Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2022-Q2

[Björn Tibell, Investor Relations]

Good morning, and welcome to the presentation of ASSA ABLOY's first half year report in 2022. My name is Björn Tibell, I'm heading Investor Relations. And joining me here in the studio are as ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. We have set aside about 1 hour for the call today. And as usual, we will now start with a summary of the report before we open up for your questions.

So with that, over to you, Nico.

[Nico Delvaux, Chief Executive Officer]

Thanks, Björn, and also good morning from my side. I can present good results for Q2, and therefore, also good results for the first half of the year. We had a strong growth in the quarter with an organic growth of 13%, a total growth of 25%. Also strong profit, with a profit of around -- an EBIT of around SEK 4.4 billion, a good EBIT margin of 15%. And I would say that despite all the significant operating challenges, challenges around material shortages in general, chip shortages, in particular, labor shortages, and then, of course, all the inflationary pressure, inflationary pressure around labor, around material, around logistics, around energy.

So a good result on the income statement side. I think also a good result on the cash flow side. Strong cash flow, record cash flow for Q2. We have a good conversion -- cash conversion rate of 90%. We also completed 6 acquisitions in the quarter.

If you look at the numbers, sales of SEK 29.5 billion, 25% up, 13% organic growth. Net acquisition growth of 0%. And then helped by currency in an important way, plus 12%. An EBITDA margin of 15.5% and an EBIT margin, like I mentioned, of 15% versus 15.2% a year ago.

An EBIT of SEK 4.4 billion, 23% up. EPS 2% down. But if you adjust for a positive onetime tax effect in Q2 last year, our EPS growth was strong, 24%. If we then look a little bit into the different regions, a very strong North America with organic growth strong momentum and continuous momentum as well on the commercial side as on the residential side.

Continued strong South America with an organic growth of 17% on top of a high double-digit growth a year ago and high double-digit growth 2 years ago. So I think also a very strong performance in South America. A very good Europe, plus 9%. We also here strong market conditions as well on the residential side as on the commercial side.

Africa plus 10% and Oceania plus 4%. And then the only weak part with a negative growth of minus 10%, Asia, and that is mainly only because of the very challenging situation that continues to be very challenging in Greater China. So overall, I think most of the regions post very good continued positive organic growth in the quarter.

Some market highlights. The first one, definitely very excited about that one, 1,500 loading bays and doors for the largest logistics center in Europe, very nice win and access control upgrade for one of the biggest airports in Asia. And I would say it's also interesting and good and positive to see that despite the challenging situations in China, we also win there nice projects.

And also good to see that the cruise ship business is coming back with several wins in that vertical. Our R&D efforts continue to pay off and are awarded, Gateman in Korea is again recognized as the #1 digital door lock brand now for the 17th consecutive year. It's quite impressive.

ASSA ABLOY PULSE won an award in Denmark. And we continue to launch new products. We have launched a new machine protection door in Entrance Systems. We also launched a new family of products with new coating and antimicrobial finish to avoid the spread of bacterias.

If we look a little bit at sales growth. So now again, 6 consecutive quarters with strong positive organic growth. I would also say accelerated organic growth compared to pre-pandemic times. Of course, we had 4 quarters during the pandemic in 2020 with negative growth.

But therefore, an accelerated sales growth curve. Operating margins flat at 15%. So flat margins increased top line, therefore, also accelerated operating profit, record profit in the quarter.

We continue to be very active on the acquisition side with 7 acquisitions completed in the year, 6 in the quarter. And 7 acquisitions represent an annualized sales of around SEK 2.8 billion. And if we zoom in on 2 of them, we finally got the approval from the antitrust authorities in the U.K. and Ireland to complete the Arran Isle acquisition, complementing very nicely our door and window hardware in the U.K. That company represents sales of almost SEK 1.5 billion, and they will be accretive to EPS as from the start.

And then Caldwell, also a nice acquisition, strengthening our position in the fenestration segment. Caldwell has a sales of around SEK 1 billion and also they will be accretive to EPS as from the start. If we then zoom in, in the different divisions.

A good performance of EMEIA in the quarter with an organic sales of 8%. Good strong contribution from all countries with the exception of South Europe, where we had stable sales growth, and that was mainly due to the fact that we had a very difficult comparison with last year. They had very high growth last year coming out of the pandemic in that part of Europe a year ago.

A good operating margin of 14.4%. We have a strong operating leverage of 40 basis points and that despite high material, high logistics and high energy costs, and of course, all operational challenges linked to material shortages in particular -- in general and chip shortages, in particular. So very good, job well done by our operations team in that division.

