Assa Abloy's (ASAZY) CEO Johan Molin on Q3 2016 Results - Earnings Call Transcript

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Assa Abloy AB (OTCPK:ASAZY) Q3 2016 Earnings Conference Call October 21, 2016 4:00 AM ET

Executives

Johan Molin - President and Chief Executive Officer

Carolina Dybeck Happe - Executive Vice President and Chief Financial Officer

Analysts

Johan Wettergren - Carnegie Investment Bank AB

Peder Frolen - Handelsbanken Capital Markets

Andreas Willi - JPMorgan Chase & Co.

Ben Maslen - Morgan Stanley

Tiantian Li - ‎Credit Suisse

Guillermo Peigneux - UBS

Daniela Costa - The Goldman Sachs Group, Inc.

Lars Brorson - Barclays Capital Markets

Matthew Spurr - RBC Capital Markets

Johan Molin

So ladies and gentlemen, welcome to ASSA ABLOY and the third quarter reporting. A stable and good quarter, as usual, [on the set] [ph].

Turning now to the numbers, we saw stable development in the third quarter with strong growth in Americas and Global Tech, good growth in Entrance Systems and growth in EMEA. APAC continued negative as we have seen in previous quarters.

Sales improved by 3% to SEK18 billion with 2% organic, 2% acquired growth and 1% negative currency effect. On the EBIT side, we improved by 2% to SEK3,020 million with an almost flat currency effect, only minus 2% in the quarter. And we see now that the currency starts to disappear in our numbers.

And earnings per share improved by 3% to SEK1.91. Looking to the full year, January to September it looks pretty much the same. A little bit stronger growth with strong growth in Americas and Global Tech. A good growth in EMEA and Entrance Systems, and negative growth in APAC, just like as we saw in this quarter as well.

Sales have improved by 4% to SEK51.8 billion, 3% organic, 3% acquired growth and 2% negative currency. And profit improved by 4% to SEK8.3 billion, negative currency effect of SEK160 million in the year, and earnings per share improved by 4% as well to SEK5.21.

Turning now to the market side, it’s always difficult to judge, or not judge but to choose what to show you. Today I will share with you about data analytics, that’s something that comes more and more into our access systems. In this case, it’s Cliq that is getting an addition of this. And what is happening there is that you can see every movement in a building. It’s perhaps not so important, if you are in your own home, but even there you can do it.

But it’s more like in an airport or other public facilities, where you can see if there is any abnormalities happening in the building or any abuse of usage of accesses in various parts of the building; very important, and more and more in demand from our customers.

We also see more and more energy-efficient solutions. We have showed you several times about our locks, that more or less are now having zero footprint when it comes to energy consumption. Here in this case it’s the same in Entrance Systems, where we have launched freezer transportation doors, which are high-speed doors which in a truck container today they lose a lot of energy when they have open back doors or side doors on a permanent basis, when they load and offload their containers or their carriers.

In this case, it saves several thousands of liters of diesel fuel in a year, because they are cooled by diesel fuel by having a door that closes at the moment you don’t need it. So it’s a very, very big improvement when it comes to savings. Same with industrial docking systems, more or less it’s not hermetic, but as close as you can get to hermetic closures, which means that you save cool air or hot air depending on what the climatic zone you are in on the inside or outside. So there is no loss of energy when you do load and offload.

Customers can also be guided by return on investment calculator, so that they can see themselves when do I have money for - my money back on my investment as such. We also see with the digital door locks, they have been very popular for home automation, but more and more DIY chains like to see our solutions also to be used in - by ordinary customers going and buying themselves.

They are rather easy to install, so that means that you can buy them off the shelf and install them. So we see a pull from DIY chains in a number of countries in recent times. And, of course, we are more than willing. For us this is a new segment, because ASSA ABLOY normally is a non-residential company, but of course we are not shying away from this opportunity that is occurring in several countries.

In the Scandinavian - sorry, in the Scandinavian markets, we have unified our locksmiths. It is so that in Sweden we brought all our locksmiths under the name of Certego. We did the same in Denmark and in Norway in recent time, and in the last few months we have done the same in Finland. And this means that we can service our large customers in the Scandinavia-Nordic region on a 24/7 basis, and do installations and do quotations in a sort of standardized way to all those customers; very important in an economy where sort of access control becomes standard and electronic solutions become standard as well. It’s very important for our customers.

Turning now to the situation in the world, it is just as before. The mature markets are doing quite well this year. America has grown organically 6%, EMEA has grown 4% organically, and Pacific a little bit less, only 1%, so a good evolution. Surprisingly enough, emerging markets is still 24% despite the negative evolution we’ve seen in China with minus 12% since the beginning of the year of volume or turnover in China.

We still have 24% in emerging markets, and this is of course, partly due to five acquisitions in Brazil last year, but also that we are growing 6% organically in Latin America, 6% in Africa and in Asia, then there we have a negative in minus 8%, and that includes also the Middle East which is also quite weak in these days.

So altogether a rather pleasing picture, a little bit better than I’d expected myself, especially for the emerging market. And here we should remember in Latin America, it includes Brazil that is minus 10%. So it’s a good evolution, in the other markets, I mean.

Turning now to sales growth, very good evolution, if we look a little bit longer scope. You see the yellow which is our acquired growth. It’s about 2% to even up 17% in 2011. And the blue, which is our organic growth, that has continued since the financial crisis between 2% and 4% per annum. This year is no exception. And with this accumulated, in fact has more than doubled our sales, up from SEK34 billion, SEK35 billion back in 2010 to more than SEK70 billion.

We’re just shooting through the SEK70-billion-level right now, so more than doubling of the business, quite encouraging evolution. And this quarter, we had 2% - or 4% nominal growth, organic 2% and acquired 2%.

