Earnings Call: Q3 2017

Oct 20, 2017

Welcome to Assa Bloy and the 3rd quarter reporting, a quarter that is stable with good development in all divisions. So we saw in the quarter itself good organic growth in all division with Specialist Global Tech growing at a 6% pace. Good growth in EMEA and EMEA has been continuously improving you could say and Americas a little bit weaker in this quarter, while we saw growth in Entrance Systems and APAC despite that we continue to have a weak China. Also a continued good development for smart door locks and our electromechanical new solutions. Turning to the numbers, a good evolution here, 3% top line growth of €18,500,000,000 on the back of 3% organic, 2% acquired and 2% negative currency in the quarter. And EBIT improved by 2% to €3,080,000,000 with a negative currency effect of minus €70,000,000 and earnings per share improved by 1% while margin was almost flat at 16.7% compared to 16.8% last year. Looking now from the beginning of the year, January to September, an 8% improvement of turnover to 56,000,000,000 with 4% organic, 2% acquired and 2% positive, in this case, currency. EBIT improved by 8% as well, same as our turnover to over to €8,900,000,000 or rounded off €9,000,000,000 with a positive currency effect of €167,000,000 and EBIT 16%, down from 16.1% last year. And earnings per share likewise improved by 8%. So altogether, €8.8.8 Turning now to the globe. Good situation, continued strong situation in the mature markets. America has grown organically, which is the green here, 5% since the beginning of the year, same in Pacific, while Europe has 4%. So the mature market have continued to have a strong evolution just as we have seen in the last 5, 6 quarters. In South America, Brazil is still problematic in the sense that it doesn't take off. It's less the negative in this quarter, but it's minus 6 since the beginning of the year. And it is constitutes about half or a little bit more than half of South America, which means that the rest of the South America is growing at a good pace, in fact very strong. The same situation is in APAC where China is minus 7% since the beginning of the year, while we have 0 there and it's something like 55% of our business there. And that means that the rest is growing at the +8 percent pace. So a good evolution also here. In Africa, it's more problematic. South Africa does not have a strong situation, which is the largest market in South Africa, but we have grown 1%, and most markets are flattish in the situation. But altogether, a rather positive picture with a few problems in a way, that is China, that is Brazil. And in the Middle East, we are also doing some destocking, which also is negative for us in the quarter, just like it was in the quarter previous quarter. Market highlights. Exciting things happening. New products all the time, difficult to choose as usual. Here we see then our new baby, I will call it. It's small. It's not really a lock or it's a lock, but it's not really a key. It's, in fact, a sort of sword that you put into the keyhole, and then you generate the power you need to open the door. So it's a completely green solution for the market. So there's dynamo inside just like you have on your bike or when you're biking. You create your own power and that is enough to solve the transaction that goes between the key and the door and opens the door if you have authenticated yourself as having the right owner of the key. It is also connected toward our Accenture system, which is a system we've launched now for multi housing and large facilities, which is completely in the cloud. And this also interacts with HRD CO systems. It interacts with all smart door locks that we have and click systems. So that means for a customer that wants to configurate a building, he can do anything for a fire door, entry door, exit door, any apartment door, and we think this is very suitable for an apartment door for a residential application. But in principle, with this now, we can solve these problems for any facility that the customer would like to have digitalized. And you can connect to it as well. So that means that you can open and close your door in a freeway. So depending on what choice you make from our portfolio of various products. So very positive evolution. It is now launched in a Bloy version, and then we will launch it progressively in beginning of next year in Ola and the brands. So a very exciting evolution. On the specification side, we continue to see progress. I'll share with you about Americas and EMEA and also Pacific where we have BIM. Now we have it also with Entrance Systems. So they have started with BIM. And we see very good pickup of specifications. In America, we still see a double digit evolution. It is so that with the BIM systems that we launched, the architects can draw to some extent themselves the building. And that means that they do part of our work. Of course, we still are advises to them, but it gives us much more leverage in front of the end users and the architect. The same is now happening in Entrance Systems. And the beauty there is we get higher success rate when it's drawn our stuff into the solutions and also the margin follows in a positive direction. The virtualization, which is a la mode everywhere, is also going into inside Assa Abloy. We have now had one of the larger soccer events in the world where we have then had virtual keys based on the sales system with very good results. And this is, of course, very interesting for this year of tickets in those kind of events or pop concerts and others. There's always a lack of or there was a black market or copycat type of tickets, so which people then buy and they are not valid. And in this case, when you do it in an electronic way and a virtualized way, have full control of the whole value chain. Also very valuable for those arenas. So we've had now a few tests, and it works very well. So we expect continued progress in this field. Another thing that I'm very excited about, we have been working on the agave side. And in this case, then we have the 1st full win, which means that we deliver ADOSET in full system. In this case, it's for Tanzania in Africa, where we will be doing everything, including the hardware, but also the software. And this is the first time we get all the software. And in this case, it is how to produce a very smart state of the art passport. And on top of that, a virtualized version, which you then if you lose your passport, which happens frequently, surprisingly enough, but it happens. People lose their passport when they're abroad and they can't get back. And then you have to go to the embassy or somewhere. If you can authenticate yourself, you will get it virtualized into your mobile phone and you