Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2022-Q1

[Björn Tibell, executive]

Good morning, and welcome to the presentation of ASSA ABLOY's First Interim Report in 2022. My name is Björn Tibell, I'm heading Investor Relations. And joining me here in the studio are our CEO, Nico Delvaux; and our CFO, Erik Pieder.

We will stick to the normal setup today. So we will start now with a summary of the report before we open up for your questions. So with that intro, I'd like to hand over to you, Nico.

[Nico Delvaux, executive]

Thanks, Björn, and also good morning from my side. Start of the year, a good start of the year with strong organic sales development, an organic growth of plus 14% where all the different divisions and all the different areas are contributing in a positive way, with perhaps the exception of Greater China where market conditions continue to be challenging. Good growth on the residential side and on the commercial side, good growth on the equipment side and on the service side.

And then a very strong operational execution. I would say despite, again, a very tough operating challenges with higher material costs, higher logistic costs, even higher labor cost and then definitely also labor shortages and component shortages in general and semiconductor shortages in particular. But giving us a bottom line of 15% and a record EBIT in value for Q1 and EBIT value of more than SEK 4 billion.

We also signed 3 acquisitions in the quarter. And then a lower operating cash flow, that's mainly due to higher receivables because of the higher growth and higher inventory where we have now inflation kicking in into our inventory and where we also have some strategic stock taking to make sure that we can invoice our backlog.

So in numbers, sales of SEK 26.6 billion, 22% up; 14% organic growth; 0% net acquisitions, and that's mainly because of the CERTEGO divestment; and then positive 8% currency. An EBIT margin of 15.6% and an EBIT margin, like I mentioned, of 15% versus 14.6% a year ago. And then record EBIT for Q1, above SEK 4 billion, 26% up; and earnings per share, 27% up.

If you look then a little bit at the different regions, a continued very strong North America with an organic growth of 22%, where the residential side continues to perform on a high level. I would say commercial side is completely back and at levels well above pre-pandemic 2019 levels. So North America, I would say, very high activity.

The same is true for South America with an organic growth of 23%, perhaps a little bit surprising because of very tough comparison with a year ago and even with 2 years ago.

Europe, plus 9%, solid performance. Also here, good activity as well on the residential side as well on the commercial side. Africa plus 17%. And then Australia and New Zealand, plus 10%. Also here, both residential and commercial good market conditions.

And then the only negative, Asia, minus 6%, where we should really make a distinction between Greater China and the rest of Asia. And the rest of Asia is really coming back after COVID-19. We have seen now a couple of consecutive quarters in Southeast Asia with strong double-digit growth. Again, we see South Korea stabilizing and growing again. It's really more Greater China where, on one side, the construction market remains very depressed where we also still have a very conservative approach when it comes to doing business with the bigger key accounts and where, clearly, all the COVID-19 zero tolerance policy-related issues have an important negative effect on the business. And I would say, that's not only Shanghai what we all hear in the news, but it's also in several other places in Greater China.

So overall, 14%. In emerging markets, plus 8%.

So market highlights. Also, this quarter, several good strong project wins, a major critical infrastructure project for U.S. water utility company, including more than 8,000 locking points and also with good recurring revenue opportunity. HID got an ePassport business for a large African country where we cannot name the name of the country.

And then we continue to extend our Apple Wallet applications with now the launch of an employee and tenant batches for the World Trade Center in New York. And also, significant wins in the health care segment like you can see on the slide.

We also continue to extend our partnerships, for instance, on the smart locks side with Alexa, Homey and Zipato. And then we continue to win awards when it comes to our R&D and new product development efforts.

It took a worldwide pandemic to kill our strong record of 27 consecutive quarters with positive organic growth, and we had 4 negative quarters in 2020. But we have now, again, 5 consecutive quarters with very strong positive organic growth. And we are now definitely, again, nicely above pre-pandemic levels.

Our operating margin slowly goes back into the direction of the 16% to 17% bandwidth. We are on a run rate of -- at 15%, in line with the 15% of Q1. So if you improve margin, if you improve top line, obviously, also, your operating profit in absolute value increases. And there you see that our operating profit in absolute value in Q1 was almost on the same level as Q4 and significantly higher than traditionally for Q1.

Acquisitions, we continue to be active. Three acquisitions signed in the quarter. They represent an annualized sales of around SEK 250 million. And then we still have Arran Isle, a U.K. acquisition that we're now closing in Q2. And then no further news on HHI. We're still waiting there for approval from antitrust authorities, and that should happen later during the year.