FX, very dilutive, 110 basis points. And M&A accretive 20 basis points, that was mainly thanks to the divestment of CERTEGO. We also took acquisitions costs related to the Arran Isle acquisition in the quarter.

If we then go to Americas, very strong excellent performance again in Americas with inorganic sales of plus 20% with all countries, all business areas performing and contributing in a very strong way. A very good operating margin of 20.6%, with a very good operating leverage of 160 basis points.

Obviously, same challenges, as I mentioned, in EMEIA, when it comes to operations. Good strong price realization. FX 20 basis points dilutive and M&A, 120 basis points dilutive. That's only related to acquisition costs for HHI. Acquisition costs for HHI in the quarter were around SEK 75 million.

You've also seen the announcement that we have now extended the agreement with Spectrum Brands until the end of the first half next year because we continue to discuss with the antitrust authorities, and we see that there is potential some further delay in closing the HHI acquisition.

If we then go to Asia Pacific division, more challenging with an organic sales decline of 5%. Very different picture between Greater China and the rest of the division. The rest of the division is performing on a good high level, a good strong sales growth, where obviously, in China, the market conditions remain very challenging.

Construction industry is still depressed in China and also the zero tolerance when it comes to COVID, definitely does not help. So we have seen significant sales decline in China. And therefore, also an operating margin of only 1.9% clearly because too low top line, giving us a negative operating leverage of 640 basis points.

And of course, we have the same challenges when it comes to material inflation, shortages and so on. And on top of that, we had the lockdowns in China, mainly in April and in May. FX, accretive 10 basis points and M&A dilutive 80 basis points, that is again only related to acquisition costs for the Caldwell acquisition in Australia.

If we then go to the Global division, starting with Global Technologies. A good organic sales of plus 6%, where most of the business areas in HID and all the business areas in Global Solutions performed in a strong way.

With the exception of PACs, physical access control, mainly. And also Identity & Access Solutions and Extended Access where we saw a sales decline. For our PACs business, we continue to see challenges around chip shortages. And we estimate here also that we lost around SEK 300 million top line for PACs in the quarter.

And as you know PACs is also very important for the overall profit for the division, for also an operating margin of 15.3% with a negative leverage of 90 basis points, mainly due to that negative mix in a sense, more Citizen ID and less PACs gives us an important negative mix. But also here, all the other operating challenges. And on top of that, we had the lockdowns in China, which affected our Global Solutions business, hospitality business, in particular, in an important way. Our factory for locks for hospitality was completely closed in April and was working at 50% capacity in May.

FX helped 80 basis points and M&A dilutive 30 points. And then last but not least, Entrance Systems, also here, again, a very strong performance in the quarter, an organic sales of 19%, with all segments and as well Equipment-as-a-Service contributing in a strong positive way. A good strong operating margin of 15.5% versus 14.9% a year ago, with a strong operating leverage of 40 basis points, despite again here all the similar challenges I mentioned earlier.

Also here a strong price realization again in the quarter. FX up 20 basis points and M&A was neutral. And with that, I give the word to Erik for some more details on the financials.

[Erik Pieder, Chief Financial Officer]

Thank you, Nico, and also a very good morning from my side. As mentioned before, we ended up on a sale of SEK 29.5 billion, up 25%, of which the organic stands for plus 13%, the FX is roughly 12%. Operating income ended on SEK 4.4 billion, up 23%.

EBIT margin is 20 basis points lower than the same period last year and ended at 15%. And as mentioned before by Nico, if you look on the net income and EPS, it's 2% lower than the same period last year, but then we need to take into account that last year, we had a onetime tax impact, which affected the EPS and the net income positively.

If we exclude for that one, the EPS and net income was actually up with 24%. Cash flow strong at SEK 3.8 billion, up with 4%. We see that, I mean, the increased sales as well as I would say that we have been able to -- I would say, lower the increase in working capital.

If we look on receivables and payables, it's following, I would say, the sales. And we have an increase in inventory, but it's not, let's say, to the same extent as what we have seen in the quarters prior.

Return on capital employed ended at 16%. It's up from 14.9% in the same period last year. If we then sort of look for now into Q3, you can see the numbers what we estimate then for the FX as well as for the M&A. But I would also like to remind that last year, we took a capital loss from the divestment of CERTEGO of roughly SEK 195 million.

If we then go into the bridge, the 13%, if we dissect it, 7% is volume, 6% is price increases that we've done in the quarter. That is on top of the price increases that we did a year ago. So this might -- you've heard Nico talk about on the operational challenges, despite this, we have an operating flow-through of 15.5%, where we can, of course, see that we have been able to, let's say, be more efficient and also use, I would say, the increased sales leverage in order then to still being able to perform a 15.5% on the organic.

