Earnings Call: Q1 2019

Apr 25, 2019

Good morning from Stockholm and welcome to the presentation of Assa Bloy's First Interim Report 2019. My name is Bjorn Tibella. I'm heading Investor Relations and joining me here is our CEO, Nico Del Vohr and our CFO, Erik Pieder. We will start this conference with a presentation before we open up for your questions. And with that, I would like to hand over to you, Nico. Thank you, Bjorn, and 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% and then 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. And also this quarter, the highlight of the quarter, our electromechanical products growth, up 30%, including currency, up 22% if we exclude currency. A 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 and by a continued headwind of raw material prices. Also, operating strong operating cash flow more than doubled compared to a year ago. In numbers, sales SEK21.5 billion, 16% up, like I mentioned, 5% organic, 4% gross acquisitions, but 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, a very strong North America with 8% organic growth, a 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. But they had the same story. It was a big project of Entrance Systems last year. So if you only look at APAC division business in Australia and New Zealand, then our organic growth was 3%. Negative growth in Asia, and 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 2 here. 1 is a new fingerprint reader by HID, for sure the most secure fingerprint reader in the market today. And then we also launched a new wireless Wi Fi video doorbell under the August brand for 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 2 weeks ago the ISC West exhibition in Los Angeles in Las Vegas, sorry, in the U. S. That's the biggest security exhibition in the world. I visited that exhibition myself. And 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 7 awards. We got the majority of the awards that were handed out in our field. So it's good to see that also those professionals recognize all the effort that we put in innovation and new product development. And 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 and I think a strong accelerated organic growth over the last 4, 5 quarters. And that complemented with good growth through acquisitions. I believe there's not too many companies in the industry that can show this track record, so very proud about that result. Operating margin, unfortunately, is still at 15.8 percent, so below the bandwidth where we want to be, the 16% to 17% bandwidth, but working very hard and also confident that we will be able to bring that operation 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 5 years. Acquisitions, a fully active pipeline on the acquisition front. We have 3 acquisitions completed in the first quarter. They represent an annualized sales of SEK650 1,000,000 and also very excited about the announcement that we have an agreement to take a majority stake in Akta Record, a strong Swiss pedestrian door company with sales of almost €400,000,000 This deal is conditional on regularity approval, and therefore, we expect this deal to close towards the end of the year. If I then go into the different divisions and 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 and then in the Middle East and Africa Good growth in East Europe, Benelux and the U. K, stable growth in South Europe, but the negative sales in France. As I mentioned also in Q4, we have seen market conditions declining in France and that is then also translated in our negative sales results. Good operating margin of 16.2% versus 16% last year. We have a strong organic growth leverage of 50 basis points and also acquisitions, which have been accretive for 20 basis points. So overall, very happy with the EMEA results. 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. So that was the only negative business area in the U. S. Also good performance in Canada. And then in Latin America, a bit of mixed picture, where we saw very strong growth in Brazil, but where we saw declining sales in Colombia and in Chile. And 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. And we know that, that has a dilutive effect. And then we see also a continued headwind of raw material price in cases. 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. So very good performance of the Americas. Then Asia Pacific, I would say 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 the declining sales in South Asia, where our external sales in China has been slightly positive. And then the operating margin of 5.2% versus 7.9%. Obviously, 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, very low. We also had some extra cost in building up our new China organization to start implementing our new strategy, but that was a minor reason. The real biggest reason is the highest 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, we have very strong growth, I would say, in most of the business areas and then 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 and D as well on the HID side as mainly also on Global Solutions side, but only 17.9% because of a strong dilution because of acquisitions, Cosmetge acquisition, the big €100,000,000 acquisition we did at the end of last year and where we are still in the early months. So we have still some double cost there, but 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%, strong growth in pedestrian doors, in residential doors in Europe and in industrial doors and a slightly negative sales for residential doors in the U. S, where we see, of course, residential markets now going down. And 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. And we are confident that, that service growth will also accelerate further now in the coming quarters. And then an operating margin of 13.2% versus 13.3% last year, a negative volume leverage of 10 basis points because of the product mix, the residential doors in Europe. Also here, continued headwind of raw material. And then, of course, we don't see the return from that higher service growth yet because at the beginning, of course, you have to invest in that organization. So with that, I give the word to Erik. Thank you, Nico. Good morning or good afternoon, everybody. If we then look on the sales, we ended up on SEK21.5 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. But as a guidance for Q2, there will be 2 working days less in Q2 versus last year. The acquired net growth was in reality, it was 3.5%. So but we rounded it down to 3%. And 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 4%, and then we had the divestment of the wooden doors, which sort of reduced it with 1%. If we then look on the currencies, we had 8% increase due to the weaker SEK, which sort of all in all then led to a sales increase of 16%. Operating income or EBIT was up with 15%. If we then look into the margins, the EBITA 