Good morning, and welcome to the presentation of ASSA ABLOY's first half year report in 2022. My name is Björn Tibell. I'm heading Investor Relations and joining me here in the studio are ASSA ABLOY CEO Nico Delvaux and our CFO Erik Pieder. We have set aside about one hour for the call today, and as usual, we will now start with a summary of the report before we open up for your questions. With that, over to you, Nico.
Thanks, Björn, and also good morning from my side. I can present good results for Q2, and therefore also good results for the first half of the year. We had a strong growth in the quarter with an organic growth of 13%, a total growth of 25%. Also, strong profit with an EBIT of around SEK 4.4 billion. A good EBIT margin of 15%, and I would say that despite all the significant operating challenges around material shortages in general, chip shortages in particular, labor shortages, and then of course all the inflationary pressure around labor, around material, around logistics, around energy. A good result on the income statement side.
I think also a good result on the cash flow side. Strong cash flow, record cash flow for a Q2. We have a good conversion, cash conversion rate of 90%. We also completed six acquisitions in the quarter. If you look into the numbers, the sales of SEK 29.5 billion, 25% up, 13% organic growth. Net acquisition growth of 0%, and then helped by currency in an important way, +12%. An EBITA margin of 15.5% and an EBIT margin, like I mentioned, of 15% versus 15.2% a year ago. An EBIT of SEK 4.4 billion, 23% up. EPS, 2% down.
If you adjust for a positive one-time tax effect affecting Q2 last year, our EPS growth was strong, 24%. If we now look a little bit into the different regions, a very strong North America with an organic growth of 22%. Strong momentum and continuous strong momentum as well on the commercial side, as on the residential side. A continued strong South America with an organic growth of 17% on top of a high double-digit growth a year ago and a high double-digit growth two years ago. I think it was a very strong performance in South America. A very good Europe, + 9%. We have also here strong market conditions as well on the residential side, as on the commercial side. Africa + 10%, and Oceania + 4%.
The only weak part with a negative growth of -10%, Asia. That is mainly or only because of the very challenging situation that continues to be very challenging in Greater China. Overall, I think most of the regions posted very good continued positive organic growth in the quarter. Some market highlights. The first one, definitely very excited about that one. 1,500 loading bays and doors for the largest logistics center in Europe. Very nice win. Access control upgrade for one of the biggest airports in Asia. I would say it's also interesting and good and positive to see that despite the challenging situations in China, we also win there, nice project.
Also good to see that the cruise ship business is coming back with several wins in that vertical. Our R&D efforts continue to pay off and are awarded. The Gateman in Korea is again recognized as the number one digital door lock brand now for the 17th consecutive year. Quite impressive. ASSA ABLOY PULSE won an award in Denmark. We continue to launch new products. We have launched a new machine protection door and Entrance Systems. We also launched a new family of products with a new coating and an antimicrobial finish to avoid the spread of bacteria. If you look a little bit at the sales growth, now again six consecutive quarters with strong positive organic growth.
I would also say accelerated organic growth compared to pre-pandemic times. Of course, we had there four quarters during the pandemic in 2020 with negative growth, but therefore an accelerated sales growth curve. Operating margins are flat at 15%. Flat margins increase top line, therefore also accelerated operating profit record profit in the quarter. We continue to be very active on the acquisition side with seven acquisitions completed in the year, six in the quarter. The seven acquisitions represent an annualized sales of around SEK 2.8 billion. If we zoom in on two of them, we finally got the approval from the antitrust authorities in U.K. and Ireland to complete the Arran Isle acquisition. Complementing very nicely our door and window hardware in the U.K.
That company represents the sales of almost SEK 1.5 billion, and they will be accretive to EPS as from the start. Caldwell, also a nice acquisition, strengthening our position in the fenestration segment. Caldwell has the sales of around SEK 1 billion, and also they will be accretive to EPS as from the start. If we then zoom in in the different divisions, a good performance of EMEIA in the quarter with an organic sales of 8%. Good, strong contribution from all countries, with the exception of Southern Europe, where we had a stable sales growth. That was mainly due to the fact that we had a very difficult comparison with last year.
They had very high growth last year coming out of the pandemic in that part of Europe a year ago. A good operating margin of 14.4%. We have a strong operating leverage of 40 basis points, and that despite high material, high logistics and high energy costs. Of course, all operational challenges linked to material shortages in general, and ship shortages in particular. Very good job well done by our operations team in that division. FX very dilutive, 110 basis points and M&A accretive 20 basis points. That was mainly thanks to the divestment of CERTEGO. We also took acquisition costs related to the Arran Isle acquisition in the quarter.
