Assa Abloy AB ADR (OTCPK:ASAZY) Q4 2016 Earnings Conference Call February 2, 2017 4:00 AM ET
Johan Molin - President and Chief Executive Officer
Carolina Dybeck Happe - Executive Vice President and Chief Financial Officer
Mattias Olsson - Head of Investor Relations
Peder Frolen - Handelsbanken Capital Markets
Andreas Willi - JPMorgan
Lars Brorson - Barclays
Andre Kukhnin - Credit Suisse
Ben Maslen - Morgan Stanley
Guillermo Peigneux - UBS
James Moore - Redburn
Welcome to ASSA ABLOY and the fourth quarter reporting. We have a solid quarter in front of us. We feel very good about. All four divisions out of five are performing very strongly. I think you can guess that APAC was a little bit of troublesome in this quarter, just like in the previous quarters.
So turning now to the numbers. The financial highlight, we saw a solid underlying development in the fourth quarter throughout out the group, with good growth in Entrance Systems in EMEA and growth in Americas and Global Tech and here we had very high comps from last year. We saw negative growth in APAC and that was mainly due to China.
Sales improved by 6% to SEK19.5 billion, 1% organic, 3% acquired, 1% divested and 3% currency. EBIT improved - declined, sorry, we normally we have always improved, declined by 4% to SEK2.9 billion, excluding APAC and write-off, we had 6% improvements, it follows pretty much to say it we normally have it and earnings per share improved by - declined by minus 2%, I am not used to decline, so sorry for that.
Then turning to the full year, at least now I can use improved. It was a good year despite challenging market, with strong growth in Americas, good growth in EMEA, Global Tech and in Entrance Systems and negative growth in APAC, just like we had also the year before.
Improved sales by 5% to SEK71.3 billion, with 2% organic, 4% acquired, 1% divested and currency was flat for the year, also in profitability it was flat more or less. And profitability improved by 2% to SEK11.3 billion, including China, write down - it was SEK 300 million, EBIT improved by 4% in the quarter and earnings per share improved by 2% to SEK7 and SEK 9 overall.
On the market side, thank you, I am not seeing two of them, two computer is not easy, the market highlights a lot of exciting things happened, it’s always difficult to choose what to share with you, we saw strong digital sales in Europe and in this quarter we saw strong sales in other parts as well, but in particular in Europe and in fact we are growing in all parts, digital door locks are doing very well.
Especially in the Scandinavia region but also in other markets now start to catch on and the innovation pipeline as well is strong, so we will have lot of new things coming into market. So I feel very good about this. And in Europe right now more than 30% of sales is coming from electronic products, so it continues to grow as a share of our sales.
On HID side system integrators are now more and more adopting our virtual keys and they are becoming very popular, only in December we had more than 100 companies, like [indiscernible] about 600 companies now therefore joined virtual key.
It’s still small business, but it post - it has a high pace of growth and it post $10 million during last year from more or less a very small numbers in the beginning of the year. We also see system integrators to our year - are starting to see the value of this. So they start to integrate in their apps, so that to manage buildings. And in this case you have excellent perform, Honeywell's Vector they call it. It’s a sort of PP flow system and also building management system where virtual keys is one of the important cornerstones.
On Entrance side, more and more business is done direct sales and service, with service technicians in Europe we have far more then 2000 technicians with advance, we have more than 1 million service contracts, we have developed now kits, conversion kits for major - all major competitors, that mean that we can take any total building and maintain and manage the doors for the customers and this is happening at higher and higher frequency.
And we also do offer to e-service maintenance to our customers, which is in fact nothing more than that they can have it online what is happening to the door environment, also become very popular. So in a very short period of time we have sold more than 50,000 of doors contact. So a very good evolution I would say.
Turning now to - where am I, I am sorry for this, but I have two computers. Turning now to the group’s sales occurring in the globe, what it looks like and I can say then North America continued in a solid way for us throughout the year, if we had not had this AT&T order which was very big in Q4 last year, America grew by 4% organically, so I would say Q4 was a normal quarter for us also there.
Organically for the whole year it was plus five, in Latin America it was also plus five organically, in Europe plus four, so Europe was very strong I would say throughout the year with 4% organic. This is the combination of all divisions and Africa was also plus four.
Pacific was weak - weaker minus 1% and this was mainly driven by Australia, while New Zealand was positive and Asia was minus 6 organically, where China was minus 11 during the year. So China is really the one that pulls us down.
This has also an effect on emerging markets for us, the share of emerging markets went down from 26% to 24%, so of total sales. So still close to one fourth of our total sales is coming from emerging markets, I think that is very important in the future that this continues to grow sales, 85% of the world population live in those countries.
Looking to sales growth, we have pulled SEK 71 total turnover for the group. We had a reeled growth for the year of 5%, a little bit less then we are used to. If you go as to my favorite looking, little bit longer perspective since 2010 we have more than doubled our size, so a very positive evolution and you can see the combination of the blue which is organic and the yellow which is acquired how powerful that is for growth. It continues to add and add. So - and I see no reason why we will see later on why not we could continue to have growth and acquired acquisitions going forward.
