ASSA ABLOY AB (publ)

Good morning everyone and welcome to the presentation of Assa Abloy's third interim report in 2022. My name is Björn Tebell, I'm heading investor relations and joining me here in the studio is our CEO Nico Delvaux. Erik Peder, our CFO, he is unwell and not here today. As usual, we will now start this conference with a presentation and summary of the report before we open up for your questions. So with that, over to you, Nico. Thanks, Bjorn.

And also good morning from my side. Our Q3 results, very strong performance in the quarter. with an organic sales growth of 14%, with, again, entrance systems and Americas contributing in a very strong way, but perhaps also the difference this quarter, also global technologies contributing in an important way to the top line. Also good sales growth in EMEA and then the sales declining in APAC. Strong EBIT margin improvement at 15.6%, 60 base points, better than the comparable figure a year ago. Very active on the acquisition side, growth to acquisitions of 3%, net and six acquisitions signed in the quarter. And also, as said earlier and predicted earlier, strong cash flow with a 95% cash conversion in the quarter. If you look at the numbers, sales of almost 32 billion SEC, 33% up, 14% organic, 3% net acquisition, and then helped also by currency 16%. an EBITDA margin of 16.2% within that bandwidth we aim for, and an EBIT margin of 15.6% versus 15% corrected for the Certigo divestment last year in the quarter. An EBIT of almost 5 billion SEC, 39% up, and earnings per share 3.2 SEC per share. If we comment a little bit on the different regions, a very strong continued North America with a 22% organic growth, where we saw strong growth as well on the residential side as on the commercial side, slightly higher on the commercial side than on the residential side, despite, I would say, a difficult comparison with Q3 last year. We still see good momentum, good market dynamics in the market today. Again, as well on the residential side as on the commercial side. And our spec business was up in the quarter, high double digits. Also very good South America with a 12% organic growth also here despite a very strong quarter a year ago and also here we still see good market dynamics. Africa plus 22, also here a strong quarter. And then Europe plus 6. In Europe, we have seen a little bit more mixed picture. I would say in general still very strong market dynamics, also here on the commercial side and on the residential side. Also in Europe, our spec business was up double-digit. There are some markets where for some channels to market on the residential side and on the more direct consumer related side, I would say we have seen some weaknesses. That's for France, for the UK and for the Benelux where the DIY channel has been weaker and where our channel partners, our distributors have also done some destocking activities in the quarter. But overall, still good momentum also in Europe, with a plus 6. Australia, Oceania, strong quarter, plus 12. Also here, still strong momentum on the commercial and the residential side. And also here, perhaps if you want to notice a weakness, it's also more on the DIY channel, something we see a little bit in general, in the Home Depots in the US, in the Bauhaus in Europe, and in the Bunnings in Oceania. If we then take Asia minus one, I think a very different picture between Greater China and the rest of Asia. The rest of Asia has shown very nice positive high growth. And then in Greater China, we have seen a significant double digit negative growth. And in Greater China, we continue to suffer from the construction crisis and then are also not helped by the continued zero tolerance when it comes to COVID in that country. But overall, I think still a very positive picture. If you look at some of the market highlights in the quarter, also this quarter, nice big project wins. A leading US retail chain upgrading their loading dock equipment in 20 of their distribution centers. We secured a public transport ticketing system in Australia, including more than 7 million contactless cards. A big win for a resort in South Korea with delivery of more than 9,000 locksets, door closers and cylinders. And then a nice senior care project in North America. As you know, every quarter we launch, I would say, more than 100 new products. We just picked a couple of them this quarter. The launch of the Yale Assure Lock, our newest US flagship for smart locks in the US. Very excited about that new product launch. We have here in Sweden signed a partnership with DHL for e-commerce in-home delivery. launch of a new innovative smart air wireless electronic lock, and then the extension of our software solution around Abloy Beat for critical infrastructure in global solutions. So a strong accelerated organic growth in the quarter. That's now again seven consecutive quarters with strong positive organic growth. And then a margin that is slightly slowly improving back towards the 16-17% bandwidth. We are now on a 12-month moving trend at 15.3%. So an accelerated top line with a better margin means also a strong acceleration of our operating profit on a record level and 61% higher compared to the same quarter five years ago. The acquisitions, we continue to be very active. Six acquisitions signed in the quarter. Eleven acquisitions closed year-to-date, representing sales of around 3.3 billion SEC, so adding almost 3.5% to the bottom