If we go to Americas, very strong, excellent performance again in Americas with an organic sales of +20%, with all countries, all business areas performing and contributing in a very strong way. A very good operating margin of 20.6%. We have a very good operating leverage of under 60 base points. Obviously, same challenges as I mentioned in EMEIA when it comes to operations. Good, strong price realization. FX 20 base points dilutive and M&A 120 base points dilutive. That's only related to acquisition costs for HHI. Acquisition costs for HHI in the quarter were around SEK 75 million.
You've also seen the announcement that we have now extended the agreement with Spectrum Brands till the end of the first half next year because we continue to discuss with the antitrust authorities and we see that there is, yeah, some potential further delay in closing the HHI acquisition. If we then go to Asia Pacific, the situation is more challenging with an organic sales decline of 5%. Very different picture between Greater China and the rest of the division. The rest of the division is performing on a good high level with good strong sales growth. Where obviously in China the market conditions remain very challenging.
Construction industry is still depressed in China and also the zero tolerance when it comes to COVID definitely does not help. We have seen significant sales decline in China, and therefore also an operating margin of only 1.9%, clearly because you know, a too low top line, giving us a negative operating leverage of 640 basis points. Of course, we have the same challenges when it comes to material inflation, shortages and so on. On top of that, we had the lockdowns in China, mainly in April and in May. FX accretive 10 basis points and M&A dilutive 80 basis points. That is again only related to acquisition costs for the Caldwell acquisition in Australia.
If we then go to the global division, starting with Global Technologies, a good organic sales of +6%. Where most of the business areas in HID and all the business areas in Global Solutions performed in a strong way, with the exception of PACS, physical access control mainly, and also identity and access solutions and extended access, where we saw a sales decline. For our PACS business, we continue to see challenges around chip shortages, and we estimate here also that we lost around 300 million SEK top line for PACS in the quarter. As you know, PACS is also very important for the overall profit for the division. Therefore, also an operating margin of 15.3% with a negative leverage of 90 basis points, mainly due to that negative mix.
In a sense, more citizen ID and less PACS gives us an important negative mix. But also here all the other operating challenges. On top of that, we had the lockdowns in China, which affected our Global Solutions business, hospitality business in particular, in an important way. Our factory for locks for hospitality was completely closed in April and was working at 50% capacity in May. FX helped 80 basis points and M&A dilutive 30 basis points. Then last but not least, Entrance Systems. Also here again, a very strong performance in the quarter and organic sales of 19% with all segments as well, equipment as service contributing in a strong positive way. A good strong operating margin of 15.5% versus 14.9% a year ago.
With a strong operating leverage of 40 basis points, despite again here all the similar challenges I mentioned earlier. Also here, strong price realization again in the quarter. FX helped 20 basis points and M&A was neutral. With that, I give the word to Erik for some more details on the financials.
Thank you, Nico, and also a very good morning from my side. As mentioned before, we ended up on sales of SEK 29.5 billion, up 25%, of which the organic stands for +13%. The FX is roughly 12%. Operating income ended on SEK 4.4 billion, up with 23%. EBIT margin is 20 basis points lower than the same period last year and ended at 15%. As mentioned before by Nico, if you look on the net income and in the EPS, it's 2% lower than the same period last year. We need to take into account that last year we had a one-time tax impact, which affected the EPS and the net income positively.
If we exclude for that one, the EPS and net income was actually up with 24%. Cash flow strong at 3.8 billion SEK, up with 4%. We see that, I mean, the increased sales as well as I would say that we have been able to, I would say, lower the increase in working capital. If you look on receivables and payables, it's following, I would say, the sales. We have an increase in inventory, but it's not, let's say, to the same extent as what we have seen in the quarters prior. Return on capital employed ended at 16%. It's up from 14.9% the same period last year.
If we then sort of look for Q, now into Q3, you can see the numbers what we estimate then for the FX as well as for the M&A. I would also like to remind that last year we took a capital loss from the divestment of CERTEGO of roughly SEK 195 million. If we then go into the bridge, the 13%, if we dissect it, seven percent is volume, 6% is price increases that we've done in the quarter. That is on top of the price increases that we did a year ago.