Organic growth, I like you to note also has been positive ever since the financial crisis. So this industry is growing industry, despite and that it might be a difficult surrounding world that we are living in right now.
Looking to operating margin, very firm between 16% and 17%. We have as you can see here it was 16.2% in the last 12 months, 16.3% previous 12 months. We said that currency would be zero at the end of the year, it was negative in the first half of the year, positive in the other half of the year and it ended up zero and we had dilution from acquisitions by 0.2%.
So a pretty normal year, the only thing that was not normal, it was that we have a dilution for APAC by two times for a percent, which will co-persist during 2017 due to the weakness of the China's market. But that we already said last quarter.
Looking to profitability, an absolute numbers, and here it gets very exciting in a way because here we can see the profit has more than doubled during this year. So - and it’s going from a SEK4.5 billion to SEK11.5 billion, so a good evolution and last year was one of the weakest years only 4% improvement, but still in the right direction. So a good evolution all together.
Looking then to manufacturing footprint, we launched as we said in manufacturing, but we came a little bit higher that we said, we said 1500, but currency exchanged little bit, so was almost SEK1.6 billion, two and half thousand will leave the company, 10 factories closed and four sales offices will be consolidated or other offices will be consolidate throughout the group. 50 acquisitions is with this lost time, so no wonder that we had some pent up demand and very good return. I was surprised when I saw it myself, that we will have SEK700 million return over the next 3 years from this program.
We closed some 76 factories and converted pretty much what we have as in manufacturing into assembly units across the globe. So very good consolidation I will say throughout the group has taken place during the last 7, 8 years. SEK 1.6 billion is still in the balance sheet to do this - to implement this program.
On the margin side, excluding the APAC write down in the quarter, 16.5%, 16.6% but remember here we have a 0.2% dilution from APAC in addition here. So we have a good evolution, despite that we had only 1% organic growth, as all divisions, but APAC had a good leverage and I already mentioned the currency and acquisition impact. Currency most positive in this quarter.
Acquisitions, we have really seen so many things in the ad when it comes to acquisitions, so it’s quite a lot of activity in this field. We made 15 acquisitions in the last year, it’s pretty much what we normally do and four in the last quarter and one today in this morning by the way.
And we had 4% added turnover, we have never left so many acquisitions possibilities as we did in the last year, and the reason for that is sometimes the prices as you probably know are rather exaggerated. So we are little bit careful to pay 13, 14, 15 times, that sometimes is the price for assets because the return would be rather low. So we are selective I would say in where we go.
Still we had 4% added sales and we will continue to see a good addition going forward and if the prices come down, I can promise you there are many targets out there, that would be target to us. So I am not worried, I would say, because I get the question quite often why is it only 4 and not 5 or 6 and that is the answer in fact. We divested also car locks that was not core assets for us during the year.
Looking then to the acquisitions, so a little bit highlight over few of them, I will not go through all four, construction specialties, perfect acquisition for us, doors and dockings lead there in Mexico with 80 service technicians. This is a small market for industrial doors today, but its growing quite strongly and so this was very attractive assets for our ASSA ABLOY to add to our North American direct sales and service operation.
Bluvision, a tech company, here of course multiples are difficult to talk about, but was expensive, but it’s a very interesting company, because this adds to our access control and then access management departure of HID, their ability to triangulate people.
So imagine a hospital where you then offer this kind of solution where you know then all the time, real time where is the doctor, that is sometimes very crucial to know, or an airport where you like to know are there entrepreneurs? That might be 10,000 people coming and going during the day, they are supposed to be? Meaning then that you don’t need to put up walls or fences other things, you can see from the system and it tells you whether someone is trespassing or moving in the wrong direction. We think these kinds of things together in access control systems are going to fly in the future. So that’s why we went into this direction. A very exciting addition. It’s neutral to earnings per share, so it’s not going to dilute or so.
LOB, Poland, why are we buying dull locking company, so you could ask yourself. But they are not dull, they are very exciting to be honest. This is a market leader in Poland and this puts us in a position where with our electronic lock because we are an electronic lock, it’s the market leader in Poland with electronic locking, put us in position where we can offer the total building in the Polish market.
We also owned old companies in Poland. So all together, for the non-res market ASSA ABLOY - puts ASSA ABLOY with a complete portfolio in the Polish market and that’s declared market leader. So, very attractive move for us.
Turning now to the divisions. EMEA's margin improved from 16 to 60.8 on the back of 2% organic. Here we have unusually a 0.5% positive dilution or accretion into this case, and this is coming by the phase of car locks, car locks had a very bad Q4 last year, so that is why you see this.
And also that we had good leveraged in EMEA and just before the northern part of Europe is doing quite well, Germany, Benelux, while we still see France, Italy and then also the Middle East. The Middle East was quite weak in Q4, and we think it’s going to continue weak. We see that the number products are diminishing in the Middle East unfortunately but that is life. Oil prices are low and so they are lacking funds more and more.