If we then look into the different divisions a little bit more in detail, starting with Opening Solutions EMEIA. A good start for EMEIA with organic sales of plus 7%. All countries contributing in a positive way, except for the Benelux region where we saw a sales decline. A strong operating margin of 14.6% with good operating leverage despite all the high material and logistic costs, despite record high energy costs and despite all the operating challenges linked to material shortages, in general, semiconductor shortages, in particular, and definitely also the Omicron-related labor shortages. An FX dilutive of 70 basis points. And M&A accretive, 30 basis points. That's mainly -- thanks to the divestment of CERTEGO because we also booked acquisition-related costs for Arran Isle in the quarter.

A very strong start of the year for Opening Solutions Americas. Success story continues with now an organic sales of plus 22% in all countries, all regions and all different business areas contributing in a strong positive way; continued strong momentum on the residential side; and commercial business back on a high level. Also strong execution here and an operating margin of 20.3%. A very good operating leverage, 20 basis points.

Also here, despite all the operating challenges I mentioned earlier, we were helped a bit by a positive mix in the sense that we had more North America and less South America, and we had more commercial and less residential in the growth, helping in the mix. But we were also held by very good strong price management. FX, neutral. And then M&A, dilutive 60 basis points. That's mainly or only acquisition-related costs for HHI that amounted to around SEK 40 million in the quarter. It's a very good start for the Americas.

Opening Solutions Asia Pacific. An organic sales of minus 2%. And like I mentioned earlier here, we should really make a difference between Greater China and the rest of Asia Pacific, where we had very strong sales growth in Australia and New Zealand, where Southeast Asia is definitely coming back, and a stabilization and improvement in South Korea and then a double-digit decline in Greater China for the reasons I mentioned earlier.

Operating margin at 3.5%. Negative operating leverage of 10 basis points, of course, because of the negative sales growth because of the operating challenges and then definitely because of all the Omicron-related restrictions in Greater China. FX, also strongly negative 80 basis points. And M&A, neutral.

If we then go to the global division, starting with Global Technologies. Also here, a good start of the year with an organic sales of plus 11%, with very strong sales growth for Global Solutions. And we have good sales growth also for all business areas in HID with the exception of PACs, Physical Access Control, where we suffer with shortages of electronic components and where we estimate the negative effect on top line to be in the quarter around SEK 300 million. For total group, we believe top line negative effect of component shortage -- electronic component shortages is around SEK 400 million.

An operating margin of 12.7% versus 14.3% a year ago. Negative operating leverage of 140 basis points. Important negative mix in the sense that we have much less PACs, Physical Access Control, and more, for instance, Citizen ID. And we know that we have higher margins on PACs, than on the other businesses in this division. Clearly, component shortages and all the other operating challenges I mentioned earlier. FX, accretive 20 basis points. And M&A, dilutive 40 basis points. That's mainly integration costs related to the three latest acquisitions with it in Global Technologies.

And then last but not least, Entrance Systems. Also here, I would say a fantastic start of the year with an organic sales of plus 20% and all 4 segments contributing in a strong way. A good, strong growth in service, but a much bigger growth even on the equipment side. And then excellent operating margin of 16.1% with a very strong operating leverage of 140 basis points. Also here, good strong price management and very strong operational execution. FX, accretive 10 basis points. And M&A, neutral.

And with that, I give the word to Erik, who will then give a little bit more details on the financial numbers.

[Erik Pieder, executive]

Okay. Thank you, Nico, and also a very good morning from my side.

As mentioned by Nico, we had a great start of the year with a top line growth of 22%, of which 14% is organic growth, 8% is related to currencies. Operating income is up with 26%. And as you've heard before, we are very proud that it ended above the SEK 4 billion in the quarter. The same as what we had actually -- roughly the same as what we had in Q4. You see also that net income and earnings per share is up with 27%.

Operating cash flow is much lower than what it was a year ago. It's down with 65% or, in value, it is at around SEK 900 million. And as mentioned by Nico, some of it comes, let's say, purely from the volume, like, for instance, on the receivable. But the main part of it comes from the inventory where, of course, you get the volumes. You also get what Nico mentioned, the strategic sourcing. It means that you increase your inventory as well as we get the full cost into our inventory. So the cash conversion was low at 24%, but we expect that, that will improve during the year.