Despite you have heard Nico talk about the operational challenges, despite this, we have an operating flow through of 15.5%, where we can of course see that we have been able to, let's say, be more efficient and also use, I would say, the increased sales leverage in order then to still being able to perform on a 15.5% on the organic. Currency, yeah, you have seen it shifts a bit between the different divisions where EMEIA is, let's say, having a currency, negative currency impact coming from the strengthening of the dollar as well as the weakening of the SEK. You can also see on the other ones like Global Technologies, where they sort of have a help from the dollar. If you look in total, it's marginally neutral, the currency effect.
Acquisitions, the - 1% on the sales is related to the divestment of CERTEGO. The negative part on the operating margin are related to acquisition costs from the three acquisitions, HHI, Caldwell, as well as Arran Isle. It is more than SEK 100 million in the quarter. If we take the cost breakdown, direct material is 1.8 points negative versus the same period last year. If we dissect it, roughly 100 basis points come from the negative mix, where we have the division mix, where I would say a weaker Global Technologies and the stronger Americas, as well as we have the interdivisional mix, like for instance, in Entrance with a stronger parameter, but also that we have for the Opening Solutions division, a stronger electromechanical or digital lock sales.
The higher material cost, and as you know now, it's not only the raw material, it's also electronic components, as well as sourced components, had a negative impact of a - 80 basis points. We see, of course, that the raw material is coming up, but we don't see any improvements yet on the electronic components. With the price increases that we're doing, we still expect that during the later part of the year that we will be able to flatten this impact out. Conversion cost is positive with 140 basis points compared to the same period last year, where of course, we get help from the volume, but we've also been able to do operating efficiencies. The positive impact from the manufacturing footprint savings are SEK 130 million in the quarter.
We can also see that we have a positive impact from the leverage as well as efficiencies within our sales and administration. In total, you can see it's 50 basis points, but we continue to invest in R&D in order then to be on the technology forefront. Cash flow, as mentioned before, almost SEK 3.8 billion +4% versus the same period last year. The cash conversion improved from the first quarter, as we said now, to the second quarter and ended at 90%. We expect this to continue to improve. The gearing, we net debt versus equity is down from 45% to 42%. This is despite that we have done the acquisition of Caldwell as well as Arran Isle.
If you look in value, the debt is up with SEK 4.9 billion, partially of course related to the acquisitions that I just mentioned, but we've also paid dividend as well as we have a currency negative currency impact due to the weakening of the SEK. Net debt versus EBITDA is slightly up from 1.6 last year to 1.7 this year. Despite this, we have a very strong financial position and can continue our acquisition strategy as well as being, let's say, ready from a financial point of view when we will close the HHI acquisition. Last but not least from my side, I mentioned before the earnings per share and down in actual with -2%. If we take the tax effect out last year, it's actually up with 24%.
With that, I hand back to Nico for some closing remarks.
Thank you, Erik. Yeah, we are very happy with the Q2 result. Again, a very strong sales growth. We have an organic sales of 30% up. A good EBIT and a good EBIT margin. We have our operating profit up 23%, and then also a strong cash flow. I think good Q2 result, good first half of the year. Of course, we live in very challenging operating environments. We also, everybody reads the newspapers about the uncertain general economic climate. Component shortages of course remain, and inflation is on a high level as well when it comes to labor, logistics, energy cost, and material cost.
We must say that we don't see any slowdown yet, perhaps, in our business. We see still good momentum in our market, and therefore we will, you know, continue to execute on our strategy to see how we can further accelerate our profitable growth. Obviously, we will also look at how our market conditions might evolve. We have, as you know, built good agility in our organization. We are ready to adapt to whatever market condition might come to us. Last but not least, we also want to remind you that we have our Capital Markets Day now scheduled for November the 16th in London. With that, I give the word back to Björn for Q&A.
Thank you, Nico. Yes. We'll open up for your questions now, but before we do that, can I just please remind you to limit yourself to one question and a follow-up each to allow as many as possible to ask questions, as we have quite a few people already lined up in the queue to ask questions. Operator, this means that we are ready to open up for Q&A. Please go ahead.
Thank you. Anyone who has a question may press star and one on their touchtone telephone. The first question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.
Hi, this is Eva asking on behalf of Daniela. I have two questions, if that's okay. The first one is, would ASSA reconsider, like, consider renegotiating the HHI deal price if it takes too long to complete as we see some leading indicators in the U.S. residential market that has deteriorate? The second question is, do you think that the current macro environment favoring like a step up in M&A activities in case of lower valuations and versus rising rates? Thank you.