Looking then to profitability, I’d like to remind you we buy companies that normally are not making all that much money. Despite this, by lifting the profitability in those companies, we’ve gone from more than a doubling of the profitability since 2010. So it’s really behind that very strong upsurge on the profitability, since - in fact in every year. And in the last four quarters, we have grown profitability by 6%.

Margin-wise we are in our target zone, 16% to 17% EBIT, 16.2% to be exact now in the last 12 months. And in this quarter we had no dilution from acquisitions and currency. We said in the beginning of the year currency is negative and now it has turned positive. So it’s nullifying then the dilution we have from acquisitions in this quarter, so it’s a flat situation.

And you can see then in the last four months - four quarters, we had 16.2% EBIT and 0.01% lower than last year, so a very, very stable evolution, positive I must say. And one of the reasons why this is happening is our manufacturing footprint. That is doing quite well. And as you know, we are going to launch another one here in Q4, little bit more than SEK1.5 billion. It’s costing that we so far have seen. Some 10 - a little bit - most likely a little bit more than 10 factories are going to be closed and a number will be converted.

So far in the old program, 76 factors out of 78 are now closed, so we are almost coming to term. And 101 factories have been converted to assemblies, so pretty much in high-cost countries today the ASSA ABLOY Group is an assembly company. And, of course, if there is a financial downturn, this means that our load or our exposure to downturn has been reduced thanks to this rather serious work.

We have seen almost 12,000 people leaving us since the beginning of the program, so a good evolution, I would say.

On the margin side we lost 0.02%. I would say, this mainly and only - almost only due to the APAC situation, where we have lower margin. You will see that later on the presentation. And we had the flat situation between currency and dilution from acquisition. It was zero in between those two.

We have savings from manufacturing footprint. Carolina will give a more exact number later on. But it is very positive and also general savings, but we must remember salaries and other and raw material have now started to creep up, so it compensates for that. And the loss of 0.02% is really related to APAC.

And here of course, due to the drop in China, I mentioned it last time and I’d like to come back to it, that in China due to that it’s dropping it, has dropped so far at the 10%-12% pace. That will put a load on us to really catch up when it comes to savings.

We are saving a lot of money but not fast enough when it drops at that pace, so we will see a drag from China also in a few quarters forward before we catch up with the decline that we have seen.

On the acquisitions side, this is the first quarter I stand here and say only one acquisition. That’s unusual. There are many in the pipeline. So we continue to have good activity, but you don’t rule over the exact timing. Still we have 10 this year and we have added almost 3% turnover or SEK1.9 billion to be exact on turnover. And we have sold one company as well, also very unusual for us, but it happens sometimes.

Turning to this Trojan in the UK, it’s a typical bolt-on acquisition; very positive for us in the sense that we can add it to our activities in the UK without really adding a lot of indirect costing. So it means that it adds nicely to our earnings per share. And in this case, it complements very much our offering in the UK market on doors and windows. And so we get a complete holistic offering to our customers.

A very positive acquisition and I wouldn’t call it a no-brainer, because there is a lot of work behind to get it up to standards, but it is a very good accretive acquisition from our point of view. It’s a pity it’s only SEK220 million, but that’s why we do make 10 acquisitions this year as you need to do many to get a lot of add on.

Turning then to EMEA, an improvement of margin by 0.02%, despite that we only grew 2% organically. And here in fact it’s from acquisitions that we see positive accretion and this is because we had Carlocks sold three quarters away and Carlocks was not very profitable, so sometimes we get dilution in another direction.

We saw, as usual I almost said strong growth in Scandinavia, and unusual in the UK strong growth as well, and despite then the Brexit. And it looks rather good the UK market right now, so probably due to that it gets a pull from the weak currency. An unusual friend up there is Israel that we haven’t seen growing for a while, but in this quarter, it had a strong growth.

Germany, Benelux continues to grow in a good way, and Iberia and Italy are also coming back that has been declining for many, many years in the past. Finland was I would say unusual way they’re not growing this quarter. While Africa is declining and Eastern Europe, Eastern Europe is okay, but Africa is weak, just like the Middle East, as I mentioned earlier. And France is also weak as a market and that we have seen in many quarters before, but altogether a rather good picture.

And here, I’d like to underline we had in this quarter two extra working days in August, when people are on vacation, and we lost two working days in July. So there is - especially in EMEA that is very sensitive to working days, there was some negative effect of that. They’re very difficult to quantify, but it’s definitely the case.

In Americas, pretty much everything is growing. Margin is stable on 21.7%; down 0.1% from last year on the back of 5% organic growth. And here, we have a dilution then from Brazil, where we bought five companies last year of minus 0.6%. So a good achievement, good leverage in what they do.

Everything is pretty much growing at a good pace, strongly or at a good pace, 5% as I mentioned altogether, except on the architectural hardware which is our basic locks. But that is because we have the very big orders on DIY - sorry, on home automation for last year, that has not really produced this year. So that means that we have a little bit of a drag for that reason on our ordinary locks. However, a lot of home automation companies are connecting to us, so we think this is only temporary. And then as I mentioned, Brazil is also negative.

What is encouraging is that we see that quotation levels continue to improve on a continuous basis. So even though we know that Q4 we had growth of quite high growth, we still see the potential to continue to grow going forward and the market is still in a good demand situation.

Turning to Asia-Pacific, here is a page that you prefer not to show, but since it’s a little bit tough, but let’s go through it. Pacific was growing. Korea was growing as well. And South Asia was flat. So what we see is, in fact, a repercussion from China where markets surrounding are weakening, at least with a few exceptions like India still doing quite well and a few other markets also. But mainly what we see is that, a few markets or a number of markets are cooling off.

We saw continued decline in China by 12%. And here we continue to reduce our staffing a little bit more than 10% since the beginning of the year in the last 12 months. So we follow up, but not fast enough since we are dropping even faster, a 12% also for the full year and in this quarter. We dropped a little bit less in the first quarter, more in the second quarter, little bit less now in the third quarter.