line. And then we have four additional acquisitions that we closed now in the beginning of Q4. if we zoom in on two of them a little bit more in detail doorbird a german manufacturer of high quality ip door intercom very excited about this acquisition for our emea division they represent the sales of around 220 million sec last years And then Control ID in Brazil, which will be integrated in the Americas division, developer of hardware and software for access control and time and attendance, reinforcing our current access control and biometric offering. Very nice company, very excited about this one as well. They had the sales of 250 million SEC last year. And then you have seen, of course, that DOJ has tried to block our HHI acquisition. We, together with Spectrum Brands, are now contesting that DOJ position in court. We will have our case in court somewhere second quarter next year. And as a result of the concerns DOJ had on the acquisition, we have also initiated a sales process to divest our Emtech business in the US and our Smart Resi business in US and Canada. Together they represent a sales of around 350 million US last year. It's very nice businesses. It's unfortunate we have to divest them, of course, condition on approval by the judge of our HHI acquisition. But also with that divestment, we still are very convinced on the HHI acquisition and the strategic rationale behind it. And we reconfirm the $100 million acquisition EBIT synergies in year five after the acquisition. That figure remains valid also after the potential divestment of these businesses. If we then go into the different divisions, a little bit more in detail, starting with EMEA, an organic sales of 4%. Very strong sales growth in Scandinavia, Middle East, Africa, India. Also good sales growth in East Europe. And then, like I mentioned, a bit weaker UK, France, and Benelux on the residential side with the distributor channel and the DIY channel. And in those three markets, for those channels to market, we have initiated some contingency actions to protect the bottom line. An operating margin of 14.3% versus 11.3% last year. But of course, last year, we booked a capital loss related to the Cetigo divestment. The comparable figure is slightly above 15%. We saw good operating leverage, 40 base points in the quarter, and I would say despite continued significant higher inflation, continued material inflation, labor inflation, logistic inflation, energy cost inflation, and general inflation. FX was strongly dilutive, 110 base points, that is because of the weaker SEC, obviously. And then the M&A 317 base point, a creative link to the Cetigo capital loss booked last year. America's another very strong quarter with an organic sales of 17% and all countries and all business areas contributing in a very strong way. Good performance on the residential side as well as on the commercial side. An operating margin of 20.9% versus 20.6% a year ago. Very strong operating leverage, 170 base points up. Very strong operational execution and good strong price realization. FX dilute if 30 base points. And M&A diluted 110 base points, that is mainly or only acquisition-related costs for HHI, which amounted to around 80 million SEC in the quarter. And then go to APEC, an organic sales decline of 2% and a very mixed or different picture between Greater China and the rest of Asia Pacific. The rest of Asia Pacific showed very strong sales growth, is performing on a good level, as well in Southeast Asia, South Korea specific. And then a strong double-digit sales decline in China, like I mentioned, because of the weak construction market and the continued zero tolerance when it comes to COVID. An operating margin of 4.5% versus 5.8% a year ago. And also here you should make a difference between the rest of APAC, where we see strong operating leverage, good margins, and good execution. And then we see a loss in Greater China with a strong negative operating leverage for the division of 200 base points due to, I would say, subdued volumes in Greater China. FX accreted 60 base points, M&A accreted 10 base points, where we consolidated the call 12 acquisition in Australia in the quarter. If we then go to the global division, starting with global technologies, a very strong quarter with an organic sales growth of 19%, with all business areas in HID and all business areas in global solution contributing in a strong way to the top line. What I think is different this quarter to previous quarters is that PECs, our physical access control business, came back. and we were able to invoice part of the backlog that we build up because of shortages in the past on ships for our readers and our controllers. You might remember that we redesigned some of our readers and our controllers. to be able to use chips that were more readily available and that production started at the end of q2 and now full speed q3 giving a good recovery of the packs business which is important top line wise and also bottom line wise because it's also an important margin contributor The second difference is in global solutions where we saw a good hospitality business, which is also a good citizen ID business, by the way, so the travel-related sectors coming back from a low level. And that hospitality recovery is obviously also important bottom line-wise, and therefore we can show a strong operating margin of 17.3% versus 15.8% a year ago with a good operating leverage of 