Finally, on this slide, our return on capital employed on a 12-month basis went up with 2.6 points and ended at 15.7%.

If we start to dissect the result a bit. If you look in the organic, 6% is price, 8% is volume. The flow-through, I think, is strong at almost 20%. And you've heard Nico here talk before about all the challenges that we have had. But we have done a good job in, let's say, still being able to be efficient in order then to reach the 20%. Currency has impacted top line of 8%. Bottom line is very marginal. It's only 10 basis points, negative.

Acquisitions, there, we have, on the positive side, the divestment of CERTEGO. That's why you have a negative sales, but it has a positive impact on the bottom line there. And then as mentioned before by Nico, we have also taken acquisition costs at the range -- for HHI at the range of SEK 40 million, but we've also taken a bit of cost on Arran Isle as well.

Going even further to the cost breakdown, you see on the direct material, it's negative with 2.6 points. Roughly 2/3 of that comes from the negative mix, where we have a stronger Americas, where you have a higher portion of direct material. But you also have within the divisions, like for instance, you have a stronger parameter, you have a stronger residential within entrance as well as you have a higher sales of Smart Locks, and they have a larger portion of direct material. On the other 1/3 is then the high material cost. It had a negative impact of 80 basis points.

Now we don't only talk raw material, we also heard from Nico before about the electronic component shortages. The shortages also means that the cost is going up. And there, we have now roughly 80 basis points negative impact on the result. And since I would say that the prices -- the cost, especially in electronic components, is continuously rising. So we have previously said that we would imagine, let's say, half year to have, let's say, breakeven and then start to have a tailwind in the second half of the year, I think this will be a little bit later than what we have previously said.

On the conversion cost, it's -- on the other hand, the conversion cost, we see a positive 2 points where it ended at 24%. Here, we have been able to absorb with the help of operational efficiency, the increase in logistics as well as the increase in electricity. Also, we have done a good job when it comes to efficiencies also in our SG&A at 1.2 points, where we continue to be efficient when it comes to sales and administration, but we make sure that we maintain a high investment level within R&D.

Operating cash flow, as mentioned before, this is purely related to working capital. And if you take the volume component out of it, it's the inventory. That's the one that's sort of making that we have so much lower than what we were a year ago. And as I said before, the cash conversion was at 24%, but we expect it to improve.

The gearing and net debt. The gearing, 38% versus 46% year ago. Net debt is down from 1.8 to 1.5. You see that there is -- in absolute value, there is an increase in comparison to Q4. This is purely related to currency. And if you see it being at 1.5 net debt to EBITDA, we are sort of -- we have a strong balance sheet, and we can, let's say, absorb the HHI acquisition as well as we can continue our acquisition strategy going forward.

Earnings per share, finally from my side, is up at 27% and ended at SEK 2.57 per share.

And with that, I hand the word back to Nico for some final conclusions.

[Nico Delvaux, executive]

Thanks, Erik. So yes, a very good start of the year. We have a strong profitable sales growth, organic sales up 14%. All divisions, all regions contributing to that organic sales growth with the exception of Greater China. And then despite all the operating challenges, a very good operational execution with strong EBIT improvement, operating profit up 26% for the first time above SEK 4 billion for Q1 and EBIT margin of 15%.

It's clear that we are and we continue to work in a challenging operating environment with high labor, material, logistics and energy costs and also with components and labor shortages. I would say, component shortage, in general, but definitely electronic component shortages in particular. And then, of course, we also have the direct, which are more limited but also the indirect negative effects from the War in Ukraine. And we will see how that plays out going forward, but I believe we have proven in Q1 that we can deliver in difficult operating environments. And I think we have proven that also in Q4 and throughout the COVID-19 quite. So we are very confident that we will be able to continue to do also going forward, whatever the operating environment might be.

And with that, I give back the word to Björn for Q&A.

[Björn Tibell, executive]

Thank you very much, Nico. So we'll soon open up for your questions. And I know there are many questions actually in line. So before doing that, I would like to remind you to limit yourself to one question each and a follow-up so we can allow as many as possible to ask questions.

So operator, this means that we are ready now to kick off the Q&A session. Please go ahead.

[Operator]

[Operator Instructions] With that said, the respected speakers, the first question is coming up from [ Martin ].

[Mattias Holmberg, analyst]

Can you hear me?

[Erik Pieder, executive]

Yes, we can hear you.