Thank you, Daniela. On HHI renegotiating the price, that's not on the agenda today. Like we mentioned, we have extended now the agreement with Spectrum Brands till mid or end of June next year. As we said also at earlier occasions, we don't buy HHI for the next quarter. We buy HHI for the long term. We believe that HHI is a strong complement to our business. It will give us also a footprint on the residential side in North America, what we are lacking today.
We are very confident that, you know, over mid to long term, HHI will be a business that can bring us that 5% organic growth and that, with an EBIT margin within that 16%-17% bandwidth. As such, you know, we believe whatever the market conditions today, the HHI acquisition will be a good acquisition. When it comes to M&A in general, yes, we see perhaps a little bit higher activity level today. As you know, most of the acquisitions we do are smaller acquisitions, often also family owned businesses. They're really often the negotiations are on a one-to-one basis.
You know, we see, I would say normal multiples in the market today.
Next question, please.
The next question comes from the line of Andre Kukhnin with Credit Suisse. Please go ahead.
Good morning. Thank you very much for taking my question and follow-up. My main question really is about the comments you made, Nico, on preparedness for change. Could we maybe talk about when you run the scenarios for businesses like EMEIA or Entrance Systems, could you tell us how much of a revenue impact do you think this business can take on annualized basis without deterioration and profitability?
Yeah. Let me first be clear. I mean, we don't see any slowdown in the market yet. We see still, in general, very good momentum. For the time being, our focus is still on how can we, you know, continue with our profitable organic growth. Of course, we also read the newspapers. We also see what's happening around us, and therefore, yes, we are prepared for potential slowdowns and for different levels of slowdowns. We have our contingency plans updated and ready to execute if need be on a local level. As you know, our decentralized organization really gives us that agility.
I think that is needed and that will be needed also in the future if the markets would go down because, again, markets will not go down in the whole world at the same extent and at the same time. Being able to take decisions in the local markets close to the customer, close to the market, definitely gives us an advantage when it comes to agility. I would answer your question by looking back to previous crises. We have said that the COVID-19 crisis is an exception. It was a different crisis because COVID-19 was a crisis around trust, where, you know, the normal, I would say, rules of previous crises did not count.
If you look back to other crises like the financial crisis, you will see that we are very resilient because we have that 2/3 of our business which is after market. If tomorrow you will see a slowdown of general economic conditions, that 2/3 of that business will continue, of course, and that's also the more profitable part. You have seen also in previous times that, you know, top line can go down also to a bigger extent while we are then able to maintain the bottom line or limit, I would say, the damage to the bottom line in a significant way. I think conditions are, you know, for us internally, no different today than they were in the financial crisis or previous crises.
Thank you, Nico. If I may follow up, I want to just check on China, specifically. I know it's not largest exposure for you, but in the quarter, is it possible to isolate the lockdown's impact, specifically, and what degree of impact that had on your profitability in Asia Pac, just to understand how much of it is kind of a non-recurring, hopefully, piece? It looks like it's around SEK 80 million-SEK 90 million. I just wanted to check if that's kind of right ballpark?
Yes, indeed, China represents only around 3% of total sales today for us, so it's, yeah, a smaller part. I would say that the lockdowns mainly had an effect on our results in Global Technologies because we have an important factory in Shanghai for all our hospitality locks and all our marine locks. That factory was completely closed in April. It was working at half capacity in May. In June, we did more than 100%, but obviously not enough to recover. That had an important negative effect on the bottom line for Global Technologies. I would say that for APAC, it had a lower effect.
The main reason for the lower margin in APAC is the very low volumes that we have experienced in Q2. Due to the very low volumes in Greater China, we have a high double-digit negative growth in China. To a certain extent, we are a bit subcritical in Greater China today. That's the main reason for the lower margin in the division.
Is it possible to quantify the global tech impact then in the quarter from that?
I don't know the details. Perhaps we can, you know, check and then Björn can come back to you.
Sure. Thank you for your time.
The next question comes from the line of Lars Brorson with Barclays. Please go ahead.
Thank you. Good morning, Nico. Maybe I can just follow up on that question with regards to GT. SEK 300 million lost revenue this quarter, I think similar to Q1. We had a little bit in Q4. I'm assuming there's a quarter SEK 700 million-SEK 800 million backlog, particularly in your PACS business due delivery. If we assume no further lockdowns in China, can you help us with how you see the cadence of that invoicing? Can you catch up fully in the second half of lost revenue of that backlog? Or is that more of a 2023 impact? I'll start there, please. Thanks.