50 base points. And FX helped 120 base points because of the stronger US dollar. And then M&A diluted 20 base points. And then last but not least, Antrim Systems, another very strong quarter. Organic sales up 20% with all four segments contributing in a strong way. And as well on the equipment side, as on the service side, showing nice growth. Service had... good double digit growth in the quarter very good operating margin of 15.7 versus 14.8 a year ago very strong operating leverage of 110 base points fx neutral and then m a dilutive 20 base points If we then go a little bit more into detail on the financial numbers, I already talked about the 14% organic growth, about the 3% net acquisition growth, and the 16% growth because of currency. And EBITDA margin of 16.2%, 140 base points up. And then the EBIT margins for a 15.6 versus reported 14.2 a quarter ago. But again, corrected for Citigo 15%, 60 base point improvement. EPS 3.2, 48% up. Operating cash flow very strong, 25% up compared to a strong quarter a year ago. Cash conversion, like I mentioned, of 95%. And then the rose on a 12-month moving trend at 16.8%. 220 base points better than the same quarter a year ago. We also give you the run rate effects for Q4 now on FX and acquisitions. For FX, 17% accretive and then M&A, 3%. If we then look a little bit at the bridge, 14% organic growth where we have, I would say, a high 5% price and then an 8% volume. A very strong volume leverage of 23%, giving us 100 base point growth. Accretion, 30 base points positive currency and 10 base point positive acquisition. Again, it's the net between on one side the CETIGO comparison with last year and then the 80 million SEC we had to book for HHI related costs in the quarter, giving us the 15.6 EBIT in this quarter. quarter if you look at the cost breakdown good progress on the direct material side where we continue to compensate through price increases for the higher inflationary cost we have still 110 base point dilution That is partly because of the negative mix 70 base points and then the higher material cost 40 base points. You might remember that in Q2 that was 80 base points. So we are really bridging that gap. We are confident that that will continue now. Price versus cost and somewhere towards the end of the year, we should then be able to get tailwind from price versus cost and work away that 40 base points dilution. Good operational efficiencies seen on the conversion cost, 150 base points. We continue to execute on our MFP program where we had the saving of around 130 million SEC in the quarter. We estimate to do around 500 million SEC for the full year. And I believe we have around 300 million SEC still to go with the existing programs for next year. and we will then launch like we mentioned earlier the mfp9 program now in q1 next year we are still further consolidating all the different projects will be similar project than the earlier ones most probably a little bit lower in in total amount but a little bit better probably in in payback And then the conversion cost, of course, we have also seen very good efficiency gains in our operations through VAV activities and further negotiations in the supply chain. And then SG&A, also here good operating leverage on the sales and admin side, 90 base points gain compared to the same quarter a year ago. Operating cash flow, like I mentioned, 95% cash conversion on the 12-month trend, now 76%. We see that recovery from a weaker Q1 into a good Q2 and a very good Q3. And we are confident that that cash flow recovery will now continue going into Q4. gearing and adapt equity ratio of 35% coming from 38% a year ago and adapt versus EBITDA 1.4 versus 1.5 a year ago. So strong balance sheet that we can continue to execute on our acquisition strategy. And last but not least, earnings per share significantly up in the quarter on a very high level. So as a conclusion, it was a good quarter, very strong sales growth, organic sales up 14%, complemented with growth through acquisitions of 3%. A strong EBIT margin improvement from 15% to 15.6% comparable. And then our operating profit up 47%. And if we correct for the Cetigo divestment up 39%. Strong cash flow with a cash conversion of 95%. So overall, I think very good financial result. But then it's clear that we live in an uncertain economic climate. Again, in general, we still see good momentum in our markets apart from some slight weakness in some markets in Europe on the residential side in some channels, but overall still good momentum as well on the commercial side as on the residential side. It's clear that we are not immune to what's happening around us. And therefore we have to make sure that we are agile and stay alert and that we can react fast if and when the market goes down. And that's what we do. We have updated contingency plans. We are ready to push the button if needed. And the fact that we are very decentralized in our setup is, we believe, also a very strong advantage because if downtime comes, obviously, it will not hit us everywhere at the same extent. And therefore, being able to take those decisions locally in the different local markets is a strong, I would say, competitive advantage. And last but not least, just to remind you that we have our Capital Markets Day now on November the 16th in London. And we look forward to meet many of you there again face to face. And with that, I want to give the word back to Bjorn for Q&A.