[Nico Delvaux, executive]

Yes, we can hear you.

[Mattias Holmberg, analyst]

Sorry, I didn't hear my name. It's Mattias Holmberg from DNB. A quick one on the pricing. You mentioned earlier, I think, something like total price increase of 7% cumulatively to have fully compensated for the cost inflation. I assume that the picture has changed a bit since we spoke in Q4. So perhaps an update on this? And then also, you mentioned here that the sort of tailwind in terms of net price versus cost inflation was pushed a bit from H2 forward. So perhaps a bit more granularity on this would be very helpful as well.

[Nico Delvaux, executive]

Yes, we indeed made a statement of 7%, 8%, and we made that statement with the footnote if indexes stay where they are 3 months ago. And unfortunately, of course, the world has further changed over the last 3 months. So that still has come down a little bit compared to 3 months ago, but all other commodities have further gone up. And with aluminum, in particular, significantly up. And then like also Erik mentioned, yes, that is -- if you only look at basic materials but, of course, we have also all the components. And we see an important increase on the electronic components, but we also see increases more in general on the material side.

If you would make the same calculation from 3 months ago where we set the 7% to 8%, it would be more 9% to 10% today that we need as a price increase to fully compensate for the material inflation. That, again, under the circumstances that all other conditions remain the same and that we don't realize other operational savings. Having said that, means, obviously, that our breakeven point, price versus cost, will be pushed forward and that we will need more price increases to realize that turning point. And that's what we are doing. We have further continued price now in Q1.

And again, there, it's important that the market follows. We, as the market leader, always try to increase prices first and then we see the direction of the market. And as colleagues, competitors in the market have similar challenges, so far, we see that we can put that price increase to -- in the market, and that's what we will continue to do. So it's very difficult now to predict one. We will have the headwind becoming a tailwind, but it's clear that there's definitely a delayed, and we should now most probably look much more towards the end of the year. And that, again, under the circumstances that indexes and costs where they are today.

[Mattias Holmberg, analyst]

That's very clear. A quick follow-up. You -- I understand that you normally never really have to give back any price increases once you manage to implement them. Do you see any risk of having to give back prices in a potential scenario where cost inflation starts to come down?

[Nico Delvaux, executive]

Yes. Definitely, in the situation we have today, that is not the case. I would say if prices stay more or less on the level where they are today or if they go slowly down, we don't see that risk. Obviously, if tomorrow material would go down with 30%, 40%, 50%, then obviously we will get that challenge. But if, I would say, normal circumstances with normal inflation of prices normally down, that should not be the case now.

[Operator]

The next question is coming up from Lars Brorson from Barclays.

[Lars Brorson, analyst]

A follow-up maybe just on that around pricing. We're heading into an environment where you'll be pricing up sort of double digit, at least in parts of your business. I think we heard from your U.S. competitor yesterday, they're looking at something similar in the next quarter or two. I guess the follow-up is what will be the impact or how do you assess the potential impact on customer behavior? We talk a bit about demand -- potential demand disruption or maybe in the case of some of your key end markets, potentially a change in customer behavior around trading down. You are a premium brand. Do you see risk around some of those dynamics? I'll start there, please.

[Nico Delvaux, executive]

And you, of course, talk about double-digit price increases. It depends what you use as a reference because you should not forget we have now a plus 6% -- on a plus 1% price increase same quarter a year ago. If we go in quarter 2, we already had, I believe, plus 3% price increase. So even if we further increase prices, it will be against a more difficult comparison a year ago.

But definitely, if you go back to where inflation started 2 years ago, yes, that should be the ambition. But as you know, what we sell in the construction project is very small managed plus 1% or 2% of the overall investment that people have to make to do a construction project. So I would say that our price increases don't decide on if a project is going to happen or not. It's more the general inflation on construction materials, in general, that decides if a project happens or not.

And I can only say, yes, we get those questions all the time. I can only say that up until today, we don't see that happening. Yes, we see some projects being delayed because material is not there or labor is not there, but we don't see too many projects being canceled because the cost has gone up 20%, 30% for the project. And therefore, the project is not economic -- valid anymore.

But yes, I assume that is a risk if costs, in general, for construction materials, in general, continues to go up. Like it is a risk if interest rates continue to go up for mortgages. But again, we don't see that dynamic today in the market. We still see very strong momentum as well on the residential and well the commercial side as well in North America and Europe.