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 and 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 SEK73 1,000,000. Out of that, onethree is related to the IFRS 16 change. The rest is due to increased interest rates and also we have an effect of currencies in that as well. The net income was up with 13%. The tax rate is 26%. And the earnings per share ended up with SEK2, which is an increase of 13%. And the highlight of the quarter is the operating cash flow, which ended up close to SEK1.2 billion and then this an increase will more than double compared to what we had last year. If we then look into the bridge, we can see that the if we sort of dissect the 3% organic part, the 5% organic part, 3% is related to volume and 2% is related to price. And there, the main drivers is, as you've seen before, is Americas, and it's a Global Tech division. If you now can see that on the bridge that we have a positive impact of 10 basis points And this is where I would say that EMEA, Americas and Global Technologies is affecting it positively. But then we have the performance of APAC brought it down with about 20 basis points. The currency, as I 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 cross match and also that we have acquisition cost. Going forward, we're a little bit the same, let's say, somewhere between 3% 4%, we expect then for Q2. If we look into the cost breakdown, you see that we have an impact on direct material, which is negative with minus 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. And you can see that the 70 basis points negative that we have on direct material is then offset with positive impacts on the conversion cost, which is the same then on the 70 basis points. As I mentioned before, 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 of from the MFP of about SEK180 1,000,000 in Q1. The SG and A, there we had a positive volume leverage impact on from admin and the sales and marketing cost, but this was then offset with higher investments into R and D, mainly then in Global Technologies division. If we go to the cash flow, as I said before, this was the highlight of the quarter with almost SEK1.2 billion positive cash flow in the month. You can see that the EBIT is 96%, which is very, very strong. And since we had a strong earning and this has actually flown through the whole way, and that, I would say, is the main reason for the cash flow. On top of that, 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's an actually it's an increase of SEK 5,900,000,000. The main reason for this is the new accounting change of the IFRS 16, which has an impact of about SEK 3,700,000,000. We also have an impact on the currency of a little bit more than SEK900 1,000,000, and the rest is then related to acquisitions, tax payments and so forth. You see the net debt versus EBITDA is at 2.2%. So 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 SEK2 per share in the quarter. And by that, I'll hand it back to Nico. So 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. And 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. And then we will propose to the Annual General Meeting this afternoon a dividend proposal of SEK3.5 per share. And with that, I give back to Bjorn 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 1 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. The first question is from Daniela Costa, Goldman Sachs. Your line is now open. Please go ahead. I actually have 3 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 we have 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? And my third question is, can you talk us a little bit through the visibility you have in terms of smart locks on 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. So a 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 nonresidential 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. And 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. But apart from that, I think still strong market conditions in North America on the nonresidential 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 2 biggest markets. So yes, let's see in which direction that goes. We have seen a good market development in Brazil. I'll be confident that, 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. When we then go to Europe, I would say in general, still positive market conditions in Europe, perhaps not on the same exciting level as in 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. And then also in the U. K, we have a little bit this wait and see attitude. So also there, it's a little bit lower activity. And then obviously, there is a couple of smaller markets, markets like Turkey, which is for us smaller from a revenue point of view, where there is also clear negative trends. When we then go to APAC, I think China, India, Southeast Asia, not so much difference as compared to previous quarter. So that I think is an answer on your first question. When I go then to your third question around smart locks, I assume you're talking about digital door locks on the residential side. So there we have seen strong double digit growth in all three regions: APAC, Europe and Americas. And obviously, we have seen the strongest growth in North America, in the U. S. In particular. And 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. And in that aspect, we want to remind you that as of Q2 now, we will compare for Google Nest with no longer with a quarter of 0 sales the year before, but with the Q1 where we got sales from Google last year was also a significant order because it was an order to fill their eggs, where this year, hopefully and confidently, we will get an order to replenish the racks. But of course, it will be of a different magnitude. But I think it's 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. And we see that on the commercial side and definitely also on the residential side. And then 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 2 working days less. And obviously, that has an effect for us on top line and definitely also on bottom line because you let you get less absorption in your operations in your factories. And 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 parts, field service where obviously if your service technicians have 2 days less, that also has an effect. And then perhaps on the second question, Erik? On the second question with the ROS, that is related to acquisitions. Of course, I mean, the EMEA did quite a lot of acquisition end of last year where we then had quite a lot of goodwill coming out of that those ones. I guess just following up on 1 and 3 together. So would you say that you had 5% organic growth that when you 1, you mentioned several tailwinds and 2, you mentioned the headwind. Is that a sustainable level you see throughout the year? Yes. We don't make forecast on our sales 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 3, 4 months ago, with two exceptions. 