will -- you will see a staggered reduction, okay? But I agree with you IT spending will not go below 3% of turnover, that's my personal view on that. Does that answer the question?

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [31]

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Bernd Pomrehn from Vontobel again. Could you quickly elaborate a little bit on cost inflation. You already mentioned that you are seeing raw material costs rather coming down. What about underlying labor cost inflation? Where do you see your underlying labor costs developing in the next 12 months?

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [32]

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Bernd?

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Bernd Brinker, dormakaba Holding AG - CFO [33]

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With regard to raw materials, I would like to give some examples. We see on the one hand side, some relief here and there. We also see some extraordinary development, for example, for nickel, which has an incredible increase due to, let's say, country-specific situation. I think it's in Indonesia. So therefore, there, we expect, basically, not a significant increase in the current financial year. However, we have some mid- to long-term contracts, which might be difficult to immediately benefit from a lower base. But let's say, after a period of 6 to 9 months, we should be able to adjust to current levels.

With regards to underlying labor costs, we are -- we continue to try to tackle high labor costs with automation. We've done that already very successful in Switzerland. We are in the process to continue to do that in Germany in a lot of our plants. However, we see -- we have obviously a significant employee base in Germany. And Germany, as an example, has significantly high labor increase, and we expect that to happen again and again. So therefore, this is an ongoing effort on our side also to address it with measures to manage costs, whether it's automation or whether it's a transfer for certain standard products as we've done that already 3 years ago. So that is always our answer. But our expectation on labor cost is we expect a slight increase also in the current financial year to happen.

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Riet Cadonau, dormakaba Holding AG - Chairman & CEO [34]

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Further question? If not, let me show our future activities when it comes to Investor Relations. We look forward to seeing you there again. And again, thank you for coming. Thank you for your interest in dormakaba. Goodbye. Thank you.

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Bernd Brinker, dormakaba Holding AG - CFO [35]

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Thank you.