can back again. And we are doing this not only for Tanzania, but we are going to do it for a few other applications as well. But so we see really how the virtualization is catching on in a very positive way. It's a very exciting win. Turning to our usual graph. When it comes to growth, I'd like to underline again. If you take a 5 year perspective here, we have grown more than 50% as you can see from the graph. This quarter, we grew 5% real term, 3% organic, 2% acquired. But the power behind what we do with acquisition on a continuous basis and the growth about 2% to 4% per annum from an organic point of view creates a very powerful cocktail over time. And in this case, then more than 50% in the last 5 years. And on the margin side, unfortunately, then when you do a lot of acquisitions, they dilute you. So we in this case, in this quarter, no difference. We had minus 0.2% from acquisitions. And as we have said earlier in the year, we also lost 2% 0.2% due to APAC that is then having a trouble as we have forespelled in the beginning of the year would happen. So we have a dilution from APAC and altogether 0.4%. And still the margin is pretty flat. As you can see in the last 12 months, we have 16.2%, just the same margin as last year. So this means underlying that we have good leverage from the business that we are running. And this I see no reason why we should not be able to continue. And looking then to profitability, same graph, but now in absolute money, and you see then that the profit has improved by 66%. And we are now at the run rate of €12,200,000,000 up from €11,400,000,000 1 year back or a 7% improvement. So very powerful continuous add on quarter after quarter, year after year. So and one of the secrets there behind to be able to have this leverage is, of course, our manufacturing footprint program. We have not closed any factories in this quarter, but we did convert 3 units into assembly. And you see but the program you see there, there are still lot of activities ongoing, 11 more factories to close and 33 to go. We have acquired 17 companies this year so far. There's still a few more months, so we probably will come a few more. And that means that we have a record number. So I think you anticipate the question I will get, you can expect that we will have to do this once again and once again once again since we buy so many companies. But altogether, this is a very positive evolution. And you can see we have provisions then to do the remainder of this program, which is manufacturing footprint program, mainly number 6 that we call it, SEK1.2 billion in the balance sheet to take care of those changes that we are implementing. On the acquisition side, very active. And I said in the beginning of the year and it's still very active, many companies are for sale. Unfortunately, and I think you all know that, very expensive. So you need to choose what to do and not to do. We try to keep sort of a focus line where we try to buy primarily so far smaller companies. And the reason for that is because the multiples are not that exaggerated there. We have now 4% acquired growth from acquisitions, €2,800,000,000 so far this year, 17 done and one sold, which is Advenite, which is our trading business within Global Tech. And you see the names of the ones that we have done this year, they are all variants, but I'm going to share with you the most recent ones. And the one that we announced yesterday is, of course, an exciting one because this is how we intend then to go into the DIY as well in the U. S. Side on the smart door lock. August is rather well implemented in that field, while we are more on the sort of business to business type of distribution. This is a very nice complementary thing for us. And they also are quite good in software, just like AssaBLOY. And together, we create a very powerful constellation. So here, people are looking for connected locks. And we and them are the leaders in the connected lock field. So together, we can really create a powerful expansion into this sector. And Aogors is one of the fastest growing companies in this field in the U. S. In the DIY chains. So very, very positive acquisition from our point of view. On I should perhaps add those, it's not accretive. I mean, I think that's important to say because otherwise, you will complain next quarter. On the Mercury side, very exciting company here. It is accretive, this one. Has a turnover of almost €500,000,000 It is the brain of access systems. We do also this kind of panels. They work very much with system integrators. We work also so, but they are larger than we are in this field. And together, again, we get very nice complementary add on together with them. They are focused on OEMs, so they pretty much supply to most independent system integrators these solutions. And we have a number of others as well. So it really reinforces our global leadership on access control systems. So a very positive addition to the group. And here we have another one. So this time we have 3 strategic acquisitions. This is SMI India. It's a smaller one, but quite important. In India today, we produce in China mainly and we export into and ship into India Indian locks. The problem we have is there are heavy import duties. By going local now, we can then compete on equal terms with the Indian companies. This will take a year or 2 before we have converted what we import into localized products, but we think this is a very, very important step forward in order to be very competitive also in the Indian market. Today, in India, we sell $70,000,000 to $80,000,000 to $80,000,000 It's probably going to be $80,000,000 It's very strong growth in India right now at the end of this year. And this is then putting ourselves in a position that we can continue to compete in a very competitive way on the Indian market. So very exciting. And India is something like 1,400,000,000 people. So it is a market for the future. Turning now to the divisions. EMEA grew 4%, as I mentioned, pretty much positive evolution in all parts. Negative in the Middle East, it says here. It said the same last quarter. This is destocking that we do with 1 of our or not one, with our largest importer there. We feel rather confident that it will be over after this quarter. We have taken out quite some inventory, and we will probably turn that also into a positive territory going forward. But altogether, in EMEA, it's a little bit weaker in the north and it's stronger in the south. And this has, of course, to do with that in Sweden and other markets here. We have seen growth now for 4, 5 consecutive year on a very strong basis. And we see we think it's going to plateau somewhere next year or a year after. So therefore, we see more and more how it's moving down. And to our joy, also