Thank you, Nico. Well, we'll start the Q&A now. Just a quick reminder before there are more than 10 people who are in the queue. So please limit yourself to one question and one follow up so we can allow as many as possible to ask questions. So with that operator, we're ready to kick off the Q&A session. Please go ahead.

We will now begin the Q&A session. Anyone who has a question may press star and one at this time. The first question comes from Wei-Fan Zhang from Goldman Sachs. Please go ahead.

Hi, good morning. This is actually Daniela here, and I have two questions, please. So the first one wanted to ask you regarding sort of how do you see the balance of the carryover on pricing versus cost as we kind of start looking into the end of the year in 2023. I think in the past you have comments sort of about balance around Q4. I wonder sort of whether that's a bit more positive now and whether it can get you into the 16 to 17%. corridor soon. That's the first question. And the second question, assuming, obviously, we don't know regarding the HHI, but if the case doesn't go through and you can't complete the deal, can you tell us a little bit about what's your strategy for the U.S. in terms of resi? Will you pursue more aggressive organic investments? Are there other similar opportunities on the inorganic side, sort of how shall we think about the resi positioning in the U.S. if the deal doesn't go through? Thank you.

Thanks, Daniela. On the price, like I mentioned, we had a dilution still of 40 base points, cost versus price in Q3. There was 80 base points in Q2, so we are making good progress. We continue to increase prices, I would say, for most of our products and most of our markets and most of our businesses. Where it becomes a bit more difficult, I would say even impossible to further increase prices, is on those products that have a very high steel content, like residential doors, like fences, and perhaps also steel security doors. But there we so far can keep prices. the prices and of course our ambition is there to keep that price also going forward even if steel is declining again from a material cost perspective. But all the rest as we continue to see material prices for other products like copper, zinc, nickel, aluminium still on a high level as we continue to see labor inflation, general inflation, logistic inflation, we have an ambition to further increase prices. So we are confident that we will be able to bridge that gap cost versus price now somewhere towards the end of the year. And then if indexes stay where they are, that would give us then accretion as of 2023. And that 40 base point dilution should go away. When it comes to HHI, we remain convinced that we will be able to convince the judge that this is a very good deal for the American consumer and that this deal will go through. As you know, we are very small on the residential side. in the US and acquiring HHI is a once in a lifetime opportunity for us to become also a leader on the residential side which is something that is very difficult to do organically. HHI has a nice installed base, has a nice channel to market that we missed today on the residential side in the US. So we still go, I would say, for plan A, which is the acquisition of HHI. We expect a decision of the judge somewhere Q2 next year. And if what we don't believe, but if we would have a negative decision, then at that moment we will go for plan B and continue our organic journey like we are doing today.

Thanks, Nico.

I'll actually squeeze in a question that we received via email from Vivek at Citi Research. It's related to HHI. So the question reads like this. Setting aside the antitrust process for HHI, since the announcement of the deal last year, we have seen some quite large changes in interest rates and other factors. Should the deal go through as planned? How do you see the performer earnings accretion form the deal?

So what we have said is that the moment that we close HHI, the first 12 months, HHI will be diluted around 70, 80 base points. We have said that we have seen clear synergies of around $100 million bottom line that we aim to realize within a five-year period once we close. own HHI and we can reconfirm that 100 million dollar now also even with the divestment of the M-tech business and the smart transit business in the US and Canada those synergies remain intact then it's clear that interest rates are indeed more expensive today or interest cost is more expensive today than a year ago but we bought HHI a year ago we are not negotiating today

Thank you. Operator, we can continue with the next question.

The next question comes from Matthias Holberg from DNB. Please go ahead.

Hi, thank you. Could you please help us a bit with the catch-up effect in global tech from the increased deliveries in HID, please? First of all, should we think of this as sort of a one-off in this quarter, or is this something that could also spill over into Q4 and 2023?

And the question was on the cash or on?

On HID in global tech. So from the improved production that you mentioned.

On the sales side. So as you remember in Q1, we had mentioned that we lost around 300 million SEC for PAX business because we didn't have the ships to produce and therefore invoice. And we mentioned a similar figure for Q2. We estimate that today we were able to recover around one fourth of that backlog, perhaps a little bit more than one fourth. So there is still quite some backlog that we further have to invoice now in the coming quarters. And we have now secured ship availability for that backlog for the coming quarter. So we are confident that recovery will continue now in the coming quarters.

Thank you. Perhaps an add-on rather than a follow-up, but could you quantify or tell us anything more about the initiated cost reduction actions in Europe, please?

Like I mentioned, it's still very limited. It's only in France, UK and the Benelux. And even in those markets, if you look, for instance, on the commercial side, we still see good momentum, good sales development. It's really on the residential side and then specifically on the DIY channel that is weaker in general in the world, I would say. And then specifically also in a distributor channel in France with the Cacaillers where we have seen that channel destocking because of the uncertainty in the market. So I would say that the cost measures are not significant yet. It's just to adapt and to protect the bottom line. And it's, I would say, a dynamic moving target depending on how those markets will further evolve now going forward.

Thank you very much.

Next question, please.

The next question comes from Bruce and Lars from Barclays. Please go ahead.

Hi, good morning, Nico. It's Lars from Barclays. Thank you. One question on Europe and one question, please, on HHI follow-up. On Europe, Nico, I wonder whether you could help us with the magnitude of the decline in the resi businesses in these markets and indeed the trend as you exited the quarters. My assumption is that these markets, UK, France, Benelux, Rodin, call it mid-single digit in volume terms in the quarter with non-resi still good, as you just said. Should we think of the resi segment down in the sort of low double digits in these regions? Did that accelerate through the quarter? And related to that, if I can, you're obviously now actioning some contingency plans. Some others that have called out DIY and distributed destocking have seemed to have implied that that is largely behind this. I presume that's not what you're seeing, given the initiations of cost out action. Thank you.

