Good morning from Stockholm, welcome to the presentation of Assa Abloy's first interim report 2019. My name is Björn Tibell. I am heading Investor Relations, joining me here is our CEO, Nico Delvaux, and our CFO, Erik Pieder. We will start this conference with a presentation before we open up for your questions. With that, I would like to hand over to you, Nico.
Thank you, Björn, good morning to most of you. Good afternoon to some of you. Our Q1 results, I think we had a good start of the year with strong organic sales development, 5%, complemented with good acquisition growth, a bit more than 3%. Very strong growth in Americas, strong growth in Global Technologies, as well on the HID side as on the Global Solutions side. Also strong growth in APAC, although that growth came from intercompany sales. If we exclude intercompany sales, APAC was rather flat. Good growth in EMEA and in Entrance Systems. Also this quarter, the highlight of the quarter, our electromechanical products growth up 30%, including currency, up 22% if we exclude currency. Strong EBIT growth of 15%, but margins diluted. Margins 20 basis points lower than the same quarter last year.
Diluted by acquisitions, by product mix, by a continued headwind of raw material prices. Also strong operating cash flow, more than doubled compared to a year ago. In numbers, sales SEK 21.5 billion, 16% up. Like I mentioned, 5% organic, 4% gross acquisitions. With the divestment of our wood door business in the U.S., 3% or 3.5% net and 8% currency. Our EBITDA margin 15.6%, 10 basis points below last year, and EBIT margin at 15.1% versus 15.3% last year. EBIT up 15%, earnings per share up 13%. If we look at the sales in the different continents, very strong North America with 8% organic growth, very strong Europe with 5% growth. We show only 2% in South America, but it is mainly because of a big HID project order last year. If you look at South America, only for the Americas division, South America was up 4%.
1% in Africa, also 1% in Australia. There the same story, it was a big project of Entrance Systems last year. If you only look at the APAC division business in Australia and New Zealand, then our organic growth was 3%. Negative growth in Asia, that is this quarter, mainly because of strong negative double-digit growth in Southeast Asia, where we got a lot of sales at the end of last year in anticipation of price increases at the beginning of this year. Also worth mentioning here that we have changed our definition of emerging markets. We have limited the scope of emerging markets and follow now the IMF's definition. Market highlights. We invested and launched different new products in the quarter. I only will mention two here. One is a new fingerprint reader by HID, for sure the most secure fingerprint reader in the market today.
We also launched a new wireless Wi-Fi video doorbell under the August brand, for the time being, only in North America, but we have ambition there also to roll that further out. We are investing in our Pan Pan brand in China. We launched a refreshed, more modern look of the Pan Pan brand. We published our sustainability report with very good progress when it comes to health and safety, with 11% reduction in injury rate and also very good progress when it comes to sustainability with a 5% energy intensity reduction. We had two weeks ago, the ISC West exhibition in Las Vegas in the U.S. That's the biggest security exhibition in the world.
I visited that exhibition myself, traditionally, they also hand out their innovation awards, and those innovation awards are given out by really professionals that understand our business, that work every day in our business. We got seven awards. We got the majority of the awards that were handed out in our field. It's good to see that also those professionals recognize all the effort that we put in innovation and new product development. We got a couple of other awards as well, as you can read on the slide. Sales growth, now 24 quarters, consecutive quarters with positive organic growth. I think a strong accelerated organic growth over the last four, five quarters, and that complemented with good grow through acquisitions. I believe there's not too many companies in the industry that can show this track record, very proud about that result.
Operating margin, unfortunately, still at 15.8%, below the bandwidth where we want to be, the 16%-17% bandwidth. Working very hard and also confident that we will be able to bring that operating margin back within that bandwidth in the remaining part of the year. Strong development of our operating profit, acceleration of operating profit now 69% up over the last five years. Acquisitions, a fully active pipeline on the acquisition front, with three acquisitions completed in the first quarter. They represent an annualized sales of SEK 650 million. Also very excited about the announcement that we have an agreement to take a majority stake in agta record, a strong Swiss pedestrian door company with sales of almost EUR 400 million. This deal is conditional on regulatory approval, therefore we expect this deal to close towards the end of the year.