France is starting to come to life where we haven't seen much in years. It's still only in good growth, but France hasn't been there for many years. Margin improved by 1 10%, 3%. We had dilution from acquisitions here and slightly positive currency effect as well. So positive evolution for EMEA. In Americas, we grew a little bit less, as I mentioned initially, 3%. Here, we see 2 phenomena. I should say also altogether, we had one working day less in the quarter, even though you never know how much that has influenced, but that has an influence for us. But in America, we grew 3%. Here, we see a lot of activity in the marketplace, surprisingly strong, But there are also a lot of delays in many projects. And at least many of our partners say that it's due to that they don't find people to do it, to really execute the jobs. That is so that has an influence. And then I don't like to say excuses, but we also have a few hurricanes coming in, disturbing a few states in the U. S. In September and also an earthquake in Mexico, which didn't help, I could say, even though I don't want to give a too big impact. 3% is still a reasonably good number on the base of 5% we had last year. But here, we're also growing pretty much in all parts of the business. The only part that is not growing is Brazil, but there we see a clear situation that Brazil is leveling. And even though we thought it would be start to be flat in this quarter, it didn't happen. Hopefully, it will happen in the Q4. We will see. Margin improved 1 10ths of a percent to 21.8 percent, up from 21.7% last year. Asia Pacific then 2% organic, strong growth then in every part except China. And China declined some 6% in the quarter. And here, we continue then to rationalize and improve our efficiency. And we saw continuous growth in smart door locks. And here, we see clearly in China that the market is converting from mechanical to smart door locks in new construction. So we see a very nice upsurge on that part of the of our business. However, as you know, our main business in China is not smart door locks, it's steel doors. And those are not yet in growth mode. I should add, however, that we have seen that China seems to, at least for our business, seems to level in the sense that the order intake has been positive now for 3 months in a row. So we will see what happens in Q4. I cannot promise that we will start to grow, but it looks at least positive relative to last year. We lost 1% margin here to 11.3%, down from 12.31% year back. And it is, in fact, organic growth that is behind it. And it's mainly the price that is difficult. It's difficult to get paid for steel. Steel has gone up some 40%, zinc 80%, which is quite an important element. And copper has also gone up quite a bit. We have increased prices net with some 2% to a little bit more than 2%, but it's not enough to compensate for those raw material increases. In the steel door, steel is the element in and if 2% doesn't cover for 38% or 40 percent price increase on the raw material. So we continue to work on pricing, and that is the main element because cost wise, we reasonably good in the restructuring and keeping up with the downturn. Turning now to Global Tech. Very positive growth, 6%. Here, pretty much everything is doing well except the authentication piece, identity and access management. Here, we launched a lot of new products. We see also here positive traction, but still weak situation. It was negative in this quarter. It's been positive every now and then, but it's not really growing. But all the rest is doing quite well. And hospitality on the back of virtual keys that hotels are very excited about is doing very well. We see continued strong growth. And it seems as if the hotels are converting their especially the large chains, converting their portfolio of locks into more and more virtual locks where they see a big potential for improved relations with their customers. So this will probably continue for a few years more. The margin declined by 0.3% and here we had 0.5% dilution from acquisitions, not much to do. When you buy tech companies, they're not always ideal. First, we take all the costs from acquisition. And then in the RU case, we did not see very much sales in the 1st month, not unusual. They only been in for 1 month. And BlueVision also is a tech company that is very, very small, which also dilutes to some extent. But altogether, a positive evolution, underlying positive evolution and very strong organic growth. Entrance System 2%. Here we saw strong growth in many areas as well, good growth in high speed doors and U. S. Residential doors, while EU industrial doors and gate automation. Gate automation is a small segment. But industrial doors was not positive in this quarter. We think this is very much timing. There are quite some activities, especially on logistics centers, where we are doing quite well. So it jumps up and down. These are rather big projects that comes in, goes out. Last year, we had some very nice projects. So it depends a little bit how the quarter composition is. I wouldn't draw too much conclusion out of that. Continue very good leverage. The consolidation of what we have bought is going on in a very positive way. We have 0.4% positive leverage here. And of course, then a piece of that disappeared through the acquisitions where we have 0.3% dilution from acquisitions. But also here a good evolution. That concludes my overview. I'll now hand over to Carolina to guide you through the financials. Thank you. Thank you, Johan. Good morning. 3rd quarter gone already and happy to see that we had organic growth in all the divisions in the 3rd quarter. And starting with the financial highlights and organic growth, we saw 3% organic growth in the quarter and the separation of that is that we have 2% in price and that is really continues to be on the back of the increased raw materials. So we have compensated for that and therefore the price increase this year has been a bit higher than we usually see. 1% on volume in the quarter and again that on the back of a quarter which has one working day less. So a total of 3% here. Similar trend to what we've seen in the beginning of the year with strong in double tech and then good to stable growth in the other divisions. Acquired growth, I'm going to say net 2%. You're going to get used to that for 4 quarters because we have a divestment that happened in this quarter and that will then, of course, affect the numbers for a year going forward. So gross 3% acquired growth in the quarter and a net 2% here. And then currency. Sometimes it makes you happy, sometimes it makes you less happy. First half of the year, it made us happy because we had a good addition on the growth, but now we start to see the opposite