1 is that clearly, residential newbuild in North America is weaker than 3 months ago and 2, that we will have those 2 working days less in Q2 versus Q2 last year. Thank you very much. Yes, we need to proceed to the next one. Thanks. The next question is from Guillermo Peigne of UBS. Your line is now open. Please go ahead. Hi, good morning. Guillermo Peigne 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 its impact? I know the majority is mixed, but can you help us understanding how much of the margin erosion came from mix, renal mix? And then how much of it came actually as a consequence of investments you put in to drive the new organization and Pampano branding? Yes. Guillermo, I can say that most of it came from mix. You know that we always divide APAC in 2, the rest of APAC and China. And 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. And 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 had double digit growth in China. And margins for intergroup sales are not very different from margins for external sales. So they are on more or less on the same level, as I mentioned earlier, for China. So it's really that 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. So 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 talked there perhaps about 30 basis points, something like that. Okay. And from a group perspective, could you comment a little bit on the raw material pricing situation or price into raw material situation as we progress through Q2 and Q3, please? Yes. So as I mentioned also for the Americas, and I could say that, 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. And if indexes stay where they are, we should start to see even a positive contribution from prices versus material inflation then going into the second half of the year. Americas is a little bit advanced when it comes to timing compared to NTRAN Systems and APAC, but we see similar trends in those divisions. And also there, we are confident that later in the year, we will be able to bridge that gap. The next question is from Lucie Corlier of Morgan Stanley. Your line is now open. Please go ahead. Yes, 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? I mean, 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. And 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% to 17% bandwidth for the full year, and that will then happen later in the year. Okay. So for the full year. And 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? And you were mentioning that you expect a new order coming from them in the Q2. You said the magnitude could be lower. How much lower are we thinking here? And why should it be lower, especially if we're seeing increased penetration? Yes. So if you look at digital door locks for residential applications, there's a couple of aspects. 1, 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 the New Year's and everybody buys a digital door lock for their family and friends. So in that aspect, Q1 is normally the lower and then slowly it ramps up. If you look historically and 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 then even a stronger acceleration in Q4. So 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. And in a way, up till this quarter, it was easy for the Google Nest business because we were always comparing. We have a quarter last year where we had 0 sales. So if you sell something, of course, it's infinite growth, so very high percentages. Whereas now of Q2, we will compare with for Google Nest with 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, and 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 wreck. So it will be of a different magnitude. So that is one difference. Again, the 2 days the 2 working days is another difference. And then the third one is that, yes, also for the rest, the comparison becomes more difficult because we have seen that very high growth last quarter. But I'm confident that the adaptation towards digital for mechanical digital will continue and will continue to accelerate. So 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. And finally, are you seeing new competition in the U. S. Smart Lock business? I mean, we've heard some of your U. S. Competitor kind of were a bit late before on that, kind of now ramping up and launching on the in this area. I think there is, yes, different players. I mean, 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 6 months ago. I think we have the advantage that because everybody inventors of the digital door lock in the sense that we bought iREVO a long time ago. When was that, 'sixteen? 2000 and 7. Yes, 12 years ago. You could say that Irivo 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. And we have really leveraged on that from a technology perspective, And it's just up to us to make sure that we continue to invest, that we continue to come with new products and that we make sure that we stay in the driver's seat. And that's what we are working on every day. The next question is from Andreas Willi of JPMorgan. 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 the 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 have had over the last 6 quarters or so on raw materials or just bridge it? And kind of what does that say about pricing power you have? And also kind of 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 would traditionally see is that when material prices go up, pricing lacks 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. So 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 to pricing in the markets. So I mean, 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. And my question on Agta Record. You basically, they reported decent Q4 results, so you kind of start to 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? Yes. 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 to the process and come closer to closing of that deal. But obviously, we have the ambition in the first place to bring those margins from active record up to the level where we are with Entrance Systems today and that we want to do in the coming years after closure. And then we will see afterwards how we then can further grow margins for Entrance Systems division as a whole. And clearly, the service aspect is an important contributor there as well top line as definitely also bottom line. The next question is from Lars Persson of Barclays. Your line is now open. Please go ahead. 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 ACTA Record taking it to Entrance Systems 14% versus the 12% adjusted EBIT margin I see for ACTA last year over a couple of years. Why aren't synergies more substantial? Can you help us understand that? Yes. I think it's ambitious because when I talk about the margins, I talk obviously about EBIT margin. And 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. So we will lose there a couple of points. So it's not a comparison, let's say, 12% to 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. And then secondly, if I just can on APAC margin, I don't quite understand the incremental impact from intergroup sales in Q1. I mean, intergroup contributed, I think, 6% this quarter, 7% in Q4, when obviously margins were flat and now you're losing 300 basis points. 