Earnings Call: Q3 2018

Oct 19, 2018

Good morning and welcome to the presentation of Assa Abloy's results for the Q3 2018. I'm Holger Lembert, Investor Relations Officer at Assa Abloy. And with me, I have our CEO, Nico Delvaux and our CFO, Carolina Dubeck Happe. We will kick off this webcast with a presentation and then we will open up for questions and answers. So with that, I will hand over to you Niko. Thank you, Holger, and also good morning from my side. AssaBLUE Q3 results in brief, a very good quarter with strong organic sales development, strong growth in Global Technologies and Americas, a good growth in Entrance Systems and a stable development in EMEA and in APAC. Definitely the highlight of the quarter, our electromechanical products development, up 25%. That is including currency. If you exclude currency, that family was up 17% and all regions growing strongly. A good strong EBIT development, but EBIT margin diluted by FX, 30 basis points and also continued raw material headwind. As a matter of fact, raw materials were on the highest level in this quarter, the highest of the year, I think also the highest for at least the last 3 years. And then also a very strong cash flow in the quarter. In numbers, sales SEK21.2 billion, 15% up, 5% organic growth, 4% acquisition growth gross, but we also did some divestments, so 2% net acquisition growth and then 8% currency. An EBITDA margin of 16.6% and an EBIT margin of 16.2 billion. EBIT up 11%, value of SEK3.4 billion. If you look a little bit at the sales per region, very strong Americas as well North America and South America Europe, in line with the year to date growth a lower Africa and Middle East a continued low Asia, mainly because of China and then a flat evolution in Australia and New Zealand. Highlights for the quarter. Strong progress, like I mentioned, in electromechanical in general and in smart residential in particular. We have now also made the link between the Yale Logs and our August cloud based software, which means that we now can use that August software for smart residential all around the world in all our Yale countries and Yale applications. And we also started a pilot for in home delivery in the U. K. With John Lewis and with Waitrose, very excited about that pilot, where they will deliver groceries into your house, into your fridge at home even. We also continue our efforts with new product development. We just mentioned 1 here, a new generation of overhead sectional doors. You see a picture on the right focusing on energy efficiency. This new family is 2x more energy efficient than the previous one. And to give you an idea, on average, on such a door, you can save up to SEK1500, SEK15,000 per year in energy cost per door. And then, of course, it's good that we continue to be recognized for all our innovation efforts. I will not go through all the awards we won this quarter. I think what is important is that these awards are given by professional people in our industry, so people that really understand our industry and therefore also can judge very good what is true innovation. So very glad with that as well. Nice growth in the quarter, like I said, 5%, also 5% year to date growth, so in line with our quarter with our target, sorry. And now 22 quarters with positive organic growth, I believe, a rather strong track record. And we realized that growth with an operating margin within our bandwidth of 16% to 17%, a bit on the lower side in the bandwidth. We also show the EBITDA figures on this graph. As you know, as we do more and more technology acquisitions, we also have the amortization of this of the goodwill for this technology. And therefore, also the gap between EBITDA and EBIT is bigger. If you keep your margins within the bandwidth and you grow your top line in an important way, then of course, also your operating profit grows further, 11% in the quarter, 6% on a 12 month moving trend and 67% over the last 5 years. We continue our efforts on manufacturing footprint. We still have 2 restructuring programs running, our MFP5 and MFP6 projects, where we still will have to make 675 people redundant. And then we're also working on a new program that we will probably launch at the quarter 4 call. The scope of that project will be very similar as the previous ones, an investment of cost of around SEK1 1,000,000,000 to SEK1.5 billion and we have a very similar payback as the previous ones around 3 years. With the difference that we will now book the restructuring cost in 2 parts, the majority at the end of 2018 and then part of the cost also in 2019. But we will come back there with all the details in Q4. Acquisitions, we continue our acquisition effort. We acquired 4 companies in the quarter, 14 year to date. And definitely, the highlight of this quarter was the acquisition of CostMatch, a U. S.