The total effect on top line in the quarter was around SEK 400 million. Like I mentioned, indeed, SEK 300 million for PACS. The other SEK 100 million was on digital door locks, where the result could have even better than it is already today. If you look at the SEK 300 million top line loss for PACS, I would say that it's not linked to lockdowns in China directly. It's linked to the fact that we have difficulties to get electronic components, chips in to make our readers and to make our controllers. I will say that we don't see an improvement in general when it comes to electronic components availability.
We see the same challenges today as we saw the beginning of the year, and we believe that will continue for the remaining part of the year. The good news is that in the meantime, we have been able to redesign some of our products impacts, mainly on the controller side, where we had the biggest problem. That redesign we have made as such, of course, that there we have availability of chips. That should definitely help us now in the second half of the year to work away some of that backlog that we build up on the PACS side. To what extent we will see, because again, the visibility in general on electronic component shortages remains very short.
Definitely should get as a positive effect to at least partly come back on the PACS side, and that obviously then should also help on the bottom line.
Helpful. Can I ask secondly and follow up just to Erik, perhaps, on the raw material, the 80 basis point adverse impact in the quarter. I heard you say, kind of expecting that to flatten through the year. Can I ask Erik, are we now past the kind of peak negative impact if we assume current spot prices? That surprises me a little bit. We've seen some steel price spikes, particularly in February/March after the Russia-Ukraine war and of course particularly on European steel prices. I would have thought that's still to hit. Maybe you can help us again with sort of how you see the cadence from that 80 basis point impact in the quarter through the second half of the year.
If you have any commentary at this point in for 2023, from a sort of price cost standpoint, that would be helpful, assuming current spot prices.
I think there, just to start with, of course, we increased the prices last year with roughly 3%, and then if you add the 6%, so we're at 9%. We are not yet really there. We need to continue to increase a bit, despite though that the raw material prices has come down a bit. As said, I think with sort of with the actions that we are taking on price, as well as what we see that the, let's say, the raw material and like the steel is coming down, we expect the effect to flatten out and be, let's say, positive towards end of the year, and then that should help us also going into next year.
Thank you both.
The next question comes from the line of Vivek Midha with Citi. Please go ahead.
Thanks very much, everyone. Good morning. I have one question, please. Just following up on the comment that you haven't seen any slowdown in business. Can I just confirm, is that a comment about current trading or quotation activity or both? Any indication on what quotation activity you've seen in the quarter, maybe in some trends since July, that'd be very helpful. Thank you.
If you look at, you know, long leading indicators, as you know, we don't have too many long leading indicators. We have, of course, externally the architecture billing indexes and so on, and they are still on the positive side. Internally, we have our spec business and the quotation levels on the spec business side. There we can say that they are still up double digit as well in Europe as in North America. That's the further leading indicator we have. When I say that we don't see any slowdown, I really mean market activity in general. We see still good market conditions in our main markets.
That being said, it's of course always very difficult to read Q3 because July and August are always holiday months, and what makes or breaks your Q3 is what you do in September. With all the things happening in the world, of course, September is still a long way to go. We will see when we come there, how the market will evolve. Again, for the time being, we still see good market conditions in general.
Thank you very much.
The next question comes from the line of Alexander Virgo with Bank of America. Please go ahead.
Thanks very much. Good morning, Nico, Erik. Thanks for taking the question. A couple I would like to ask around Entrance Systems, I suppose, in particular. I'm surprised at how strong that has continued to be. I'm just wondering if you could give us a little bit more color on the various moving parts within the business and what exactly is it that's driving that strength there, particularly given broader market concerns around momentum in warehouse demand and residential markets, but especially in the U.S. That's the first question.
Second question, if I could push you a little bit on HHI, just wondering what exactly it is that's causing the extended discussions, and whether you could give us any indication as to what that might be. Thank you.
For Entrance Systems, yes, indeed, I think very good performance in general. We can look at the four segments. I would say all four segments are performing strongly, and we are performing strongly on the equipment side as well on the service side. Remember we have said that we had the ambition to grow our service business high single digit for the coming years. We are now at that high single digit level for service. On the equipment side, of course, pricing helped as one important driver. Americas and Entrance Systems were the two divisions that had a higher price increase than the group price increase of 6%.
If you then dissect perimeter security, which is today for us a business only in North America and U.S., you could say that continues at high pace. I think we have done very good job there in tailor-made solutions for different verticals. When you go to data centers, when you go to high security embassies, when you go to warehouses, we have a dedicated solution for every vertical. We have invested in feet on the street. We have invested in products really paying off in a good market. If you take residential, again, the vast majority of what we do for garage doors is in North America.