If I then go into the different divisions, start with EMEA, I believe a strong performance of EMEA in the quarter with an organic sales growth of 3%. Strong growth in North Europe, in Scandinavia, Finland, also in Germany in the Middle East and Africa. Good growth in East Europe, Benelux and the U.K. Stable growth in South Europe, a negative sales in France. As I mentioned also in Q4, we have seen market conditions declining in France, that is then also translated in our negative sales result. Good operating margin of 16.2% versus 16% last year. We have a strong organic growth leverage of 50 basis points. Also acquisitions which have been accretive for 20 basis points. Overall, very happy with the EMEA result.
Also very strong Americas performance, organic sales growth of 10% with all business areas, I would say, in the U.S. showing very solid growth, with the exception of perimeter security. There our business was affected by the bad weather in the U.S. Of course, when it's a lot of snow, when it's a lot of bad weather, it's not the right moment to put fences outside. That was the only negative business area in the U.S. Also good performance in Canada. In Latin America, a little bit of mixed picture where we saw very strong growth in Brazil, but where we saw declining sales in Colombia and in Chile. There, of course, political situation has changed in different markets, Mexico and Brazil. Remain to be seen how those markets will react now going forward. Strong operating margin of 19.6%.
We have a good volume leverage of 10 basis points, despite that negative product mix in the sense that we are growing faster with digital door locks and electromechanical products in general versus mechanical. We know that that has a dilutive effect. We see also a continued headwind of raw material price increases. We are further bridging the gap. We are almost there, I would say, and we are confident that we will be able to bridge that gap now between raw material inflation and price increases going into Q2 and the second half of the year. Very good performance of the Americas. Asia Pacific, I would say a disappointing result with yes, indeed, 6% organic sales growth, but that sales growth comes almost exclusively from intercompany sales, so mainly sales to EMEA and to Americas.
Our external sales has been rather flat, mainly because of a declining sales in South Asia, where our external sales in China has been slightly positive. The operating margin of 5.2% versus 7.9%, obviously there the main reason is the fact that we grew faster in China because of that intercompany sales, and we know that our margins in China are very low. We also had some extra cost in building up our new China organization, to start implementing our new strategy. That was a minor reason. The real biggest reason is the higher sales mix China versus the rest of Asia Pacific. Global Technologies, also very strong performance, again, as well for HID as for Global Solutions, with very strong growth, I would say, in most of the business areas, and in total organic sales growth of 9%.
Good operating margin of 17.9% versus 18.8% last year, with very strong volume leverage, 50 basis points, despite, I would say, investments in R&D as well on HID side as mainly also on Global Solutions side. Only 17.9% because of a strong dilution, because of acquisitions, 200 basis points, and that is mainly Crossmatch acquisition, the big EUR 100 million acquisition we did at the end of last year, where we are still in the early months. We have still some double cost there. We are confident that the first synergies will start to kick in now in Q2, and that that dilution will start to go down in an important way as of the next quarter.
Entrance Systems, an organic sales growth of 3%, a strong growth in pedestrian doors, in residential doors in Europe and in industrial doors, a slightly negative sales for residential doors in the U.S., where we see, of course, residential market now going down. That has a little bit an effect on our Americas division. It has more an effect on Entrance Systems because obviously those residential doors are sold in new builds, in new projects on the residential side. Positive accelerated service growth. We are not at the high single digit yet, but we are nicely on our way to get there, we are confident that that service growth will also accelerate further now in the coming quarters. Then an operating margin of 13.2% versus 13.3% last year. Negative volume leverage of 10 basis points because of the product mix, the residential doors in Europe.
Also here, continued headwind of raw material. Then, of course, we don't see the return from that higher service growth yet because at the beginning, of course, we have to invest in that organization. With that, I give the word to Erik.
Thank you, Nico. Good morning or good afternoon, everybody. We then look on the sales, we ended up on SEK 21.5 billion, which is an increase of 16% versus last year. The organic part increased with 5%. Important to mention is that we had the same amount of working days in Q1 this year that what we had last year. As a guidance for Q2, there will be two working days less in Q2 versus last year. The acquired net growth in reality was 3.5%, but we rounded it down to 3%, then it's a little bit lower than the guidance that we said that was 4%. Important to mention is that the gross was above four, then we had the divestment of the wooden doors, which sort of reduced it with 1%.
