ASSA ABLOY AB (publ) (OTCPK:ASAZF) Q1 2021 Results Earnings Conference Call April 28, 2021 3:30 AM ET
Björn Tibell - Head of Investor Relations
Nico Delvaux - President and Chief Executive Officer, Head of Global Technologies and of Asia Pacific Division
Erik Pieder - Executive Vice President and Chief Financial Officer
Conference Call Participants
Vivek Midha - Citigroup
Lucie Carrier - Morgan Stanley
Daniela Costa - Goldman Sachs
Lars Brorson - Barclays Capital
Alexander Virgo - Bank of America Merrill Lynch
Guillermo Peigneux-Lojo - UBS
Alasdair Leslie - Société Générale
Good morning and welcome to the presentation of ASSA ABLOY's first interim report in 2021. My name is Björn Tibell, I'm heading Investor Relations. And joining me on the call is our CEO, Nico Delvaux, and our CFO, Erik Pieder.
We have set aside about one hour for this conference. And we will now start with a summary of the report before we open up for questions and answers.
So, with that, I would like to hand over to you, Nico. Please go ahead.
Thank you, Björn. And also good morning from my side. Q1 result, a good start of the year. As you know, it took a worldwide pandemic to kill our, I would say, very longstanding record growth of 27 consecutive quarters with positive organic growth. And then, we had a difficult 2020 where we had four quarters with negative organic growth. So, very happy to be back to good organic growth in Q1, an organic growth of 4%, complemented with good growth through acquisitions, net also of 4%.
And I believe, very good operational execution, I would say, despite operational challenges with further increasing material prices, with electronic shortages, and also still with a lot of disturbance of COVID-19 related issues with people being at home or in quarantine or at home with COVID-19. But good operational execution, leading to a strong improvement of the EBIT margin. We have an 80% volume leverage. And then, also very strong cash flow of 118% versus a year ago.
In figures, sales of almost SEK 22 billion, 2% lower than last year, with 4% organic growth, 4% net growth through acquisitions, but a strong headwind of currency minus 10%. An EBITDA margin of 15.3% versus 13% last year and an EBIT margin of 14.6% versus 12.4% a year ago. EBIT up 16%, almost SEK 3.2 billion and earnings per share up 21%.
If we then comment a little bit on the different regions, starting with North America, a solid performance in North America with a 2% positive organic growth. We have seen a very strong development on the residential side as well for the Americas division. We have seen very high double-digit growth for mechanical, residential, and also for smart residential, but also on the Entrance Systems side where we have also seen double-digit growth for our residential garage door business.
We have seen also, on the commercial side, a sequential improvement over the quarter. So, that positive trend from Q4 now further continued in Q1, in the sense that February was better than January, March was better than February. That trend now also continues going into the first weeks of April. And our commercial business was only down mid-single digit in North America.
Then South America, very strong performance with a growth of 21%, with double-digit growth in all South American markets. And I would say, to highlight Brazil, a little bit perhaps, despite what you would expect with the COVID-19 cases in that country, but it's a good performance in South America. Good momentum.
If we then got to Europe, plus 4% organic growth. And you could say that better on the residential side than on the commercial side and better in those markets that were hit last year more by COVID-19 and weaker in those markets that were less affected. So, better growth in countries like Spain, France, UK, and then lower positive development in markets like the DACH region and Scandinavia.
But also in in Europe, we have seen a slight sequential improvement towards the quarter and that continues now also at the beginning of April.
Africa, Middle East, plus 2%, and Oceania minus 2% against a difficult comparison. And in Australia, same picture, that residential much stronger than commercial. is still, I would say, that the underlying business is still very positive if we compensate for the difficult comparison.
And then, strong plus 16% growth in Asia, of course, compared to an easy quarter a year ago because, in Q1 last year, of course, China was already hit very much by corona as it was caught at the beginning of the crisis. But nevertheless, we had seen around 57% growth in China. So, we overcompensated for what we lost last year. So, total plus 4%. Emerging markets, plus 10%. So, this is perhaps also a little bit more the picture we'd like to see going forward, in the sense that we would like to grow fast in emerging markets than in mature markets.
The market highlights also, this quarter, several important big project wins, several large distribution center orders in Europe and in North America. And that's also one of the important drivers for the 11% organic growth that we see in Entrance Systems. We see that logistic, warehouse vertical really growing high-double-digit.
Our strategy in China focusing on different verticals also continues to pay off with several nice new orders for metro stations. And then, we got also an important contract for critical infrastructure in the electricity vertical in the Middle East. We have been also very active on the R&D side with several new product launches, a facial recognition solution for construction sites in the construction vertical in Global Solutions, and then a complete new design for customization product range in Emtek where you really then individually can personalize the Emtek door handle wrench to specific individual and customer needs. And then, it's the Seos Essential, a new single-application credential solution.
