Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2018-Q3

[Holger Lembrér, Investor Relations Officer]

Good morning, and welcome to the presentation of ASSA ABLOY's results for the third quarter 2018. I'm Holger Lembrér, Investor Relations Officer at ASSA ABLOY. And with me, I have our CEO, Nico Delvaux; and our CFO, Carolina Dybeck Happe. We will start with webcast, with the presentation, and then we will open up for questions and answers. So with that, I will hand over to you, Nico.

[Nico Delvaux]

Thank you, Holger, and also good morning from my side. ASSA ABLOY quarter 3 results in brief. Very good quarter with strong organic sales development, strong growth in Global Technologies and Americas, a good growth in Entrance Systems and a stable development in EMEA and in APAC. Definitely, the highlights of the quarter, our electromechanical products development, up 25%, that is including currency. If you exclude currency, that family was up 17%. And all regions are growing strongly. A good strong EBIT development, but EBIT margin diluted by FX, 30 basis points and also continued raw material headwind. As a matter of fact, raw materials were on the highest level in this quarter, highest of the year, I think, also the highest for at least the last 3 years. And then also a very strong cash flow in the quarter.The numbers, sales, SEK 21.2 billion, 15% up, 5% organic growth, 4% acquisition growth -- gross, but we also did some divestments, so 2% net acquisition growth and then 8% currency. And EBITA margin of 16.6% and an EBIT margin of 16.2%. EBIT up 11%, value of SEK 3.4 billion.To look a little bit at the sales by region. A very strong Americas as well North America and South America, Europe in line with the year-to-date growth, a lower Africa and Middle East, a continued low Asia mainly because of China, and then a flat evolution in Australia and New Zealand.Highlights for the quarter, strong progress, like I mentioned, in electromechanical in general and in smart residential in particular. And we have now also made the link between the Yale locks and our August cloud-based software, which means that we now can use the August software for smart residential all around the world in all our Yale countries and Yale applications. And we also saw that a pilot for in-home delivery in U.K., with John Lewis and with Waitrose, very excited about that pilot. They will delivery -- deliver groceries into your house, into your fridge at home even.We also continue our efforts with new product development. We just mentioned one here, a new generation of overhead sectional doors, you see a picture on the right, focusing on energy efficiency. This new family is 2x more energy efficient than the previous one. And to give you an idea, on average, on such a door, you can save up to EUR 1,500, SEK 15,000 per year in energy cost per door. And of course, it's good that we continue to be recognized for all our innovation efforts. I will not go through all the awards we won this quarter. But I think what is important is that these awards are given by professional people in our industry. So people that really understand our industry and, therefore, they can judge very good what is true innovation. So very glad with that as well.Nice growth in the quarter, like I said, 5%, also 5% year-to-date growth. So in line with our quarter -- with our targets, sorry. And now 22 quarters with positive organic growth, and is a rather strong track record. And we realize that growth with -- in operating margin within our benefit of 16% to 17%, a bit on the lower side in the bandwidth. We also show the EBITA figures on this graph, as you know, as we do more and more technology acquisitions, we also have the amortization of this -- of the goodwill for this technology. And therefore, so the gap between EBITA and EBIT is bigger. If you keep your margins within the bandwidth and you grow your top line in important way, then of course, you'll see operating profit growth further, 11% in the quarter, 6% in -- on a 12-month moving trend and 67% over the last 5 years.We continue our efforts on manufacturing footprint. We still have 2 restructuring programs running, our MFP 5 and MFP 6 project, where we are still -- we'll have to make 675 people redundant. And then we're also working on a new program that we will probably launch at the quarter 4 call. The scope of that project will be very similar as the previous ones. An investment -- a cost of around SEK 1 billion to SEK 1.5 billion, and we have a very similar payback as the previous ones, around 3 years, with a difference that we will now move the restructuring cost in 2 parts, the majority at the end of 2018 and then part of the cost also in 2019. But we will come back there with all the details in Q4.Acquisitions. We continue our acquisition effort. We acquired 4 companies in the quarter, 14 year to date, and definitely the highlight of this quarter was the acquisition of Crossmatch, a U.S.