We then look on the currencies, we had 8% increase due to the weaker SEK, which all in all then led to a sales increase of 16%. Operating income or EBIT was up with 15%. We then look into the margins, the EBITDA margin was down with 10 basis points. The EBIT margin was down with 20 basis points. This is mainly due to the performance of APAC, also we have an impact of the product mix. The income before taxes was 13%. We have an increase in the financial net of about SEK 73 million. Out of that, one third is related to the IFRS 16 change. The rest is due to increased interest rates, also we have an effect of currencies in that as well. The net income was up with 13%.
The tax rate is 26%, and earnings per share ended up at 2 SEK, which is an increase of 13%. The highlight of the quarter is the operating cash flow, which ended up close to 1.2 billion SEK, and it is an increase with more than double compared to what we had last year. If we sort of dissect the 5% organic part, 3% is related to volume and 2% is related to price. The main drivers is, as you've seen before, is Americas, and it's the Global Technologies division. We have a positive impact of 10 basis points in this where I would say that EMEA, Americas, and Global Technologies is affecting it positively.
We have the performance of APAC brought it down with about 20 basis points. The currency, as said, the top line was 8%. It has a marginal dilution of 10 basis points. Going forward, we estimate the impact to be 3%, and it should be neutral when it comes to the margin. Acquisitions was, as I mentioned before, was actually 3.5%, and we had a negative impact of 20 basis points, which comes from Crossmatch and also that we have acquisition cost. Going forward, we're a little bit the same, let's say somewhere between 3% and 4%, we expect then for Q2. We have an impact on direct material, which is negative with -70 basis points. That comes from currency, it comes from product mix, it comes from raw material increase.
We also have on the direct material impact on the division mix, which sort of has a negative impact when we look into the direct material, but then it has a positive impact if you look into our conversion cost. The 70 basis points negative that we have on direct material is then offset with positive impact on the conversion cost, which is the same then on the 70 basis points. It's the division mix, which here helps us, but it's also that we have the volume leverage, we see efficiency improvements, and we had also an impact from the MFP of about 180 million SEK in Q1. The SG&A, there we had a positive volume leverage impact from admin and the sales and marketing cost.
This was then offset with higher investments into R&D, mainly then in Global Technologies division. As I said before, this was the highlight of the quarter with almost 1.2 billion SEK positive cash flow in the month. The EBT is 96%, which is very strong. Since we had a strong earning, this has actually flown through the whole way, and that I would say is the main reason for the cash flow. As we mentioned already in Q4, that we have changed, let's say, the seasonal impact that we have had or the activities that we had before in Q4 has now actually yield that we have a better operating cash flow in Q1.
If we then go over to the gearing and the net debt, you can see that our net debt has gone from 50% to 64%. It is an increase of SEK 5.9 billion. The main reason for this is the new accounting change of the IFRS 16, which has an impact of about SEK 3.7 billion. We also have an impact on the currency of a little bit more than SEK 900 million, and the rest is then related to acquisitions, tax payments, and so forth. You see the net debt versus EBITDA is at 2.2%. We still have a very strong financial position so that we can continue our acquisition strategy and also continue with the incorporation of agta record later on. Last for me is the earnings per share, where we ended up with a +13% and ended with a two SEK per share in the quarter.
By that, I will hand it back to Nico.
As a summary then, we had a good start of the year with strong organic sales development, 5% up, very strong Americas, very good Global Technologies and APAC, and also growth in EMEA and in Entrance Systems. That organic growth complemented also with good growth through acquisitions. Again, this quarter, Electromechanical Products, the highlight of the quarter, up 30%, including currency, up 22% excluding currency. A good EBIT growth of 15%, operating cash flow that more than doubled. We will propose to the annual general meeting this afternoon a dividend proposal of SEK 3.5 per share. With that, I give back to Björn for the questions and the answers.
Thank you, Nico. Before I hand over to the operator, could I just please remind you to limit yourself to one question each to allow and give the opportunity to as many as possible to ask questions. Operator, that means that we are ready to open up for the questions. Please go ahead.
Thank you. We will now begin the question and answer session. If you have a question, please press zero then one on your touch-tone phone. If you wish to be removed from the queue, please press zero then two. If you are using a speakerphone, you may need to pick up the headset before pressing the numbers. Once again, if you have a question, please press zero then one on your touch-tone phone. The first question is from Daniela Costa, Goldman Sachs, your line is now open. Please go ahead.