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 1 compared to Q4 last year. And on top of that, it was obviously on a much lower volume because we had Chinese New Year, so a relatively short month, so where it was then difficult also to compensate with operational efficiencies. So that was the main driver, I would say. And the big difference with Q4 was indeed that in Q4, we had a strong Southeast Asia with good margins contributing in a positive way. And this quarter, we have a Southeast Asia with double digit negative growth and therefore, in a mix contributing in a negative way. Do you see Southeast Asia coming back in 'nineteen? Yes. We are confident that let's say that perhaps Q4 was a bit overstated and then definitely Q1 is understated. So we don't expect, so at this stage, you tend 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. So we are confident that, that will come back yet. The next question is from Alastair Leslie, Societe Generale. Your line is now open. Please go ahead. Hi, good morning. Question actually on the medium term growth prospects in China. Your U. S. Peer was very bullish about the potential for digital door lot 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 positioning yourself for that growth, maybe both organically? Are you exploring further partnerships? And maybe also inorganically, could M and A perhaps come back on the radar again in China? Yes. So 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. And most new projects today are with digital door locks on the residential side. But again, to put it in the right perspective, as we mentioned several times, our total digital door lock business in the world is SEK2.5 billion. So also when in China, this might be very exciting. It's still a very small part of our total business in China. So really, to move the needle in China, other things have to happen. And then obviously, our new strategy where we're going out to market with 3 strong brands, 2 on the residential side and 1 on the commercial side. PanPan 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 the 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 newbuild 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 300,000,000 Chinese will move from rural areas into cities by 2,030. So the population of the U. S. Will move in China to cities. So they will all need excess solutions. And hopefully and confidently, they will also need to and buy solutions from us. And 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 Koning 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 higher comps, but growth coming more from non res from commercial, maybe industrial applications. Is that 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 Elmec 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 kind of continuing to roll out and is on the way to become mainstream? Or is that more of a slow burn adoption? So 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 the 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. And it's really that adaptation of that ecosystem in the first place that, I would say, obstructs a faster adaptation. But you see different bigger change now where you can check-in to your hotel room like you check-in to a plane. You can choose your hotel room. You get your key on your phone and you bypass reception and go directly to the room. And yes, that adaptation is also accelerating. Great. And 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 say that there you go? I could take that. I think that the as I mentioned before, that we had very good traction on MFP in the Q1. And we see actually that the savings is coming faster than what we, let's say, anticipated in the when we launched the program end of 2018. Just as a reminder, on the total, we have said it was an MFP program of SEK1.5 billion, where we have taken SEK1.2 billion of the cost in Q4 last year, where we will take the other SEK300 1,000,000 in Q4 this year, where the overall project has a payback of less than 3 years. Great. And last one, just sort of to labor on Asia Pac, but just wanted to tick off the South Asia decline. Was that purely end markets 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. And the next question is from Peter Reilly, Jefferies. Your line is now open. Please go ahead. 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? And 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 their home? You talk now specifically about digital door 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 digital locks because it's a new technology for them and the whole market is changing and clearly you've got very low penetration currently. So where does that market go? And how do you think it will look in a few years' time in terms of what the dominant channels are going to be? And 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 there, we don't know. But what we know is that today, our strategy is that we said we want to be a security provider for residential applications. 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. Then with some, we have a kind of partner ship like the Google Nest partnership where we developed for Google Nest a unique lock that they also sell on an exclusive basis. And then if you climb, I would say, the value ladder, then 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. And I would say on the top of the ladder, then 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, we compare with 0 or less, yes, so percent wise, yes, that's the highest growth, obviously. But apart from that, it's very similar growth levels in the different channels. And 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%. So there is still a big part to come and there will be enough space for us for the different channels and that will be also for our colleagues, competitors in the market to grasp part of that pie going forward. And if I can just follow-up on that. Are you agnostic about which channels turn actually more successful because they're all broadly similar gross or net margins? Or do you have a vested interest that your that some channels are inherently going to be more profitable than other channels? Yes. 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 don't have the direct channel with low SG and 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, Peter. We have reached now the end of this conference. The hour is out. So I would like to thank you for your participation and interest. We look forward to speaking and meeting with you in the coming weeks. And with that, we will say thank you for now. Thank you.