Then we did also in this quarter, and I’m sure the ones that are observant have seen that, we did a correction related to 2015. 2015 was a tough year and I was standing here saying we did better than market, and unfortunately, I was wrong. Our people did better in the market, in the sense that they sort of add the turnover that should not be there. They sort of started to invoice earlier than they should be.

We have corrected that in this quarter and we took then a one-off cost to correct the books by SEK260 million. And we have then neutralized it, because due to China is not doing so fine. The earn-outs that are due to come in the market will not come then to the same extent as was planned. That means that we had an earn-out coming in positively into the books as well. So in a way it neutralized itself.

Profitability-wise it dropped to 12.3%, down from 15.7%. And here, we have also some one-off cost. All people that were involved, which were quite a number of people, they were laid off in the quarter and so we are looking for new management in a number of our locations. We cannot tolerate in the group any kind of conduct in this case. So the moment we got to know it, we send people home straight. Something that sometimes you have to live with, in an emerging market, but I am sure we will get over it rather fast.

Organically, we declined by 7%, and we saw then, as I mentioned, then good savings on personnel and so, but we had redundancy costs in this quarter in our profitability. However, I like to underline, as I said earlier, that for obvious reasons with this kind of decline, if it continues we will continue to have problems to have the same profit level as last year.

There’s nothing much we can do about that. It’s just a few quarters then and then we are back. But the balance will come. It’s a matter of time. And on a group level it has very little impact.

Looking to Global Tech, a very positive picture, HID grew everywhere strongly. Altogether, Global Tech grew 7% and we had - the only area that we grew less fast was physical access control which is one of the larger areas within HID. So profitability-wise and sales-wise, we are doing quite well.

We have invested quite a lot of people in R&D and in sales in order to foster this. We have divisionalized HID. And the results are quite good, and very positive I would say.

On the hospitality side, we signed more agreements when it comes to virtual keying in hotels, so it is developing very well. So we saw very strong order take in the last quarter. However, we have done flat sales. We are now meeting very strong sales from one of several agreements we had last year. It’s always tough when you grow fast before, to grow fast again, but it looks pretty good there as well.

Profit-wise we had a dilution of 0.5%. Profit-wise then we reached 18.1%, down from 18.6% one year back, so a rather flat situation with quite some more investments in R&D. We have almost 100 people more. So that is even what we are working very hard on is virtualization and cloudification [ph] of our offerings. So the investments that we see is very good for the future, so a very pleasing picture here.

And also in Entrance Systems, it’s a very pleasing picture. Entrance Systems is in big transition, consolidating an industry that has not been very consolidated, doing a lot of acquisitions, having dilutions, but still growing margin to 14.3%, up from 13.9% one year back, despite a dilution of 0.2%. So leverage with 4% organic, leverage with 0.6%, very strong.

We see strong growth in most areas and good growth in Industrial and 4Front. And the only area that declined in this quarter was our Residential that was in Europe. And the reason for that is because we have decided due to long shipments from Scandinavian market where we make those doors to France and to Poland that we are not going to continue those. And that means that we have a discontinuation of a part of the business. That’s why it’s negative; so altogether a positive picture for Entrance Systems. Very encouraging considering, as I mentioned, all these changes that we’re doing there.

That concludes my overview. I’d like now to hand over to Carolina to give us some highlights on the financials.

Thank you.

Carolina Dybeck Happe

Thank you, Johan. Good morning. The third quarter continued in a good way for ASSA ABLOY on most parameters. And I will take you through them here.

In the financial highlights, starting with the organic growth, we saw a 2% organic growth in the quarter. We estimate that to be 1% price and 1% volume. We’ve seen a similar trend on the top line in the divisions as in the first half year, and we do believe that we have somewhat of a working-day effect in EMEA due to the shift between the holiday months that Johan mentioned.

Acquired growth, net of 2% in the quarter, so that means that we had the divestment of Carlocks, so that takes it down with 1%; so we are on gross 3% and net 1% acquired growth, as we spoke about before. The year so far is on net 3% acquired growth. And if I look at what we have in the books already, the full year will then end on the net 3% acquired growth.

Finally, currencies, last year is big drama and showstopper. Small effect this year, only 1%, 1% negative in the quarter. And the year so far is on minus 2%. And if we assume that the currency stay flat, which basically they never do, but still, then the year will have a full-year effect of minus 2% on the top-line here; so totally in the quarter, up 3%.

And if we then look at what it translated, into 2% improvement then of the EBIT. And here we have seen good development in most of the divisions when it comes to the profit, also based on the 2% organic growth with, of course, APAC being the tough one with a lower margin.

And within APAC, we have the two anomalies in the quarter. On the one hand side, the correction from last year with the SEK260 million, on the other hand side release of the earn-outs back to the P&L of SEK268 million, so basically a wash from those two effects in the quarter.

The margin slightly down from 17% to 16.8%, and that is really due to the dilution from the acquisitions.

Cash flow, always important; third quarter, that’s when the cash flow starts coming in and this was no exception. We saw good cash flow in the quarter. And if we look at the year-to-date number, we are actually up 10% year over year on cash flow, so a strong development as well on the cash flow.

And then, finally on the highlights, earnings per share, in line with the top-line growth, a full 3% improvement. And here we basically have a stable financial net and a stable tax rate. And therefore, the overall improvement is 3% in the quarter. And year-to-date same development, top line 4% up and earnings per share up also with 4%.

From the highlights we dive into the details, bridge of the P&L, and again starting with the organic here on the 2%. And here we can see that we have the different divisions. We have Americas and Entrance Systems, and the combination of good organic growth to strong organic growth and a nice leverage both from raw material improvements, but also very strong operational efficiency gains, so we saw really good drop through from those two.