I also put - material cost here, and the material cost is of course going up tremendously when it comes to steel. So we're into now our third round of price increases and we try to catch up with 38% to 40% or sometimes even more price increase on steel and also - who you that know us, is that steel is one something that it’s abundant in our product, so we need to compensate in the marketplace. So we are busy with this in all parts.
Same in Americas, you see material cost there as well. American good profitability 20.8% dilution by 2%, but you can see then from Brazil that we had quite some dilution from acquisitions. So with only 1% organic growth, America’s margin kept up, so I think it was a very strong score from them.
Growth in Mexico and good growth in most other parts. You see architectural hardware here, negative as it’s been in my time before and this is because AT&T was a big last year that - when that fell out now it became negative.
Underlying, we are growing in America in a good pace, so it was 4% in North America, so it’s a positive evolution underlying, but AT&T had a very big order last year Q4. So a pleasing picture from America and the same in Asia-Pacific, almost, here we have 10.4% underlying profitability. So it's not so that we pull the drain in a packet.
The market - most market are doing quite well, China not, and as you can see here we are adjusting quite a bit minus 12% adjustment. That South Asia is negative this time, has to do with India. They took away all the currency or the floating currency, the cash in the market.
So October November became the markets where we sort of dropped heavy so by just whole underground and December sales returned again and it looks normal in January. So I think it's mostly a temporary thing, but there was no money in the economy simply. So we couldn’t do much about that.
So altogether, we took also this write-off of SEK300 million, Carolina, will come back to it later on. So I will tell you. But here, I think, I like also to warn for material cost, China is depressed market, so here we'll take more time to cover up for their raw material increases on steel. So our estimation is that we will have a tough time in the first six months this year to compensate for the steel cost increases.
Global Tech, very good evolution, physical access control, where the virtual keys is doing very well. Ident and Access Management maybe added 50 or in fact more than 50 new engineers 2, 3 years back. The new products are catching on in a very nice way and the inlay business which is related to the Gov business in part is also doing quite well.
Secure issuance which are printers, they sell a lot in Middle East, and Middle East was weak, so this quarter was not the best, it was only good growth, while products sales where we had $20 million order last year in Q4 was not repeated in the same magnitude this year. So, in fact, a negative order, that it was only 1% organic growth was related very much to Gov-ID, but mainly the project sales that did not materialize in China this year.
Hospitality continued strong, we see there also a very strong pickup of our mobile keys in the hotel growth. All hotel groups are preparing for the shift to alpha order customers, virtual keys, so this is very beneficial to the group.
Margins increased from 84% to 86% with only 1% organic, but this has to do with the mix we see up in HID. And we had a very heavy - continued heavy dilution here, mainly from and the solution here, mainly from Bluvision and a few others with 0.3% still the margin expanded. So very positive evolution.
And Entrance System continues to consolidate its business, doing well on door automatics, where we have new products, our sliding doors are growing very strong and US is also doing well on the industrial side. So a very positive evolution.
And consolidation continues, so we have very positive effect of that and margin improved to 15.1% to 15.4% in the quarter. So a pleasing picture and you can see here the size of Entrances is now with 30%, so it’s almost past SEK20 billion and as you know, our target is now set to go for SEK30 billion, so there will be more acquisitions here.
That concludes my overview, and I would like to invite Carolina now.
Carolina Dybeck Happe
Thank you, Johan. Good morning, everybody. Another year ended and it ended in a solid way for ASSA ABLOY. I will start by looking at the financial and highlights, starting as usual with a very important organic growth, in the quarter we had a 1% organic growth, we estimate that to the 1% price increase and flat volumes.
And if you look at the divisions, I would say the trend is similar to the third quarter on the growth side, we do have very strong comps for both Americas and Global Tech and therefore the growth on top of that was a bit lower.
On the other hand, we have Americas - sorry we have EMEA and Entrance Systems where Europe based, which had good growth in the quarter, slightly positively helped by the effect of some working in December, we should remember Christmas time though doesn’t make that much difference with the working days because they are in the middle of a holiday.
And then we have APAC which continued to go down in the quarter. Acquired growth 2% net I would say, we commented on that during the whole '16 because they've had divestment of car locks, so gross it was 3% and net 2% and for the full year we are on net 3%. And looking at what we've already acquired during '16, we do have a carryover effect of around 2% acquired growth already on the books for 2017.
Currency, another interesting one, which you can't stay over much, for us in the quarter we saw a positive, plus 3, first time we had positive this year and therefore the full year on currency is zero on the top line. And here in just assuming the currency rate is still the way we are, we will have a carryover effect on '17 of around 2% on the top line. That said, we are in February - that’s very early on in the year. So I think we have to wait and see the development of the currency.
And in total, top line growth of 6 and EBIT of minus 4 and the adjusted for the China wire down its plus 6. So it’s really in line with the top line growth and here we have 4 out of 5 divisions having good to strong drop thorough from the organic side. So happy with that development.