And our R&D efforts continue to be rewarded by several awards. We got a Red Dot award for a new interior door operator developed by Entrance Systems, SW 60. We are also recognized as a leader in the Gartner Magic Quadrant for HID indoor location services.
So, back to positive organic growth, plus 4%. Strong complements by growth through acquisitions of another 4%. So, really, balancing forward and reaccelerating again.
Also, operating turning in the right direction, upside again, and going back towards that 16% to 17% bandwidth where we are now at a run rate 12-month of 14.2%. That's where we were in the quarter if you exclude acquisitions at 15%.
So, higher top line, better margin. Therefore, also better operating profits, 16% up versus the same quarter a year ago.
And then, perhaps, a smaller quarter when it comes to acquisitions. Only three acquisitions, with SEK 12 million annualized sales. Just to mention that Technology Solutions, a UK-based, RFID handheld reader company, of around SEK 30 million that will be accretive to EPS as of the start.
And if we then go into the different divisions, starting with EMEIA, as we call it now – as a matter of fact, we moved responsibility for India from APAC to EMEA. As of the beginning of the year, strong organic sales of plus 5%. Very strong sales growth in UK, France, Eastern Europe, Middle East and Africa. But sales declined in Scandinavia. And then a good operating margin of 14.9% versus 12% last year, with very strong volume leverage, 220 basis points, I would say, despite the negative mix, in a sense less North Europe and more South Europe, more residential and less commercial, and also despite a strong material headwind where see material indexes further going up, inflating and where we also see higher costs for electronic components. Led to continued efforts in operational efficiency and the continued savings really paid off, giving us 14.9% operating margin. We were helped by FX, 80 basis points and a 10 basis point dilution in M&A comes from the move from India from APAC to EMEA.
And then, go to Americas. I think a very strong performance in the quarter with an organic sales of 0% growth against a normal quarter last year, the quarter prior to COVID-19 because COVID-19 only started to hit Americas as of q2. And as a matter of fact, Q1 last year was a strong quarter on top of a strong growth rate in 2019. So, very strong sales growth in the US smart residential and US residential, like I mentioned in Latin America. And then, mid-single digit negative growth on the commercial side.
Very good operating margin, 20.7% versus 19.9% last year. Very strong volume leverage of 80 basis points. Also here, despite the negative mix, because also here more South America and more residential and less commercial means negative mix. And also here, very strong material has been well received. All materials, copper, zinc, nickel, aluminum, you name it, further going up. There were of course – steel is the most extreme. As a matter of fact, indexes for steel today are 100% up compared to a year ago. We've obviously tried to mitigate that with strong negative pricing increases and also with price surcharges. FX was helping us 10 basis points; and then M&A, 10 basis points dilution.
And then, go to Asia Pacific, strong organic sales of 23%. But again, compared to an easy quarter last year, very strong sales growth in China, South Korea and Southeast Asia and then in sales declining in Pacific against a difficult comparison. An operating margin of 4.4% versus minus 9.6% last year. We had have very strong leverage, 1,330 basis points. And also here, negative mix in the sense, if you have more China, less Southeast Asia, less Pacific, it's a negative mix. Helped by FX and then the positive on M&A is mainly the shift from India from Asia Pacific to EMEA.
Then we go to the global division starting with Global Technologies. An organic sales decline of, I would say, only 9%, with good sales growth in Secure Issuance, but negative growth in all other business areas, in HID and significant sales decline still in Global Solutions where the hospitality vertical and the marine vertical, the cruise ships continue to have a difficult time.
But despite 9% organic sales decline, operating margin at par with last year at 14.3%, a good solid leverage of 90 basis points. A strong negative currency effect of 70 bps and we've been hit most by currency. And then also, M&A dilutive with 20 basis points.
And then last, but not least, Entrance Systems also very strong performance in the quarter with an organic sales of plus 11%. Very strong growth in perimeter security, high double-digit growth where that segment really continues quarter after quarter to excel. And then also, double-digit growth in residential, but also strong high double-digit in industrial and good growth also in pedestrian.
Good growth on the equipment sides. Also, high single-digit growth on the service side, giving us an operating margin of 14.6% versus 12.2% last year.
I think extremely good result if we take into account that we have a 130 basis point dilution from the agta record acquisition still. I think integration is also going fast where we are realizing synergies also faster than anticipated. So, very happy with the way that acquisition is going. And then helped by FX, 50 basis points.