effect because of the weakening of the kroner and it will continue then as it looks for into the Q4 next year as well. So overall, 3% top line growth. And with that, we also improved the EBIT with 2%. Margin almost flat here, 16.7% from 16.8%. And we do see good help from the organic growth and from the acquisitions as well, while the FX then the translation effect of that is a bit of the profit. A small deviation between operating income and earnings per share and really the financial net is basically stable, a couple of less, tax rate also stable on the 26%, but we did have a positive one off last year in Q3 with the divestment of Car Locks, so that makes the difference between 2% a bit and 1% earnings per share. Last but not least, cash flow. Cash flow in the quarter was like 6% down compared to Q3 last year. But if you look at it on a year to date basis, we still have a good development of plus 4% on cash, and I'll come back to that more later. So from the highlights to more of the details and this slide I think with the bridge continues to be very important considering the many acquisitions we do and we really try to show how the business is doing like for like and this is also how we measure internally to make sure that the business is improving by itself. And what we can see on the organic growth side is that we did improve because within these numbers, we have LPAC that is diluting 20 basis points. So it basically means that the improvement from the other divisions more than offset that. And we saw Global Tech, strong growth, strong drop through with 40 basis points there, although they did have a bit of a tough mix. We saw entrants, not that big organic growth, but on the other hand, very good results from the consolidation and efficiency programs. EMEA, good growth and good efficiency, also good drop through. Americas, a little weaker on the drop through here due to Brazil and also the doors that we have seen here. So a net effect then of 10 basis points from organic here. Currency, top line minus 2, mostly translation effect and therefore also sort of the same margin, so no real dilution on the margin from the currency here. And finally, acquisitions. And here then the net of the 2%. So it's a mix then of the acquired companies. And as Johan mentioned, we had a couple of acquisitions in the quarter. So both the performance of the acquisitions and the costs for the transactions are in here. And on the opposite side, we also have a slightly help from the Advernay divestment, which is a positive effect because it had such a low margin. So overall, with the graph, you can see that we come to 16.7% in the quarter. A different way to look at the P and L as components of sales. And here, we have a year to date view, it's pretty similar to where we were after Q2. So now after Q3, you can see that on the material side, the direct material continues to have a big effect and we have a full 50 basis point increase here. And of course, we can say we have seen a very strong growth in raw materials that we have been working on compensating for, which we did pretty well in. But then we had a second spike that we're starting to see now, which will then basically mean that we need to continue with the price increases, especially in the divisions, which are heavy on the raw material side. On the other hand, on the conversion cost, good results there, continue to see good effect from the restructuring programs as well as the other efficiency programs, so basically offsetting the whole increase from material. So as you can see, the gross margin is stable. And then the SG and A, basically growing a little bit less than we grow the top line and therefore improving with 10 basis points. And here you can say it's a shift where we take out on the support function side and we invest in front end, but also in R and D here. P and L then ends in cash. And this nice graph shows that over time, we actually managed to convert basically the full profit to cash. So very strong developments over many years and stability here as well. Of course, the first rule for good cash flow is to have a good profit, so it starts from there. But then we also have the working capital that we continue to measure and really inefficiency terms relating to what happens to our growth. And here, if we look at working capital on the receivable side, we are up to 55 days. So it's actually 2 days more than last year, so slightly worse off there. On the other hand, on the payable side, we have increased to 59 days from 54 days. So we have a very healthy gap between the receivables and the payables. And then material throughput time or really the inventory speed, we are also down to 95 days compared to 98 days a year ago. And if you can see on the 12 months rolling, we are basically on 95% cash flow conversion to EBITDA, so good development here as well. Good cash, good debt side. So on the debt side, what's really interesting to see is that basically our debt has been stable for the last couple of years, while we have continued to grow as a company. It also shows that basically we have self financed the acquisitions that we have made and the dividends that we have continued to give every year. The slide also shows that the gearing now is down to around 50%, 53%, but also net debt EBITDA is on 1.9%. And even if you don't see it here, I can tell you then that the net debt EBITDA ratio has been stable for many years now, which really means that we have a lot of firing power. But we, of course, want to use that for assets that we believe are for the right price. And then finally, earnings per share. Earnings per share slide shows you also the rolling really nice trend that we have seen. In the quarter, it's 1%, but year to date, we are up on a full 8% improvement of EPS. So strong development also this year. And with that, I'll give back to you, Johan, for conclusions. Thank you, Carolina. So I only have one slide as usual. So sales improved real term 5% in the quarter as such, strong growth in Global Tech, good growth in EMEA and Americas, growth in entrances and APAC despite the weak China that we have discussed. And then it's missing here, but August acquisition, I think, was very important in the quarter as such. We had it yesterday, so we haven't put it in there yet. And then also Mercury, which adds very much to our access control side. So very exciting acquisitions in the quarter. And earnings per share in 1% better and EBIT 2%. So with those words, concluding words, I'd like to open up the floor then for Q A. And Matthias also will start by, I guess, ask the usual question to us. Thank you, Johan and Karolina. So you're preempting my words here. I will first ask the participants to ask one question each only. So allow as many people as