Cash flow, well, you know, fourth quarter is strong on cash flow for us and it was this year as well, very strong SEK4.6 billion in operating cash flow, so a good number here coming from the profit, but also good control over the working capital.
Finally, earning per share, minus 2 and here it’s less down then the EBIT and the difference relays that we have lower financial net in the fourth quarter than we had last year and that really is due to some FX changes that we've had. So minus 2 on the earnings per share in the quarter and for the full year plus 2.
From the highlights down into the details, here we have the bridge and I will start with organic column, plus 1 on the organic side and here we saw Americas and Global Tech with only 1% organic growth, but still good and strong drop through on the margin, America is 30 basis points and actually up to 50 on Gilbert Tech, also due nice mix in Global Tech that Johan mentioned.
We have EMEA and Entrance Systems both with good organic growth and good results from the efficiency measures and the existing manufacturing footprints and therefore also a good drop through here. And then we have APAC, and here we have separated the write down, so what you see in the organic column is the like for like comparison on the business and with a drop of minus 4 on the organic side, of course, it’s tough with the margin and we do have a dilution from APAC on the margin here.
Currency, 3% top line, I would say as expected or at least as communicated and here you can see that we did have a positive effect on the margin of 20 basis points and reflect for that the first half of the year was negative on the margin, the second half was positive. So for the full year we are flat when it comes to margin development due to currency.
Acquisitions, the net 2% that I talked about, as you can see only 10 basis points dilution from acquisitions and that is also thanks to the divestment which was low in margin.
And then before I go into the P&L from a different perspective I will make a little bit of detail around APAC. So this slide only shows the APAC and while we explained last quarter that we've had overstated sales, mainly in '15 and beginning of '160 and therefore the comparable numbers are too high.
So what you can see here is that, if you look at it like for like, the fourth quarter in 2016 we are on minus 3 organically for APAC compared to the reported minus 8 and for the full year you will have the effect of minus 5 being the underlying organic growth rather decline for APAC while reported is 9 and the overall difference for the full year on the sales line 380 difference.
And then back to the P&L as components of sales and here we have the perspective of the full year, and the like for like comparison, you can see like we've during the year the direct material has gone down significantly during the year and we have 70 base points improvement on that side.
I would say that a part of it on behalf really comes from the mix and the other half it comes from lower raw materials underlying. That said, you have to remember we have a time lag because of our inventory times for when we purchase and where actually have in the P&L and Johan commented, we all know that during 2016 most of the major raw materials that are related to us went up significantly.
So unfortunately, I would say this looks very good now, but we have to be very careful going into '17 and we have already started with significant price increases in many of the places where that is permitted.
Conversion cost, stable, gross margin, nice improvement than for the year, whole 60 basis points and then we have the SG&A and here we have, I would say half of that is really the opposite effect from the mix and then the other half is investment in front-end sales people, R&D, but also in IT. So like for like for the year the margin is up 10 basis points and then we have the dilution from acquisitions of 20 basis points and end them with 16.2.
Cash flow. I have to say fourth-quarter in '15 where we had this very high cash flow of over SEK4.5, I was very happy and I was little bit worried this year we would manage to have to as high cash flow in the fourth quarter as we did then, but we did. So very happy to say that we managed to have operating cash flow over SEK4.5 billion and that really brings the full year to a 5% increase on operating cash flow.
And part of that of course, comes from the increased profit, but also because we have very good control over the working capital. And here we have the DSOs that are down to 50 thus and there DPOs that are around 60, which means we have a very nice gap between the deals on the DPO.
On the material throughput side, we are actually up 5 days, but that’s not necessarily the volume, but here we do start to see the increased raw material price that they will start to trip in to the inventories then. So overall very good cash flow development also in 2016.
Good cash flow, low debt. We ended the year with a little bit above SEK23 billion in debt, if you compare that with about a year ago, it’s only about SEK1 billion higher and actually only the revaluation of the debt due to FX is higher than that difference, so we have during the year managed through our cash flow to both finance the dividend and all the acquisitions that we've done through the year and there we also have a net debt EBITDA that is on a low 1.8. So a good development here as well.
And now the year ends, and here we are, you can see for the full year the EPS is now [indiscernible] and with that, we have also dividend proposal that is increased to DKK3 and that’s a full 13% increase on the dividend.
And on that positive note, I give back to you Johan, for the conclusions.
Thank you, Carolina. So the conclusions for the quarter is that we had 6% growth, whereof 3% was reel term or nominal growth, you could call it, which is then acquisitions and organic, good growth in Entrance Systems and EMEA, decline in China continued and stable underlying profit or EBIT development throughout the group in four divisions very strong and APAC of course as we say not that strong and a very good cash flow and also the board had decided then to propose 13% in dividend increase.
So with those words, I'd like now to invite for Q&A and Mattias also will help us, but before I'll let Martia's open up, I like to clarify a little bit about China as well because I am sure you have a lot questions, try to sort of help you out as best as I could, what has happened is China then in Q3 as you probably remember.