In Global Tech, also strong growth. Here we had a little bit of a mix. Everything grew, but some grew even more, so a little bit negative mix here and also continued investment in R&D; so basically flat on the margin here.

EMEA, 2% growth, little bit low to be able to offset the margin effect from inflation, but EMEA basically managed that as well, thanks to the operational savings mainly.

And then we have APAC. APAC continued tough on the top line with minus 7% in the quarter, and therefore, an effect also on the margin. The combination of the two anomalies basically evening each other out, but then the underlying business and, as Johan mentioned, some of the redundancy costs, therefore significantly lower on the margin. But overall, we managed to have only 20 basis point dilution here.

Then adding currency, small effect in the quarter, only minus 1% on the top line. And I mentioned in the beginning of the year that that we believe that the first-half would be negative on the margin and that the second-half would be slightly positive on the margin. And that is also what we see in the quarter with 20 basis point improvement on the margin from currencies.

Finally, acquisitions and divestments, so the net then of the 2%; and I would say as expected and as usual, lower on margin and therefore also dilution from acquisitions of 20 basis points in the quarter. And with that, we come to 16.8% in the quarter.

A different perspective, not only quarter, but looking at the trends for the year so far in the P&L and as components of sales since then, we get this picture. And here what we can see is the direct material has had a big change, a big improvement. And there are as usual I would say there are particularly different pieces in this equation.

One part is that around a third of this is related to raw material development. And we saw that in the divisions that are high on, I say high security doors and high on raw material content, so that improved. We also have operational efficiencies which improves the numbers here. And then we also have a mix effect. And part of that comes from China, but also some from the other divisions.

And the opposite from the mix effect you see on the conversion cost, which is basically flat. And if I look at the units like for like, they are improving on conversion costs, so that’s sort of the shift of the mix. The most important therefore is the gross margin and the development here. And we have some strong development on the gross margin in the year, so 60 basis points improvement here.

And then, part of that has been reinvested in R&D, sales people, even some IT. And therefore, the SG&A is up a couple of percent points. And therefore, the EBIT for the year like for like is up 30 basis points. Then we add the acquisition and the divestments and we get back to the 16.1%, because the year so far has had a dilution of around 30 basis points from acquisitions, as expected.

The P&L should then materialize into cash and it has continued to do so. So this is a picture that I’m very proud of. And to look at development over time, you can see that we have managed to basically transform the P&L profit to cash as well.

You also see from here it’s a strong seasonality in the year with the second-half being much stronger. It was similar this year. I would say that we had a very strong second quarter and, therefore, the third quarter is strong. But more importantly, on a year-to-date basis we are up 10% when it comes to the cash side.

And here you have to look at the efficiency ratios to really see how we’re doing. And on the DSO we have improved three days year over year to 53, part of that being the improvement in the changes in China. On the DPO we have also improved with three days, so also good development here.

And then finally, on the inventories we are a couple of days up to 98 days from 96 days, but continue to be on a good level, the inventories.

So that’s to the cash. And then the other side of it, the gearing and the net debt, and I think it’s interesting here to see sort of the trend over time. We are now on SEK25.6 billion in debt. And if you look at that compared to a year ago, it’s basically where we were a year ago. But since the company has grown and the debt is the same, the KPIs here are improving. And the gearing is really down to 57%. And when I looked at this page, I can see it’s only been that low, well, basically just before the Cardo acquisition, so in a low level.

And an important measure also net debt-EBITDA ratio, which continues to be on a good level of 2%, thanks to the development of the companies that we buy.

Finally then, earnings per share. The quarter had a top-line increase of 3% and the EBIT was up 2%. And then we added to that with the stable debt situation and basically the stable financial net. And the tax rate, also stable, we came down to a 3% improvement of the EPS in the quarter and a year-to-date number of 4%, also in line with the top-line overall growth.

And with that, I give back to you, Johan, for conclusions.

Johan Molin

Thank you, Carolina. Rather short conclusions. Good growth in the quarter, 3% altogether with 2% organic and 2% acquired growth; strong growth in Americas, just as we have seen since the beginning of year and Global Tech as well. And digital door locks are progressing nicely in the DIY sector, which is a new sector to us to a very large extent.

Decline in China continues, unfortunately just like we said. And stable EBIT development and good cash flow, as such, as we saw from Carolina, so altogether a stable and pleasing picture.

That concludes our overview and we like now to open up the floor for Q&A. And we have Johan here, so [get to stand] [ph] to help us ask the right questions. So be nice to us now, all right?

Question-and-Answer Session

Q - Johan Wettergren

I will be very nice, definitely.

Johan Molin

Okay.

Johan Wettergren

So my name is Johan Wettergren, I’m with Carnegie. I am here to conduct the Q&A session. Before we start, I just want to ask everyone to limit themselves to one question just so that everyone gets to ask their questions.

I think I’ll start with two, one for you, Johan, on China, obviously. No, but just can you elaborate a bit on what you expect from China going forward, I mean, looking into Q4 and then into 2017? I mean, are we approaching some kind of bottom or…

Johan Molin

I don’t know. As I mentioned last time and we talked about it, we are very exposed to the northern part of China due our door businesses quite large in the northern part of China, and that is a problem for us, because that region is hard hit, while if you move into Shanghai region, southern part of China, we are growing there. So it’s a sort of dual situation, and a number of other towns are not growing either, so it’s very hard to say.

Personally, I think we have - we are going to continue to decline. To what extent I really don’t know. And remember also we sent home quite a number of our heads. That means that we’re now in heavy recruiting to replace those people with hopefully people that are not doing any stupid things. So we all most likely, at least for a quarter forward in a difficult situation when it comes to management.

Johan Wettergren

And then one for you, Carolina, on these earn-outs, I mean, you took back another SEK268 million, I guess, in this quarter. What do you have left in terms of earn-outs for the remainder of this year and then into 2017, which potentially if the China problems remain, I mean, could be taken back?