-basedleaderinbiometricidentitymanagement, company with a revenue of around $125,000,000, 2.70 employees And they allow us now to offer biometric identity into critical applications, and they also help us to complement further our total solutions offering for HID. Very excited about this acquisition. If we then go into the different divisions, starting with EMEA, I would say a little bit disappointing quarter for EMEA with an organic growth of only 2%. Mixed picture, we have a strong North Europe, Scandinavia and Finland, a weaker U. K. And France and a negative growth in Benelux and Africa, Middle East. And that lower organic growth also led to a lower operating margin, 15.9% versus 16.8% last year, where we have to say that we had a very strong dilution by FX in the quarter, 80 basis points. Americas, I think very good performance, very strong organic growth of 10%. Would say strong organic growth in all domains and in all regions as well North America and South America as well commercial as residential and then also an operating margin of 20.1% versus 20 1.8% last year. Here, continued dilution from raw material and also a dilution because of mix, where we grow faster on the residential side than on the commercial side. And we know that we make lower margins on the residential side than on the commercial side. And then also dilution from acquisitions, and that's mainly August. I must say that I'm very happy here with the progress we make on compensating with price increases and cost efficiency measurements to compensate for the higher material cost. Like I mentioned before, material cost was on the highest level in this quarter year to date, but also if you go back the last 3, 4 years. But nevertheless, we managed to make the gap between material cost increase and price increase smaller. And we really see that gap getting smaller quarter after quarter. It was still high in quarter 1, it was small in quarter 2, it's even smaller in quarter 3, and we are confident that we further will be able to bridge that gap going to quarter 4 and the beginning of next year. Asia Pacific, an organic growth of only 1%. Strong growth in South Korea, but negative growth in China. You know the challenges we have in China. We also explained to you that we have implemented there a new strategy. We have now the new team on board, and it's now a matter of starting to execute that new strategy. But as explained earlier, that will take more time. That is not a matter of a couple of quarters. That takes longer. And then with a negative growth in China, of course, also an operating margin of only 9.2% versus 11.3% last year, where we also continue to have a dilution from the high material costs. Going to Global Technologies, I think a very strong quarter as well on the HID side as on the ASSA ABLOY Global Solutions side, as we call hospitality nowadays. I would say strong growth in all different business areas with the exception of secure issuance, where it's more a timing issue and where this will come back now in Q4. And then operating margin of 21.4% versus 17.8%, very strong performance, good volume leverage and also positive contribution from acquisitions. Perhaps a couple of words on the new name for hospitality. Hospitality historically was focusing mainly on the hotel business, on the hotel vertical, also doing some work on the marine side with cruise ships and so on. But more and more hospitality is going also in other verticals with the acquisition of Fonero into elderly care. We also have ideas and projects around solving the last mile on the logistic side. We also focus on student accommodation. And therefore, we found that the old name, hospitality, was not really covering what this part of our business stands for. We believe Wassa Ambloi Global Solutions is a much better name, also because we want to reinforce activities on those other verticals and also add other verticals to this part of the group. Entrance Systems, a good solid performance with an organic growth of 4%, strongest growth in residential doors and negative sales in high performance doors. And that is also the explanation for the operating margin of 14.1% versus 14.5% last year, because you know that we make higher margins on high performance doors than on residential doors. So it's mainly a mix effect. I will not jump too fast to conclusions here. If you look at year to date figures for Ensign Systems, they have a very nice volume efficiency gain, and I think year to date is a very solid performance. We are confident that mix here will come back to normal levels in the near future. And with that, I think I give the word to Carolina. Thank you, Nico. Good morning. I will start with the financial highlights and of course, with the top line. Very happy to see the good organic growth of 5% in the quarter and that is with the same number of working days and we estimate the price increase to be 2 and the volume to be 3. And for the Q4, we will have 1 working day less. Moving then to the acquired growth. And here we had, as Nico said, 4% gross and then 2% net because of the divestments that we've made. And we have already for the Q4, we will have 3 percent acquired growth looking at the companies that we've bought so far. And we have a carryover effect for next year of the already acquired ones of 1.5% acquired growth. And then to currency. Well, a strong effect from currency, especially on the top line in the quarter, full 8% on the top line. And if I take the rates as they are today and extrapolate them for next quarter, we will have around 5% top line added from currency, assuming they stay the same, which they almost never do still. So top line up 15% and then bottom line followed with a full 11% improvement on the bottom line. The margin was a bit under pressure. We had both the negative drop through from the organic as well as a