We have the flawless behavior in 8 facilities in China. We went in then for obvious reasons and laid off more than 50 people, all pretty much all management in those areas were - left the company very quickly.
We brought in auditors to help us out, to sort out how things were, we saw then that the sales was exaggerated by some SEK400 million, so that is what Carolina showed on the slide, we rectified that in last quarter, orders are continued to work now in this quarter and one of the things that we asked them to do was really to check for the substance, is the assets, all the assets in the company as they should be.
The conclusion was not in every case, so we have concluded that the majority of what is missing is some receivable, but primarily it is inventory, so we took a SEK300 million one-off in this quarter to rectify that.
We have hired new people, most - many of those are in or if not all, but most of them are also on their way, so we're going at - be in this year with not full team, but at least a good team, as I would say.
And so from that point of view, I would say we open up 2017 with rectified books and we have also checked the other - we have 22 units, other 14 units we also went in order to check, they could not find any missing substance, so it looks good. So that means it was isolated to these 8 units and we go in now into 2017 with corrected books and looking forward them to continue to develop sales and rather focus on that to run around trying tight the leaks.
We've also reinforced a lot in initiative field, Carolina has been very busy in working on that, so we have a split division of what people can do and cannot do, meaning that no one can do the same task like payment and receivable, either you invoice, but you don’t receive money and sort of to handle the bank at the same time. So we don’t risk at anything fraudious can occur gain, even though we can never guarantee hundred percent, right. But at least undertaken a lot of measures and you cannot pay the suppliers without different people doing it. So feel good that we have done what we can though, and that we start on a page in 2017.
So with those words, I open up then for Mattias to lead us in Q&A.
Thank you, Johan, thank you also Carolina. As Johan said, my name is Mattias Olsson I head the Investor Relations team here at ASSA and I will facilitate the Q&A session today. As usual, I ask you to please ask only one question, so to allow for as many people as possible to ask questions. And I will also ask the operator to please repeat instructions to how to ask questions before we kick off.
[Operator Instructions] The first question
I will start out with asking Johan a question. You say in the report that the global economic development is relatively weak, but you also see positive trends in some markets in Americas and Europe. So how has 2017 kicked off Johan?
It was told and last year October, November were rather weak months, December was a good month and January looks also pretty good. We should remember there is - January has one more working day. But we don't think the impact of that day is that strong. So it looks pretty good.
And I like also to underline here that Q1 will have any Easter effect in a positive sense, so April and March - the Easter will shift place between March and April. So this year we will have full March and Easter will be in April. So that means that we will have a positive mainly in European arena, so it’s there, but we celebrate Easter.
But all altogether a positive picture...
I am also the moderators so have the privilege, I will also ask Carolina a question. We just launched the six-manufacturing footprint program, Johan says that it looks good from the savings point of view, could you tell us what to - what about the project - program and what to expect in terms of saving also this year and then maybe 2018, please?
Carolina Dybeck Happe
Yes. We have launched a new manufacturing footprint program, the one-off charge is around SEK1.6 billion. The savings off to 2019, the run rate will be SEK700 million and out of that in 2017 we expect this to 300, in '18 we expect to see 250 and then in '19 SEK150 million in the savings profile.
Okay. Thank you, Carolina. So will kick off the Q&A session here and in Stockholm. So please, Peder.
Yes. Thank you. Peder Frolen, Handelsbanken Capital Markets. My question will be related to China, and there might be some small sub-questions in that question. But if we look at the run rate in Q4, and assume that all books are cleared, if that run rate were to persist during the course of 2017, what organic growth should we then have purely mathematically? Tied to that, if you were complete in the marketplace in the sense that all managers are in place, you're back on track, do you sense that that will capture some market shares back again that you could add to that figure?
Well, the run rate was minus 11 for the years, like it was for APAC, as a whole for China and as I have said before, our footprint is not sort of Denver [ph] China, it’s very much north and north of China has been very weak for us. While regions like Chengdu, Xinjiang [ph] so they are in fact growing. So it’s not the uniform down slide that we have.
We have a number of units, despite then the decline that they are growing, while the northern part has declined heavily. So will then recover market share, difficult to tell, we are launching now some 20 new door models in the various entities, we put in quite some new engineers to really reinforce our stance there and it looks good. We launched most of them in Q4.
So it’s not so that have don’t have competent people, but we had flawless people. So we can’t work with those. So we had to take or as a step back and say this is something we cannot accept as a company, we need to have be clean and everything. So in a way you hurt yourself, but long-term we do the right thing.
I cannot really answer whether we will regain market share, but I would say, I have good hope, we do the right things, at least.
So again, on the level, just to understand the mathematics here, because since the inflated books were in 2015 that effect has gone consequently in 2016. If Q4 volumes, daily rates, were to persist what would that mean for organic growth in 2017, purely mathematically?