So perhaps a little bit a different picture between UK and then France and Benelux. I think UK has been challenging throughout the year. It has shown a rather flat development, I would say, since the beginning of the year. I think UK as a country has bigger challenges. challenges we haven't seen a bigger decline if that's the question in september or now beginning of october the decline has been similar throughout q3 and now also in the first weeks of of october and it's somewhere at that mid single digit negative growth, which is the same for France and Benelux. Also here we don't see that it improves or it goes down in September or now in the first weeks of October. It's a rather similar lower level than in Q1 and Q2 and it's around that mid single digit decline.

Understood. If I can, please allow a follow-up on the HHI deal and the remedies. And you're proposing the $350 million sales to be divested from EmTech and Smart Resi. I mean, that's more than half of your current U.S. residential business. I understand that the Smart Resi piece includes both Yale and August Home. I wonder whether you can explain the logic behind that specifically on August Home. I'm a little bit surprised. That was the key strategic acquisition five years ago in the U.S. smart lock market. You've been globalizing that business, rolling out the software and applications from August globally. What are the implications on your non-North American business from having to divest that asset base?

So the divestment only concerns US and Canada. And it's indeed the Yale Smart Resi and the August Smart Resi business. It has no effect whatsoever on the rest of the world. So our Yale business in South America or in Europe or in Asia remains intact. and it's true that we divest to two nice smart resi businesses the yale and the august in u.s and canada but on the other hand we get a much bigger very interesting residential business under the quickset brand with hhi we have a strong installed base and a strong channel to to market that we believe we can leverage on and through our R&D efforts, new product development, we can further lift that business in an important way once we are the owner of that business.

So no impact from utilizing the IP from August Home outside of North America going forward?

No, that is correct. Thank you.

Next question, please. The next question comes from Guillermo Peño from UBS. Please go ahead.

Hi, good morning, Nico. Good morning, Bjorn, and speedy recovery to Eric. It's a follow-up, actually, on the last question. So how do we think about the technology patterns that will be It's on your company now, but you're probably selling on the remedies that you will deal with on the US and Canada smart businesses. Is that something that is transferred as well, or do you keep the patents to yourself? Basically, the strategy here is you have the technology, you own the patents, and as soon as you own Kwikset, then you roll over that technology into the install base of QuickSet and therefore basically incorporate that at a fast speed.

We don't want to go too much into the details on the technical side, but you can say that the software platform that we have today in the rest of the world, excluding US and Canada, remains intact. We will continue to develop that platform, which to a certain extent is also already different, I would say, from US and Canada because we have much more additional features like alarm camera in Europe. that we don't use in the U.S. and Canada because U.S. and Canada is more just the sale of the digital door lock. And in the U.S. and Canada, we will use the HHI, the Kwikset technology to further build on. So it will be two different directions, one for the U.S. and Canada, and then one for the rest of the world.

Thank you. And can I confirm that Kwikset has a very limited, if negligible, actually exposure to smart locks?

No, that is wrong. I think Kwikset has also a good business on digital door locks today, a business that we believe that we, with our technology, clearly can further accelerate and build upon. But it's not so that it's neglectable. It's a good part of their business today already.

Thank you. Next question, please. The next question comes from Andre Cohen from Credit Suisse. Please go ahead.

Hi, good morning. Thank you for taking my question follow up. Can I just go back to Europe and could you quantify the size of that D stock in the quarter, please, for us? And then just on the margin side related to that, is that really all volume driven or is there anything else in the quarter that drove that? Negative operational gearing.

On the first question, like I mentioned earlier, in those markets, France, UK, Benelux, if you combine them together, you should think about a mid-single-digit negative growth in the quarter. And that is a combination of a weaker DIY channel and destocking. It's very difficult to break the map, but I would say it's not something radical. It's just a slowdown. I think on the second one, I don't understand the question because I think we have very good operating leverage in the EMEA division. We have a good margin. So perhaps you should explain a bit better what you mean with your second point.

Maybe I'll double check, but I think you reported 14.3% margin on 4% organic growth. So when I take out the acquired and currency contributions Just on our kind of simple drop-through calculation, it suggests it was near zero.