Carolina Dybeck Happe

Well, first I would say that China, since you mentioned that, in China there’s a very little earn-out left, so that will not have that much effect on changes. If we look at in total, we have SEK1.9 billion to pay still on acquired companies, both on earn-outs and hold-backs. And a couple of hundred of that is still this year, and the rest is really in 2017 and 2018. So that is where we are.

Johan Molin

A normal situation, yes.

Carolina Dybeck Happe

Yes.

Johan Wettergren

And how much of that is from Brazil then, if I on the…

Carolina Dybeck Happe

Well, yes. And that is a little bit further since we acquired them. That’s in 2017 and 2018 so it’s not really for this year. But there are a couple of hundred million there as well.

Johan Wettergren

Thanks a lot. Then let’s start here in Stockholm and then we’ll move over to the telephone conference later. So Peder, let’s…

Peder Frolen

Okay. On the do-it-yourself sort of initiatives, maybe you could share a bit about the base, I mean, how limited that business is today, and what you see going forward. But also, what your conclusions has been from a more - sort of the U.S. market is more normal in that sense with the big boxes and your competition there being really strong. And of course, tied to that the - what you’re aiming for in terms of profitability in that specific segment. Most are doing bad, some are doing very, very good in profitability in that specific channel. So that’s my question.

Johan Molin

As I mentioned, the residential market is not very large for the group. We estimate it will be a little bit around 25%, less in the USA, more in Europe, and even more so in Asia Pacific. So that - but average is around 25%. So three-fourths of what we do is non-res.

On the profitability side, when you move into DIY it’s not all that bad, because what you do have is a margin that is lower, but as a benefit you have less costs, because they take care of the sales. So you don’t have the same number of overheads connected to it, so profitability is surprisingly good in that sector.

Peder Frolen

And especially on the, I mean, residential could be both do-it-yourself and sort of other channels, we talk about locksmiths and all of that, but if you try to extract that specific channel, and try to expand the size there and hence the potential?

Johan Molin

We are quite big in the UK on that side. We sell close to £50 million in this segment. We have it recently in the Scandinavian markets with good success, we are progressing very nicely. You see Nest building a picture of the Nest lock that is on its way to the market, and that one will then be in Walmart in the USA, so we will see some development there. But DIY has never been our focus in the past, and the reason for it is because coming with a meaty offering when you haven’t been there before, it’s not really interesting.

We’ve seen in Mexico and a number of other markets where we then have added the digital offering that we are very attractive as a partner, because that’s something new that they didn’t have before. And in the UK, we have also extended our offering so we have seen more inroads into that sector as well. So I can answer you that it’s small today, but it’s definitely going to grow for us.

Peder Frolen

Thank you.

Johan Wettergren

Let’s move to the - do we have any more questions here in Stockholm, or –? No. Then we move to the telephone conference. Operator, please.

Operator

Thank you. [Operator Instructions]. The first question is from Andreas Willi of JPMorgan. Please go ahead, sir. Your line is open.

Andreas Willi

Yes, good morning, Carolina, good morning, Johan. My question is back to China. In terms of the restatement, if you could just explain that to us a bit more. So you said you changed the base for organic growth for the prior year but the absolute sales number in Asia Pacific hasn’t changed. And also, what would have organic growth in Asia and separately in China would have been in Q3 last year without the restatement?

And maybe if you could just elaborate a little bit more in terms of what exactly you have done in terms of the accounting change over the last few quarters. Is that just the last few quarters, or is that going back further? Thank you very much.

Carolina Dybeck Happe

Yes. The change is not large enough to do a restatement of the last year’s numbers, so we have not restated last year’s numbers, so the numbers are what are they from last year. But the correction that we have made, we have made in this quarter, it’s mainly related to 2015, and what we have done is that we have taken the P&L effect of this in the third quarter, and that is the SEK260 million that we have mentioned.

What we have done though, because very important is to understand how the China business is doing, is that we have recalculated the number on organic growth. So that you can understand how we are doing compared to sort of the true underlying number in last year’s China. And for this year, year-to-date, we are on 12% negative for China and 8% negative for the whole group in China. And as to the last year’s numbers, Johan, you may want to comment on?

Johan Molin

Yes. Last year, we - I stood here and was rather happy about the situation in China in the sense that the market we see, since we do a lot of OEM-ing to other door makers, we saw that the other door makers were declining by in many instances 20% or more. So then, we felt very good that we had a rather slow decline ourselves. In relative terms, it was about 7%, 8% decline. But it was a false picture because our people then were inventive and increased the numbers without having a reason for it.

So in a way, what we have done and concluded, and we saw it in fact on the receivables that never really got paid, but they were very smart in rolling them. That’s why we discovered only in the second half or after the second quarter reporting, they were rolling them by crediting and re-invoicing. So it was fresh receivables but never paid.

So it’s very difficult to discover, and the situation in a way is that we exaggerated the turnover from last year. We don’t know the exact number, but of course we have a rather good picture about it, and we are still working on then getting the full picture. So we will have to have some patience before I can be precise on the exact number.

Andreas Willi

Thank you very much.

Operator

Thank you. And our next question comes from Ben Maslen of Morgan Stanley. Please go ahead. Your line is open.

Ben Maslen

Yes, thank you, morning, morning, Johan, morning, Carolina. Just a couple of questions. Firstly, on China, can you just say what percentage of group sales it is now post the restatement, post the organic decline?

And then I guess in terms of growth going forward, has this experience or the problems you’ve had in China just changed your view at all of the attractiveness of that market and how you expand there, i.e., via M&A? Do you have to do anything differently there based on what’s happened the last 18 months? Thank you.