negative from currency, while the acquisition part was flat. And I'll come back more to that later in the bridges. And you can also see that the comparison on EBIT year over year is 50 basis points difference, while on EBITA, as Nico mentioned, it's only 30 basis points. And here, you see the difference on the amortization that is increasing with the increased number of technology acquisitions. From the EBITDA, we had a financial net that basically went up in line with the increased debt, have a tax rate that we estimate to start at 26%. And with that, we have an earnings per share that is up with 11% in the quarter. And finally, and very importantly, the cash flow. Strong cash flow in the quarter, a full SEK3 billion of cash flow and we're up 13% year over year on cash flow. More about that later. So from the highlights to the details. Looking at the bridge. And here, we separate basically the P and L in 3 parts, the organic and the drop through and then we have the currency and then the acquisition. And very importantly then on the organic, with the 5% top line growth, we had a negative of 20 basis points drop through. And here, as I mentioned, we have 2% price and 3% volume and a bit different between the divisions. And you have the bridges in the appendix of presentation so that you can look at them on a divisional level as well. And there you will see that there is a mixed bag. We had very strong help from Global Tech with very strong growth and also strong drop through. We then had Americas, also very strong top line but not as positive on the bottom line. And as we have talked about before, they are closing in on the gap from the raw material as well as having a mix component from more resi for the Americas. And then we move on. We have M and M Entrance Systems, 4% top line, so a good growth and a flat on that from the margin. But year to date, they've seen very good development on the margin like for like on organic. So I think it continues to be a good development. EMEA, 2% top line and not really enough to manage to keep the margin, so slight dilution there on the margin. And then finally, APAC, with 1% growth and weak China, I would have to say as expected and as we communicated negative on the margin. And the effect from Eltek on the group is really 20 basis points on the margin. If we look at currency, so a strong top line development, but a bit weaker on the bottom line. Here, a big part of this is translation effect and then some part is also transaction. And really what we can see here that it's not totally balancing and part of that is because Swedish krona got weaker, and we make more money in Swedish krona. So in the quarter, it was tough on the bottom line from currency due to the SEK profit. And then finally, acquisitions. Gross for net 2. And since we acquired companies with a high margin and also divested companies with a very low margin, we've had a good mix. Included in this is also August, which is then, as you know, strongly dilutive. But overall, for the group, the net effect is flat on the margin from acquisitions. Next version of the profit and loss components of sales. And here, it's the year well, year to date, so January to September. And here, you see the effect also like for like and then adding the acquisitions. And here, you can also see the effect from the raw material that you see in direct material that we have talked about. We have increased the price with 2%, but the raw material is up 4%. On the other hand, you see the effect also from general inflation and direct labor. But we have cost savings from the good restructuring programs as well as volume growth, which also helps on the coverage of fixed costs. So like for like, year to date, we are 20 basis points down, and that is really also the effect from APAC. And then we add the year to date, 10 basis points dilutions from acquisitions, and we end on 15.7 percent. So from the P and L then to the cash. And as I mentioned, the strong development of cash in the Q3. What you can see from the graph is that we have a very strong seasonality in our numbers. We have a very weak first quarter, good second and third quarter and a very strong fourth quarter. And this year so far has been similar, but we have started to work on different initiatives to try to smoothen out the cash flow over the year. So the overall one would be good, of course, but not as strong. We have some seasonality, as you know, and that we can't do much about, but we work on other things to try to make it more smooth. But in the Q3, good development. We saw a slight improvement on the diesel one day. On the DPO, on the other hand, we were a couple of days lower, but we still have a positive gap between DSO and DPO. Inventories, above 100 days, so a little bit higher, I would say, compared to last year as well. But here, we also have the effect of the increased raw material, basically the value of raw material in the volume of our inventories. So overall, good development on cash flow and up a full 13% in the quarter. So good cash flow, but then also buying nice companies like Crossmatch that we also tell for. So you can see on the net debt that basically it is stable from the 2nd quarter, €31,400,000,000 to €31,500,000,000 So basically flat. So the good cash flow and then the outlook on acquisitions basically kept us on the