I actually have three quick questions, if I may. The first one, some quarters you give an early read on what's happening on the actual quarter. I wonder if you could maybe comment on so far what you have seen in Q2. That's my first question. My second question is regarding the Return on Capital Employed in Europe. There's a drop-down there, which we actually haven't seen much change in the margins. Can you comment on what drove that drop on the return on capital? My third question is, can you talk us a little bit through the visibility you have in terms of smart locks? I know you have some frame agreements on what's the path on those going forward that you expect in terms of delivery? Thank you very much.
Okay, perhaps I will take the first and the third question, and then Erik, if you can take the ROCE on Europe. I'll bit on Q2, how do we see markets? I would say that not too much has changed as compared to Q4 in the sense that we still see a strong North America. On the non-residential side, what has changed in North America is definitely that on the residential side, we see a decline, but as you know, we are not so much affected by residential new build in North America, definitely not for the Americas, because our residential business there is one side mechanical and that's more in replacement. Definitely also our digital door locks is not affected by if new build go up or down.
It has a more important effect on Entrance Systems where we have our residential garage door business in the U.S. and obviously that is new build related. Apart from that, I think still strong market conditions in North America on the non-residential side. In South America, it's a bit difficult to predict what's going to happen because, as you know, we had the political changes in Mexico and in Brazil, the two biggest markets. Yeah, let's see which direction that goes. We have seen a good market development in Brazil. Let's be confident that continues. We have seen a little bit of a slowdown in the market in Mexico. Let's see if this is temporary or if this is more a longer trend.
We go to Europe, I would say in general, still positive market conditions in Europe, perhaps not on the same exciting level as in the U.S., but still solid, with the exception from a couple of bigger markets for us, obviously, France, where I already explained in Q4 that we see market conditions going down, and we see them still on that lower level today. Also in the U.K., we have a little bit this wait and see attitude. Also there, it is a little bit lower activity. Obviously there are a couple of smaller markets like Turkey, which is for us, smaller from a revenue point of view, where there is also a clear negative trend. We go to APAC, I think China, India, Southeast Asia, not so much difference as compared to previous quarter.
That, I think, is an answer on your first question. I go to your third question around smart locks, I assume you are talking about digital door locks on the residential side. There we have seen strong double-digit growth in all three regions, APAC, Europe and Americas. Obviously we have seen the strongest growth in North America, in the U.S. in particular. We see that in the different channels, in the DIY channel, directly on our website for August or Yale, and definitely also with our partners like Google Nest. In that aspect, we want to remind you that as of Q2 now, we will compare for Google Nest no longer with a quarter of zero sales the year before, but with the first quarter where we got sales from Google Nest last year.
Was also a significant order because it was an order to fill their ex, where this year, hopefully and confidently, we will get an order to replenish their ex. Of course, it will be of a different magnitude. I think it is fair to say that we continue to see an acceleration of that willingness to adapt and make that move from mechanical to electromechanical and digital. We see that on the commercial side and definitely also on the residential side. Perhaps as a last remark as well on your first and your third question, I also want to remind you that, as Erik mentioned, Q2 will be a quarter with two working days less. Obviously that has an effect for us on top line and definitely also on bottom line because you get less absorption in your operations, in your factories.
If you look at the different divisions, most probably the one that is most affected by this is Entrance Systems, because in Entrance Systems, you also have the service part, field service, where obviously if your service technicians have two days less, that also has an effect. Perhaps on the second question, Erik?
On the second question with the ROCE, that is related to acquisitions. Of course, EMEA did quite a lot of acquisition end of last year, where we then had quite a lot of goodwill coming out of those ones.
Thank you. I guess just following up on one and three together. Would you say that you had 5% organic growth? That when you, in one, you mentioned several tailwinds, in two, you mentioned the headwind. Is that a sustainable level you see throughout the year?
As you know, we don't make forecasts on our sales or in general. I can only repeat what I said before, is that we don't see too many changes in the market conditions now today as compared to three, four months ago, with two exceptions. One is that clearly residential new build in North America is weaker than three months ago, and two, that we will have those two working days less in Q2 versus Q2 last year.
Daniel?
Thank you very much.
Yeah, we need to proceed to the next one. Thanks.
The next question is from Guillermo Peigneux of UBS. Your line is now open. Please go ahead.
Hi, good morning. Guillermo Peigneux from UBS. Couple of questions regarding the APAC margins. I think you alluded to the regional mix and investments. Can you help us quantify a little bit each impact? I know the majority is mix, but can you help us understanding how much of the margin erosion came from regional mix and then how much of it came actually as a consequence of investments you put in to drive the new organization and Pan Pan and branding? Thank you.