Currency, yes, you have seen it shifts a bit between the different divisions where EMEIA is, let's say, having a currency -- a negative currency impact coming from the strengthening of the dollar as well as the weakening of the SEK.

You can also see on the other ones, like Global Technologies, where they sort of have a help from the dollar. And if you look in total, it's marginal neutral, the currency impact.

Acquisitions, the negative one on the sales is related to the divestment of CERTEGO. The negative part on the operating margin are related to acquisition costs from the 3 acquisitions, HHI, Caldwell as well as Arran Isle. It is more than SEK 100 million in the quarter. If we take the cost breakdown, direct material is 1.8 points negative versus the same period last year.

If we dissect it, roughly 100 basis points come from the negative mix, where we have the division mix where, I would say, weaker Global Technologies and the stronger Americas as well as we have the interdivisional mix, like, for instance, in Entrance with a stronger perimeter, but also that we have for the Opening Solutions division, a stronger electromechanical or digital lock sales. The higher material cost.

And as you know, now it's not only the raw material, it's also electronic components as well as source components had a negative impact of minus 80 basis points. We see, of course, that the raw material is coming up, but we don't see any improvements like on the electronic components. But with the price increases that we are doing, we still expect that during the latter part of the year that we will be able to flatten this impact out.

Conversion cost is positive with 140 basis points compared to the same period last year, where, of course, we get help from the volume, but we've also been able to do operating efficiencies, the impact from -- the positive impact from the manufacturing footprint savings are SEK 130 million in the quarter.

You can also see that we have a positive impact from the leverage as well as efficiencies within our sales and administration. In total, you can see it's 50 basis points, but we continue to invest in R&D in order then to be on the technology forefront.

Cash flow, as mentioned before, almost SEK 3.8 billion, plus 4% versus the same period last year. The cash conversion improved from the first quarter, as we said, now to the second quarter and ended at 90%. And we sort of -- we expect this to continue to improve.

The gearing -- we -- net debt versus equity is down from 45% to 42%. This is despite that we have done the acquisition of Caldwell as well as Arran Isle. If you look in value, the debt is up with SEK 4.9 billion, partially, of course, related to the acquisitions that I just mentioned, but we've also paid dividend as well as we have a currency -- negative currency impact due to the weakening of the SEK.

Net debt versus EBITDA is slightly up from 1.6 last year to 1.7 this year. But despite this, we have a very strong financial position and can continue our acquisition strategy as well as being, let's say, ready from a financial point of view when we will close the HHI acquisition.

Last, but not least, from my side, I mentioned before the earnings per share down in actual with minus 2%. If we take the tax effect out last year, it's actually up with 24%. And with that, I hand back to Nico for some closing remarks.

[Nico Delvaux, Chief Executive Officer]

Thank you, Erik. So yes, we are very happy with the Q2 results. Again, a very strong sales growth with an organic sales of 13% up. A good EBIT and a good EBIT margin with our operating profit up 23%. And then also a strong cash flow.

So I think good Q2 results, good first half of the year. Then, of course, we live in a very challenging operating environments. We also -- everybody reads the newspapers about the uncertain general economic climate. Component shortages, of course, remain. And inflation is on a high level as well when it comes to labor, logistics, energy cost and material cost.

We must say that we don't see any slowdown or we don't see any slowdown yet, perhaps, in our business. We see still good momentum in our markets. And therefore, we will continue to execute on our strategy to see how we can further accelerate our profitable growth.

But obviously, we will also look at how market conditions might evolve. And we have, as you know, the building good agility in our organization. We are ready to adapt to whatever market condition might come to us.

And then last, but not least, we also want to remind you that we have our Capital Markets Day now scheduled for November 16 in London. And with that, I give the word back to Björn for Q&A.

[Björn Tibell, Investor Relations]

Thank you, Nico. Yes, we'll open up for your questions now. [Operator Instructions] So operator, this means that we are ready to open up for Q&A. Please go ahead.

[Operator]

[Operator Instructions] The first question from the telephone comes from the line of Daniela Costa with Goldman Sachs.

[Unidentified Analyst]

This is [Indiscernible] asking on behalf of Daniela. Sir, I have 2 questions, if that's okay. The first 1 is, would also we conserve renegotiating the HHI deal price if it takes too long to complete, as we see some leading indicators in the U.S. residential market has deteriorated?

And the second question is, do you think that the current macro-environment serving like a step-up in M&A activities because of lower valuations and versus rising rates?