same level as we were for the half year. And I would say important here is to look at the gearing, and the gearing is 63%. So it is well, it's a little bit higher than last year, but it's actually lower than a couple of years before. So good room for maneuver there. And also importantly, the net debt to EBITDA ratio, which is basically staying around 2. It's 2.1 in the quarter, and it's been around 2 for quite a long time. So very good KPIs here as well. And then finally, it all boils down to this, the earnings per share. And we had a strong development of the top line, the 15% then down to the EBIT of 11%. Percent, good financial development as well as stable tax rate and therefore also the earnings per share is up with a full 11% in the quarter. So with that, Nico, I'll give back to you for coming. Thank you. So in summary, we can say it was a good quarter, a good Q3 with strong organic sales development, 5%. Definitely, with the highlight of the quarter, the electromechanical product development, 17% up, excluding currency a strong EBIT development a strong cash flow. And then also worth to notice is that we will have our Capital Markets Days on the 14th November here in Stockholm. So we hopefully will see all of you there. But then also before we go to the Q and A, this is the 27th quarterly call for Carolina, but unfortunately, it will also be the last call that Carolina does with us. You have seen that we announced Carolina's replacement. That is Erik Pieter. He is today the Vice President Finance in Atosco Compressor Technique. He will join us as of the 14th January. I would like to take the opportunity, and I think I can also speak for most of you, perhaps for all of you, to thank Carolina for, I think, a great contribution to these quarterly calls. And I think the good relation we have with the people on the front, with the investor community is definitely also thanks to for a big extent to all the good work you did over those 26 or 27 quarters. So thank you for that, Carolina. We will have time to celebrate or to say farewell to Carolina at the Capital Markets Day, sorry. We'll keep it for the Capital Markets Day. And with that, I think we can open for Q and A. I think the operator will explain how this works. Thank you very much, Nico. Before we kick off the telephone conference, I would like to remind everybody to limit yourself to one question to give a lot to as many as possible to ask questions. Before we kick off, operator, will you please remind how to ask questions? Yes, of course. Thank you. If you wish to attract that question, just press 0 and then 2. And as you informed, please limit it to 1 question per round. And I'll first go to the line of Lars Brorson at Barclays. Please go ahead. Your line is now open. Thanks very much. Good morning all, Nico, Carolina and Holger. I'll take just one question, maybe more to you, Carolina, and thanks again for all your help over the years and good luck. But before you leave, maybe I can just bore you with one question on U. S. Tariffs. I appreciate it's quite a dynamic picture at the minute, but an offset of U. S. Tariffs to be implemented in late September, so that's the Section 301 Level 3, does seem to me to be quite a potential impact on your Americas business in 2019. Can you help me understand how to quantify the expected impact on your business? Have you done the work to break that down? And if you can provide some numbers around that, that would be helpful. Thank you. So, Ash, your questions are never boring. And now on the tariffs then. Yes, we have looked into it. The regulations are sort of partly implemented and partly coming, just as you say. For us, the effect is on the Americas division and also on the Global Tech division. But that said, it's a pretty limited effect for us. And we have yes, we have looked into it, but we don't see a significant effect of it, both on the the actions so far and what's planned to come. Of course, we don't know how that will pan out in the end, but from what we know now, it's not a big effect. And it's also so that it's about being adaptive. So also for Americas, I know that we have already done some resourcing to sort of adjust to the new situation, and we will continue to do so. Perhaps also in the market, we see or we have the ambition to compensate obviously also with price increases, but mainly also with surcharges for these tariffs. And we also see that the market is applying similar methods. So for most of the players in our field, the situation is similar. Yes. Thank you very much. It's encouraging. Thank you. Thank you very much, Lars. Operator, please, next question. Next question is over to UBS. And Guillermo Peigneux, please go ahead. Your line is now open. Thank you, Guillermo. Penier from UBS. Another question for Carina before she goes regarding the raw mats dilution and your comments, Nico, that this is probably the toughest. Can I just read that Q4 dilution will be less than Q3 dilution? And whether you can give us some color as to what a Q4 dilution that would be and what do you expect for the first half twenty nineteen, if I may? And the same for FX, if I may. First, I will start with material and then Carolina can add on material and on FX. It's true that material prices are today on the highest level or material cost for us is on the highest level this year