No, I think that is wrong. You should look at the bridge, which is included in the deck, and I think you will see a good, strong operating leverage. Out of my head, I think it's around 25% or so. The big difference is the big dilution because of FX, because we had, obviously, a weak SEC there. and a very strong Sweden in the quarter. So strong Sweden, strong SEC gives us strong dilution on the FX. I think it was around 150 base... A bit more than 100 basis points, yeah. Base point dilution. But you can see it in the bridge. The operating leverage, I think, was good on the growth.

I think, yeah, maybe the FX we overestimated. And if I may, just a really quick one on M&A, not HHI related, but you're obviously showing quite a trend of acceleration of closing deals. Is that something that we can think of as a trend or is it just kind of usual kind of durations and cadence of M&A?

No, we are very happy with the pipeline we have today. We are very active. Then again, we can only be happy once the pending deals are closed, but we are confident that we will see some more deals closing going forward, yes. Great.

Thank you. Thank you, Andrei. The next question comes from Andrew Wilson from J.P. Morgan. Please go ahead.

Hi, good morning. Thanks for taking my questions. I've got two. They're, I guess, slightly broader. I just wanted to come back on conversations we've had in previous quarters with regard to market share. And it feels like we spoke, I guess, earlier in the year about you taking market share and looking at these numbers, it looks like that has continued. Can you give us a sense of whether that's a fair comment, but also, I guess, your confidence in retaining some of those shares? I know some of your competitors have maybe had more challenges in terms of ramping up with volumes than you did earlier in the year. I'll start there.

Yeah, of course. I guess if you ask all us and all our colleagues, the market will be 120 or 130 percent. Everybody will say that they grow a market share. I can only say that I think we are happy with our development. I think we have done good work in uh in general and i mean if you if you look in in some markets of course most probably our market or our growth has been been been higher than the the market perhaps if you look at markets like north america and and south america that is most probably uh the case i think we have invested a lot in feet on the street in this market we have also continued to invest heavily on new product development throughout COVID-19 crisis and not only in those markets in general and I think that is bringing fruits now that we come out of that COVID-19 crisis.

Maybe as a follow-up just I guess adjacent on the supply chain you kind of made a A number of comments on today's call around some of the improvements you've seen, obviously most tangibly in terms of global tech. Can you just try and help us understand, is that all being driven by ASA-specific actions? You talked about the redesigns on the chips, for example. Or are you actually seeing, I guess, a broader easing of some of the challenges we saw earlier in the year? Yeah.

So I think if you go back to the beginning of the year, we said that there was a challenge with component shortages in general. I would say that that today is over. Today, that's perhaps still an excuse, but not a real reason anymore. What is still a challenge today is semiconductor component shortages. And then we must say that we have seen a slightly improvement in the last weeks, perhaps the last month. But it remains a very fragile situation in the sense that, yes, we see easing up for some ships and then other ships still have a problem or have a bigger problem. So I would say that we are not out of the woods yet when it comes to semiconductor shortages. But definitely in the last couple of weeks, yes. an improvement not because there is more capacity coming on board or not because people change their unrational behavior but more i guess because there is less demand in the market on the consumer side and therefore more capacity available to to buy But I would say with specifically HID, the Pax business, it's mainly because of our redesign on the reader and on the controller side through which we could now invoice an important part of that backlog that we build up in Q1 and in Q2.

Thank you.

Thank you. The next question comes from Gael Debray from Deutsche Bank. Please go ahead.

Oh, thank you. Good morning, everybody. Nico, in your experience from prior cycles, do you think that Europe will lead the U.S. in this cycle? I mean, is the slowdown that has been visible in southern Europe this quarter a warning signal about what is yet to come in the U.S., in your view?

I don't think there is a real correlation. It's not that in previous crises the same thing happened. So I don't think we can take that as a sign that tomorrow the U.S. is going to go down. No, I don't think so. I guess what you should not forget is that we are late in the cycle. So perhaps you should look more at, I don't know, the cement guys that put foundation into the soil. And when we start building new buildings, we often do projects that started a year ago, a year and a half ago. But I don't think there is that correlation between US lagging and Europe not.

Okay, I understood. And maybe I missed that, but did you quantify the impact of the desktoping at the distributor level in Europe in Q3?

No, I said that it was in those markets, destocking and the DIY channel, you could say the direct consumer channel, also the sales online directly to the consumer, and together it was mid-single-digit negative growth in those markets. But it's very difficult to then split it up between destocking and other reasons.

Do you think the destocking process is completed now, or is it still yet to... to continue into Q4?

I can only say that in the first two weeks or the first three weeks of October now, we have seen a similar trend for those markets. And, of course, you can, as a dealer, only destock so much. At a certain moment, you have no stock left. It's not something that will go on, obviously.

Okay. Thanks very much.

The next question comes from James Moore from Redburn. Please go ahead.