Yeah. Guillermo, I can say that most of it came from mix. You know that we always divide APAC in two, the rest of APAC and China. We always say that in the rest of APAC, we make similar margins as we make in EMEA. That has not been different this quarter. We have seen actually even good progress in most other regions than China. Then we have said that in China we make very low single-digit margins. If you then calculate back, we have said that external sales was slightly positive, but obviously with the intergroup sales and APAC being up 6%, if you calculate back, because that intergroup sales comes mainly from China, you will see that we are double-digit growth in China. Margins for intergroup sales are not very different from margins for external sales.
They are more or less on the same level as I mentioned earlier for China. It's really that drives in the first place, the lower EBIT margin. That together with the fact that we had strong double-digit negative growth in Southeast Asia, that's a big difference compared to Q4 last year. Southeast Asia is, for us, a more profitable part of APAC and obviously with minus 10% or minus double-digit growth in Southeast Asia, that also has a dilutive effect. That in a short quarter with Chinese New Year, there's not too much volume that we can use to compensate. That is really the main reason. The investment in the China organization is smaller. We talk there perhaps about 30 basis points, something like that.
Okay. Thank you. From a group perspective, could you comment a little bit on the raw material pricing situation or pricing to raw material situation as we progress through Q2 and Q3, please?
As I mentioned also for the Americas, I could say that is true in general, we were able to further bridge that gap between material price increases and compensating that with sales price increases. We are not there 100% yet, but we are confident that now going into Q2, definitely for the Americas, we will be able to bridge that gap, if indexes stay where they are, we should start to see even a positive contribution from prices versus material inflation going into the second half of the year. Americas is a little bit advanced when it comes to timing compared to Entrance Systems and APAC, but we see similar trends in those divisions, also there we are confident that later in the year we will be able to bridge that gap.
Thank you, Guillermo. Thank you so much.
The next question is from Lucie Collier of Morgan Stanley. Your line is now open. Please go ahead.
Thank you very much. One was, first of all, a clarification around the margin trajectory for the year. You said you were hoping to kind of reach the 16% level during 2019. Do you mean reaching it at some point or do you mean reaching it for the year?
I don't think I said hope, because I think we should not hope in business. We should be confident in business. I think what I've said is that we are working very hard, and we should be confident to bring our margin indeed back within that 16%-17% bandwidth for the full year. That will then happen later in the year.
Okay, for the full year. Thank you. Then my second question was a follow-up initially on your comments you made around the smart lock in the U.S. Can you maybe remind us the ramp-up of that business last year? I remember the second quarter was strong because you had that big order from Google Nest, but how should we think of the trends second, third, and fourth quarter? You were mentioning that you expect a new order coming from them in the second quarter. You said the magnitude could be lower. How much lower are we thinking here? Why should it be lower, especially if we are seeing increased penetration?
Yeah. If you look at digital door locks for residential applications, there's a couple of aspects. One, it's a very skewed business in the sense that you get a very big part of your total business in Q4, because that's when you have the Black Fridays and the Christmas and New Year's, and everybody buys a digital door lock for their family and friends. In that respect, Q1 is normally the lower and then slowly it ramps up. If you look historically and then you go back Q1 last year, we saw a good double-digit growth compared to the year before. We have seen an acceleration in Q2. We have seen a further acceleration in Q3, and even a stronger acceleration in Q4. We have really seen a trend of faster adaptation towards digital door locks on the residential side.
We still see very nice high double-digit growth this year, but of course, the comparison becomes more difficult quarter after quarter because now you compare with a strong quarter last year. In a way, up till this quarter, it was easy for the Google Nest business because we were always comparing with a quarter last year where we had zero sales. If you sell something, of course it's infinite growth, so very high percentages. Whereas now of Q2, we will compare for Google Nest with a Q2 last year, where we got a significant order from them, because that was last year, the first order we got from them when they started with that new lock. That was obviously an order then to fill the racks in their sales channel.
Whereas the order that we confidently will get this quarter will be more in order to replenish the rack. It will be of a different magnitude. That is one difference. Again, the two working days is another difference. Then the third one is that, yeah, also for the rest, the comparison becomes more difficult because we have seen that very high growth last quarter. I'm confident that the adaptation towards digital, for mechanical digital will continue and will continue to accelerate. We are confident that we will continue to see good business on the digital door lock side also going forward now in the coming quarters.