[Nico Delvaux, Chief Executive Officer]

Thank you, [indiscernible]. On HHI on renegotiating the price, that's not on the agenda today. Like we mentioned, we have extended now the agreement with Spectrum Brands till mid of -- end of June next year. But as we said also at earlier occasions, we don't buy HHI for the next quarter.

We buy HHI for the long-term. We believe that HHI is a strong complement to our business. It will give us also a footprint on the residential side in North America, what we are lacking today. And we are very confident that over mid- to long term, HHI will be a business that can bring us that 5% organic growth and that -- with an EBIT margin within that 16% to 17% bandwidth.

And as such, we believe whatever the market condition is today, the HHI acquisition will be a good acquisition. When it comes to M&A, in general, yes, we see perhaps a little bit higher activity level today. As you know, most of the acquisitions we do are smaller acquisitions, often also family-owned businesses. And then really often the negotiations are on a one-to-one basis. And we see, I would say, normal multiples in the market today.

[Operator]

The next question comes from the line of Andre Kukhnin with Crédit Suisse.

[Andre Kukhnin, Crédit Suisse]

My main question really is about the comments you made, Nico, on preparedness for change. Could we maybe talk about when you run the scenarios for businesses like EMEIA or Entrance Systems, could you tell us how much of a revenue impact do you think this business can take on an annualized basis without deterioration and profitability?

[Nico Delvaux, Chief Executive Officer]

Let me first be clear, I mean, we don't see any slowdown in the market yet. We see still, in general, very good momentum. So for the time being, our focus is still on how can we continue with our profitable organic growth.

But of course, we also read the newspapers, we also see what's happening around us. And therefore, yes, we are prepared for potential slowdowns and different levels of slowdowns. We have our contingency plans update and ready to execute if need be on a local level. As you know, our decentralized organization really gives us that agility. I think that is needed and that will be needed also in the future if the markets would go down because, again, markets will not go down in the whole world at the same extent and at the same time.

So being able to take decisions in the local markets close to the customer, close to the market, definitely gives us an advantage when it comes to agility. I would answer your question by looking back to previous crises. And we have said that the COVID-19 crisis is an exception. It was a different crisis because COVID-19 was a crisis around trust, where the normal, I would say, rules of previous crises did not count.

But if you look back to other crises, like the financial crisis, you will see that we are very resilient because we have that 2/3 of our business which is aftermarket. And if tomorrow, you will see a slowdown of general economic conditions that 2/3 of that business will continue, of course.

And that's also the more profitable part. So you have seen also in previous times that top line can go down also to a bigger extent while we are then able to maintain the bottom line or limit, I would say, the damage to the bottom line in a significant way. And there, I think conditions are for us internally no different today than they were in the financial crisis or previous crises.

[Andre Kukhnin, Crédit Suisse]

And if I may, a follow-up, I wanted to just check on China specifically. I know it's not largest exposure for you, but in the quarter, is it possible to isolate the lockdown's impact specifically? And what degree of impact that had on your profitability in Asia Pac, just to understand how much of it is kind of a nonrecurring hopefully piece? It looks like it's around SEK 80 million, SEK 90 million. I just wanted to check if that's kind of right ballpark?

[Nico Delvaux, Chief Executive Officer]

Yes, indeed, China represents only around 3% of total sales today, first, so it's a smaller part. I would say that the lockdowns mainly had an effect on our results in Global Technologies because we have an important factory in Shanghai for all our hospitality locks and all our marine locks.

And that factory was completely closed in April, was working at half capacity in May. Then in June, we did more than 100%, but obviously not enough to recover. So that had an important negative effect on the bottom line for Global Technologies.

I would say that for APAC, it had a lower effect. The main reason for the lower margin in APAC is the very low volumes that we have experienced in Q2 due to the very low volumes in Greater China with a high double-digit negative growth in China. And to a certain extent, we're a subcritical in Greater China today. That's the main reason for the lower margin in the division.

[Andre Kukhnin, Crédit Suisse]

And, sorry, is it possible to quantify the Global Tech impact then in the quarter from that?

[Nico Delvaux, Chief Executive Officer]

I don't know the details, perhaps we can check and then Björn can come back to you.

[Operator]

The next question comes from the line of Lars Brorson with Barclays.

[Lars Brorson, Barclays]

Maybe I can just follow up on that question with regards to GT. So SEK 300 million lost revenue this quarter, I think, similar to Q1, we had a little bit in Q4. So I'm assuming there's a, call it SEK 700 million, SEK 800 million backlog, particularly in your PACs business, due delivery. If we assume no further lockdowns in China, can you help us with how you see the cadence of that invoicing? Can you catch up fully in the second half of lost revenue of that backlog? Or is that more of a 2023 impact? I'll start there, please.