and definitely also in history, the way we can go back, definitely the last 3 years. There is always a time lag between material indexes going up or down and us seeing that effect in our cost. That delay is around 6 months. I think the good news is that since a month or 2, we have seen some material prices going down, copper, zinc, brass. So that is good news if that trend continues because that's then something that we should see on the positive side going into 2019 with that 6 months delay. We are very much affected, as you know, by steel prices, and they also have stabilized now on a very high level, I would say. So if that trend indeed also continues, then also the continued price increases that we realize should then more and more compensate for the steel prices. And definitely in the Americas, like I said, we are making good progress and we are confident that towards the end of the year, beginning next year, we will be able to bridge that gap. Yes. And if Americas is sort of bridging the gap, I would say if you look on all the divisions, the other ones you know are okay. The one that is still not okay then is Asia Pacific. And there, it's going to be a longer journey to try to compensate for the price changes there. So for the Q4, assuming the raw mats stay the way they are, yes, for the whole group, there will be sort of a smaller effect, a more better situation for the Q4. And you also asked about currency. With the currency as it is now, if I look at the Q4, we will have 5% top line effect. And I know also just from making a simulation, assuming the same flows, we would have a flat margin on that, so more in line with what we usually see with the currency. So happy to see that. And a comment on the Q3 where we did have dilution. That was, as I mentioned, a lot from the Swedish krona or the profit in Swedish krona that was then less in relation to the other parts of the group. And then for the first half twenty nineteen, from the raw mats perspective will be accretive? The first half? Well, yes, price versus raw material, yes. But you have to remember, we also have other inflation, right? On general inflation, we have direct labor inflation. On the other hand, we also have positives from restructuring programs. And so but just looking at price versus raw mat, yes, assuming it stays raw mat. Thank you so much. I'll stay in line for the next question. Thank you much, Guillermo. Operator, please, next question. Okay. The next question is Andreas Willi at JPMorgan. Please go ahead, Andreas. Your line is now open. Yes. Good morning, everybody. My question is on the digital business. You mentioned the joint Louis partnership for pilots that you're running. Maybe you could tell us a little bit more about what kind of business model that has in terms of are they using your software? What's the payment structure? How does that compare to what you have been doing in the U. S? And related to that also in terms of August, which you now said you will use some of their software for Yale globally. Maybe you could help us better understand some of the financials around August, obviously, given the given you have disposals and acquisitions in the Americas division, it's a bit hard for us to figure out exactly how August is performing. Do you still expect to get to that kind of SEK 500,000,000 sales number? And what's the breakeven target there? Perhaps first on the in home delivery in the U. K. Let's say that it's a pilot. It's a small pilot, so it's not a lot of business yet today, but it's an interesting pilot with those two companies. I think the pilot is around 100 families. So basically, it works like that, that you as a family buy grocery online in their shop and then you ask them to deliver in your home. When they come to your home, they will have a special code that they can type in onto the Yale lock and get into your house. They will have a video camera on their breast that they film while they come into your home and they will put the grocery on the table, on the kitchen table or into your fridge if it has to be put in the fridge or if you give other instructions, they will follow your instructions and they will go out again. That's a bit the concept. And then the way we make business out of it is obviously by selling the hardware, our E. A. Locks. And then there is also a recurring revenue part on the software and on the service, the brokerage we do for the keys. When it comes to August, we have said from the beginning that August would be dilutive around 20 basis points for the group. This quarter, it's a little bit higher. As you know, the sales of August is very seasonal. The 1st three quarters are lower and then the 4th quarter is normally a big quarter for August. So we are confident that indeed quarter 4 now will be a very good quarter for August. But we have also said that this dilutive effect of August will also continue in 2019 that we only have the ambition by 2020 somewhere to turn that around. August is more or less going according to plan. We also see a lot of synergies with August and the Yale organization in the rest of the world. This software platform of August that we now use for Yale Smart Living in the rest of the world is one good example. We also have more and more products of August that we will also use under the Yale brand and sell under the Yale