Finally, are you seeing new competition in the U.S. smart lock business? We've heard some of your U.S. competitor who were a bit late before on that, now ramping up and launching in this area.
I think there is different players. I think our traditional colleagues in the market have also digital door lock solutions. There's also other players in that field. In that aspect, we don't see too much changes today compared to previous quarter compared to six months ago. I think we have the advantage that because we were the inventors of the digital door lock in the sense that we bought iRevo a long time ago. When was that, 16?
2007.
Yeah. 12 years ago. You could say that iRevo was the inventor of the digital door lock. That's also one of the reasons why we see that high penetration today when it comes to digital door locks in Korea. We have really leveraged on that from a technology perspective, it's just up to us to make sure that we continue to invest, that we continue to come with new products, that we make sure that we stay in the driver's seat. That's what we are working on every day.
Thank you, Lucie.
Thank you very much.
The next question is from Andreas Willi of J.P. Morgan. Your line is now open. Please go ahead. We can't hear you at the moment. Perhaps you're still on mute?
Yes. Sorry. Good morning. Firstly, a follow-up question to the earlier one on raw materials. We've had now a number of quarters where you had a negative impact, and now you expect to bridge that. Do you expect to fully recover this kind of lost earnings we've had over the last six quarters or so on raw materials, or just bridge it? What does that say about pricing power you have and also do you need raw materials to basically go back down to fully recover that? Or even if raw materials stay at the current level, you would expect to eventually have made up what you lost earlier in terms of compensation with the time delay on pricing?
What you traditionally see is that when material prices go up, pricing lags a little bit those material prices, and then over time you start to compensate, and then when material prices go down again, you are able to keep that price and therefore get a positive later in the cycle. Everything really depends on how material prices and how material indexes will evolve going forward. I think we, in general, we like inflation. We definitely also like material inflation because we are in a market where you can put through that inflation for material and labor through pricing in the market. In a way, if material prices stay on a reasonable high level, it's something we like because through that we can also continue with compensation with pricing and using that pricing to, like I said, bridge that gap and then even get a positive going forward.
Thank you. My question on agta record, basically, they reported a decent Q4 results. It kind of starts at the 12% EBIT margin or EBITA margin in terms of the run rate. What are the specific opportunities you see there from the combination in terms of profitability, and whether you expect to eventually bridge the margin dilution the business brings to Entrance Systems in terms of cost savings opportunity?
Yeah. Obviously, we see synergies as well on the operational side as on the sales side. I think they are very complementary to us as well from a product range perspective as from a geographical coverage perspective. I think we will also comment more in detail as we go further through the process and come closer to closing of that deal. Obviously, we have the ambition in the first place to bring those margins from agta record up to the level where we are with Entrance Systems today, and that we want to do in the coming years after closure. Then we will see afterwards how we then can further grow margins for Entrance Systems division as a whole. Clearly, the service aspect is an important contributor there as well top line, as definitely also bottom line.
Thank you.
Thank you.
The next question is from Lars Brorson of Barclays. Your line is now open. Please go ahead.
Hey. Hi. Thanks, Nico. Two quick follow-ups, if I could. Just on that question from Andreas. It doesn't sound overly ambitious to me on agta record, taking it to Entrance Systems 14% versus the 12% adjusted EBIT margin I see for agta last year over a couple of years. Why aren't synergies more substantial? Can you help us understand that?
I think it's ambitious because when I talk about the margins, I talk obviously about EBIT margin. Okay, it's too early to say. We will see when we close, but obviously, part of the goodwill we will amortize under as intangibles. We will lose there a couple of points. It's not a comparison, let's say 12 with 14, it's most probably going to be a comparison 10 to 14 or something around those lines, depending on what exactly the figure of the PPA will be once we close.
That's clear. Thank you. Secondly, if I just can on APAC margin, I don't quite understand the incremental impact from intra-group sales in Q1. I mean, intra group contributed, I think, 6% this quarter, seven in Q4, when obviously margins were flat, and now you're losing three on a basis point. Am I right in understanding that the main mix impact in APAC is intra APAC, if you like, i.e., very negative or double-digit decline in Southeast Asia, whereas the intergroup impact is not an incremental negative from the Q4 result. Is that right?