possible to ask questions. Then I will do whatever what you told, ask one question each to you guys. I will start with you, Johan. We have had year to date organic growth of 4%. So what do you expect for Q4 and for next year? Well, we don't give forecast, as you know. So that was a little bit longer question than we usually get. But if at the sea, what I have we really have seen is that October looks pretty much in line with that 4% that you mentioned. And it's a month of 1 more day. So taking that into consideration, sort of it is a good month. Okay. And for next year? I don't know. It's too early to say, to be honest. And last year this year, I said 2% to 4%, and we are now 4%. So it wasn't out of that bracket. But I can't say it now. It's too early. Thank you, Johan. Now to Carolina. Continued that sort of you've seen a new sort of hike spike in raw material prices. You said earlier that the second half of the year will be easier on raw material price. And what do you expect now for Q4 and for next year when comes to that raw material prices and our price increases? Yes, it would have been easier if the raw material prices hadn't increased again. So I would say the divisions which has a big raw material impact then with the doors with Americas entrance but also APAC are seeing the 2nd spike. So we need to continue to compensate for that and that will take at least until the end of the year and then we'll have to see where the raw materials go after that. And the toughest one to mitigate is, as Johan mentioned earlier, is in China, where it's very hard to get the price increases through enough. Okay. Thank you, Johan and Carolina. So we'll start here in Stockholm with a question. So please. Erik Karlsson, Private Investor. So Entrance Systems has been a little bit slower for the last couple of quarters, 3% Q2, I think, and 2% this quarter. Given it's a younger business where you have a little bit less dominant positions than some of your other businesses. One would have thought you could outperform the market more there through innovation and investing in the front end. And I appreciate your comments. Like you said, Q3 might not be representative. But what do you think is a normal or trend organic growth for Entrance Systems in the quarters and years to come? We've seen tremendous growth in the U. S. On the U. S. Side for several years. And I think after I think now it's probably 5 or 6 years now we've seen strong growth. And what we have seen in the last four quarters has been that the U. S. Is still growing, but not at the same high percentage. Europe has not grown that much, and that is pretty much what happens then when you have one strong and one normal growing or if you call it normal, then it has leveled now around the 3%, 3%, 4%. So I really don't have a better answer than that. It's clearly so that it's U. S. That it's growing less strong in recent time that has made that. If we listen to our customers, they tell us that this the reason for it is because there's some kind of labor shortage in the marketplace. How much this is impacting us, I leave open. We really don't know. Or if it is simply so that growing on growth on growth on growth that is becoming harder and harder at the end of the day. Thank you, Erik. One more here from Stockholm. Peter de Freljian, Handelsbanken, Capital Markets. On August Home and Home Automation in total, I would say, Could you please, with this acquisition, give us a sense how large your Home Automation piece of the pie is today? And secondly, a slower U. S. Residential market, is that something that affect that market at all? Or is it just a conversion that is ongoing? And obviously, you're not give us any data on this acquisition except for it's not being EPS accretive. Is there anything you could say regarding dilution, multiples, PPAs, anything? So how big smart door locks are altogether? Without August, and we count to be at €2,000,000,000 level this year that we have already communicated last quarter, and it looks as if we're going to be there. And it's growing at a high pace. When it comes to the U. S. Residential market, you saw that was declining. I guess that is the question why. And there is AT and T that it was the last quarter they went out of our numbers. And from now on, we should be in a position to start growing again. And there we have Google Nest and we have Vivint and a few other customers that are adding on, not immediately in Q4, but partly in Q4. But there are so we will see positive situation there. And on the dilution from we don't know from August because August has very strong ambition to grow. But of course, its cost is fueled by a lot of advertising and other things. So we count on to have a dilution effect of some 0.2% out of this acquisition unless it goes better than we expect. It can also go worse. But this is, in my opinion, a very necessary step for us really to manifest ourselves in this field. Thanks for very clear answers. On the smart door locks, the SEK 2,000,000,000, is that entirely to the residential or is your business that is most likely more into commercial or non res than res? Only res. Okay, Very clear. Thank you. Thank you. We will take some questions now from the telephone conference. But first, I ask the operator to tell the audience how to post a question. Thank you. Our first question comes from the line of Lars Bralson from Barclays. A couple of questions, if I could. Maybe just one quick follow-up on the industrial door question earlier. It's not positive this quarter. And I appreciate your comment, Johanna. It's partly timing. It's partly perhaps lumpy. But I guess reality is we didn't grow in Q2 either. And it goes a little bit against what I've seen in terms of industrial activity, I. E. Sequentially improving through the year. Can you give me some sense of what you're seeing? You have slightly better visibility in this part of the business. What are you seeing in terms of order trends or backlog on the industrial door side? And what gives you confidence that we could swing back into some better growth in the next quarter? Well, it is so that we bought NASA 1 year back, and we are sort of doing we're putting them into our organization. So 1 plus 1 is rarely 2. So we lose something on Nasao. If you take away that effect, which is quite heavy on those doors, then in fact, it is growing. But of course, we are always showing the total and not part of it or excluding anything. So I'm rather confident that this industry is growing, especially logistics centers in Europe are quite have a very strong trend. It's less strong so for the 1 to 1 doors into the industrial segment. But altogether, it's not a negative situation. Service is a little bit less growing than we had hoped for, but that is things