And with that, I give the word to Erik, our CFO, who will then dig a little bit deeper into the figures.
Thank you, Nico. And good morning, everybody. As alluded to, as mentioned by Nico, our sales was down with 2%, mainly related to the currencies. But despite this, we were able to improve the operating income by 16% and ended up with almost SEK 3.2 billion. The margin improved from 12.4% to 14.6%.
If you look on the income before taxes, it went up even more with 21%. And the reason for this is that we had lower interest rate, but also we were helped a bit by the improvement of the Swedish currency.
The cash flow ended up at SEK 2.6 billion, 118%. And this is a record for the first quarter for the group. This is very much driven by increased earnings as well as good performance when it comes to our working capital.
Return on capital employed, now we calculate this – we show it then on a 12-month rolling basis. It's down with 2 points to 13%, which comes from during the period we have had lower earnings as well as we have increased our capital employed.
If we move to the next slide, you would – if you look on the bridge, the organic growth of 4%, there, we almost had a 3% volume leverage. And as alluded to before by Nico, the material prices has also meant that we have increased our prices where the price component is almost 1.5%.
We have good operational efficiency. If you look on the organic flow through, it's almost 80%. And we see that we have good traction on our efficiency savings in all our divisions.
The currency had a huge impact on the top line, but it had no real impact on our bottom line.
The acquisitions was up with 4%. It has a value dilutive impact of 40 basis points, of which then the dilution from the agta record acquisitions is 50 basis points.
If we go to the cost breakdown, you can see on the direct material that we have a negative comparison to last year of 50 basis points. This is mostly related to the negative divisional as well as regional mix. You heard that Nico talked about, if you look in EMEIA where the strong result in the north of Europe. We also had the regional mix in the Americas with stronger Latin America then compared to the US as well as product mix.
And the raw material, we have almost been able to offset this during the quarter. But the material prices continues to increase. And we see challenges in being able to offset this during the remainder of the year. So we expect a headwind for the full year.
The conversion cost showed nice improvement of 30 basis points. So, we can see that we have efficiency and savings in our production sites. The savings, we can also see if we go to our sales and to our admin part, whereas then we continue to invest in R&D.
And if we take the operating cash flow, once again, it was the highlight, I think, of the quarter. It was a record for the first quarter and ended up at SEK 2.6 billion. As I said before, it was impacted by good increased earnings. We had a lower working capital as well as we had lower CapEx investments. If we look on a 12-month basis, the cash flow is 137% versus the EBT.
Our cash position is still at the higher level than normal at SEK 3.6 billion, but we expect that it will come down during the next quarter due to the dividend payout that will happen then in May. If we look on the net debt, debt versus equity is down from 58% to 46% despite the acquisition of agta record that we did during end of last year. The net debt is also done with SEK 600 million if we compare December now to end of March. And the net debt versus – the EBITDA versus net debt is also down and ended at 1.8. We have a strong balance sheet and we can continue our acquisition strategy going forward.
Last slide from my point part is the earnings per share was up with 21% and ended at SEK 2.03. I would also like to mention that the board has proposed to the annual general meeting a dividend of SEK 0.039 per share, which will be paid in two equal installments, one now in May and the other one then in November.
And with that, I hand back to you, Nico, for some final comments.
Thanks, Erik. So, yes, I think we can say we had a good start of the year. We have a good organic sales growth of 4%, complemented with good growth through acquisitions, net also plus 4%, and good cost measures and operational efficiency execution, with in turn operating margin of 15% if we exclude M&A. And then, definitely, one of the highlights of the quarter, the very strong record cash flow for Q1, 118% up versus a year ago.
We really see now that vaccines are being rolled out at a bigger scale. And through that, we also see that just with societies coming back, let us not forget that this crisis for us was in the first place a crisis about trust. When trust comes back, business confidence will come back and mobility will come back. And mobility is obviously a very important factor for many of our businesses. So, we really believe that gradually business opportunities will improve and we will be able to reaccelerate again our profitable organic growth.
On the other hand, we are, of course, still very much in COVID-19 times, while many markets are opening up, you see all of a sudden other markets further putting restrictions in place. Markets like France, Germany, not to speak about a country like India where they're hit again in a hard way with COVID-19. So, short term, it will remain very unsecure, and therefore, we'll also continue to pay a lot of attention on the cost side.
And the last point, we would like to remind you that we will host our Virtual Capital Markets Day on May 26. And with that, I give back to Björn then for Q&A.
Thank you, Nico. Before I hand over to the operator to facilitate the Q&A, could I just please remind you to limit yourself to one question and one follow-up, so we can allow as many as possible to ask questions. Operator, this means that we are ready to kick off the Q&A session. Please go ahead.