The business for garage doors or the business for residential in general is still having good momentum in North America. As you know, garage doors are in the first place steel, of course price also helped there. If you then take pedestrian foot and non-foot retail the record acquisition, which you know helped us in a very good way where we were able to realize synergies faster than anticipated. They gave us also some extra product range that we now can sell in the whole world also through the ASSA ABLOY channel. On the pedestrian side, also good performance for equipment and for service. I would say the only weaker point is also there, China.
The same is true for the industrial segment, where also the only weaker point is Asia and China in particular. Also on the industrial side, we see still good momentum in Europe, in Americas. Obviously, the whole loading dock business continues to fly, I would say, on a high level. Also, for instance, if you take high-speed doors on the automotive side with a lot of new models being implemented, is a positive driver.
I think a lot of good things happening in the market, but I think also a lot of good self-help with a lot of good things we have done internally, as well when it comes to product development as when it comes to investing in channel to the market. Yes, happy with the performance of Entrance Systems in general. Right. The second question on HHI. Yes, the antitrust authorities continue to review that acquisition. We believe this is an acquisition that should have been closed long time ago. This is a really good thing for the American consumer.
We really can bring innovation to an installed base that HHI has today and to the, you know, the channels that HHI has in that residential segment. As you know, we are very weak, almost nonexistent, with ASSA ABLOY on the residential side. This is this once in a lifetime opportunity to become also a leader on the residential side. It's a bit, I would say, frustrating that it takes so long, also for, you know, the people for HHI that can't wait to join the ASSA ABLOY family. There's been many concerns or different concerns raised by antitrust authorities.
Most of them we have been able to clean out or clear out, clear up in the meantime. Obviously it's an ongoing process. You know, every time when they look into new data, they find other things and they ask questions. There are still some open points, and we are working on clarifying those open points. We will see how it goes. Again, it takes longer than we expected and anticipated.
As we didn't want to work against a firm deadline in December, where we had the agreement with Spectrum Brands where, you know, the agreement would close, and I would eventually also had to pay a penalty. We felt on both sides it was good to extend that agreement, just not to be under that, I would say, artificial pressure of that deadline of December. In common agreement, we decided to extend it to the, you know, middle of next year. We'll see how fast it goes. We are still very confident and very committed from, you know, I would say from both sides as well, from Spectrum Brands side as from our side.
Okay, great. Thank you.
The next question comes from the line of Gael De Bray with Deutsche Bank. Please go ahead.
Oh, good morning, everyone. Thanks very much. I have, I guess, a question related to HHI again. I mean, this acquisition is obviously a major transaction, a major strategic transaction for you, but it is also quite expensive and it could take, as you said, perhaps 12 more months to be completed. Meanwhile, I mean, would you agree that this will limit to a degree your M&A ambitions elsewhere? I was also wondering if one should see a potential pause on your M&A activity as, you know, potentially a blessing given current macro uncertainties and falling valuations.
If you take your first question, Gael, I think that our balance sheet is strong enough, even when we add the HHI acquisition, that we can continue our acquisition strategy. That we've said all along, and it's the same situation now. We've also seen that we have in Q2 here closed, I would say four, I mean, normally for us two, I would say, larger acquisition in Arran Isle and Caldwell. I think the balance sheet can take also the HHI as well as continue with acquisitions. What was the second part of the question?
The economic climate related to acquisitions.
Yeah, I think, I don't know if that's the economic climate is specifically for HHI. I think I answered that earlier. We don't buy HHI for the next quarter. We buy HHI for the mid and the long term. We believe it's a very nice company on its own that can give us that 5% organic growth with a EBIT margin within 60%-70% once we have realized the synergies that we have identified. We also believe that in general, the residential market midterm, long term will remain strong in North America.
Yes, perhaps you can have a little bit of a slowdown one or two quarters but underlying the fact that there is a big deficit in housing capacity in North America will continue to drive mid and long term the residential housing market in North America. We, you know, are still very positive about that acquisition. In general, again, yes, we see good activity on the acquisition side. We have a good pipeline of potential acquisitions. We are confident that we will do more acquisitions this year. Of course, acquisition is never done until it's signed. We are working on several projects.
We will see how that goes in the second half of the year.
Okay. Thanks very much for this. Can I have a follow-up on Global Technologies? Could you perhaps just give a sort of indication on the backlog you have at the moment and how it compares to, let's say, a year ago?