that we are working on where we are sorting out. It used to be done on a lot of, I wouldn't call it, rubbish stuff, but things that are not really doors in the past. And we are taking those things and we're scrapping out some pieces of what we do. And this is, of course, this to find better profitability, as you can see from the leverage. It is not very profitable to do service on things that are not part of your business really. So we are stepping out of that. So the main things that are negative is Nasao, which is then added to bolted on to what we do, where we knew that by sort of closing their facilities in a way and put them into the Assa Bloy body mass. And on the service side, we are scrapping a number of service activities, have a negative toll. But taking that away, it's a positive evolution in my opinion. This is part of being a consolidator. Understood. I gave that good color, but it sounds like it's growing but not accelerating even if we ex out NASO. Okay. Thank you, Lars. We will take the next question from telephone conference. Thank you. Our next question comes from the line of Andreas Willi from JPMorgan. Please go ahead. Your line is open. Yes, good morning. Thanks for your time. I have a question around operating leverage. If you look out the next few quarters and impact of M and A, if you could help us a little bit more given the many moving pieces on M and A. I mean, you helpfully gave some guidance on August, which once consolidated, it seems to have about a minus 10% operating margin, if that's the correct assumption and how long it will take you, what your plan is to bring that to profits? And then what the general impacts from M and A is for Q4 and for next year, given also the benefit you should get from the disposal. And if you look at the underlying operating leverage, obviously, I appreciate there's China in there, which is still a headwind. If you strip out China, are you kind of happy with where you are? Or should we is that something we should see improving in terms of a drop through ratio maybe as some of the investments in some of the new technologies and so start paying off? That was not one question, but perhaps Carolina you can help us here. Let's start with the margin questions and then I'll leave to Johan to say how long it will take until it improves. Okay. I'll do my best. If we do on the M and A side then for the Q4, if we look what we have in the books now, including yesterday night, basically we have 4% acquired growth gross and a 3% net and that will then be slightly dilutive for the Q4. And then it's a mix of the acquired companies that we talked about, but also the divestment which helps the margin a bit there. For the next year, we will have it's going to be between 2% 3% gross and a little bit less than 1% of that taken away from Adventite and the dilution from that as it looks now is probably around 20 basis points for 'eighteen. And if you ask also about the margin and the leverage from China on the organic side, for this year, we are expecting and we have continued to see 20 basis points dilution from APAC. And if we take that away and look at the other divisions, basically, we will see in this quarter, we had 30 basis points improvement of the margin on a 3% organic growth. So we are pretty happy with that part. For the next year, that depends on what the organic growth will be. Well, I think Karina gave you a very comprehensive answer. The only thing I can say is that we should be aware that when you buy tech companies, they normally have a seasonality. So they are quite strong in Q4, Q3, and they're weaker normally in the beginning of the year. So that means that it will not be evenly distributed, the dilution. But apart from that, I can't say much. We will have more negative dilution in the beginning of the year than we will have towards the end. Especially in a company like August, there is a Christmas season. Christmas season is normally very strong in that kind of business. How long until you expect this to turn into profits and then at some point become profitable, properly profitable? I think you know us. I don't think I even need to answer whether we make money or not. Our intention is only to make money. Okay. Maybe when? On August? We are not in the forecasting. August is we think it's the right thing to do for us, and it's going to give us some dilution. We are quite confident that this is the right move for us and gives us a good improved position in an area where we think there will be strong growth in the next coming years. So it's very important for us. I don't can't say much more. Okay. Thank you. Is there another question here in Stockholm? Okay. Follow-up here, Peter Freligen. On the raw material, I think it was very clear with another second run, but if you look at the actual increase, if you look at both direct semi finished and finished, that part of the P and L, is that up 50 bps? Is that correct on the margins, so to speak? So if I take that divided by the absolute number, I get the increase in the cost. Yes. Yes, on a year to date basis, direct material is up 50 basis points. There is an element in this that is also mix, which is not directly connected with raw material. But if you take out of that, out of the 100% that we then sell, roughly half is then related to raw materials and then the rest is semi finished and finished. And you do have a difference between the divisions depending on what kind of products they have and that's why you see and of course, the pricing power, so that's why you see different effects in Americas and APAC and Entrance Systems being the 3 big ones in this. But that needs to be then the gross number, I mean, then when we talk about these products being up well between 5% 10%, it's quite a lot. Is the 2nd round in those numbers? Or the price hikes that you were given in September will affect more in the Q4 and forward on the contracts or would you say that? It's not done yet. Have nice calls from us regularly. But I wouldn't be too worried. We have seen this every time that Carolina was right when she mentioned this. China will continue to be a problem for us, unfortunately. And steel doors in the U. S. Has had a lag. There we have seen now that the because one of the main problem we had in the U. S. Was that people had hedged their steel. There is I would be surprised now if competition has hedged again because they did go up by some 40%. And then to hedge up there, then you need to be very cool and think it's going to go 20 more. And it's now right now, I think it's 15 more or something like that. And so we feel that we can there is room for improvement like usual, meaning that price can go up. And that is what we have done. And in Entrance Systems, we didn't have any problem. In