Yeah, thanks. Good morning, everyone. Nico, could I go back to HHI and ask a couple on that, please? One, just to follow up on the synergies. Can you explain how you still get $100 million of synergies despite selling M-TECH and smart locks? And my main question really is on the antitrust. I'm led to believe that the DOJ has indicated to ASA and Spectrum that selling EmTech and smart locks to private equity is insufficient to satisfy their concerns as they believe private equity doesn't replicate competition, it under invests. Is that correct? And does it mean that you need to dispose those remedy assets to an industrialist that has no lock revenues?

So I think on the first one, the synergies we have, of course, sales synergies. We see HHI and Kwikset as a very interesting platform to accelerate our digital journey. They own, to a big extent, the hardware in the house. a place where we are not at all today and we believe we will also see a digitalization of not only the front door but a lot of other hardware in the house and therefore HHI and Kwikset is a a good platform with a good install base and and a good channel to market for to start from We believe also through our innovation, new product development, we can further lift the brand equity of Kwikset and offer wider and more solutions to the American consumer. And then two, HHI is of course a very competitive operational footprint with nice factories in Mexico and in Asia that we can then further leverage for more business. I would say that is the main component of those synergies and that's also why the 100 million remains intact even if we have to divest the businesses I mentioned earlier. earlier when your question specifically on the trust around smart resi, we are very convinced DOJ is completely wrong. and it's an irrational behavior even of DOJ. And definitely now with the divestment, I would argue that nothing will change in the competitive landscape because we will acquire a bigger business from Kwikset and we will divest a successful business, our business to a new owner. So from a market dynamic perspective, In the global market, in the US and Canada, nothing will change. So that's why we are also confident, or very confident, that this divestment proposal will solve, I would say, more hypothetical concerns that DOJ has.

Thank you. Thank you, Nicky.

Next question, please. The next question comes from Richard from Jefferies. Please go ahead.

Yes. Good morning. Thanks for taking the question. So I'll start with still follow up on HHR, please. Can you just help us with. You know, the cost analysis that perhaps you've gone on separating EmTech and the RegiSmart business in North America and how separate is the manufacturing footprint of those businesses versus the rest of ASA. You sounded that you're looking for an outcome by the second quarter of next year. How do you make sure HHI is well run? I think we've had a long enough sort of period where you're trying to conclude on this deal and how do you make sure that business is still well run?

I'm not sure I understood completely the first part, but I will start to answer them. Bjorn, if I answered wrong, you correct me. But it's around $350 million business that we will divest and the margin is slightly below America's margin. So that gives you an indication of top line and bottom line. It's a rather straightforward carve out that we can do. And we will divest the whole value chain from supply, production, sales after sales to the new potential owner. That was the first part of the question. The second one was? HHI, how it's run. HHI has a very mature seasoned management team that is very excited to become part of the Assa Abloy group. HHI was and is run in a rather independent way within the Spectrum brand organization. And as that whole management team will come over, they, of course, do all the right things to keep business up and running in a good, profitable way. I know that they are doing cost measures to adapt also their cost structure to the market. I mean, you have seen their figures, I believe, in the first half of the year, as they are, of course, much more exposed to DIY than us. They have seen that weakness on the DIY set more than us. If your question is, yeah, but why would they do big restriction paybacks if the payback is very long? Why would Spectrum do that? I think the advantage is, of course, that we are in the U.S. We are not in some countries like in Europe where it's more difficult perhaps to adapt cost, personnel cost to new reality. It's much easier in a country like the U.S., and therefore we are very confident that they are doing the right thing to to run that business in the best possible way in the transition phase. And I can tell you everyone is frustrated that this acquisition didn't go through yet. I think it's a shame for the Assobloi people, for the Spectrum people, and definitely for the HHI people that are left in a vacuum for too long. But I think it's also a shame for the American consumer because we will bring a lot of innovation and a lot of good things to that American consumer. I would argue that even it's a shame for the American taxpayer because somebody, of course, pays for this whole investigation. Therefore, we are hoping and we are confident that soon this whole project will be behind us and we can embrace the HHI organization, the HHI people in the Ashabloy family.

Okay, thank you. And then, Nico, very quickly, where would you assess the risk of destocking on the non-residential side, given the supply chain? chain constraint that we've seen in the last few, the last two years. Is there any risk that you see similar trend on non-rise as well there from your channel partners destocking on the non-rise side?

I guess this is a question more in general, not specific to one country. Like I mentioned in the call, we still see very good, strong momentum on the commercial side. Our spec business is up high double digit in the US, up double digit in Europe, up double digit in Europe. in Oceania. So we don't see any slowdown yet on the commercial business. Then, of course, I cannot look in the future more than you. I can only see what we see today and we continue on the strong momentum.

