ASSA ABLOY AB (publ)

Hello everyone and welcome to the presentation of Assa Abloy's second interim report in 2023. My name is Björn Tebella, I'm heading investor relations and joining me here in the studio are Assa Abloy's CEO Nico Delvaux and our CFO Erik Pieder. We have set aside about one hour for this call as usual, and we will now start with the summary of the report before we open up for your questions. So with that, over to you, Nico.

Thank you, Bjorn. Also good morning from my side. We can report good results for Q2. I would say despite a more challenging residential market environment and despite a difficult comparison with a year ago and the fact that we have one working day less this quarter, we nevertheless were able to show an organic growth of 3% in the quarter. We have very strong sales growth in global technologies and a continued good sales growth in Americas. We complemented that organic growth of 3% with a strong growth through acquisitions of 6%. above our ambition level and that contribution of growth acquisitions will now also continue at least for the next four quarters because we were also able now to finally close the hsi acquisition in in the quarter Very strong operational execution with a strong EBIT margin of 16.7% if we exclude HHI. A record EBIT of 5.5 billion SEC. Also a record operating cash flow of 6.7 billion SEX, 76% up. So really strong performance on all three items. And then, as we mentioned earlier, we booked one of costs in global technologies related to impairment of goodwill and intangible assets in our citizen ID business. If we look at the numbers, sales of 34.5 billion SEC, 17% up, like mentioned, 3% organic growth, 6% growth through acquisitions, and then held by currency of 8%. I will comment on profit margins excluding HHI. And then Eric, in his part, will then comment on the margins including HHI. So an EBITDA margin of 17.3%. And like I mentioned, an EBIT margin of 16.7%. And then EBIT 29% up and EPS 18% up. If you look a little bit at the different regions in the world, starting with North America, a continued strong performance, an organic growth of 5%, where we continue to see good momentum on the commercial side, where our spec business is still up high single digit compared to a tough comparison a year ago. Well, we have obviously seen a decline on the residential side in general and on new builds in particular, affecting in the first place our garage door business, our residential garage door business. our parameter security business, the part that is residential related, and then also our window hardware business that is an export business from Australia to North America. We must say that we are a bit more optimistic, perhaps, on the residential business in the US than in other parts of the world, where we believe that we might have had the worst behind us and that we should see a bottoming out of the residential decline and should start to see already improvement now in the second half of this year and then definitely going into next year. Continued strong South America, also here, 5%. Organic growth with, I would say, all countries contributing in a good way. Africa plus 13%. Australia and New Zealand plus 11, a continued strong core business in Australia and New Zealand on the commercial side. Very similar picture on the residential side, where also in Australia and New Zealand, residential business suffers and new-built suffers even more, but continued good momentum on the commercial side. And then Asia plus nine with a very strong Middle East, a very strong India, and a better greater China, where our external negative growth in greater China was only very small, single-digit negative growth. It was more down on the intercompany side because our sales towards Australia, New Zealand, EMEA and Americas went more down. So China together had a higher single-digit negative growth still in the quarter. And then we come to Europe, the more challenging part in the world, I would say, with a minus two organic growth, especially for EMEA, our residential part of the business, so important decline as well on the R&R side as especially on the new build side. I would say for all regions, but in particular also for our Nordic region and Sweden region, in particular where our OEM business saw a higher double-digit negative growth in the quarter. And as residential is a bigger part of our EMEA business that affected the EMEA division result in an important way. The commercial side in Europe, very similar to the U.S., still good momentum with our spec business up higher single digit. And I would say in general, on the commercial side, it's not the market that is our biggest concern. It's more the high comparison with a year ago. If you then look at some market highlights, also this quarter, some nice project wins a service contract for more than 5,000 pedestrian doors for a retailer in North America. And then good to see also that our mobile credential strategy continues to pay off in different verticals. We have a leading cruise line company that now invested in mobile key capabilities. And we have also a significant order for physical access control in a major global bank that is also calling in for our call this morning, where we also will implement mobile credentials into the Apple wallet. Our R&D efforts continue to pay off. Doorbird got a design award for their IP video solution. And then we launched also several new products in this quarter. Just to name a couple of them, we launched the first facial recognition lock in India for Yale. And we launched also a comprehensive range of IoT-enabled dock levelers that will increase operational efficiency and safety for the logistic vertical. Now 10 consecutive quarters with positive organic growth and in recent quarters that organic growth also complemented with very strong growth through acquisitions and improved operating margin. Like I mentioned, if we exclude HHI in the quarter at 16.7%, if we exclude HHI on a 12-month moving trend at 16.2%, so well within the bandwidth of 16 to 17% we aim for. Even if we include HHI at 15.8, 12-month run rates are very close to that bandwidth. So a stronger