Johan Molin

I think we need to remember 80% of the world population is not living in Europe or in America, so we are not going to shy away. China, there are several ways, you can be like the - where I used to work, Atlas Copco, you can be sort of growing organically, because the demand for investment goods. We have not investment goods, we have locks.

So we have been forced to get into that market by acquiring local players, and I can tell you they were not very conformed with the legislation in China and when we acquired them, they are nowadays. But it has been a journey, of course, to get into that position.

We have not changed our idea about long-term whether or not it’s right to go in this direction. We have now 24% of our turnover in these markets. Most of them are making good money.

So it’s a matter of volume and structure. Unfortunately, in China, it has been more difficult really to get solid collaborators that really work together with us and I think one of the reasons is because these companies were manually booked. You can imagine companies with 4,000 employees and nothing is in the computer.

We are now installing IT systems in every unit that we have, but unfortunately, this has made it possible to have a few loopholes that have in some cases been used. When we’ve seen it, we have immediately taken that person out, but it’s still work to be done. But I’m not changing - I don’t think a second that it’s not the right thing to go into such a market with 1.3 billion consumers that is going to need a lock on their door going forward, and most likely an electronic lock as well. So it’s a very attractive territory for us. The same with Brazil that is negative now. That’s why we took that decision last year.

So I feel good about it, but we need to work through the difficulties we have, not growing organically but rather creating a culture. That takes some time, unfortunately, but that is part of life.

Ben Maslen

Thanks. And just in terms of overall percentage of sales?

Carolina Dybeck Happe

I was coming to that. I was coming to that.

Johan Molin

I should have started there. 7.5%, down from 10% [ph].

Ben Maslen

Got it. Thank you. And if I can have a follow-up. The new restructuring program that will come in Q4, can you run through what the main areas of focus are in terms of where the footprint will be taken out and what level of cost savings should we assume for a SEK1.5 billion charge? Thank you.

Carolina Dybeck Happe

Yes. The program is still work in progress. We are on a little bit more than SEK1.5 billion in one charge. It’s around 10 factories, and let’s say, 40 offices for in total roughly around 50 projects. Where it is? It’s still also work in progress, but a good bet is that quite a lot of that is in Europe because the cost of change in Europe is high.

But that said, we have seen really nice projects from all the divisions for this program, and you’ll have more information on the savings profile and so on, once the program is firm and we communicate that.

Ben Maslen

Got it. Many thanks.

Operator

Thank you. And our next question comes from Andre Kukhnin of Credit Suisse. Please go ahead. Your line is open.

Tiantian Li

This is Tiantian on behalf of Andre. So just a few more questions on China, can we get an idea on how you’re doing relative to the underlying markets specific to your own exposure? And we’re wondering if there is any temporary impact from the personnel leaving the company. And related to that, can we please get a rough idea of what actually is your exposure into the Liaoning Province, which we think that’s where Pan Pan headquarter is based? Thank you.

Johan Molin

Well, how we are doing? I think we have discovered - disclosed that it’s minus 12% in the quarter and also for the year. How we’re doing relative to the market? I think I’ll have to answer in the usual way. In China, statistics is not so easy to get your hands on. We can see from what we sell, locks to other manufacturers, that the market is not doing very well.

Whether or not 12% is representative for the Liaoning market, I don’t know. I think it has very much to do with what geography you are in. And we are in a geography, at least in the northern part which is not so favor as far as we can see.

On the impact of personnel, we let go of those people that were involved, quite a number of them. There was a scheme among the door group people. Most of the managers were involved. So unfortunately, we had a rather big number of people leaving, including the financial, because you can’t do that without having support of financial people as well.

Most of those people have been replaced on an internship or by permanent people and, of course, we are in a recruiting phase. That’s all we can say about that. And in the Northern Province, I’m not sure if I understood your last question what really that was. Could you repeat that?

Tiantian Li

Yes. What exactly your exposure to the northern three provinces, or to Liaoning specifically, where I believe the economy is doing very badly?

Johan Molin

Well, it is much less than before. That is what I can tell. We don’t normally go into those details, but it’s less than it was before because we have dropped there, quite a bit.

Tiantian Li

Okay. Would you be able to say whether it’s more than 50% or 30%?

Johan Molin

No. It’s less than 50%, but it is - was a large portion of our sales and still is. So…

Tiantian Li

Okay. Understood. Thank you.

Operator

Thank you. And your next question comes from Guillermo Peigneux of UBS. Please go ahead. Your line is open.

Guillermo Peigneux

Hi, good morning. It’s Guillermo Peigneux from UBS. Actually, one follow-up on China regarding the underlying margins. Is there any change in the structure or the mix of the margins as now you change in a way the way you look at the market, and maybe I have a follow-up, but I will ask that later. Thank you.

Johan Molin

Well, it will take - as I mentioned, it will take a few quarters before we catch up with the drop that we had in order to adjust our cost base. China is of course, when you have a market that has been growing 30 years endlessly to the extent that it is today, and you have for the first time then contraction of volume, people start to bite in the sense that people are less willing, they are now more willing to give concessions on price. And that is also something we have to live through, which is only natural. And that’s why we think it will have a drag a few quarters forward on our profitability.

And as you can see here in this quarter it was 0.2% on total profit - no drama.

Guillermo Peigneux

Okay. Thank you. And maybe second question regarding EMEA, actually. I’m interested in understanding a bit the trends in Middle East; probably Turkey and also the UK. Can you elaborate a little bit on how those markets are evolving as we speak in terms of organic growth? Thank you.

Johan Molin

Turkey has been negative in the last quarter. Turkey is not a huge market for us. Russia was negative as well, which is also not a very large market but still an important one. When it comes to the UK, we saw good and brisk demand. I don’t know if people have sort of got more positive with Brexit in the local market, but at least we got some - quite some nice orders on the broad basis, it’s not only from one sector. So the market was pretty good in the quarter as such.