Let's say that, yeah, we have a good backlog, especially also for PACS. Like I mentioned earlier, if we can get electronic components in, we should be able to, you know, to see an improvement of the PACS's performance in the second half of the year.
Okay. All right. Thank you very much.
The next question comes from the line of Nicholas Green with Bernstein. Please go ahead.
Good morning. Nick Green from Bernstein. Thanks for taking my question. Nico, you said earlier that you don't yet see any slowdown in the market environment, but presumably 13% organic growth, 6% through pricing, 7% through volume. Presumably we all agree that probably isn't a normal position. Maybe you could help us try and get a sense of what normal growth looks like. First, here then, do you feel that the price increases are mostly done? Erik mentioned there may still be a need for some more, but it must be getting increasingly difficult to push those through. Maybe a comment on the pricing. Second, the 7% volume increase.
Maybe just give us a sense, I don't know whether it's by division or region, how much of this do you think is effectively still part of the sort of COVID rebound that you benefited from, a kind of last hurrah of, you know, good volume growth as people got back to work and versus how much do you feel is actually sustainable and at a good level of organic growth?
The final part of this to say is that if you do feel that 13% organic growth is quite sort of high and good at the moment, if you're kind of at the top of the market, are there defensive actions you think you can take over the next six to 12 months that can allow you to really sort of come off the top of this market in as strong a position as possible? Thank you.
That's a lot of questions, but perhaps if I start with price. Yes, we continue to increase prices. We have increased prices in June, and we have even further increased some prices in July because yes, you see some material indexes going down in recent weeks, recent months. Like we said earlier, it takes around six months between an index going up and down and us seeing that in our income statement. We still see the prices today in our income statement from six months ago. If you look six months ago to today, it's still some way up. We had a 6% price increase in the quarter on top of 3% last year. You could say 9% versus two years ago.
If we calculate where we stand today, we need around 10%. You could say we are almost there. We will need some more price increases now in the coming months. That's also why Erik said that slowly that 80 basis points gap, cost versus price, should narrow and then somewhere towards the end of the year, beginning of next year, if indexes stay where they are and if, you know, mixes stay as they are. We should then start to see a tailwind from price versus cost, and then it should be accretive rather than dilutive. When it comes to growth, I would just fall back on what we always said.
We have the ambition to grow 5% organically over a business cycle. If you look at the components historically, we had a 1% price and then you could argue we needed 4% volume. I think most people will agree that we move into a higher inflationary world. Perhaps not at the inflation levels like they are today. Going forward, most probably inflation will be higher than prior to COVID-19 and therefore, hopefully, confidently, our price component will be a little bit higher than prior to COVID-19. So if it was 1% prior to COVID-19, perhaps it's. I'm just saying something 2% after COVID-19. So that means that you only need 3% volume to come to that 5% organic growth. Clearly there are different drivers.
There's the shift from mechanical to electromechanical and digital, where we have seen 18% close to 20% growth in the geographical divisions in the quarter, and where we continue to see that acceleration. That's definitely one growth driver. I mentioned the service business which we grow high single digits and where we have ambition to continue to do so in the coming quarters, coming years, which is obviously another growth driver. I mentioned price. You know, it's still true that we are in the first place a Western world company. We still see very good opportunities in emerging markets in general.
Perhaps the last driver is everything around, you know, recurring revenue, software as a service, which, yeah, continues to see high growth as well. I think over a business cycle, we should continue to reckon with that 5% organic growth. Your last question when it comes to slowdown. It depends if a slowdown is a lower growth or if you know if it's a negative growth. Of course, if it's a lower growth, still absolute value-wise, it's you know a bigger volume and therefore you continue to profit from the bigger volume. Again, like I said earlier in the call, you should look back at the financial crisis and previous crises.
You will see that compared to other industries, we have been very resilient in downturns. It comes from the fact that 2/3 of our business is aftermarket business. It's not because you will see a slowdown of economic situation in general that aftermarket business will slow down. People will continue to use our products and our solutions and therefore will have to continue to consume on the aftermarket side. Like I mentioned earlier, the aftermarket part of the business is more profitable than the new build or big refurbishment project side. Therefore you see that historically we have always been able to protect the bottom line in a rather good way when a downturn occurs.