[Lars Brorson, analyst]

Understood, Nico. My final question related to that then is I was a bit late on the call and apologies for that. I think I heard you say a SEK 400 million group revenue impact from supply chain shortages, of which SEK 300 million in PAC, Physical Access Control. That's obviously, what, 9%, 10% organic hit to your GT business. There was also a notable impact in Q4 with no cancellations to your point and the backlog building. I appreciate visibility is low, but how to think about the cadence from here in a normalizing environment around supply chain for GT. It does look like win for some strong quarters, if you can get that out as it were of your backlog.

[Nico Delvaux, executive]

Yes. So perhaps to clarify, indeed, we estimated to be around SEK 400 million. SEK 300 million indeed in HID impacts, and it's mainly on the readers and mainly on controllers where we have electronic component shortages. And the other SEK 100 million is around digital door locks, again, where we have challenges on electronic component shortages.

And we, unfortunately, don't see the situation on electronic component shortages improving. It remains a very challenging situation. I would even argue that it's even a bit more difficult than 6 months ago. And we believe that, that tough situation for electronic component shortages will definitely continue throughout the full year.

And yes, the biggest challenge is the lack of visibility. We have very short visibility for some of our electronic components, sometimes only 4, 5, 6 weeks. So it's very difficult to predict how it will evolve. But it was SEK 400 million negative effect on top line in Q1. I think it was 300 -- or SEK 200 million we said in Q4. It was definitely higher than a quarter ago.

[Operator]

The next question is coming up from [ Mathar ] from Citi.

[Unknown Analyst]

So my question is on Entrance Systems. The strong margin of 16.1%, which is interesting given the possibilities usually quite back-end loaded in that division. So should we see that current strength as reflecting mix given the strong perimeter? Or should we still expect that typical seasonal back-end loading of margins this year?

[Nico Delvaux, executive]

Yes. There is, of course, different mix dynamics that play in Entrance Systems. But clearly, the fact that we have relatively more perimeter security helps on a positive way in the mix because we know that perimeter security makes margins in line with Americas margins, so significantly higher than the other three segments. So that's definitely one dimension. But you could also argue that we were growing faster in equipment and on service, which has a negative mix because, normally, we make better margin on service than on equipment.

As an important contributor is definitely the very good operational work we have done on the residential side. You remember from previous calls, that was the segment with the lowest margins. And there, we have seen very good improvement on the margin that helps in the overall picture. But I would say that also in the industrial and the pedestrian segment, both are executing and are delivering on their plans to improve and to grow in a profitable way. Clear that it's a division that is fired on all cylinders today. So yes, we should not take the level where we are today as the new starting point for the future from where we will further grow. This is -- this was a very good quarter, margin-wise, for Entrance Systems. Don't take that now as the reference going forward.

[Björn Tibell, executive]

Have we lost the operator? So for those of you who are online and listening to this, we are checking now with the operator. We can't hear anything here in the...

[Operator]

I'm sorry, my line got disconnected. The next question is coming up from [ Poppey Taylor ] from Goldman Sachs.

Since there is no response, going up to the next participant. Rizk Maidi from Jefferies.

[Rizk Maidi, analyst]

So just perhaps one on the outlook for the rest of this year. Nico, obviously, you started with a very strong quarter in terms of demand. How do you see demand over the coming quarters, especially in the light of higher interest rates, especially in the U.S. where we see residential rates now, mortgage rates going above 5%, but also on the commercial side, too? Just how you see the word here, please?

[Nico Delvaux, executive]

Yes. As you know, I'm not an economist and I'm definitely not an economist that can predict the future. I can only look at, at what we see as indicators in our business. And then I follow this back to our own specification activity. And I can say there that specifications as well in North America as in Europe are up double digits. So we don't see a slowdown there yet or we don't see a slowdown. We see good activity on the residential as on the commercial side, like I mentioned earlier. So we are still confident for the visibility and for the future we have in front of us.

Obviously, visibility is not so far. And like you said yourself, there is a lot of uncertain factors playing in the world. You have the inflation. You have definitely also all the different conflicts. You have the situation in China. So it's very difficult to predict. That's also what we say to our people internally. What is important for us is that we are agile enough to react to whatever condition that comes in front of us. For the time being, we are really focusing on further accelerating our profitable growth, but we are agile enough and be able to switch to other modes if and when necessary.