[Nico Delvaux, Chief Executive Officer]

So the total effect on top line in the quarter was around SEK 400 million. And like I mentioned, SEK 300 million for PACs. The other SEK 100 million was on digital door locks where the result could have even better than it is already today.

If you look at the SEK 300 million top line loss for PACs, I would say that it's not linked to lockdowns in China directly. It's linked to the fact that we have difficulties to get electronic components, chips in to make our readers and to make our controllers.

And we will say that, that we don't see an improvement in general when it comes to chip electronic components availability. We see the same challenges today as we saw at the beginning of the year, and we believe that, that will continue for the remaining part of the year. And the good news is that in the meantime, we have been able to redesign some of our products in PACs, mainly on the controller side where we had the biggest problem. And that redesign, we have made as such, of course, that there we have availability of chips.

And so that should definitely help us now in the second half of the year. work away some of that backlog that we build up on the back side. To what extent they will see because, again, the visibility in general on electronic component shortages remains very, very short. But definitely should get us a positive effect to at least partly come back on the PAC side. And that, obviously, that should also help on the bottom line.

[Lars Brorson, Barclays]

Helpful. Can I ask secondly and follow-up just to Erik, perhaps on raw material, the 80 basis point adverse impact in the quarter? I heard you say kind of expecting that to flatten through the year. So can I ask, Erik, are we now passed the kind of peak negative impact, if we assume current spot prices, that surprises me a little bit? We've seen some steel price spikes, particularly in Feb-March after the Russia-Ukraine war and of course, particularly on European steel prices, I would thought that's still to hit.

So maybe you can help us again with sort of how you see the cadence from that 80 basis point impact in the quarter through the second half of the year? And if you have any commentary at this point in for 2023 from a sort of price cost standpoint, that would be helpful, assuming current spot prices?

[Erik Pieder, Chief Financial Officer]

I think just to start with -- of course, we increased the prices last year with roughly 3%. And then if you add the 6%, so we're at 9%. We are not yet really there, we need to continue to increase a bit despite though that the raw material prices has come down a bit.

But as said, I think with sort of with the actions that we are taking on price as well as what we see that the, let's say, the raw material and like the steel is coming down, we expect the effect to flatten out and be, let's say, positive towards end of the year, and then that should help us also going into next year.

[Operator]

The next question comes from the line of Vivek Midha with Citi.

[Vivek Midha, Citi]

I have 1 question, please. So just following up on the comments that you haven't seen any slowdown in business. So can I just -- is that a comment about current trading or quotation activity or both? So any indication on what quotation activity you've seen in the quarter, and maybe some trends into July, that would be very helpful?

[Nico Delvaux, Chief Executive Officer]

If you look at long-leading indicators, as you know, we don't have too many long-leading indicators. We have, of course, externally the architecture billing indexes and so on, and they are still on the positive side. Internally, we have our spec business and the quotation levels on the spec business side. And there, we can say that they are still up double digits as well in Europe as in North America. And that's the further leading indicator we have.

But when I say that we don't see any slowdown, I really mean market activity in general. We see still good market conditions in our main markets. That being said, it's, of course, always very difficult to read Q3 because July and August are always holiday months.

And what makes or breaks your Q3 is what you do in September. And with all the things happening in the world, of course, September is still a long way to go. So we will see when we come there, how the market will evolve. But again, for the time being, we still see good market conditions, in general.

[Operator]

The next question comes from the line of Alexander Virgo with Bank of America.

[Alexander Virgo, Bank of America]

So a couple I would like to ask around Entrance Systems, I suppose, in particular. I'm surprised at how strong that has continued to be. And I'm just wondering if you could give us a little bit more color on the various moving parts within the business? And what exactly is it that's driving that strength there, particularly given broader market concerns around momentum in warehouse demand and residential markets, but especially in the U.S.? That's the first question.

And then second question, if I could push you a little bit on HHI, just wondering what exactly it is that's causing the extended discussions? And whether you could give us any indication as to what that might be?

[Nico Delvaux, Chief Executive Officer]

So for Entrance Systems, yes, indeed, I think very good performance, in general. And we can look at the 4 segments, I would say all 4 segments are performing strongly. And we are performing strongly on the equipment side as well on the service side. Remember, we have said that we had the ambition to grow our service business high single digit for the coming years.

We are now at that high single-digit level for Service. On the equipment side, of course, pricing helped as 1 important driver. And Americas and Entrance Systems were the 2 divisions that had a higher price increase than the group price increase of 6%.

But if you then dissect perimeter security, which is today for us a business only in North America and U.S., you could say, that continues at a high pace. I think we have done a very good job there in tailor-made solutions for different verticals.