No, it is indeed an incremental as compared to Q4 in the sense that we had higher portion percentage of intra-group sales this year, quarter one compared to Q4 last year. On top of that, it was obviously on a much lower volume because we had Chinese New Year, a relatively short month, where it was then difficult also to compensate with operational efficiencies. That was the main driver, I would say. The big difference with Q4 was indeed that in Q4, we had a strong Southeast Asia with good margins, contributing in a positive way. This quarter, we have a Southeast Asia with double-digit negative growth, and therefore in the mix, contributing in a negative way.
Do you see Southeast Asia coming back in 2019?
Yes, we are confident that perhaps Q4 was a bit overstated, then definitely Q1 is understated. We don't expect Southeast Asia to stay on the level where we were in Q1. There's also no real market reason to stay on that lower level. I think there is several markets in Southeast Asia which are still positive from a market perspective. We are confident that that will come back, yeah.
That's helpful. Thank you.
The next question is from Alasdair Leslie, Société Générale. Your line is now open. Please go ahead.
Hi. Good morning. Question actually on the medium-term growth prospects in China. Your [audio distortion] was very bullish about the potential for digital door lock growth in China, particularly on the residential. I think they were talking about penetration rates in Chinese households going from 6% last year to as high as 35% already in 2022. Just wondering if you recognize that potential as well, and perhaps what's the strategy for positioning yourself for that growth. Maybe both organically, are you exploring further partnerships and maybe also inorganically, could M&A perhaps come back on the radar again in China? Thank you.
Yeah. Perhaps first, particularly on digital door locks. Yes, for sure. China is also, let's call it an early adapter when it comes to digital door locks. Most new projects today are with digital door locks on the residential side. Again, to put it in the right perspective, as we mentioned several times, our total digital door lock business in the world is SEK 2.5 billion. Also when in China, this might be very exciting. It's still a very small part of our total business in China. Really, to move the needle in China, other things have to happen. There, obviously, our new strategy, where we go now to market with three strong brands, two on the residential side and one on the commercial side.
Pan Pan being a strong local Chinese quality brand, Yale being a strong international reputable brand on the residential side, and Assa Abloy on the commercial side, and then a dedicated key account organization for attacking the top 100 key accounts. That is an important aspect, and we are confident that this strategy over time also will bring results where we will also move more from new build on the residential side, also to the commercial side and also grasp more of the more profitable aftermarket business. I think we, in general, clearly believe in the China market. It's forecasted that another 300 million Chinese will move from rural areas into cities by 2030. The population of the U.S. will move in China to cities. They will all need access solutions, and hopefully and confidently, they will also need to buy solutions from us.
It's clear if you want to be a global leader, you also have to be one of the leaders in China. When it comes to acquisitions, yes, China on the medium long term is definitely an interesting country where we could consider acquisitions. On the short term, for sure not. We first want to get our new organization stable, in place, delivering results on the new strategy, and then afterwards, we might consider to grow also through acquisitions in China.
Thank you.
Thank you.
The next question is from Andre Kukhnin of Credit Suisse. Your line is now open. Please go ahead.
Good morning. Thanks so much for taking my questions. Firstly, on electromechanical, I have a couple of quick ones. Firstly, that change of mix that you're seeing in growth with what sounds like a bit less residential as we see high comps, but growth coming more from non-res, from commercial, maybe industrial applications. Does that have any margin implications for you? Is that something for us to bear in mind for the rest of the year? And the second one on el.mech. was just on the hotel digital keys, virtual keys. We haven't heard about that for a while. Just wanted to get an update on whether that's something that is continuing to roll out and is on the way to become mainstream, or is that more of a slow burn adoption?
On electromechanical versus mechanical, we have said in general that indeed electromechanical is dilutive to the margin, and that is mainly because of the digital door locks on the residential side. We have seen indeed also good, strong progress on the commercial side, and we see that in all different verticals, in all different regions. I would not use that as a significant argument on the margin side. When it comes to the hotel business and the credentials on your phone, yes, that's something we see, I would say, very similar to the adaptation from mechanical to electromechanical and digital.