[Rizk Maidi, analyst]

Okay. The second one is on China specifically. So your performance in the country looks, at least to me, a bit weaker than other construction-related companies that we look at. I'm just wondering whether there is a ASSA ABLOY-specific thing here or it's just you being more cautious in terms of doing business with the big real estate developers? And yes, any color here would be helpful.

[Nico Delvaux, executive]

As you know, we started at a new strategy for China some years ago. We are delivering on that strategy. And what you don't see, of course, in the overall figures is that we are getting good results, underlying in that move from new builds to replacement and in that move from residential to commercial.

Unfortunately, the overall market conditions are so much negative that, again, you don't see those good underlying actions in the overall picture. There's, clearly, I would say, three items that affect our performance in Greater China. That is one, the overall economic condition in the construction sector, which is still depressed, and that's true for us. That's true for our colleagues in the market. That's true for other players in the construction sector. And yes, government is looking into different ways to help mitigate that. But so far, we don't see an improvement.

The second thing is more an internal issue. Yes, we have been more cautious and perhaps we have been more cautious than other players in the market. I don't know on the way we work together with the bigger key accounts because we believe it's a high risk in the given environment in China from an exposure perspective. So yes, there, perhaps, we took less business that we could have taken, if it would have been less conservative.

And then I think the third important item is everything related to the zero tolerance when it comes to COVID-19 from Chinese government with, yes, the lockdowns that you have all seen in the news in Shanghai, but also in different other places in China that affect our operations, but also affect our business in an important way.

So we don't really see, on the short term, an improvement in market conditions in Greater China. We have said from the beginning that our strategy is something more for the long term. That is not something that we will turn around in quarters that it's going to take more years. And obviously, the whole economic situation today in China is not helping us to expedite that strategy on the contract rates further delaying the results of that strategy.

[Operator]

The next question is coming from Gael de-Bray from Deutsche Bank.

[Gael de-Bray, analyst]

My name is actually Gael de-Bray. I was wondering if you could give me a bit more details on your supply chain organization and on your manufacturing footprint in China. How many factories and distribution centers you have now in China and in Shanghai, in particular? And what share of your global COGS is actually China related?

[Nico Delvaux, executive]

Yes. I think we can give all the details on our own factories, but perhaps you can take that offline directly with Björn because I think it's perhaps not so relevant for the more underlying question that you have because, yes, we have our own factories. But even if we don't have the factories we have, of course, part of our supply chain that sits in China. And so therefore, even if we don't have our own factories, we can still be affected if the supply chain is affected.

You know that we have the strategy to produce as much as we can locally. That means we produce in the U.S. for North America. We produce in Europe for Europe. We produce in China for China. And if you take, for instance, the Americas, it's less than 20% of our supply chain that comes from Asia, and it's mainly on the lower end. So the more cost competitive part. The same is true in Europe.

If you talk specifically about Shanghai, we have one factory in Shanghai, and that's our main factory for hospitality and for marine business in Global Solutions. And it's clear that, that business is now affected in April and will be affected also in May because of the shutdown of Shanghai.

We had to close our factory. We are up and running again in the factory since end of last week, but we are up and running at a lower regime because obviously, the whole supply chain has the same challenges. And then even if you can produce, you still have to get it out of the harbor in Shanghai, which is also a challenging situation, as you can imagine.

So far, we don't see a negative effect on supply chains for Europe or for Americas, but everything will depend, of course, on how long the situation will continue in Shanghai and how deep and how wide eventually the situation will further escalate.

[Operator]

The next question is coming from Andre from Credit Suisse.

[Andre Kukhnin, analyst]

It's Andre from CS. My line broke up, unfortunately. The earlier part when you talked about pricing, can I just follow up on that? Could you tell us what pricing was in Q1? And how much do you need to fully cover the current level of raw material inflation and whether you, I guess, plan further price increases for Q2? Sorry to begin with a repeat, but just to get that completely clear.

[Nico Delvaux, executive]

6% in Q1. 9% to 10% to fully compensate if we take the indexes where they are today, and we don't do any other operational efficiency gains. And yes, we continue to further increase prices. We have done that in Q1, and we will continue to do that now in Q2.

[Andre Kukhnin, analyst]

Great, very, very clear. And I wanted to ask on the Apple collaboration. How significant is this? I remember there were some tensions in the past in terms of kind of them opening, not opening the protocols -- communication protocols for you. And now this looks like a step forward. It feels like it could be beginning of something much bigger. Is this kind of the step now towards your virtual keys becoming available on Apple Wallet more broadly? Or is it just specific to that one customer and application?