[Operator Instructions]. Our first question comes from the line of Vivek Midha of Citi.
I have two, if I may. The first question is on the good cash flow that you highlighted. A much smaller seasonal swing than usual on working capital on top of what was a good 2020 for working capital as well. How are you thinking about cash flow and working capital for the full year? And can you hold on to the working capital improvement?
And secondly, on inventories. So, you've commented about slight improvements in March, early April. Did you see any restocking effects ahead of potential supply shortages? And how do you assess the latest inventory situation? Thanks very much.
To just start with the question with the working capital, I think that we have had a good momentum now for quite some while when it comes to our inventory, as well as, I would say, on all three components, but it's mainly, I would say, receivables and inventory. And I would imagine that we can continue, let's say, with a good inventory management. However, of course, when we will start to grow as we have now started to see in the first quarter, I think the inventory will go up a bit.
The second question, which is then related to the electronic component shortages, so far, I would say that so far so good. I would say that we have been able to manage that one. But as a consequence, of course, it will be that we will, let's say, be needing to ramping up in order then not to have any production disturbances going forward when it comes to electronic components.
I think if I can just add on the second one because the question was also more to the channel, for sure, there is some of that. For sure, some of our channel partners have all the more because everybody knows that there's an electronics shortage and everybody does the same thing. Everybody tries to order a little bit in advance, to be a bit more on the safe side. But I would say that, in Q1, that was not material for our overall result.
And also, on the electronic shortage side, in Q1, the effect on the top line first was minimal. But of course, it creates quite some disturbances because you have then to buy often electronic components through different other channels, on the spot markets via distributors, disturbing your operations, leading to operational inefficiency. And obviously, also, if you buy them through a distribution channel and so on, you pay a higher price, therefore, a negative effect on the cost.
Our next question comes from the line of Lucie Carrier at Morgan Stanley.
I have two and I will go one at a time. I could see that, in the press release, you were mentioning Global Technology taking more time to recover to pre-pandemic level. Can you provide maybe a little bit more color here in terms of which type of timeframe you have in mind for that? And also, how that compares with the four other division? Because, obviously, you're saying Global Tech, there are some exposure that you have, generally speaking, the general commercial business, if I think about offices or hospitality. So, can we have a bit more color on that comment, please?
I didn't hear everything what you said, Lucie. But I think I got the question. So, if you take Global Technologies, around 70% is HID, around 30% is Global Solutions. If I start with HID, around half of it is PACS and card readers. So, that business is very much mobility related. If people go back to the office, if people go back into governmental places and so on, that business will come back. And that's what we also have seen gradually, sequentially improving over the first four months this year, mainly in the US. As mobility slowly starts to get up, that business will also come back.
I think the same is true for most other business areas that we have in HID, with the exception perhaps from citizen ID. And therefore, also, we believe that part of Global Technologies will be the first one to recover.
Whereas if you look at citizen ID or the passport business and if you look at Global Solutions, the hotel business and the cruise ships, obviously, that will take longer to recover, first of all, because therefore you need more international travel, overseas travel, perhaps also. And we believe that will take quite some time to come back to prior to COVID-19 levels.
We have, of course, the other verticals in Global Solutions that are growing nicely, already in a positive way also in Q1. But they are too small to compensate for the drops that we see mainly on the hospitality side.
Okay. But you don't want to kind of guide us on a time when you expect things to go back to pre-COVID level, I guess?
So can you repeat the question?
You're not kind of ready to provide a timeframe for when you're expecting to kind of go back to normal, I guess?
I would love to do that and I would love to know that myself. But I think everything depends on how fast markets open up again and how fast mobility will come back. I think in the US, we are quite confident that things are moving in the right direction. But I at least don't know how mobility will come back in Europe. Because I don't know when [indiscernible] and I will be vaccinated, and I think vaccination is an important factor to get the trust back in society and then also mobility back in society.
My second question was around pricing. I think I was surprised to see it at roughly plus 1%, 1.5%, as you mentioned, considering what we've seen elsewhere so far in the cap goods sector, including for industries, which historically haven't had had really pricing power. And the fact that you were mentioning – Erik was mentioning that you're not sure that you can offset kind of a raw material inflation during the year with pricing, which, again, is a little bit unusual. So just wanted to understand maybe what's the issue here and where you are seeing some resistance in passing prices maybe?
Indeed. I think after Q4, we said that we were quite confident that we would be able to compensate for material prices to pass increases, that we should have a kind of neutral effect throughout the year. Since we spoke last, of course, now in the last three months, material prices have gone up further to, I would say, unprecedented levels. I think all basic materials, copper, nickel, zinc, aluminum, they're all very high double-digit up.