It's something that is accelerating in our hotel vertical, but also there the market is perhaps more conservative than we all think and hope for, in the sense also that when you switch over to these digital keys, you also have to adapt whole ecosystem around it because you have to make sure if you go in with your phone into your hotel room, that also your air conditioning or your heating still works and that you don't need a card for your air conditioning and your heating, that you can also pay with your digital card in the restaurant or in the bar in the hotel. It's really that adaptation of that ecosystem in the first place that, I would say, obstructs a faster adaptation. You see different bigger change now where you can check in to your hotel room like you check into a plane.
You can choose your hotel room, you get your key on your phone, you bypass reception and go directly to the room. Yes, that adaptation is also accelerating.
Great. Thank you. My second question is on the MFP 7 implementation. Just wanted to get an update on how that's going and what phasing of savings should we expect for 2019?
You want to take that, Erik, or?
I could take that. I think that as I mentioned before, that we had very good traction on MFP 7 in the first quarter. We see actually that the savings is coming faster than what we, let's say, anticipated when we launched the program end of 2018.
Just as a reminder on the total, we have said it was an MFP program of SEK 1.5 billion, where we have taken SEK 1.2 billion of the cost in Q4 last year, where we will take the other SEK 300 million in Q4 this year. The overall project has a payback of less than three years.
Great. Thank you. Last one, sorry to labor on Asia-Pac, just wanted to tick off the South Asia decline. Was that purely and market driven, or was there any kind of competitive dynamics there that led to that decline?
Well, I think it's in the first place, us, in the sense that we got price increases at the beginning of this year. We announced them also early at the end of last year, so we got a lot of anticipated sales in Q4 last year that we then did not get at the beginning of this year. I would say that was the main reason.
That's pre-buy and then the post effect. Thank you very much. Thank you.
The next question is from Peter Reilly, Jefferies, your line is now open. Please go ahead.
Well, good morning. You were talking about your different sales channels for electromechanical locks in North America, so DIY, internet, and partners. Can you talk about the relative potential of each, where the whole market is going? Do you think any one channel is going to dominate? In particular, do you think you're actually set up for the right channels going forward, or do you need to make major investments in market access to make sure that you've got the right people guiding consumers towards installing what's quite a different technology for the home?
You talk now specifically about digital locks for residential applications or?
Well, mainly for residential, because I guess that's where the market access is going to be the biggest problem, because a lot of traditional locksmiths are going to be reluctant to fit digital locks because it's a new technology for them, and the whole market is changing. Clearly, you've got very low penetration currently. Where does that market go, and how do you think it'll look in a few years' time in terms of what the dominant channels are going to be? Do you have the right plans in place to have the right market access?
I guess the fair answer, where will it go and which channel will dominate or will be the winner? I think the honest answer is that we don't know. What we know is that today our strategy is that we said we want to be a security provider for residential applications, and we attack the market through different channels. We are just a component supplier through the different channels, DIY channel, our own channels, and also on the Amazon channel. With some, we have a kind of partnership like the Google Nest partnership, where we developed for Google Nest a unique lock that they also sell on an exclusive basis.
If you climb, I would say, the value ladder, we also say we want to be an open source provider for people that want to do home automation, where they can buy from us a home security solution. I would say on the top of the ladder, we have our own home security solution, Yale Smart Living or the August Smart Security solution. What we see today in the market is that all the different channels on that ladder are growing very similar percent-wise. Obviously, the highest growth comes from Google Nest because again, they compare with zero last year, percent-wise, yeah, that's the highest growth, obviously. Apart from that, it's very similar growth levels in the different channels.
We also believe that there is going to be enough space for all those different players in the coming years, because if you look at penetration grades today in the U.S., most probably they are somewhere mid-single digit, 4%, 5%, 6%. There is still a big part to come, and there will be enough space for us, for the different channels, and definitely also for our colleagues, competitors in the market to grasp part of that pie going forward.
If I can just follow up on that, are you agnostic about which channels turn out to be more successful because they're all broadly similar gross on net margins? Or do you have a vested interest that some channels are inherently going to be more profitable than other channels?
Obviously, if you look at margins, we would prefer to sell everything directly on our Yale website or on our August website because that's obviously where you then have the direct channel with low SG&A cost and the better margins. It's clear if you sell to people like Amazon or Google Nest that are very professional when it comes to sourcing that margins are lower.
Thank you.
Thank you, Peter. We have reached now the end of this conference. The hour is out, I would like to thank you for your participation and interest. We look forward to speaking and meeting with you in the coming weeks. With that, we will say thank you for now. Thank you.