Again, the fact that we are very decentralized and can take decisions close to the customer in the local markets gives us an advantage when it comes to agility. When a crisis would hit, it will obviously not hit at the same extent and at the same time everywhere in the world. Us being able to take a local decision in France based on local market condition in France and a local decision in the U.S. or a local decision in Brazil gives us that agility, which I think is very important if and when the market would go down.
That's very comprehensive. Thank you for that. I'll hand over.
The next question comes from the line of Rizk Maidi with Jefferies. Please go ahead.
Yes. Hi. Thanks for taking the questions. Nico, I think in previous calls you stated that if we see commodity prices coming down 20%, 30%, 40%, that there could be a risk of you giving away some of the price increases. Actually, we've seen a collapse of some of the raw materials prices. I'm just wondering how you think about the situation and your ability to, you know, carry over the sort of price increases ourselves here.
Well, if you talk about a collapse, then I don't know what you call the, you know, the increase we have seen over the last two years. Because over the last two years, steel went up more than 200%.
If, you know, 20%-25% down is a collapse, then of course the 200% must be, you know, I don't know what is the word for much bigger than collapse. But yes, steel has gone down over the last weeks, months. But we should not forget that steel is still on a very high level compared to where we start from a year and a half, two years ago. And we should also not forget that all the other materials haven't shown that same trend as steel. Yes, aluminum is a little bit down the last couple of weeks, but it's significantly up still compared to the beginning of the year. Overall, I think there is still an inflationary pressure on basic materials.
Again, there is a delay between indexes going up and down, and that's in our income statement of around six months. But next to the basic material, you have, of course, all the other inflationary pressures. Logistics cost, energy cost. If you look at gas prices in Europe, which went up multiple 7x, 8 x. All that together makes it that you know, we believe we can, you know, given the circumstances today, keep prices and further increase prices. We have, like I mentioned also in recent weeks, further increased prices. We see that the market still follows and therefore we are also confident that we will be able to further bridge that gap between cost and price, yeah, in the second half of the year.
Thank you. The follow-up questions that I have is the anatomy of a downturn. Typically, if you could just talk about, you know, how long does it take for you to see sort of a slowdown when construction projects start to be canceled or the numbers starts to come down? Like, how quickly do you see it in your numbers and what are the first things that you basically see, you know, your numbers sort of turning at the quotation levels? Just if you could just give us a broader picture of how, you know, how quickly you can see the downturn and what are the sort of leading indicators internally that would point to that.
Well, I guess it's a difficult question to answer because every crisis is different. I think if you take the COVID-19 crisis, we saw it from one day to the next. When Mr. Macron decided to close down France, from one day to the next, our business went from 100 to close to zero. Again, perhaps the COVID-19 crisis is different than, you know, the crisis we or the slowdown we might experience in the future. What you see today, I guess, is that, you know, the average person in the world has to spend more money on energy bill for his house, energy bill for his car, and therefore has less money to spend on other consumer products like, I don't know, iPads or luxury things.
I guess, if you know, you will see a slowdown, you will see, you know, it happening in the first sign of that part of the business, and that is for us, perhaps things that are linked to, you know, digital door locks in the B2C channel, in the retail channel, in the DIY channel. That might be, you know, a first indicator for, you know, the slowdown that, you know, people are talking about today. You know that we are late in the cycle, normally we have good indicators of other construction companies that are earlier in the cycle.
The difference between, you know, the people that pour cement into the foundation and us coming into a construction project is 12-18 months. You could look at, you know, other companies earlier in the cycle in the construction industry to have an indication.
Okay. Thank you very much.
I think we have time for one more question, operator.
Thank you. Today's last question comes from Olof Larshammar with Danske Bank. Please go ahead.
Thank you very much. Two very short questions. Firstly, on the HHI acquisition, have you hedged anything of the purchase price? Secondly, historically, you know, have you lowered prices on, you know, your products when we have seen, you know, raw material prices, logistics costs, et cetera, coming down? Thank you very much.
I can be very short. No. On the first question and on the second question, to my best knowledge, no, in general. Of course, there is always gonna be products, you know, particular individual products or families of products where you will have to do a price decrease. In general, if you look historically for all the years I can go back, we have always posted positive price increases over recent years.
Brilliant. Thank you very much.
Thank you.
Thank you, Lars. That means it's time for us now to round up this conference. I hope it has been helpful. If you have any follow-up questions, please reach out then to us at Investor Relations, and we will try to help you as much as we can. That means that we will close this. We look forward to speaking and meeting with you in the coming weeks and enjoy the summer up here in the northern hemisphere.
Happy summer.
Thank you very much.