When you go to the data centers, when you go to high-security embassies , when you go to warehouses, we have a dedicated solution for every vertical. We have invested in feet on the street, we have invested in products, really paying off in a good market.

If you take residential, again, the vast majority of what we do for garage doors is in North America, and the business for garage doors or the business for residential in general is still having good momentum in North America. And as garage doors are in the first place, still, of course, price also helped there.

If you then take pedestrian, food and nonfood retail, the record acquisition which helped us in a very good way where we were able to realize synergies faster than anticipated, they gave us also some extra product range that we now can sell in the whole world also through ASSA ABLOY channel.

So on the pedestrian side, also good performance. For equipment and for service, I would say the only weaker point is also the China. And the same is true for the Industrial segment where also the only weaker point is Asia and China, in particular. But also on the industrial side, we see still good momentum in Europe, in Americas, obviously, the whole loading dock business continues to fly, I would say, on a high level.

But also, for instance, if you take high speed doors on the automotive side with a lot of new models being implemented is a positive driver. So I think a lot of good things happening in the market, but I think also a lot of good self-help with a lot of good things we have done internally as well when it comes to product development as when it comes to investing in channel to the market. So yes, happy with the performance of Entrance Systems in general.

Right, the second question on HHI. Yes, the antitrust authorities continue to review that acquisition. We believe this is an acquisition that should have been closed long time ago. This is a really good thing for the American consumer.

We really can bring innovation to installed base that HHI has today and to the channels that HHI has in that residential segment. As you know, we are very weak, almost nonexistent, with ASSA ABLOY on the residential side. So this is this once-in-a-lifetime opportunity to become also a leader on the residential side.

It's a bit, I would say, frustrating that it takes so long also for the people for HHI that can't wait to join the ASSA ABLOY family. There has been many concerns or different concerns raised by antitrust authorities. Most of them we have been able to clean out -- clear out, clear up in the meantime.

Obviously, it's an ongoing process. Every time when they look into new data, they find other things and they ask question. So there are still some open points, and we are working on clarifying those open points, and we will see how it goes.

Again, it takes longer than we expected and anticipated. And therefore, also as we didn't want to work against a firm deadline in December, where we had the agreement with Spectrum Brands, where the agreement would close, and would eventually also have to pay a penalty. We felt from both side, there was good to extend that agreement, just not to be under that, I would say, artificial pressure of that deadline of December.

And therefore, in common agreement, we decided to extend it to the middle of next year. So we'll see how fast it goes. We are still very confident and very committed from, I would say, from both sides as well from Spectrum Brands side as well from our side.

[Operator]

The next question comes from the line of Gael de-Bray with Deutsche Bank.

[Gael de-Bray, Deutsche Bank]

I have, I guess, a question related to HHI, again. I mean this acquisition is obviously a major transaction, a major strategic transaction for you, but it is also quite expensive. And it could take, as you said, perhaps 12 more months to be completed.

So meanwhile, I mean, would you agree that this will limit to a degree your M&A ambitions as well? And I was also wondering if one should see a potential pause on your M&A activity as potentially a blessing given current macro uncertainties and falling valuations?

[Erik Pieder, Chief Financial Officer]

Yes, I mean if you take your first question, Gael, I think that our balance sheet is strong enough to even when we add the HHI acquisition that we can continue our acquisition strategy. That we've said all along, and it's the same situation now. And you've also seen that we have in Q2 here, closed, I would say, for -- I mean, normally for us to, I would say, larger acquisition in Arran Isle and Caldwell. So I think the balance sheet can take also the HHI as well as continue with acquisitions.

[Nico Delvaux, Chief Executive Officer]

What was the second part of the question?

[Erik Pieder, Chief Financial Officer]

The economic climate related to acquisitions.

[Nico Delvaux, Chief Executive Officer]

No, I think I don't know if the economic climate specifically for HHI. I think I answered that earlier. We don't buy HHI for the next quarter. We buy HHI for the mid- and the long-term. We believe it's a very nice company on his own that can give us that 5% organic growth with an EBIT margin within 16%, 17% once we have realized the synergies that we have identified.

We also believe that, in general, the residential market, midterm, long-term will remain strong in North America. Yes, perhaps you can have a little bit of a slowdown in 1 or 2 quarters. But underlying the fact that there is a big deficit in housing capacity in North America will continue to drive mid- and long-term that residential housing market in North America. So we are still very positive about that acquisition.

And then in general, again, yes, we see good activity on the acquisition side. We have a good pipeline of potential acquisitions. We are confident that we will do more acquisitions this year. Then of course, acquisition is never done until it's signed. We are working on several projects. We will see how that goes in the second half of the year.