EMEA, we didn't have any problem. In the U. S, we had problem with the steel doors. In Brazil and China, there's depression, and both those markets have been difficult to raise price. And those 2 will remain difficult, but they are rather small as a whole in our profitability. So I wouldn't be too worried. So combining all of this, I guess price increases will eventually it's more into and at the same time, we get higher raw materials. So if you were to present a similar organic growth in the 4th quarter, that would be approximately the same leverage, I guess. The recent hike we most likely will not see much of in Q4 because that goes through our inventory. It will only start to come into the numbers in beginning of next year. So we have time to raise prices. The question is then when you do that, will you get a defect out of that immediately or will it be some lag in between? And that is what we had especially on the steel doors laws in the U. S, there has been a lag. And the lag has been related to competition, at least to our estimate, have had hedges that protected them from price increases. Now we see some of them are running really behind and they're really taking prices up quite strongly. So we think we can do the same. Okay. Thank you. Thank you, Peter. And we go back to the telephone conference, please. Thank you. Our next question comes from the line of Lucy Collier from Morgan Stanley. Please go ahead. Your line is open. Hi, good morning, Johan. Good morning, Carolina. Thanks for taking my question. Johan, I wanted to come back to the comments you have made on China, where I have to say you sounded a bit more positive than the last few quarters in the way you commented about the orders. Can you give us maybe a bit more colors in terms of that better order momentum that you've seen, whether this is for the entire of your activity in China, including the steel doors or whether this is still kind of more focused on one part of the business? A bit more color would be helpful. We have seen improved relative to last year, which was a rather weak year, growing order intake in the last 3 months, both in China but also in the whole region. Asia is doing quite well outside of China. But also China has an improved situation. And that is valid for all pieces except the northern part of China, which is still very weak. But there we have lost already lost what we have lost. So that is not really a huge problem. But altogether, it looks better. Then whether this will continue for long or more than 3 months or so, it's very hard to tell. China is hard to foretell. It's sure so that China, at least what we see, is not really growing in construction in a number of houses. So it's not so that there is an underlying strong growth in the Chinese market. But I think we did rather bad. We had quite some turbulence a year back. So I think we did rather bad in those days, and we are doing a little bit better now than when we have management in place. So hopefully, we will see some positive signs out of that. But it's early days. So but I wanted to mention just that we see order intake has grown in the last quarter. Just maybe if I can have a small follow-up on that. When you what is normally the lead time between the conversion of those orders into your business? Depends what it is. If it's 5 doors for commercial applications, it can be up to 6 months. If it's residential doors, it's less, but it's a quarter or so. So we should see some signs of it already in Q4. Thank you very much. Okay. Thank you. Next question please. Thank you. Our next question comes from the line of Andreas Kukhnin from Credit Suisse. Can I just start with a follow-up on the size of the destock in Middle East, if you could help us quantifying that? And then more on a broader question, you've got 2 divisional new managers in place now. Could you talk maybe about what their priorities will be and what they bring to the table? The destock, we had some difficult to say, but it was something like €20,000,000 too much. So that's quite big for a region like Middle East. But and there's still inventory there, but now it's more current. So we estimate now from now on, we will be out of the destocking phase. When it comes to the 2 new managers, we have found a new head for Entrance Systems, which is Morgus Jensens. He has been heading Scandinavia for many years. And he is in the last year and a half been head of industrial doors within entrance systems. So he's very well familiar with the entrance systems business. And he has done a tremendous good job on the Scandinavia for many years. He was the one behind the consolidation. He's very used to restructuring and change and improvement and focus of businesses also. I feel very good about that. Then we have Anders Malteisen, which is then the new Head of Asia Pacific. Anders is someone that comes from GE. And I think many of you know that GE has very tough ways of operating. And I think Anders will he's a nice guy, but I think he can also be not so nice if you don't perform. So at least that is my expectation. And I'm sure that Anders will bring a lot more process into what we do the region and in a positive way. He has been there only for a few weeks, so it's early days, but I feel very confident that we have found a very good person there as well. So a good evolution, I would say, when it comes to the management team. Thank you. Our next question comes from the line of Guillermo Peigneurs from UBS. Please go ahead. Your line is open. Good morning, everyone. Guillermo Bonilla from UBS. Thank you, Johan, Carolina and Matthias. Just wanted to ask about pricing. I think, Carolina, your from the from the organic growth, it means that your volume, roughly speaking, was around 1%. I understand that you have some day adjustment to do there. But is it really the case that in unit terms, volumes are slowing down? And could you also comment on pricing per region, if I may? Thank you. Yes. You heard me right. The price increase in the quarter is 2% and we have seen that through the year really on the back then of the increased raw material and the increased prices for that. When you talk about pricing power for the different regions, I would say the ones that have increased the most are the ones that have had the biggest raw material exposure. Unfortunately, in APAC, this is not enough, but they still have risked prices significantly. We also see good price increases as usual in all divisions, but again, the ones with the bigger raw material exposure have the higher effect on price. And then there was a comment on the volumes and with one working day less in the 3rd quarter, I should also say there is one less in the 4th quarter. In some areas, the volumes are down. But what's really positive to see is on