[Nico Delvaux, executive]

Well, today, in numbers, it's still small. It's not significant. But of course, it's clear that it's a good opportunity, an important opportunity going forward. And it's also indirectly creating a lot of positive dynamics in the market, and it further helps us to further accelerate that move from mechanical to electromechanical and digital, a move that we definitely support.

[Andre Kukhnin, analyst]

But if I may, does that mean that if other customers want to put your access cards in Apple Wallet, they can just go ahead and do it? Or does that needs to be kind of blessed by Apple every single time on a case-by-case basis?

[Nico Delvaux, executive]

Yes, we cannot go too much into details on the relation with Apple. And some of the questions, you should ask Apple. But it's more like the latter part that you say. It's Apple that drives which applications, which segments they roll out.

[Operator]

The next question is coming up from James Moore from Redburn.

[James Moore, analyst]

I wondered if I could start with -- well, actually, just talk about the U.S. competitive environment. Does Allegion buying STANLEY Access change the competitive dynamics from your perspective? I guess that's the first question.

And then secondly, I wondered if we could elaborate a bit on HHI. I know it's difficult. But given the materials, I guess you're being requested to provide from the authorities. Are you able to talk a little bit about where the areas of risks are? And specifically, I'm thinking about the perimeter of market definition. Do you think it is going to be just the entire U.S. access control market? Or do you think it will be tightened into parameters like big box or others?

[Nico Delvaux, executive]

I think if we can first start with the first question, STANLEY. I think STANLEY was owned by a good company -- or the door business of STANLEY was owned by a good reputable company. Before, it will be owned by a good reputable company. And tomorrow, it becomes a property of Allegion. So I don't think, for us, competitive dynamics will change too much.

When it comes to HHI, no news in the sense that, again, I can repeat what I said last quarter. The antitrust authorities are still analyzing all the data we provide them and making up their mind and analyzing and coming up with conclusions. We are still, I would say, as confident as day 1 when we announced HHI that this will be closed as a clean deal. And again, we expect this deal to be closed later during the year.

[Operator]

And the next question is coming from Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

I wondered if you could just talk a little bit about customer dynamics and what you're seeing when you're talking to people in the broader context of demand development in the quarter so far. I think we've had quite a surprising lack of impact from what's happened in Eastern Europe across the reporting season so far. So just curious as to what you're seeing there with respect to the risks around demand from pricing as well?

And if I could follow it up with a quick one just on the specific, targeting that question specifically, Smart Locks and thinking about the penetration rates development of that in the U.S.

[Nico Delvaux, executive]

Yes. Perhaps on demand side, I think I commented on Greater China. So I will not repeat that. For the rest, I would say, like I mentioned earlier, we still see very good market dynamics as well on the residential as on the commercial side. Architecture Billing Indexes came out in March, again, up in a significant way. We see our spec business further growing double digit.

If you talk to the channel partners, if you talk to end customers, I think there's two things. Yes, some projects are being delayed because there is no -- there's component shortages. They have the same challenges as we have or they have labor shortages. And therefore, some of the construction sites are being pushed back and postponed. I would say that is not really a big issue. The business will come. It will just come a little bit later.

The second part that you hear a little bit is, like I mentioned earlier, some people saying, yes, this construction site, we are not going to do it because cost has gone up 20%, 30%, and it's not viable anymore. But I would argue that, that part, it's really exceptions that you hear today. So it's not a trend in the market at all yet today. Again, we are still seeing good positive dynamics in North America, in Europe. I mentioned Southeast Asia, where we see business coming back. We even continue to see good dynamics in South America with very difficult comparisons.

So yes, we don't see. What we also read in the news on speculation, on recession, on costs becoming too high that things are not viable anymore. We don't see that yet in our market and in our leading indicators.

And then the second question on smart resi. In general, it was again the second highest growth family in the quarter. The highest growth family was our recurring revenue, Software as a Service. And we see good continued sales as well in Asia, as in Europe and definitely also in South and in North America, where we could have done even more if you would have had the electronic components because, like I mentioned earlier, we believe that top line-wise digital door locks also was penalized by around SEK 100 million because of lack of electronic components.

[Operator]

The next question is coming...

[Andreas Willi, analyst]

Hello. Can you hear me?

[Nico Delvaux, executive]

Yes. But we didn't hear your introduction. So please...