I think the most extreme is steel. And the most extreme is steel in the US. If you see, again, steel in the US today is – material indexes is 100% up compared to a year ago. It's on an extreme high level. And of course, we have had – and we are implementing pricing increases in the US. We have already done three price increases for everybody's steel related buys in cases of price surcharges. And, of course, it's important for us as a market leader to be also the one that takes the initiative and be the price leader. And then, we have to make sure and watch to see that the market follows because, if the market follows, then you can continue to do that and try to compensate with pricing for material increases. So far, the market has followed.
But of course, there is a limit to what you can do. Again, if it's 100% up, you cannot compensate it in full for that. You try to compensate that through other price increases on other products. But, again, we believe it's not going to be possible to fully compensate for the full year.
You should reckon that the material index levels we see today, we will see that in our income statement in, let's say, six months from now. So, you could say that Q2 will be a little bit tougher than – Q3 will be perhaps the toughest when it comes to seeing the highest cost in our income statement.
Then, of course, under the assumption that prices don't go further up that they stay where they are today, hopefully, that they go down again.
Our next question comes from the line of Daniela Costa at Goldman Sachs.
I'll just have one question. I wanted to ask about the commentary on your remarks in the press release that now it's about time to invest for growth and you might need to step up capacity. And how shall we tie that need for investment plus the raw material headwinds into what we should expect regarding margins and when can you go back to that 16% to 17% medium-term margin underlying range?
Of course, we have continued to do the R&D investments also in COVID-19 times. We didn't push back on them, also to come out stronger now, now that hopefully we see light at the end of the tunnel. And that also has led to several new product introductions. And of course, when we invest again feet on the street, we will do it in a controlled way. We will see where we have the opportunities and then invest and see that we get the return on investment and then try to move on and see how we can bounce forward and reaccelerate that growth.
But on the other hand, like I said also, we are still very much in COVID-19 times. So, it's important that we also keep an eye still on the strong cost measures that we have taken last year and that we keep the valve as much closed as possible. For instance, if you take travel-related spending, yes, of course, if we can, we want to increase even to the same levels as before the travel to meet customers because we really want to be face to face in front of a customer, which was difficult in COVID-19 times. But all internal travel, for sure, will stay on a much lower level for the foreseeable future than it was prior to COVID-19. So, these cost savings that were in a way will be temporary, a lot of them will stay more permanent going forward.
And next to that, of course, we have the permanent savings we did. We reduced workforce with around 5% as compared to beginning of the crisis, so that are, for instance, permanent savings.
When will we back into the 16% to 17% bandwidth? Of course, difficult to say. We would like to be there as soon as possible and we will work very hard to come back to that 16%. But again, we can only control internally and do the right things internally. We don't control the external factors. The external factors are material inflation, electronic component shortages, but definitely still also COVID-19. In the coming months, it will still be very fragile. And a lot will depend on how fast the different markets will come out of that COVID-19 because that also affects in an important way our mix and then definitely also divisional mix.
We know that if you want to come back to the 16%, obviously, how the performance is in a division like the Americas and how the performance is in a division like Global Technologies is important because they are very key to the overall EBIT margin for the group. So, the faster HID will come back, the faster we will see that improvement on the bottom line.
Our next question comes from the line of Lars Brorson of Barclays.
A quick follow-up, Nico, if I can on price cost. And then a question on mix and cost savings. I think when we talked in February, we had already seen six months of steep steel price inflation where you were very clear that you were implementing a faster pricing response, you'd move to more premiumization and here we are talking about more adverse price cost. Don't think it's a big surprise to many. But obviously, it's a shift in your earlier message. I guess my question or follow-up is more whether you can quantify the impact, what are we talking about as you see it today for the year. Appreciate the cadence as you see it as Q2 worse and Q3 probably toughest based on current steel prices. Are we talking 50 basis point margin impact for the year or something materially worse than that as you see it now?
Of course, it should not be a surprise to you or to somebody else that materially indexes have further gone up in the last three months. We all have seen how that further exploded in general lately for steel, and that is our cost base and that's the cost increase on top of the cost increases we already saw when we talked last time, of course.
But I think what is – there's couple of things what are important. When you see today, in our bridge, you see of course the 50 basis point dilution on the direct material side. And like Erik explained, that has nothing to do with the fact that we could not compensate with pricing for higher material increases.
As a matter of fact, if you would take the higher price we paid for electronics out, then we would have fully compensated in Q1 for the material increases. We would have had seen even a slight positive still in Q1. The 50 basis points has everything to do with the mix, in the sense that we had more APAC and more Entrance Systems, which have higher direct material percentages as a division, and we had less Global Technologies – okay, less Americas, but that's the Global Technologies which has a much lower direct material percentage in that division, one.