I hope, really it will not persist, because it was minus 14. So that was worse in the Q4. I think personally we will see a leveling out of via - because we are related to the Chinese leakage of the economy also. So the economy has turned on out quite a bit on the construction.
We saw that Volvo for instance, they had very big essays of excavators now in China, so you start by digging a hole normally before we put up the building. So hopefully we see also that there are more square meters coming out in the market.
So I would be surprised even though I might be surprised, but I would be surprised if the market continue to decline like this.
Okay. Thank you.
Okay. Thank you, Peder. Any more questions here in Stockholm? Great, please. Operator, we have a question from the telephone conference.
Yes. The first question we have received from the line is from Andreas Willi, JPMorgan. Please go ahead. Your line is now open.
Yes. Good morning, Johan and good morning, Carolina. My question is on price versus raw material. Maybe you could help us there a bit more, in terms of understanding the dynamics. The 1% price in Q4, was that enough to offset the raw material impact overall for the Group in Q4? And if you look into 2017, in terms of what's in the pipeline on the raw materials, do you expect that to be immediately offset by the price increases or do you expect a time lag?
Basically, what I'm trying to figure out is, if you look at price versus cost for 2016 and we compare price versus cost for 2017, what should we pencil in, in terms of the bridge? I know that longer term, higher raw materials is a positive, it allows you to raise prices, but more from a shorter-term perspective, should we be worried for the first half of 2017, that this could be a negative rather than maybe a positive, like we've had it in the past at times? Thank you.
I think when it comes to locks, yes, we will be able to compensate like always and because they are - they you see the raw material content is companies is limited. On the door side, like always, it will take s lag and the lag will be different for different regions, we think Europe will not have a lag and when it comes to EMEA, we think America, it will - there will be a lag, we have the impression that some of our competitors have hedged and we never hedge.
So that means that we probably cannot take the full price increase because they haven't reacted in the way we normally do when you have raw material price increases. So they will have lag in our price increase, in Americas then.
In APAC in China due to this market situation, we estimate that we will also have a lag, but I will say the majority we will be able to compensate for and on Entrance Systems. Side, we are now in - because we saw this early, so maybe into the third round of price increases. So we think we will be close to cover the raw material increase, because there you have an heavy impact. There is a lot of steel in industrial door. But all altogether, I'm rather optimistic and if we have a lag we talk about the rather short one. So I'm not worried about it.
Thank you very much. Maybe as a follow-up on - you gave guidance for FX and M&A on the top line for 2017. On the margin, is there anything to note there in terms of dilution accretion from FX or M&A at current levels?
Carolina Dybeck Happe
Yes. The way it looks now, on the FX of course, they will be a bit higher FX effect in the beginning of the year and then panning out towards to end of the year, since we are comparing with the previous year’s increase towards the end.
And the beginning on the margin side, on the FX, that was slightly positive in the beginning of the year, but then really flat for the full year, flat. When it comes to the acquisitions, they are around 2% that we have in the books for '17 they do have dilution that was as usual, but since its only 2%, it’s probably 20 basis points from that.
Thank you much.
The next question we have received is from Lars Brorson, Barclays. Your line is now open.
Hi. Thanks. Good morning, Johan, Carolina. I want to just return to organic growth and pricing. But just on organic growth, first of all, in Americas it's, obviously, a tough comp, I appreciate that. If we ex out AT&T, you're talking about 4% underlying growth there. Obviously, in your comments you point to growth in all other markets than the US.
I wonder whether you felt there was anything unusual in the quarter, give the US election. We've heard from some others at least that there was an uncertainty adversely impacting their businesses, more so perhaps in the larger project.
And then for the Group as a whole, I think this time last year you gave an indication for growth for the full year, i.e., the 2% to 4% range we've talked about. I wonder whether you would offer up a view on 2017 at this point.
No. I think we stay with two to four, because we don't know about China. And China is a big drag for us. It has at least for the year the cost, drag those down bit by more than 1%. It's very difficult for us to really estimate that.
We - I think when it comes apart from China, I think we are growing at a good pace. The exact number I cannot really say, but look to Europe, look Entrance, it’s not bad what we have, at least not in my opinion.
On the US it was a little bit difficult to hear about the growth there, but AT&T was indeed 3% affecting us and then we saw October, November were slower months then we normally see or at least saw the year before. Why was that? I do know, but there was an election in the US, perhaps that had any influence, but we really don’t know.
December became - came back in good force and it looks - and our reports continue to grow all the time. So it's not so that the activity with the customers took away and ABI index went up 5% from 50 to 55 in December. So we don't have a feeling that the US is a sort of cooling off right now, at least.
If I can push, Johan, the 2% to 4%; how much of that do you expect to be pricing?
Well, probably a little bit more then you should, but 1.5% perhaps, we haven’t really forecast, do you have an idea?
Carolina Dybeck Happe
No, what usually turns out to be a net one, but it’s going to be different price increases due to - if its doors or if it’s on the lock side. So it could depend also on the mix of the group.