top line, an improved margin, therefore an accelerated operating profit, like I mentioned earlier, a record quarter. The acquisitions also an active quarter with four acquisitions signed in Q2, eight acquisitions signed in the first half of the year. We announced a ninth one this morning for secure issuance in HID and global technologies. those eight acquisitions that we signed in the first half represent an annualized sales of 17 billion second of course the highlight is that we finally were able to close now the hhi acquisition we celebrated that on on day one globally in all the hsi entities i was myself with hti management last week i must say A fantastic team. We speak the same language. We have the same chemistry or good chemistry between us. And they were really happy to become now part of the Assa Bloy family. And I'm absolutely convinced we will do very nice things together. If I then go a little bit into the different divisions, starting perhaps with the more challenging division, EMEA, an organic sales decline of 5% with a higher single-digit negative volume growth, and only strong growth in Middle East, India, and Africa, sales decline in all other regions in EMEA. And like I mentioned, still good momentum on the commercial side, but then a strong decline on the residential side with a special new build, a higher double-digit negative market development. And as in May, we have 45% of our business, which is residential. Obviously, it affected the overall result in an important way. We saw the biggest decline in the Nordics and in Sweden in particular. That's important from a top-line perspective. It's also important from a bottom-line perspective because Nordics and Sweden in particular are higher margin regions for EMEA. Therefore also an operating margin of 12.5% versus 14.4% a year ago. And I would say despite the bigger top-line drop, they have done a good job in Europe reducing cost they showed a good operating leverage on that negative growth of around 35 but obviously all the cost measures were not good enough to keep the margin up they were also not held by fx weaker sec gave us a dilution of 50 base points mna gave us a dilution of 20 base points we are taking extra cost measures in this division. And Eric will come back on the details. If you look at America, it's another, I would say, star performance in the quarter. An organic sales growth of 4% on top of a very high growth a year ago, with very strong sales growth in general for all countries and countries. and all business areas, and then a very strong execution with very strong operating leverage, giving us a bit in the quarter of 24.1% if we exclude HHI and HHI-related costs. That's a record quarter for the Americas. We also announced a new organizational setup for the Americas. We will go to a similar setup as we have in entrance systems with segments. So we will have a LATAM segment, we will have a North America commercial segment, and we have a North America residential segment. And we have appointed the three leaders for those segments, and those leaders are now building their management teams. So still, yeah, very good results in Americas. APAC, an organic sales of minus 2%, with very strong sales growth in Southeast Asia. Stable sales in South Korea, where we see also market conditions further declining. And then a sales decline in Pacific and in China. In Pacific, like I mentioned earlier, if you look at the core business in Australia and New Zealand, we saw nice positive growth. The sales decline is related to the window hardware business, which is an export business from Australia into the U.S. and obviously also local business in New Zealand and Australia and a little bit in Japan. And that window hardware business, that goes mainly to residential, new build, therefore the bigger decline. In China, like I mentioned, if you look at final customer sales, China was almost flat, very small, single-digit negative growth. But the sales decline mainly comes from intercompany sales to Australia and New Zealand and to Europe and the Americas. Then a very strong operational execution in this division, leading to an operating margin of 7.8% versus 1.9% a year ago. They were held by FX, 100 base points, and were also held by M&A, 70 base points. That is the D&D technology acquisition in Australia. Then global technologies, I would say the star performer of the quarter, an organic sales growth of 20%, with very strong organic sales in all business areas, as well for HID, as for global solutions. with the exception of secure issuance, where we had a big order for big printers a year ago, and therefore the comparison was more challenging. And those big printers, that's, of course, project business that goes up and down quarter by quarter. Overall, very strong performance, also very strong execution with an operating margin of 18.4% versus 15.3% a year ago. Strong operating leverage held by AVEX, 70 base points, and M&A dilutive, 60 base points. And as we mentioned earlier, we also did an impairment of good, well, intangible assets related to citizen ID in HID in the quarter. Last but not least, entrance systems, a stable organic sales on top of, I think, 20% organic road last year, so difficult comparison. But sales growth in pedestrian and in industrial. Compensating for the sales decline we see in parameter security related to the residential part of parameter security in the US. And then a significant sales decline in residential. Also here, the vast majority of our residential business is in the US. And an important part of that is going to residential new build. Strong growth in service delivering on our ambition to have high single digit service growth quarter after quarter. Very strong operational execution with an operating margin of 16.2%. Also on a 12-month moving trend, Entel Systems is now well, nicely within the bandwidth of 16% to 17% much earlier than our initial plan. So very happy with the execution in this division. Very strong operating leverage. FX and M&A dilutive with 20 base points and 10 base points respective. And with that, I give the word to Eric for some more details on the financial numbers.