-based leader in biometric identity management, company with revenue of around $125 million. 270 employees, and they're all ours now to offer biometric identity into critical applications, and they also help us to complement further our total solutions offering for HID. Very excited about this acquisition.If we then go into the different divisions, starting with EMEA, I would say a little bit disappointing quarter for EMEA. We have an organic growth of only 2%, mixed picture. We have a strong North Europe, Scandinavia and Finland. A weaker U.K. and France and a negative growth in Benelux and Africa, Middle East.And that lower organic growth also led to a lower operating margin, 15.9% versus 16.8% last year. But we have to say that we had a very strong dilution by FX in the quarter, 80 basis points. Americas, very good performance, very strong organic growth of 10%. I would say strong organic growth in all domains and in all regions. Strong North America and South America as well commercial as residential, and then also an operating margin of 20.1% versus 21.8% last year.We have continued dilution from raw material and also a dilution because of mix, where we grow faster on the residential sides than on the commercial sides. And we know that we make lower margins on the residential side than on the commercial side. And then also dilution from acquisitions, and that's mainly August.I must say that I'm very happy here with the progress we make on compensating with price increases and cost efficiency measurements to compensate for the higher material cost. Like I mentioned before, material cost was on the highest level in this quarter year to date, but also if you go back the last 3, 4 years. But nevertheless, we managed to make the gap between material cost inflation has increased smaller, and we really see that gap getting smaller quarter after quarter, but we are still high in quarter 1, smaller in quarter 2. It's even smaller in quarter 3. And we are confident that we further will be able to bridge that gap going to quarter 4 and the beginning of next year.Asia Pacific, an organic growth of only 1%. Strong growth in South Korea, but negative growth in China. You know the challenges we have in China. We also explained to you that we have implemented there a new strategy. We have now the new team onboard, and it's now a matter of starting to execute that new strategy. As explained earlier, that will take more time. That is not a matter of a couple of quarters, that takes longer. And then we have a negative growth in China, of course, also an operating margin of only 9.2% versus 11.3% last year, where we also continue to have a dilution from the high material costs.Going to Global Technologies. I think a very strong quarter as well on the HID side as on the ASSA ABLOY Global Solutions side, as we call, Hospitality at -- nowadays. I would say strong growth in all different business areas with the exception of Secure Issuance. But it's more a timing issue, and we have additional comeback now in Q4. And then operating margin of 21.4% versus 17.8%, very strong performance, good volume leverage. And also positive contribution from acquisitions.Perhaps a couple of words on the new name for Hospitality. Hospitality, historically, was focusing mainly on the hotel business, on the hotel vertical, also doing some work on the marine side with cruise ships and so on. But more and more Hospitality is going also in other verticals. We have the acquisition of Phoniro into elderly care. We also have IDs and projects around solving the last mile on the logistic side. We also focus on student accommodation. And therefore, we found that the old name Hospitality was not really covering what this part of our business stands for. We believe ASSA ABLOY Global Solutions is a much better name, also because we want to reinforce activities on those other verticals and also add other verticals to this part of the group.Entrance Systems, a good solid performance. We have an organic growth of 4%. Strongest growth in residential doors and negative sales in high-performance doors, and that is also the explanation for the operating margin of 14.1% versus 14.5% last year. Of course, you know that we make higher margins on high-performance doors than on residential doors, so it's mainly a mix effect. I will not jump too fast to conclusions here. If you look at year-to-date figures for Entrance Systems, they were very nice volume efficiency gain, and I think year to date is a very solid performance. We are confident that mix here will come back to normal levels in the near future.And with that, I think I give to -- the word to Carolina.