And in the Middle East, I think it has not dropped all that much yet, but we see, of course, that the number of projects that are going on in the market is declining, so I am sure it will drop in the next few quarters.

Again, Middle East is not a huge market to us. It’s still an important portion of Europe but not so much - it’s like in Italy or Spain that falls off. These are things I think we have to deal with on a continuous basis. It just happens.

Guillermo Peigneux

So maybe actually - I mean, sometimes the communication got broke in the conference call, but I just wanted to ask. Normally, you actually talk about the demand outlook in terms of growth into Q4. I didn’t hear that communication and I just wanted to ask whether you see actually the same trends continuing and how do you see growth going forward? Thank you.

Johan Molin

We grew nicely 5% last year in Q4 as an average, and that is all I can say. We have no real crystal ball for Q4. We don’t work with orders on hand very much. It’s what comes in that goes out pretty much. I mentioned that the quotation levels in the USA are positive, and there’s no major change in demand. Number of working days is very similar. We have a few - one more working day in December, we think, but unfortunately, it’s like having them in August, not much result after that, so pretty much flat number of working days.

So I think no big change. We don’t give forecast, but we don’t see - when it comes to looking to the calendar we don’t see much of a difference.

Guillermo Peigneux

Thank you very much. I’ll go back in line.

Operator

Thank you. Our next question comes from Daniela Costa of Goldman Sachs. Please go ahead. Your line is open.

Daniela Costa

Good morning. Two questions. I’m really sorry. One is a follow-up on China just to make sure hopefully because the line was not so good that I didn’t miss it. When you look at now the reset profitability for China, is China profitable?

And then the second question, you talked about a DIY opportunity. How big is that already in the numbers and is that margin accretive? Thank you.

Johan Molin

DIY, we have never been large in DIY. We are large in a few markets, it’s not significant, but we don’t have the exact number. And in China, not counting then the correction we did, it’s profitable.

Operator

Thank you. Our next question comes from Lars Brorson of Barclays. Please go head, sir. Your line is open.

Lars Brorson

Hi, thanks, Johan and Carolina. Sorry. I need to go to back to China. I have just one follow-up, but I did want to just try to understand what’s going on here. Can you tell us whether this is relating to one specific acquisition or for the entirety of the China business?

And if it’s one acquisition specifically, are we done here and what are the applications - are the implications rather as far as control and governance in that business is concerned? And are there any legal action associated with what’s going on there?

Johan Molin

It’s concerned Pan Pan and [fire door window] [ph] hardware which was managed by one and the same manager, so - and then a number of the people that in different locations, which are 10, that were also involved in this part, so an answer to that.

Could you repeat the second question?

Lars Brorson

So it’s two acquisitions obviously dating back a very long time. Surprisingly, we only hear about it now. And I appreciate your point you are making about rolling the receivables. I’m just trying to understand what this means for the China organization and what you are doing in terms of enforcing the governance and control in that part of your business.

Johan Molin

We have changed completely, and that has happened since - I can say first, why did we discover it? Because we started then to see - we saw this rolling. And perhaps you would like to answer, Carolina.

Carolina Dybeck Happe

When we were looking into the receivables, there was a part that wasn’t sort of being paid, and what we saw now what’s going really deep down into it that there was a reason for it and that was that they were too early invoiced. And it is good - well, most likely to assume that when the normal sales started to drop, it was then enhanced by being a bit too aggressive on invoicing and too early invoicing, and then basically rolling those invoices, so with time rolling them. And therefore, the biggest jump is in 2015 from this.

But we have gone through the entities and we have taken external help on it as well and really go through in a deep-dive to make sure that we capture the moment of this. And it’s really the effect on the margin and the profit that we have taken now in the quarter, but that’s for the full rolling, and it’s in the entities that Johan mentioned.

And there are legal consequences for that you asked about as well, of course, for the people. And you asked also about any other actions and insurance and, of course, we have also claims by insurance. But that’s a long process, I would say.

The most important thing now is to get a grip and get the new managers in and get the business going, because that is by far the biggest issue when it comes to our profit, especially going forward.

Johan Molin

And we have for obvious reasons also changed who can stamp an invoice to be paid. We have changed the purchasing. But that has now been done since quite a while, so that no one can purchase without having a general agreement, so there are no differences there et cetera. So there are quite some numerous changes that have taken place, not only due to this, but we have done it on a continuous basis. And we are implementing IT systems in each and every unit, which will be concluded by end of 2018, if all of the plan is followed to 100%.

And we started to discover this in fact by installing IT system and we started to see it doesn’t fit what you have here, and what you say doesn’t fit with your - what you’re going to enter into the system doesn’t fit with what you have said before or reported before.

But these things I think you should not neglect them, of course, but I don’t think they should be blown onto a huge proportions. These things happened when you go in this direction acquiring a lot of local companies, and it is not so that it’s only two acquisitions. If your fire door window hardware group has been - are many acquisitions, so they are a bit different cultures, different people, different locations. So it’s not so that you just take them in and they as one entity, it’s many entities here. We talk about ten facilities across China in many geographies.

Lars Brorson

I understand that Johan, but just finally, you are confident that we are not going to see any more issues from any of the acquisitions that follow on from these? These are obviously very old acquisitions. You’ve done a full review and are confident that we are done as far as these issues are concerned?

Johan Molin

Well, I can never be 100% confident, or I cannot promise anything. I think that would be foolish of me. I think we have to realize what we are dealing with people, and if people are not following the way that things should be handled - and we have auditors there, they have been there, they haven’t seen it. So how could I see it from my office? It’s not that easy.

I think we have to realize that this is sort of something that we create over time, and sometimes you have to take one step back. And it’s no big deal. We will manage it and then we will get to it.

Lars Brorson

Thanks.

Johan Wettergren

So operator, let’s move back to the floor here in Stockholm and take one question. Peder?