You head me mention about China, they will be launching a lot of new doors, that is one to way to increase price and then it’s difficult say how much more price you got, because you launch a new series of doors at the different price level and then you comp sort of put that in your price increase, that’s a new door. So I think there are more than one way to increase the price they you have problems.
That’s helpful. Secondly, and finally, if I could just be allowed on your US business. Can you remind us of the US business or the components into the US is imported and specifically how much for Mexico, China?
And maybe secondly to the US business, Carolina, can you help us understand your effective tax rate in the US? It's not clear to us how much a utilized transfer pricing to lower textures, so it would be helpful to get a sense of how much you might potentially benefit from a US tax reform?
Would you like to start?
Carolina Dybeck Happe
Yes, thanks for it. So I can do the tax part, well if you look at the group as a whole around 35% of our sales are in the US. That said, that is not only America, it’s also now the big pot of Entrance Systems that is in the US. So when I am saying this is, that they are very different when it comes to margin, but the tax rate in the US on corporates 38% also of course, with a lower tax rates, whatever that may be, how it pans out, that would benefit us as a group on tax. But how much and where and what I think we have wait and see until it’s implemented.
When it comes to imported content to the US, in Americas we have an intact manufacturing base. So we estimate that it doesn't take us that much time to re in-sourced what we have outsourced, part of it is coming today, I don’t know the exact percent, part of is coming from China, but an increasing part has been moved to Mexico because Mexico has become more beneficial when it comes to sourcing.
But we do final assembly in the US, while the pre-assembly is done in a low cost market. So I don't see on a temporary basis these little cost will be difficult, but on a longer term, we can easily move back into the US, at least in our estimation.
In Asia, it’s mainly software, otherwise it’s a plastic componentry and a final assembly. All the intelligence is held in our store, so to speak, in our secure volt. It's not really a problem, but it’s going to be a temporary thing in that case.
On an Entrance Systems the value add is nor more or less hundred percent USA. So except pedestrian doors that have a high European content and some Asian companies as well.
Okay. Thank you.
My I remind everyone that we limit ourselves to one question. So let’s continue on the conference call, please.
The next we have received is from Andre Kukhnin, Credit Suisse. Your line is now open.
Yes, good morning. It’s Andre from Credit Suisse. Thanks for taking my question. Can I just confirm on China, have we really drawn the line underneath that? Can we say that you've done all the digging and that's the final result?
Just secondly on that were there are any extra costs associated with that, you took some P&L like the extra auditors, consultants, the laying off, re-hiring? And if so, was that significant?
Yes, I think it’s for you Carolina.
Carolina Dybeck Happe
We have gone through all the entities. First the ones that were fraudulent already in the third quarter, but now we've looked and finished the audits in all of the companies and what you see in the fourth quarter the 300 is what we have found and we've taken all of that in the fourth quarter.
It is related to the same date that we saw in the third quarter. So for now we are all done in China.
When you ask about costs for auditors and hiring and firing, that is not part of the one-offs, so that is part of the sort of the APAC run rate. So yes, it’s part of that, but how significant it is, I think we said it’s part of our doing business now.
And if I may just follow up on the quarter result. The central line seemed to be around two times of what it was in the last couple of years. Could you shed some light on what went on there, and what would be the right level to think of as kind of maybe a normalized level or level for 2017?
Carolina Dybeck Happe
I couldn’t hear the beginning of the question, the what?
Sorry, the eliminations line off minus SEK269 million in Q4, was, looks abnormally high compared to the last couple of years?
Carolina Dybeck Happe
Yes. Well, that sort of changes a little bit over the years, but it is on a normalized line.
Right, so the 2016 run rate is representative?
Carolina Dybeck Happe
Okay. Thank you. Next question please?
The next question we received this from Ben Maslen, Morgan Stanley. Your line is now open.
Good morning, Johan, morning, Carolina. Can you just put a bit more color round the Middle East? How large is that business now, as a percentage of IMEA sales and how steep are the declines? I know it's been, you've flagged a weakness now for a couple of quarters, when do your comparatives start to get easier as you look through 2017? Thank you.
I don't have in my head the exact number, but it is not extremely significant, that has grown quite a bit in the last two years. We have been very successful in the Middle East. I don’t dare to give you that number, but if we can, we can provide you with a number right, later on, do you have a number for that?
Carolina Dybeck Happe
Yes, around half of…
But we already - we saw it coming, so we have already taken out quite some people, so we have reduced our footprint, not in size, but we have reduced our footprint when it comes to number of people. So we feel of course not good, when things go down, but we are prepared.
Thank you. Then if I can just a …
Made an impact on the EMEA, as such.
Johan, you can do 2% to 4% growth for this year is a reasonable starting point. I mean within that what would you expect from Americas this year? You did about 5% growth in 2016 is that a realistic assumption for 2017? Thanks.
You probably know that better than me, but it looks good, that is all I can say, I don’t want to give a number. We don’t give forecast.
Okay, thank you….