Okay, thank you. The next question comes from Dennis Molina from Morningstar. Please go ahead.

Thanks for taking my question. I won't ask you a CFO question since I'm sure you can answer it, but I have more of a strategy question for you. Just thinking about going into the next period when you're talking about in the press release about really trying to accelerate the electromechanical conversion, can you just maybe let us know, are you doing anything differently in terms of putting more money behind it, hiring different roles, or what's kind of the meat behind the strategy? Is there a change in what you were doing before that's significant that you expect to accelerate the markets? And have you seen any wins so far from that strategy?

Well, first of all, I think the market is going in that direction. If COVID-19 already changed something, then it's definitely the further acceleration of the move from mechanical to electromechanical and digital, as well on the residential side as on the commercial side. Because it's clear that with an electromechanical solution, you can do so much more in a building than in a pure mechanical solution. You can much better control flows on the floor, access to a building, access to a meeting room, etc. uh and and and so on so we see that acceleration of of the market we see that in our spec business we see that in our numbers we uh grow much faster on the electric mechanical side than on the mechanical side i think if you look over the last Five years, perhaps our mechanical business was growing around 2%, where our electromechanical business was growing double digit. And it's no different this quarter. Also this quarter, our electromechanical business was growing faster than the group 14%. What are we doing? We are investing in an important way in R&D for new products, new solutions, new software platforms. Our INSEADO platform in EMEA that we also use in other parts of the world is a good example. It's a software platform where you hook up all the electromechanical hardware on one and the same platform and then can offer a total solution to the channel partners and customers in the market. We are investing on specific verticals in the West, for instance, around electromechanical. So a lot of investment on R&D, also a lot of investment on feet on the street because it's clear often You need a different type of person with different qualification to sell electromechanical solutions than mechanical products. And that's something we have been doing since quite some time and we continue to do as we speak.

Thank you. Can we move to maybe one last question, operator?

The next question is from Alexander Virgo from Bank of America. Please go ahead.

Thanks very much. Morning, everyone, and thanks very much for squeezing me in at the end. It was just a quick one really to ask if you can give us any commentary around the continued strength of the entrance systems business, particularly given what we've heard from other sources around the capex going into warehouses. And I just wondered if you could give us a little bit of a regional commentary maybe and whether or not you've seen any signs of any sort of meaningful slowdown there. That would be great. Thanks very much.

So I think we have four businesses in entrance systems. And that's what I said about the Americas, that the comparison now going into Q4 becomes more challenging because we grew America's 17% in Q4 organically last year. I think we grew 14% last year in entrance systems. So also for entrance systems, the comparison is more challenging, and therefore we should perhaps expect more leveling out of that high growth number. But if you look at the four businesses, perimeter security is a US only business. I think we have done a very good job there in segmenting the market and having specific solutions for different verticals like data centers, warehouses and so on. They have shown very high double-digit growth on top of high double-digit growth. Of course, there we see a leveling out now because it's clear that you can't continue double-digit growth on double-digit growth on double-digit growth. And again, that's only a US market. If you take our residential garage door business, it's mainly a US or North American business today. There we see still good momentum. on that residential market. We don't see too much weakening yet. And then if you go to pedestrian, I would say it's driven by different things. Definitely our service business, which is a growth accelerator through the acquisition of the record business. We got also access to a wider product portfolio. that we can cross synergize among the Assa Bleu brand and the Rekord brand. And we see still good momentum in different verticals if you take food retail, if you take medical hospitals and so on. So we still see good momentum on the pedestrian side. If you take industrial through that loading docks was an important and is an important contributor to the sales growth. It's true that Amazon has announced that they are slowing down their investments. But obviously it's not only Amazon that invests on the warehousing side. There is many other players and we still see good activity from those other players. With loading dog business, we also have the highest backlog because it's the longest delivery cycle in an entrance system. So we are confident that we will be able to continue good business on the loading side for quite some time. Another contributor on the industrial side is all our high-speed doors that we also use in automotive and other applications. What is important for us in automotive is that people change models and build new assembly lines because then the assembly lines tier 1, tier 2, tier 3 has to adapt and has to buy new high-speed doors. And that's what we see. And then service is, of course, also on the industrial side, an important contributor. And then price as entrance systems has a lot of steel. The price component for entrance systems has been higher than the average, the high 5% I mentioned for the group. That I would say are the main items.

Thank you, Alex. And everyone, we need to round up now. So thank you for your interest. And if there are any outstanding questions, feel welcome to contact us at Investor Relations after this call. But for now, thank you for showing your interest and we look forward to speaking to you in the coming weeks. Thank you.