[Gael de-Bray, Deutsche Bank]

Okay. Can I have a follow-up on Global Tech? Could you perhaps just give a sort of indication on the backlog you have at the moment and how it compares to, let's say, a year ago?

[Nico Delvaux, Chief Executive Officer]

Let's say that, yes, we have a good backlog, especially also for PACs. So like I mentioned earlier, if we can get electronic components in, we should be able to see an improvement of the PACs performance in the second half of the year.

[Operator]

The next question comes from the line of Nicholas Green with Bernstein.

[Nicholas Green, Bernstein]

Nick Green from Bernstein. Nico, you said earlier that you don't yet see any slowdown in the market environment. But presumably, 13% organic growth, 6% through pricing, 7% through volume, presumably, we all agree that probably isn't normally a normal position.

So maybe you could help us try and get a sense of what normal growth looks like? So firstly here then, do you feel that the price increases are mostly done. Erik mentioned there may still be a need for some more, but it must be getting increasingly difficult to push those through. So maybe a comment on the pricing?

Secondly, the 7% volume increase, maybe just give us a sense, I don't know whether it's by division or region. How much of this do you think is effectively still part of the sort of COVID rebound that you benefited from a kind of a last or good volume growth as people got back to work and -- versus how much you feel is actually sustainable and at a good level of organic growth?

And then the final part of this to say is that if you do feel that 13% organic growth is quite sort of high and good at the moment, if you're kind of at the top of the market, are there defensive actions that you think you can take over the next 6 to 12 months that can allow you to really sort of come off the top of this market in a stronger position as possible?

[Nico Delvaux, Chief Executive Officer]

It's a lot of questions, but perhaps if I start with price. Yes, we continue to increase prices. We have increased prices in June, and we have even further increased some prices in July. Because, yes, you see some material indexes going down in recent weeks, recent months.

But like we said earlier, it takes around 6 months between an index going up and down and are seeing that in our income statement. So we still see the prices today in our income statement from 6 months ago. And if you look 6 months ago to today, it's still some way up.

We had a 6% price increase in the quarter on top of 3% last year. So you could say 9% versus 2 years ago. If we calculate where we stand today, we need around 10%. You could say we are almost there. We will need some more price increases now in the coming months. And that's also why Erik said that slowly that 80 bps gap cost versus price should narrow. And then somewhere towards the end of the year, beginning of next year, if indexes stay where they are and if mix stay as they are, we should then start to see a tailwind from price versus cost and then it should be accretive rather than dilutive.

When it comes to growth, I would just fall back on what we always said, we have the ambition to grow 5% organically over a business cycle. And if you look at the components, historically, we had a 1% price, and then you could argue we needed 4% volume. I think most people will agree that we move into a higher inflationary world, perhaps not at the inflation levels like they are today.

But going forward, most probably inflations will be higher than prior to COVID-19, and therefore, hopefully, confidently our price component will be a little bit higher than prior to COVID-19. So if it was 1% prior to COVID-19, perhaps it's, just saying something, 2% after COVID-19. So that means that you only need 3% volume to come to that 5% organic growth.

And clearly, there is different drivers. There's a shift from mechanical to electromechanical and digital, where we have seen 18%, close to 20% growth in the geographical divisions in the quarter and where we continue to see that acceleration.

So that's definitely 1 growth driver. I mentioned the service business, which we grew high single digits and where we have an ambition to continue to do so in the coming quarters, coming years, which is obviously another growth driver.

I mentioned price. And then it's still true that we are in the first place a Western world company. We still see very good opportunities in emerging markets, in general. And perhaps the last driver is everything around recurring revenue, Software-as-a-Service, which continues to see high growth as well.

So I think of a business cycle, we should continue to reckon that 5% organic growth. Then your last question, when it comes to slowdown. It depends if a slowdown is a lower growth or if it's a negative growth. Of course, if it's a lower growth, still absolute value-wise it's a bigger volume, and therefore, you continue to profit from the bigger volume.

But again, like I said, that earlier in the call, you should look back at the financial crisis and previous crises. You will see that compared to other industries, we have been very resilient in downturns. And that comes from the fact that 2/3 of our business is aftermarket business.

It's not because you will see a slowdown of economic situation, in general that, that aftermarket business will slow down. People will continue to use our products and our solutions, and therefore, we'll have to continue to consume on the aftermarket side.

And like I mentioned earlier, the aftermarket part of the business is more profitable than the new build or big refurbishment project side. And therefore, you see that historically, we have always been able to protect bottom line in rather a good way when a downturn occurs.