Two, we had more residential and commercial, obviously, higher direct material in residential than the commercial. And like Erik also explained, we had more, for instance, South America than US. We had more South Europe than Scandinavia, also negative in the mix on direct material.
If we go forward, obviously, we should be able to probably change that mix in a more favorable way once Global Technologies starts to recover, once the comparison for the Americas becomes easier. We should see a mix that should help us on that direct material side. That's on the positive side.
On the negative side. Indeed, like I mentioned, we will see income statement, the highest costs for material somewhere in Q3. Okay, we still have some time till Q3 to further increase prices. But again, I would like to see the person that can – I would like to talk to the person that can compensate at full in one go for 100% the steel price increase in the US. That takes time. And that lags, of course, to a certain extent.
Understood, Nico. Sorry to press you, were you able to give a more kind of quantification on price cost. So, I appreciate there's also a mix impact within the price cost equation. But what are we talking about as far as the year is concerned as you see it today, just in price cost?
One, I think you should expect the pricing component, which is today close to one half, significantly further go up now in the remaining part of the year. And if you look back at the last time when we had the high material inflation back in in 2018, beginning of 2019, we are confident that we can do better than at that time. So, it will be negative, but it will be not as bad as in the previous uptick of material inflation.
Secondly, if I can, just to savings. Erik, I saw you taking out your saving slide that we've seen in the last three quarters, I think. Can you help us with the total savings in the first quarter, both temporary and structural? And for the year as a whole, how are you thinking about cost savings? I'm assuming we saw last year something to the tune of about SEK 2 billion, which I'm assuming is split roughly 50/50 between temporary and structural. I could see you could probably deliver another SEK 1 billion or so of structural this year, including MFP up to SEK 750 million and some other capacity adjustments. I wonder how much of an offset that might be from a reversal of temporary savings for the year. Sorry, that's a lot. But if you could try and clarify that, that'd be helpful.
It was a lot in one question there. Of course, if you now look into Q1, we were growing in Q1 as well, which of course means that if we take the same definition of the savings as what we did the last year, our net savings for the first quarter was more than SEK 250 million. What we have said, as you mentioned yourself, for the MFPs for the full year, we have calculated roughly on this SEK 750 million and then we continue the savings as what we have done. And what we have said before is we compare ourselves to 2019 where we have said that we would have – compared to 2019, we will be sort of – our internal action plan is based on mid-single-digit negative organic growth where the costs should then sort of follow accordingly. And that plan still remains.
Our next question comes from the line of Alexander Virgo at Bank of America.
I guess just picking up on that last point actually. I just wondered if you could talk a little bit about the sequential development. You've alluded to it a couple of times through your introductory comments and thinking about activity levels relative to pre-COVID and 2019. Are we still tracking at that sort of MFP lower level or do things start to look a little bit better given the comments you've made around sequential development?
And then, if I could just tack on a quick follow-up. You talked about the aftermarket business in Global Tech declining more strongly. So, I'm just wondering if you could expand a little bit on the dynamics around that.
The sequential market question is, I guess, on market environment, business environment, right?
Perhaps if I take main markets and if I start in North America. Like I mentioned earlier, we have seen very high double-digit growth on mechanical and electromechanical residential markets in North America, giving us a strong growth in the Americas division for residential and for the garage doors on Entrance Systems side. We see that momentum continuing on that high level. I don't think that will further improve percent wise because it's on a very high double-digit growth level already today. And that's, for us, an exposure of around – between 20%, 25% for the Americas division.
But, of course, there, the big exposure in all Americas for us is the commercial side. And there, we have seen a continued incremental, or slight sequential improvement over the quarter. We mentioned that in Q4. And we have seen that now further being the case in Q1, in the sense that February was better than January, March was better than February and April so far is better than March. So, we really see a sequential improvement on the commercial side in the US, and that's important for us because that's an important percentage of our business for the Americas. And it's also from a profit perspective then, the most profitable business for us.
Short term, there is, of course, in the first place, obviously, what is after markets related coming back as people go back to schools, K-12, universities as people start to come back to the office, as mobility goes up, this aftermarket encouragement as well starts to kick in.
And we have also seen, and that's a little bit more mid to long term Architecture Billings Indexes, construction indexes in general going up. As a matter of fact, the ABI index was on the highest level in March since many years. And that's, of course, good news for us in, let's say, 12, 18 months from now. And then, of course, there is a whole stimulus package of the new president that also will give us good opportunities on the short and mid-term.