organization in the Rest of the World. So a lot of interesting synergies. Thank you, Andreas. Thank you. Operator, please next question. We go to Lucie Carrier at Morgan Stanley. Please go ahead. Your line is now open. Hi, good morning and thanks for taking my question. I wanted to go back on the Global Tech business and maybe understanding a bit better the underlying margin dynamics and how this is sustainable. I think the 21.4% was probably ahead of expectation. And I was just wondering whether there was here any specific mix effect or project which led to this performance. And as you are looking at your current backlog, how do you think that, that level of margin could be? And just on Crossmatch, as you were mentioning it earlier, it is relatively sizable, I would say, for the division in terms of size based on the sales you've provided. How should we think about the impact of Crossmatch on this acquisition on the profitability as we go into next year? On Cosmet, we have said that Cosmet is accretive as of the start. If you look at the performance of Q3, and it's a good question because we can then also tamper a little bit ambitious. Of course, if you realize the result we realized for Global Technologies in quarter 3, all the stars have to be aligned and that is what happened in Q3. We had solid growth in all different business areas as well on the HID side as on the SLA Global Solutions side. And we had also strong profit performance in all different business areas. We are still very optimistic when we go into Q4 and for the foreseeable future for Global Technologies. We believe that division has to grow higher than the 5% growth ambition we have as a group. But of course, it will not be every quarter the same high performance as we had in Q3. And that is true for top line as well as for bottom line. We explained in Q2 also that we grow normally on the HID side faster on all the other business areas than physical identity. This quarter, that was a little bit different, but normally, that is the trend we see. And if we grow faster on the other business areas, we know that the margins are lower there. You also have there then a dilutive mix effect, but a dilutive mix effect, of course, on a very high level. So as a summary, I think we are still confident for Q4 as well top line as bottom line, but don't expect the same high performance as in Q3. Thank you. Thank you very much, Jose. Operator, please, next question. We go to the line of Ben Sakhraj at Goldman Sachs. Please go ahead, Ben. Your line is now open. Hi, good morning. This is actually Daniela here. Thanks for taking my question. I wanted to ask sort of what are you comment on the U. S. About residential versus non residential? What sort of drove the acceleration versus the 9% of growth in Q3 to this quarter? And then how do you see that going forward? What's sort of your confidence on the market continue to accelerate there from here after several very strong quarters there? If you realize the result that we realized in the Americas for Q3, again, there, of course, we have to have strong performance in most markets and in most business areas. And that was the case in Q3 as well in South America as in North America. I think the only lower performance countries were Colombia and Chile. For the rest, South America was strong. And then definitely a very strong North America as well Mexico, Canada as U. S. And in U. S, we had a very strong growth on the commercial side on the residential side. And I would say it was very similar as Q2, where we had a strong growth on the commercial side and even a stronger growth on residential side. And if you then zoom into residential, we had a strong growth on the, let's say, electromechanical in general and even a stronger growth than on our smart digital solutions. We had a good contribution again from Google Nest. We also had and that is new in Q3. We started to invoice now also the Walmart order that we reported about in Q1, and that also had a positive contribution to the overall result. We see market conditions still very healthy. We foresee that market conditions will remain on similar levers in Q4 as Q3. So we also expect a good Q4 Americas. But again, to have the results we had in Q3, also here, most of the staffs were aligned. Let's see if that is also the case in Q4. Thank you. Thank you very much, Daniela. Operator, we have another question on the line. We'll go to Gael De Bray at Deutsche Bank. Please go ahead. Your line is now open. Thanks. Good morning, everybody. What's your take on the French market right now? I think you had said orders were pretty weak in Q2, but eventually you delivered stable sales in France this quarter. So what do you see in this market right now? This is actually question number 1. Can I have a quick second question on the margin momentum? Because if we exclude the Global Tech, 4 out of your 5 divisions have actually shown a negative margin momentum in Q3. So outside Global Tech, are you able to quantify what was driven by the negative mix effects related to the faster growth of your digital and residential solutions? Yes, we can do that. First question on France, and perhaps I will answer also a bit more in general on EMEA. It's clear that we were not happy with our result in Q3 in EMEA. It's true that KPIs, construction indexes are pointing in