Peder Frolen

I on the other hand think it is very wise to discuss this matter quite a lot, and this is a good opportunity. Stock is down 7% so the market is very worried. First of all, how large are the two entities in relation to the entire China exposure, 7.5%.

Secondly, if I understand correctly, Carolina, the earn-out has basically sort of ended [ph]. So would we think about this as demand will stay at current level there will be no need for further write-downs and hence that there will - well, there will be no need for reverses of earn-outs either, or - and tied to that, if demand would shrink further, would potential write-downs hit the P&L sort of clean then?

Finally, you mentioned, Johan, you didn’t know exactly how much invoicing was boosted last year, but ballpark, is the organic growth in China instead of being down 12%, is it down 20% or 15%, or 25%, or something like that? Those are my three questions. Sorry.

Carolina Dybeck Happe

I can start with the entities then. When we talk about the entities, there are around 10 big entities. So this is not a small part of our China business. Pan Pan is the largest that we have, and this is part of sort of the findings there. So we have gone through all the large entities and then sort of taken and contained this, and what you see now is the sum of that.

And when you talk about the organic growth, I think it’s important to realize that what we represent now for this year organic growth that is the correct number. It’s last year’s numbers that were too good on organic growth. So last year’s organic growth or decline was worse than we saw.

This year, what you see, what we talk about, the 7% for APAC in the quarter and 12% for APAC China year-to-date, and 8% year-to-date China the whole group, that is the real number for this year. And last year’s numbers were too good on their decline.

Peder Frolen

So the 12% is comparing to an abnormal high number?

Carolina Dybeck Happe

So that’s what I mean with the adjustment, we have adjusted it. So it’s like for like. We have done that on the organic growth because that is such an important number.

Peder Frolen

Exactly. Yes, so that’s my point that you don’t restate - so I want to know if it’s, compared to the old wrong number last year, is it minus 20% or minus 15%, or is it minus 25%?

Carolina Dybeck Happe

No, it’s not really relevant, but you can say that you have - because it’s through last year and the beginning of this year, most of it is in last year, and we say that probably a little less than 500 is the top-line effect from last year and beginning this year. So that is what you’re going to have to recalculate on.

Peder Frolen

Okay. And on this earn-out write-down days outstanding type of thinking?

Carolina Dybeck Happe

Well, I would say that earn-out is a separate thing from whatever other issues you can have. In this case, of course, the lower performance in China resulted in lower expected to be paid earn-outs in China. But the earn-outs in China are coming to an end. If you look at the profile of acquisitions, three years have gone. So the earn-outs that we have now in the books are for other acquisitions.

Johan Molin

Could I just add one thing? We are spending a lot of time, and I can understand your worry about China, and so, but again, we have four divisions doing very well. Americas is growing nicely. We’re making record profit. Europe is doing very well increasing its margin. Entrance Systems is doing fantastic considering all the acquisitions are growing strongly. And we have also global tech growing higher than ever at 7%, so all together very, very good picture with good organic growth.

If you take away APAC, organic growth is quite strong in the group and it’s in a market around us that is difficult, and still they’re growing strongly. And we have China that gave us a drag of a few tenths of a percent.

So I’m not sure if you really are focusing on the right question if it needs that much attention. We give it a lot of attention, because we don’t like what we see. But this is part of birth. Being born in these markets takes some dipping your nose and getting in trouble. And we are in trouble for a short-term period and we will solve it.

So I don’t think we should overestimate this situation, and I see no real reason why we should not carry on. We have fantastic products. We’re winning prices in every exposition we have. So don’t get overexcited about China. Let’s look for the total and realize that we are doing quite well.

Johan Wettergren

I think we have time - we have two minutes left. So I think we have time for one more question from the telephone conference, please.

Operator

Thank you. And the final question comes from Matthew Spurr of Royal Bank of Canada.

Matthew Spurr

Yes, morning all. I was going to ask another one on China, but perhaps not given that…

Johan Molin

[Well tried. I’m really sorry, so please] [ph].

Matthew Spurr

I was just going to ask really quickly on China. The Q4 - is the Q4 reported number from 2015, is that the right number to use as our base for organic growth? That was the first one.

And then I’ll probably change tack and just ask about France and what you saw that was changed from - I think you said it was good growth in the quarter before and whether you could just elaborate there? Thanks.

Johan Molin

France has been jumping up and down since quite a while, and this situation is because it’s hovering on some kind of bottom. And is it going to increase or go down? It looks as if it’s slightly growing. I think we will end this year with slight growth in France as such.

It’s a big market for us. It’s a difficult environment, but we feel that we are doing quite well. So - but again, we don’t give forecasts, but looking to where we are after September, it looks as if we’re going to end the year in positive territory.

Matthew Spurr

And just on the Q4 base for China, is that the right number - we can use the Q4 2015 base for our number to apply organic growth to? Is that right, or does that need an adjustment?

Carolina Dybeck Happe

Well, the P&L for Q4 will not change, obviously, but it’s a too high number to compare with Q4 and this year. And we will be very specific on what the real organic growth, or organic decline will be in the fourth quarter also for China.

Matthew Spurr

But should we use something similar to the Q3 for being too high, so SEK200 million?

Carolina Dybeck Happe

I can’t really get into the specifics of that. We’re going to have to save that for the fourth quarter in detail.

Matthew Spurr

Okay. Thanks.

Johan Wettergren

Then I think we are out of time. Johan, I’ll leave it over to you.

Johan Molin

So as you can see, I’m still smiling despite all these interesting questions about China. I feel very good. I think we are developing in a very positive way. China we will solve. We have very strong cash flow, strong EBIT, and we’re going to have an EBIT that is higher than last year despite than the difficulties we see around us in the surrounding world, so positive evolution. So thank you very much. Looking forward to the next quarter.

Johan Wettergren

Thank you.

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