Thank you, Nico. And also a very good morning from my side. As mentioned before, the numbers that you see here is including HHI. Nico talked before about the sales that was up with 17%. If you look in the operating income, it's up with 25%. And we have an EBIT margin for the second quarter as well as for the full year on 16%, which is one point better if you compare to previous year. And it's the best first half year that we've ever had. If you look on income before taxes, it's up with 20%. There we have a higher financial net. In the quarter, it was roughly 247, if you want to have the exact number, higher than last year. And that's related to, of course, higher interest rates, as well as higher cost for the HHI acquisitions than on the bridge loan. For the full year, we expect the financial net to be around 2.5 billion SEK. Net income is up with 18%. There, of course, we have the tax impact from the divestment of Emtech, Yale and August. If you look on the underlying tax rate, it still remains on the 25%. Cash flow continuously very strong. I'm very happy to see that we almost generated 6.7 billion SEC, which is up with 76% versus a year ago. And we have a 12-month rolling return on capital employed above the 17%, and it's 1.2 points better than the same period last year. If we dissect a bit and look into the bridge on the organic piece, we have 4% price, which then means that we have a negative 1% in volume. The flow through ended up at 75%, 1.6 points helping on the result. This is related to price realization, lower costs for direct material, logistics, as well as operational efficiencies. If you look in the operational efficiencies, we had a saving from the manufacturing footprint program of roughly 200 million SEK. And then Nico alluded to it before, but we've also implemented other short-term cost measures, which in this quarter contributed with 150 million SEK. I'll come back more to the details a little bit later on. The currency... Of course, a big help on the top line due to the weakening of the SEC, but also due to the stronger dollar, it also helped us with 20 base points on the bottom line. The acquisitions excluding HHI was at the same level almost as the group, so it had no impact there with the strong performance. Nico mentioned previously the technologies. I would also like to highlight within Americas the control ID acquisition in Brazil. and as you're all aware we finally closed the hhi acquisition and the divestment also mtech yale and august 20th of june i would agree with what nico said i was also there together with the team last week and there is a very strong team in hhi and i think this will be a very good acquisition anyhow If we look on the sales, the net effect was roughly 500 million. Of course, a dilutive impact of 70 base points on the result. We took in this month an acquisition cost of roughly 200 million SEK. A little bit more highlight on HHI. If we look on the performance for the first six months, the sales was roughly 750 million with an EBITDA margin of 12%. The financial impacts, as we foresee now from the start, dilutive impact from HHI of roughly 70 base points. And then we need to add also the dilutive impact on the divestments of roughly 20 base points. It will have a negative impact on EPS for 2023. Of course, it's related to the interest rates. We will also have integration costs, but we expect it to be slightly accretive then for 2024. That is related to that we will have lower integration costs. We will also have the synergies will start to kick in. We also expect to have higher interest rates due to the cash that we're able to generate. I would also like to highlight, I know this quarter is a bit messy with things that we have, let's say, below the line. That will continue for the next quarters. One is that we are following the IFRS rules when it comes to valuating the inventory at distributor level at the time of acquisition. And then we will, let's say, take that during the turn of the inventory. That we will consider to be a non-recurring item, as well as we still have roughly another 400 million SEC to go of exit cost from the divestment that we will also book below the line as non-recurring item for Q3 and Q4. And as I mentioned before, that we expect to have a good cash generation. One of the benefits that we have from this acquisition is roughly 50 to 60 million dollars tax benefit that we will have each year for the coming five years, which will, of course, as I said, help on the cash flow. If you look on the exposure then from the group, we have previously said that we are roughly 50. 75% commercial and 25% residential. With the acquisition of HHI, that would roughly go to one-third residential and two-thirds commercial.