the wrong direction for several markets. If you take a market like Sweden, if you take a market like U. K. And definitely also if you take like a market like France, you see indexes going down. Performance in France was, let's say, flattish in the quarter, and we don't see a real improvement for France with the visibility we have. You know that we have rather short visibility. Also because in France, more than 50% of our business is residential and the visibility is shorter. But we definitely don't see an improvement in France. That being said, I think and irrespective of indexes and market indications for the future, I believe we should be able to do better in EMEA in quarter 4. And let's say that we would be very disappointed if the organic growth figure will be on the same level again in Q4 as in Q3. But it's true definitely that some of the bigger markets in EMEA, the overall market conditions are weakening or definitely not strengthening. And that, I think, is a big difference between Americas and EMEA. In Americas, the biggest market, U. S, is strong and continues with a strong dynamic. The bigger markets in EMEA are definitely not improving if something they are weakening. When it comes to the second part of the question, the negative volume flow through, I think it's a very different story division by division. If I stay with EMEA, I would say the main reason is the lower organic growth. If you only have 2% organic growth and you have your general cost inflation, and on top of that, you have also in EMEA the highest material cost in the quarter, then it's very difficult to compensate for that with only 2% organic growth. We're also taking measures in EMEA on the cost side to further realize more cost efficiencies because that's what we have to do, obviously, if the organic growth is lower. But that, I would say, is the main reason in EMEA. And then let's not forget, we had a very strong dilution of FX in EMEA, around 80 basis points. I think it was 20 basis points volume flow through, but then 80 basis points FX. If you go to the Americas, like I said before, we're very happy with the progress we make in compensating for the material price increases and through efficiency gains. We are really bridging the gap between the two, and we are confident that the gap will become smaller towards the end of the year, towards beginning of next year. But obviously, in Americas, we have a higher exposure to steel because of our steel door business. I think on APAC, we should not further elaborate. We know the challenges. It's mainly China, and we have also said that China will take longer to fix. Also in this quarter, profit in China was very low. When we then go to Entrance Systems, like I explained, the main reason is a mix effect where we grew much faster in residential doors in the U. S. Versus high speed doors, but also versus just a standard sliding doors, the core of our Entrance System business. And we make higher margins on sliding doors and on high performance doors than we make on residential doors. So it's really a mix issue. But again, we don't see this mix to be a structural thing. It's more a quarter issue, I would say. If you look year to date for Anton Systems, you will also see that they have very nice volume leverage. And then I think Global Technologies was a good volume leverage. So I don't think we should explain there anything. Thank you very much, Niko. Operator, do we have another question on the line? Yes. We go to the line of Markus Almert at Kepler Cheuvreux. Please go ahead. Hi, good morning. Markus Almert here. I'd like to continue on the U. S. And I mean the electromechanical locks have grown extremely rapid. I mean you saw 37% growth year to date and 55 percent in the quarter. So I'm just interested to know how much of that is, first of all, how much of that is the SmartLocks? And then how much of that growth could be attributed to Google? And also on that topic, if you could give us an update on Amazon. You said you started to invoice Walmart, but is anything at all happening with Amazon and the Amazon Key? Yes. If I start with Amazon, I think we should indeed make a difference between Amazon Key and just Amazon as a retail channel. I think Amazon as a retail channel is, I would say, performing on a good level, mainly for our August lock because that's the main channel for the August lock. When you go to Amazon Key, my comments of quarter 1 and quarter 2 remain also valid now in Q3. It's on a lower than by us at least expected level. We see that it does not take off that fast. Definitely, it takes off much slower than the Google Nest solution. And perhaps it has also to do with the approach where with the Amazon Key, Amazon really wants to own the entrance to the consumer in the U. S, where Google Nest has more of an approach of we add another hardware component to our ecosystem. And indeed, we are happy with the orders we get from Google Nest. We see also that it's repeat orders. We see that the stuff on the shelf in the stores moves, and therefore, that we get these repeat orders are very positive. Of course, when you have 17% growth, you have to have strong growth on our traditional business as well as on the digital and the smart business. And I would say, yes, it's very high growth on the traditional side. It's higher growth on digital and it's, of