And again, the fact that we are very decentralized and can take decisions close to the customer in the local markets gives us an advantage when it comes to agility. When a crisis would hit, it will obviously not hit at the same extent and at the same time everywhere in the world. And us being able to take a local decision in France based on local market condition in France and a local decision in the US or a local decision in Brazil, gives us that agility, which I think is very important if and when the market would go down.

[Operator]

The next question comes from the line of Maidi Rizk with Jefferies.

[Maidi Rizk, Jefferies]

Nico, I think in previous calls, you stated that we see commodity prices coming down 20%, 30%, 40%, that there could be a risk on you giving away some of the price increases. And actually, we've seen a collapse of some of the raw material prices. I'm just wondering how you think about the situation and your ability to carry over the sort of price increases outside there.

[Nico Delvaux, Chief Executive Officer]

Well, if you talk about the collapse, then I don't know what you call the increase we've seen over the last 2 years because over the last 2 years steel went up more than 200%. So if 20%, 25% down is a collapse, then, of course, the 200% must be, I don't know what is a word for much bigger than collapse.

But yes, steel has gone down over the last weeks, over the last months, but we should not forget that steel is still on a very high level compared to where we start from 1.5 years, 2 years ago. And we should also not forget that all the other materials haven't shown that same trend as steel.

Yes, aluminum is a little bit down the last couple of weeks, but it's significantly up still compared to the beginning of the year. So overall, I think there is still inflationary pressure on basic materials. And again, there is a delay between indexes going up and down and have seen in our income statement of around 6 months.

But next to the basic material, you have, of course, all the other inflationary pressures, logistic cost, energy cost. If you look at gas prices in Europe, which went plus multiple 7x, 8x. All that together makes that we believe we can, given the circumstance today, keep prices and further increase prices.

We have, like I mentioned, also in recent weeks, further increased prices. We see that the market still follows. And therefore, we are also confident that we will be able to fund and bridge that gap between cost and price in the second half of the year.

[Maidi Rizk, Jefferies]

The follow-up question that I have is, is the anatomy of a downturn and typically, if you could just talk about how long does it take for you to see sort of a slowdown when construction projects start to be canceled or the numbers start to come down? Like how quickly do you see it into your numbers? And what are the first things that you basically see your numbers sort of turns in the quotation levels? Just -- if you could just give us a broader picture of how quickly you can see the downturn and what are the sort of the leading indicators internally that would point to that?

[Nico Delvaux, Chief Executive Officer]

Well, I guess, it's a difficult question to answer because every crisis is different. I think if you take the COVID-19 crisis, we saw it from 1 day to the next when Mr. Macron decided to closed down France from 1 day to the next, our business went from 100 to close to 0.

But again, perhaps the COVID-19 crisis is different than the crisis we -- or the slowdown we might experience in the future. What you see today, I guess, is that the average person in the world has to spend more money on energy, energy bill for his house, energy bill for his car, and therefore, has less money to spend on other consumer products like, I don't know, iPads or luxury things. So I guess if you will see a slowdown, you will see it's happening in the first side on that part of the business.

And that is for us perhaps things that are linked to digital door locks in the B2C channel, in the retail channel, in the DIY channel. So that might be a first indicator for the slowdown that people are talking about today. You know that we are late in the cycle. So normally, we have good indicators of other construction companies that are earlier in the cycle, the difference between the people that pour cement into the foundation. And us coming into a construction project is 12 to 18 months. So you could look at other companies earlier in the cycle in the construction industry to have an indication.

[Operator]

Today's last question comes from Olof Larshammar with Danske Bank.

[Olof Larshammar, Danske Bank]

Two very short questions. Firstly, on the HHI acquisition. Have you hedged anything of the purchase price? And then secondly, historically, have you lowered prices on your products when we have seen raw material prices and logistics costs, et cetera, coming down?

[Nico Delvaux, Chief Executive Officer]

I can be very short. No -- on the first question. And on the second question, to my best knowledge, no, in general. Of course, there is always going to be product, in particular individual products or families of products where you will have to do a price decrease. But in general, if you look historically, for all the years, I can go back, we have always positive price increases over recent years.

[Björn Tibell, Investor Relations]

Thank you, Lars. And that means it's time for us now to round up this conference. I hope it has been helpful. But if you have any follow-up questions, please reach out then to us at Investor Relations, and we will try to help you as much as we can. That means that we will close this. We look forward to speaking and meeting with you in the coming weeks. And enjoy the summer up here in the Northern Hemisphere.

[Nico Delvaux, Chief Executive Officer]

Happy summer.

[Erik Pieder, Chief Financial Officer]

Thank you. Bye-bye.