[Andreas Willi, analyst]

Yes. I think the problem is I can't hear the operator calling my name, so I didn't quite know whether I could start. It's Andreas from JPMorgan.

My question is around Global Technology profitability, which, obviously, you talked about the mix impact in Q1. Q1 is seasonally weaker, but obviously that business is still quite far below where it used to be. Is there anything structural? Or should this eventually still be kind of the high teens, 19% margin business that it was prior to the pandemic?

[Nico Delvaux, executive]

Yes, we've always said in this prior to the pandemic that Global Technologies should be able to grow faster than the other divisions. That's one. And that they should be able to do that with EBIT margin above 17%, somewhere between 17%, 18%, 19%. I would argue that, that is still the case in more normalized conditions.

If you dissect a little bit, I would say that perhaps 2 or 3 challenges. If we take Global Solutions, it's clear that prior to COVID-19, hospitality, which is the biggest part of Global Solutions, was also the more important margin driver. And hospitality was hit in an important way, as you know to COVID-19. It's slowly recovering now, but it's still on much lower top line levels than it used to be prior to COVID-19. And therefore, also margins and EBITDA are still significantly lower than prior COVID-19 levels. That's one.

Two is PACs in HID, which is the driver of HID and definitely also, from a profit perspective, the most important contributor. There, we don't see the growth on the sales side at least. We see good orders coming in, but we are challenging in transferring those orders into sales because we don't have the electronic components needed to realize that sales. And that has an important negative effect on the margin.

And I would say the third item, as we mentioned earlier, we are definitely not happy with the performance of Citizen ID, our passport business. We had there already some internal challenges. And definitely because of its tourist travel-related business, the negative effect on top line did not help neither. And that drags also profitability down in that division. I would say that's the three main reasons explaining the margins we have today in Global Technologies.

[Andreas Willi, analyst]

And the follow-up on the HHI discussion we had before, obviously, that business reported a pretty strong decline in profitability, particularly in the last quarter. We don't know about Q1 yet. Were you surprised to see that? Or is that -- was that always expected that we will see a pretty big dip in the near term? I suppose revenues come down and raw materials spike.

[Nico Delvaux, executive]

Of course, they work in an environment where you have seen similar things, margin dilution happening also for their colleagues in the market. Again, we don't know more than you know. We also only can look at it from an external perspective until we are the owner. But clearly, they have also important inflationary challenges.

They also buy quite a lot in Ag. So they have also the logistic challenges, the material challenges. And I guess, for them, it's also a matter of passing those costs through price increases into the market like it is for all the other players in that channel and in that market.

Again, I cannot comment too much more on HHI than what you read and see in the news. It's clear that we didn't think about a deep COVID-19 crisis at the moment when we discussed with HHI because COVID-19 was not there yet at that moment in time. But like I said, from the beginning, we buy HHI for the long term. We don't buy HHI for the next quarter. And whatever the short-term dynamics are, we are very confident that this is strategic for us, the right thing to do and will give us also on the residential side now a good position in North America.

[Björn Tibell, executive]

Thank you, Andreas. I think we have time for one more question in the queue.

[Operator]

The last question from the queue is coming up from Guillermo from UBS.

[Guillermo Lojo, analyst]

It's Guillermo from UBS. I wanted to ask about price. And I know you already repeated a couple of times, the level of pricing and what you expect. But I guess I wanted to ask in a different way, whether the pricing policies followed in the different regions are different. That's first. And what trends would there be implied maybe in Q1, EMEIA versus Americas, maybe? And then what respect as we go forward as well? If you could elaborate on that.

[Nico Delvaux, executive]

So if you take the 6% price increase and you look a little bit at the different divisions, Entrance Systems in Americas are above the 6%. All the other divisions are below the 6%. There's always margins and divisions that do better than others in implementing price increases. But I think, overall, we have done a very good job in implementing the necessary price increases.

I would say, again, there is perhaps one bigger challenge, and that's again Greater China, where it's the most difficult to increase prices. We increased prices also in Greater China, but they are on a much lower level than the 6% we have on group level.

[Björn Tibell, executive]

I think it's time then to round up this conference. I hope it has been helpful. And if there are any more follow-up questions, feel welcome to contact us at Investor Relations.

Thank you for your interest now. And the three of us here, we look forward to speaking and meeting with you in the coming weeks. Thank you.

[Nico Delvaux, executive]

Thank you.

[Erik Pieder, executive]

Thank you.