course, the highest growth with Nest. But obviously, Nest starts from a lower level. And Arthur, out of the 2.7% that you had for electromechanical locks, how much of that is smart in Americas? Out of the I don't I'm not sure I understand the question. So out of the how what part of the electromechanical sales in the U. S. Is the smart locks? Just to get an idea. We have said that in the world, our digital locks is around, we have said that 6 months ago, around 2,000,000 locks and around SEK2 1,000,000,000 business. We can say that today, this is more closer to SEK2.5 billion. That's the digital part of our business in the world. And obviously, in that business, Korea is an important contributor and U. S. Is a second important contributor. Okay. Thank you very much. Thank you very much, Markus. Operator, do we have another question on the line? Yes. We go to the line of Matthias Holmberg at DNB Markets. Please go ahead. Thank you very much. So when I look at the Americas division, you in the last quarter Q2 had 9% organic growth, but it's 150 basis points organic EBIT margin dilution where, if my notes are correct here, you said that 50 basis points were related to mix and 100 basis points of the dilution were related to steel. And now when I look at Q3, you have a still strong organic growth 10%, but only a 30% organic EBIT margin dilution. So what I'm wondering here is how do we get from the 150 basis point dilution in Q2 to only a 30 basis point dilution in Q3? So where does this sequential improvement come Well, what we're talking about is really 2 parts. First, well, one part is sort of on the residential and on the mix side, and it was even stronger in the Q2 than it is in the 3rd. So that's part of the explanation. And the other part is the closing in gap on the direct material part for Americas. Okay. So could you at all quantify if it was basis points headwind for raw mats in Q2 and we're down at 30 for the group or sorry for the division in total organically, it seems like a quite major improvement compared to Q2 then? We don't separate it out, but it's significantly lower. And I think that also relates to Nico's comment that he was very happy with the And that's also And that's also why we believe that towards the Q4 and beginning of next year, we hope to have close the gap. Of course, that is also depending on how the raw mats themselves develop, but if they stay stable and hopefully even go down. Thank you very much. Thank you, Matthias. Operator, do we have another question on the line? Yes. We go to Joy Kukhnin of Credit Suisse. Please go ahead. Your line is now open. Good morning. Thanks very much for taking my question. I wanted to talk about where you expect the El Mec residential profitability to settle in the U. S. Or Americas. Clearly, it's ramping up fast right now, and you're investing a lot in getting new customers and channels and product range. But do you expect even with those higher ASPs, the electromechanical resi to still be dilutive to your overall Americas profitability once we've had maybe a year or 2 of growth of this space? Or do you think we can ramp up the productivity savings efficiencies to get this margin structurally higher? So it's, of course, very difficult to speculate 2 years down the line because it all depends, of course, on the competitive landscape, 1. And 2, also where on Elmec we will see the biggest growth, how the mix will move because it's clear that on the traditional Elmec margins are very healthy. Then of course, if you take the complete other side, if you have people like Amazon or Nest, then the margins are lower. So it really depends on mix and on competitive dynamics. It's true that today, margins on the residential side are lower than on the commercial side, but it's true that they are, according to us, on a very nice healthy level, contributing in a very important way to shareholder value. And we also see that as we grow, there is definitely also on the residential side rooms to further improve operational efficiency, and that's what we are working on every day. But going 2 years down the road in such a fast market where things happen with a very high speed, I think, is too speculative. Right. And can I just follow-up quickly? On August, what you said earlier, do you expect 2020 to be non dilutive to group profitability or to become non loss making? We have said that August would come into the black figures in 2020, yes. Right. But still loss making 2019, but at a lower level of loss than 2018 and hence small positive on the bridge? Is that right? Correct. That's the ambition. We have said that for this year, August would be dilutive 20 basis points. Like I said, in quarter 3, it was a little bit higher. We still believe that the 20 basis points on the full year is realistic. And then obviously, as we go into 2019, we should have the ambition to lower that dilution and then go by 2020 into the black figures. Great. Thank you. Thank you very much, Andre. I think that's concluding our questions and answers today. And I would like to hand back to Nico for his closing remarks. Yes. No, I can only say that we were happy with the result of quarter 3. I think it was also in line with most of your expectations. Thank you for the call. See hopefully all of you also at our Capital Markets Day here in Stockholm soon. Thank you.