Carolina Dybeck Happe
It looks good.
Our quarter up quite a bit.
Okay, maybe I can add on the Middle East, it's about 2% of our annual sales, if you look at the group.
Okay, got it. Thanks, Mattias.
Maybe we'll take a question from the Stockholm here, please.
Hi, its Peder again, follow up. If we look at last year we saw an organic growth of 2%, say, 3% without China. If we could look at it from a product point of view instead of geographies and divisions, if the electronic and electro mechanic part is now 30%-plus, maybe, what was the growth of the old mechanical locks? And how has that affected your mix in terms on profitability all else equal?
Profit wise electronics is good, so because you have also done aftermarket when the, more electronics you sell, the more aftermarket you get. And as you know also the lifetime goes down, so the more we sell, the better it becomes.
And could you repeat the first question, I think I missed that one.
But if we do [it] very, very simplified and divide your products into old school and new school, and basically looking at the mature parts of your offering and exclude China in that, they ought to be flat at best?
Well, I think we should remember that we always have cannibalization, every electronic lock is a mechanical lock, but with the name that electronic interface, so it’s very hard - you're not fair you say, look to how mechanic is not growing because every mechanical, electronic lock has a mechanical content.
So in a way you transfer and support all your business from pool one to pool B. So it's - so I wouldn't say, but if you look only purely on the mechanical locks, little longer prospective it has doubled since 2005, but it then have six doubled on electronic. So you can have the - under the sort of move between those two buckets and of course the six doubling has eaten a lot from the one that doubled only, part of that is acquisitions, but its growing still, but not at a very high pace.
Okay. Thank you.
Okay. So we return to telephone conference.
We have the next we have received is from Guillermo Peigneux, UBS. Your line is now open.
Thank you, good morning. Hi, Carolina, hi, Johan. A couple of questions; actually, one question and one follow-up. Regarding tough comps, can I just ask whether this tough comps situation is something that will, in a way, hamper organic growth through the first half 2017? I see tough comps emerging in Europe. I see the USA was, actually, having a good first half as well. I was wondering about that?
Yes, have comps.
Carolina Dybeck Happe
It will be that good start of last year and weaker second half that affect, I am still not negative. I think at least looking to quarter and activity in the market, I am not negative what we look upon there going forward into the first quarter, at least.
We don't - as you know with many of our orders are delivered in the same months, it’s very, very hard really to say, but quoting levels are good also in Europe.
Thank you. And then a question to Carolina. Can you quantify the raw materials increase or give us any information about how dilutive that movement is, so we can play around your pricing? Thank you.
Carolina Dybeck Happe
So you can play around in your stretch, it’s okay. well, I would have to say that we tried to look forward, but if I go back then to the fourth quarter of 2016, we still had a positive effect towards most of that quarter, that’s why you can’t really take the quarter and you could see from my slide, that we did have significant lower direct material also as a percentage.
What we do so and where is it is that, on the inventory side, and already Johan mentioned, already in China we have seen strong increases. So it’s not possible to quantify like that. I think you have to look at the increase of the raw materials and then knowing that around a third of our total direct material is related to raw materials, sort of look at that increase and take probably half a year slag of the increases of raw materials in the wealth.
Thank you. That gives me enough, thank you.
Okay. Maybe well, coming to an end here, maybe we'll take it one last question from the telephone conference please.
Yes. The last question will be from Mr. James Moore, Redburn. Your line is now open.
Good morning, everyone. Hi, Carolina, hi, Johan. Maybe I could ask about your comment about the Asia Pacific margin and the China raw material and potentially given the market development, that could be tougher to recoup. Could you help us a little bit with your thoughts on how the full year 2017 Asia Pac margin might develop?
Just looking at where we are now and sort of taking away the one-offs that are related to historical periods, we could see in the fourth quarter was that the margin was around 10% compared to almost 15% the previous year, fourth quarter is a very strong quarter for APAC though.
So if you look at the run rate for the full year in '16 we consider that assuming the same effect it’s around 20 basis points dilution done for us s in '17 due to the change in margin in APAC.
Carolina Dybeck Happe
On a group level.
Okay, thank you. And really if I could just follow up a complete aside; basically that's the second question, sorry. Dormakaba buying Stanley, any thoughts on that?
Well, not much, it was not us, so it was them. We are already rather launching the USA, so and the trust had probably not been easy for us if we are going in that direction and I guess the same was valid for our Allegion. So it was probably a safe bet that the Dormakaba will be the ones acquiring.
That's very helpful, thanks.
Okay. It’s 11 o’clock. So I think we can conclude there, would you like to say some last words Johan.
Well, I but I feel good about the year that passed, another strong year for ASSA ABLOY. We continue to develop our business, a lot of very exciting products in the pipeline and as I mentioned, also a lot of acquisitions are going on. However, we are little bit hesitant when it comes to pricing and looking to 2017 at least, it looks positive from an altogether - from a total picture. So I feel good. So thank you very much for coming and following, us on the net.
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