the electromechanical side, for example, the volumes are clearly up. So it depends a bit on in which areas you're looking. So is it your behavior on pricing similar to your competitors and therefore everyone is just stable in market shares? Or can you identify any regions in which you're a bit slower in terms of market share gains or actually whether you're losing some market shares because of Yes. Well, I think on the pricing, Johan always says this, so no one forgets it in the group, our role as a leader is always to increase prices. So I would say we are probably more aggressive than many of the competition when it comes to price increases, especially in the back of raw materials. And as mentioned also sort of hedging helps you for a while, but it's only a temporary situation and we have not done that. We have continuously increased prices. Okay. Thank you. And then a small one actually regarding the Q4 EBIT impact coming from the currency. Can you guide to a number or a rough estimate at this point or it would be difficult? No, the guidance I can give you on currency is I can take the rates today and then see what effect that will have then on the Q4. And with that, we will have minus 6 on the top line for the Q4, but it should be slightly flat or slightly positive on the margin. And then for next year, if the rates stay the way they are, probably a negative between 2% and 3%. And for the full year, we have some seasonality usually on currency, but for the full year it should not have an effect on the margin. Super helpful. Thank you. Thank you, Guillermo. Next question please. Thank you. Our next question comes from the line of James Moore from Redburn. Please go ahead. Your line is open. Yes. Hi, everybody. Thanks for taking my questions. Maybe I'll go one at a time. I've got 2. On Global Technologies, you talk about a 50 basis point dilution to the margin from acquisitions. I would have thought that given Avonide is a no margin distributor business that we might have had some accretion. And I know there are a couple of other smaller acquisitions. Could you break out whether there's a specific charge in there and how you would expect that impact to move going forward? Well, should I say something on it? Yes. If you take Edvard, it has not been out of the numbers for that long. So it has been out for, what is it, 1.5 months? Months and a half years. Yes. And then as I mentioned, we have some acquisition costs. Tech companies does not come all that cheap because you need to do quite some investigation. And we as you know, we have 17 acquisitions this year and we've taken them all as cost. And it's not something that you do easily. Therefore, we had only 5% EBIT on acquisitions as a whole, margin on from acquisitions. But you're right that Advenite has positive accretion. But ARIO did not invoice much in the 1st month. You can ask them why didn't that happen. Probably they tried to get as much as possible in their own books. I don't want to accuse anyone, but this is not unusual. So we didn't invoice much. And we have BlueVision. That is a company that is a product business. Some months it has a lot and some months it doesn't have. And unfortunately, in the heavy burden to have to carry around such a thing. You should also know that the moment we buy these tech companies, we get PPA and depreciation on goodwill, which is also a heavy burden, especially if you don't sell much, then it's very heavy. We will show more on the Capital Markets Day about the PPA because the more acquisitions we do on tech companies, the more we will have to lean towards showing you the EBITDA rather than EBIT because we get more and more depreciation in our numbers. And if I could on my second question, just circle back to the question being asked by Andreas and Peda about the price and raw material impact on the drop through. Is it possible in any way that you could say for APAC and Americas what the net effect was of price and raw material to the margin, was it 5 bps, 35 bps or some rough flavor? And whether you think that net number gets worse or better or the same next quarter? I'm almost going to answer no on that question. I think if you take Americas, the overall price increase is higher than the raw material impact. Unfortunately, that is not the case in APAC. So overall for the APAC division and that's what you see also, we are full more than 1% down on APAC margin and that really comes from, of course, lower volumes, but also not being able to compensate for the prices. We have done a lot on the restructuring sites. We have savings from that, but it's not been enough to offset and that's mainly from the raw material. I think I will invite you one day, James, to come here and read our books. And you will tell me with all these variables that are changing, which one is price and which one is raw material and which one it's very tough to really know exactly. So we are trying our best to give you as good guidance we can, but it's not easy in the forest of changes that happens in the quarter that really list out. It's oneten of what Karlina says is correct, but it is also, of course, a translation of what we see. I appreciate it's difficult. I just trying to understand, given all the moving parts, whether the pressure gets worse or better or broadly similar going forward? It will be a temporary worse since the raw material is coming up again. And we are doing the usual. We increase our prices. And then we will tell you then how much I think personally we have much better chance now to get prices through because everybody is in the same situation this time. Last time everybody most people had hedged, which we don't do as a group. We don't think we should wait. We should always do price increase immediately. And that is what we do right now. I can work with that. Thank you. Thank you very much. Thank you, James. It's soon 11 So we conclude the Q and A session here. We at Investor Relations are available if you have further questions. And before I turn to Johan for his final remarks, I would like to remind everyone that we have our Capital Markets Day upcoming on November 15. So if you haven't registered, please do so. And it will be a good event, so don't miss it. Please see one, your closing remarks. Yes. I think I open up and I will close in the same way. I feel very confident about the stable continued good development within the Air Supply Group with good growth in all parts and China now or Asia is starting also to grow and be part of the contributors to growth. We have a lot of new things coming into the pipeline, and we have some very interesting strategic acquisitions as well, which adds more to our ability to continue to grow. So I feel very good about this quarter. So thank you very much for coming.