I think that the most important thing for us in North America is the whole success vaccination program that they have in the US where trust comes back and mobility comes back.
We've seen in South America, despite the whole COVID-19 and despite Chile now again being locked down, there's still very good activity, very good momentum, leading to double-digit growth in all Latin American markets.
If we go to Europe, I think despite the more stringent lockdowns again in countries like France or Germany, also in Europe, we have seen a sequential slight improvement, again February better than January, March better than February, and I will say April better if you could correct for the number of working days. As well as also, don't forget, in Q1, we had one working day less than a year ago. In Q2, we will have one working day more. And also, in Europe, we see better and a faster momentum on the residential side than on the commercial side, but we are also positive on the commercial side in Europe.
Then when you go to Asia. Of course, China, again, it was, like I said, an easy comparison. And in China, the market is perhaps less important for us. It's ourselves that have to deliver on our strategy, in the sense stability of profitability growth. We are now in that stability phase in China. We are in profitability mode, in the sense that we quarter after quarter see significant improvement in our margins in China, still on a low level, but a significant improvement. So, that strategy is working. And it's now really time for us to bounce forward and reaccelerate our organic growth, but do that, of course, in a controlled way. And as such, the market opportunities for us are still big in China. So, it's not so important how hot or less hot the China market is. It's more us doing the right thing in that market and further than delivering on the strategy and further improving our relative position.
And then, I think the second question was on Global Technologies and the aftermarket. The simple answer is, of course, if you look at the core of aftermarket, it's card and it's credentials. And if people don't go to hotel, then they don't need a card to get into their hotel room or they don't need their mobile credential on the phone. And the same is true for the office. If you don't go to the bank, you will not lose your card, you will not need new access rights to a new floor or to a new building. New people will not be added to the list and so on. When people start to go back to the office – and for us, it's not so important that they go back full time. If they go back a couple of days a week, it's good enough. As that mobility comes back, that aftermarket business comes back. And that obviously is the most profitable part of the business for Global Technologies in general.
And on the passport side, the same thing. If people don't travel internationally, their passport expires, they don't get a new passport, they lose their passport, they don't need new passports if they want to travel. And there, again, the aftermarket part of the passport business is the more lucrative part of the business.
I guess if we only go back a couple of days a week, we're more likely to lose our cards anyway, aren't we?
But it's not only that, also, when you leave – it's like a house. When you leave a house or when you leave the building, you will see that things have aged, that they are not functioning well, that they need replacement, upgrades. And definitely also, when people come back now to the office after COVID-19 times, they want to, for sure, a lot of them, upgrade also the possibilities of having better controlled COVID-19 related dynamics in the office. So, contactless openings, automatic door openings, more professional higher-end access control, I would say, which is good news for us.
Our next question comes from the line of Guillermo Peigneux of UBS.
Maybe just a couple of follow-ups. One, to your previous answer, if you could – a little bit because you were very detailed already. But could you describe a little bit the difference between renovation and non-renovation and what you see there in new building probably versus what you've seen in more the renovation markets, probably just focusing on Americas and EMEA. And I have then a follow-up, but I'll wait for your answer.
I think on the residential side, both are very good. Also new build on residential side is positive momentum. On the commercial side, obviously, the new build is still negative, but at least the sentiment is improving. But like I said, there is a lag between indexes – construction indexes going up and us seeing that in the result because we are late in the construction cycle. But I'm more optimistic because of the indexes going up, but also because you should, of course, realize there is a – there was prior to COVID-19 a long waiting time for construction sites. There is a buffer. And by the time it's our turn late in the construction cycle, of course, we will profit a bit from the buffer coming short. So, I'm also confident that that part of the business will come back faster than perhaps people anticipated. But nevertheless, that new building is a small part for us. We did much more of refurbishment, renovation and aftermarket in general. And then, of course, the stimulus packages will also come faster because the cycle for a refurbishment and upgrade is of course shorter. And there is different verticals that are definitely looking very promising in the US. [indiscernible] schools, K-12, universities. I think that has to do also with hospitals and the wider, let's call it, medical vertical because, obviously, a lot of things could not happen during COVID-19 times because people could not go on-site.
And again, when – and that happens today. A lot of people, a lot of children and students go back to school, so many in the US today. When people come back now to the office, also in Q2, before summer or after summer, that will also lead to new business opportunities also in the other verticals in the US.
And what I said about US is I think it's very similar to Europe. Most probably some of it will come a bit later because apart from the UK, which is – it's half of the cycle of the vaccination, I think the rest of Europe is behind, it's really critical that we get that vaccination going because then, again, mobility will come back. When mobility come back, business opportunities will come back.
My follow-up is, I think one of the scenarios that we were discussing late last year, one of the statements, you said that with activity levels 5% below the 2019 levels, we'll be able to reach 16% margin or the lower end of your corridor. And I was wondering how's that changed from your perspective, given all the comments around price costs and all the comments around growth and savings and so on? Could you maybe refresh a little bit that scenario?
Of course, there is the 50 basis point dilution from the record acquisition that we should keep in mind. And then, of course, like I also said at that time, a lot will depend on mix because we have very different EBIT margin levels for the different divisions. How fast will China grow or not grow, and therefore, how important will be APAC in the mix picture, how fast will Global Technologies come back because they have been very, very complementary in terms of gross margins above the 16% to 17% margin.
And then, of course, we had a strong performance in Entrance Systems. And I think top line, and also bottom line, that's still in the mix. They bring the overall EBIT down. And it's also clear, if you grow 11% in Entrance Systems, that you also have to invest again support that growth in your operations, in your sales, and even in your support admin.
So, again, we will do everything to come back to the 16% as soon as possible. And I think we are working very hard and I think in a very good way on all the factors that we can influence ourselves. But of course, there is the external variables that we don't have under control. And we can also only do the best what we can internally to anticipate and work on, given external variables that exist.
Maybe apologies for the pressure in advance, but it's something that can be ruled out already, 16% for 2021?
So, can you repeat, Guillermo?
What I said is, is sorry for the pressure, but – for the question in advance, but is 16% something that we can rule out for 2021?
Well, if you include agta record, of course, if you add 50 basis points of the dilution of agta record, yes, then the answer is yes. I think for the best, again, it depends all on external variables, material inflation, electronic components, how the different markets will come back and how COVID-19 will behave.
Our final question will come from the line of Alasdair Leslie at SocGen.
Just a couple of outstanding questions on the US. You highlighted the sequential improvement on the commercial side through Q1. I was just wondering whether you could give us a sense of the pace of improvement where that kind of mid-single-digit decline for Q1, I think you called out, where that sort of stands now? Is that kind of more flattish for April?
And then, sort of second question is just on the Americas again, perhaps it's going to feel the brunt of the price cost squeeze. I thought the drop-through in Americas was pretty impressive in Q1 despite this whole – the consult line support. So, just wondering how sustainable those savings tailwinds are there and just thinking about pushing really against or potential [Technical Difficulty] against the raw material inflation that we're probably going to see come through. Does a lot of discretionary costs have to come back as growth returns? Or can you kind of keep a tight control of that? Thank you.
I didn't understand the first question. But if Erik understood the first question, perhaps Erik can answer the first question. But if then start answering the second question on material, the highest headwind is on steel. And where do we have steel? We have steel in China on our doors, we have steel in Europe on our doors, and we have a bigger exposure on steel in our doors in the Americas. And then, we have, of course, steel in perimeter security in Entrance Systems, which is also the Americas.
If you see, the steel price inflation is important in Europe, it's important in Asia, but it's much more manageable in those markets than in the US because, in the US, again, it's 100% up compared to a year ago. So, I would say the two that will have the biggest challenges, perimeter security in Entrance Systems and then the door business in the Americas.
And again, we do everything to compensate as much as we can to the price increase, price surcharges and to anticipate some of the material cost increases we see coming. It's clear that, on steel, definitely, we will not be able to compensate fully. Then we will, of course, try to overcompensate a little bit on all the rest to then balance out for some of the increase on steel that we can't compensate for.
If I understand the question on US commercial, it was more related to if we have a sequential improvement in the commercial segment. And what we see, the answer to that one would be, yes, we were still down if you look in March, we were still down, but less than what we were in February and in January. And I think, also then, Nico has alluded to a bit what we see going forward that we expect that demand within the commercial segment will improve due to, let's say, more of – due to the mobility, due to more, let's say, that the vaccinations will continue and, of course, also with the stimulus packages, which will later in the year, I think, kick in and help also with the US economy.
But is it fair to say that sequential improvement has accelerated, so that it will play out on the commercial side maybe already in April?
As I said, we saw a sequential improvement during the Q1 where, let's say, that the – it was still down in March. And it sort of – yeah, we saw improvement. And then, of course, the other one you need to take into account is when it comes to the comparisons. Because I would say that, last year, the COVID impact hit the US market in Q2. It didn't really hit – it wasn't really an impact in Q1.
Thank you. This means that we will have to round up today's conference. I hope it has been helpful. And if there are any follow-up questions or queries, don't hesitate then to contact us at Investor Relations. And we do look forward to speaking with you in the coming weeks. In the meantime, stay safe and thank you for today's conference. Bye.
Thank you very much. Bye-bye.