[Carolina Dybeck Happe, Executive VP & CFO]

Thank you, Nico. Good morning. I will start with the financial highlights, and of course, with the top line. Very happy to see the good organic growth of 5% in the quarter, and that seems to be same number of working days, and we estimate the price increase to be 2% and the volume to be 3%. And for the fourth quarter, we will have 1 working day less.Moving then to the acquired growth, and here we had, as Nico said, 4% growth and then 2% net because of the divestments that we have made. And we have already -- for the fourth quarter, we will have 3% acquired growth looking at the companies that we have bought so far. And we have a carryover effect for next year of the already acquired ones of 1.5% acquired growth. And then to currency, a strong effect from currency especially on the top line in the quarter, full 8% on the top line. And if I take the rates as they are today and extrapolate them for next quarter, we will have around 5% top line added from currency, assuming this stay the same, which almost never do stay. So top line up 15% and then bottom line followed with full 11% improvement on the bottom line. The margin was a bit under pressure. We had both negative drop-through from the organic as well as a negative from currency, while the acquisition part was flat, and I'll come back more to that later in the bridges.And you can also see that the comparison on EBIT, year-over-year, is 50 basis points difference while on EBITA, as Nico mentioned, it's only 30. And here is the difference on the amortization that is increasing with increased number of technology acquisitions. From the EBIT then, we had a financial net that basically went up in line with the interest debt, have a tax rate at -- we estimate at 26%. And with that, we have an earnings per share that is up with 11% in the quarter.And finally, and very importantly, the cash flow. Strong cash flow in the quarter, a full SEK 3 billion of cash flow, and we're up 13% year-over-year on cash flow. More about that later. So from the highlights to the details. Looking at the bridge, and here we'd separated basically the P&L in 3 parts. The organic and the drop-through and then we have the currency and then the acquisition. And very importantly then on the organic with the 5% top line growth, we had the negative of 20 basis points drop-through. And here, as I mentioned, we are 2% price and 3% volume and a bit different between the divisions. And you have the bridges in the appendix of the presentation. So that you can look at them on a divisional level as well.And there you will see that there is a mix bag. We had a very strong help from Global Tech, with very strong growth and also strong drop-through. We then had Americas, also very strong top line, but not as positive on the bottom line. And as we have talked about before, they are closing in on the gap from the raw material as well as having mix component from more resi in the Americas.Now we move on and we have Entrance Systems, 4% top line. So a good growth and the flat on that from the margin. But year to date, they have seen very good development on the margin like-for-like on organic. So I think it continues to be a good development.EMEA, 2% top line and not really enough to manage to keep the margin. So a slight dilution there on the margin. And then finally, APAC with 1% growth and weak China. I would have to -- as expected and as we communicated negative on the margin. And the effect from an impact on the group is really 20 basis points on the margin.If we look at currency, so a strong top line development, but a bit weaker on the bottom line. Here, a big part of this is translation effect and then some part is also transaction. And really what we can see here, that is not totally balancing, and part of that is because Swedish krona got weaker and we make more money in Swedish krona. So in the quarter, it was tough on the bottom line from currency due to the SEK profit.And then finally acquisitions. Growth for net 2, and since we acquired companies with a high margin and also divested companies with a very low margin, we've had a good mix. Included in this is also August, which has been, as you know, strongly diluted, but overall, for the group, the net effect is flat on the margin from acquisitions.Mixed version of the profit and loss, components of sales and here it's the year to date, so January to September. And here is the effect also like-for-like and then adding the acquisitions. And here, you can also see the effect from the raw material, that is the indirect material that we have talked about. We have increased the price with 2%, but the raw material is up 4%. On the other hand, you see the effect also from generally inflows and direct labor, but we have cost savings from the good restructuring programs as well as volume growth, which also helps on the coverage of fixed cost. So like-for-like, year to date, we are 20 basis points down and that is really also the effect from APAC. And then we had, year to date, 10 basis points dilutions from acquisitions, and we end on 15.7.So from the P&L then, and as I mentioned, the strong development of cash in the third quarter, but you can see from the graph that we have a very strong seasonality in our numbers. A very weak first quarter, good second and third quarter, and a very strong fourth quarter. And this, so far, has been similar, but we have started to work on different initiatives to try to smoothen out the cash flow over the year. So the overall amount would be good of course, but not as strong. We have some seasonality, as you know, and that we can't do much about, but we work on other things to try to make it more smooth. But in the third quarter, good development. We saw a slight improvement on the DSO, 1 day on the DPO. On the other hand, we were a couple of day slower, but we still have a positive gap between DSO and DPO. Inventories above 100 days, though a little bit higher, I would say, compared to last year as well. But here we also have the effect of the increased raw material, basically the value of raw material in the volume of our inventories. So overall, good development on cash flow and at the full 13% in the quarter.So good cash flow, but then also, buying nice companies like Crossmatch that we also tell before. So you can see on the net debt that basically it is stable from the second quarter, 31.4% to 31.5%. So basically flat. So the good cash flow and then the outlay on acquisitions basically kept us on the same level as we were for the half year. And I would say important here to look at the gearing, and the gearing is 63%. So it is -- well, it's a little bit higher than last year, but it's actually lower than the couple of years before. So good room for maneuver there. And also importantly, the net debt EBITDA ratio, which is basically staying around 2% to 2.1% in the quarter and it's been around 2% for quite a long time. So very good KPIs here as well.And then finally, it all boils down to this, earnings per share. And we had a strong development of the top line, the 15%, then down to the EBIT of 11%. Good financial net development as well as stable tax rate and therefore, also, the earnings per share is up with a full 11% in the quarter.So with that, Nico, give back to you for closing.

[Nico Delvaux]

Thank you. So in summary, we can say it was a good quarter, a good third quarter with strong organic sales development, 5%. Definitely, we have the highlights of the quarter, the electromechanical product development 17% up, excluding currency, a strong EBIT development, a strong cash flow. And then also worth to notice is that we will have our Capital Market Day on the 14th of November here in Stockholm. So we hopefully will see all of you there. But then also before we go to the Q&A, this is the 27th quarterly call for Carolina, but unfortunately, will also be the last call that Carolina does with us. You have seen that we announced Carolina's replacement, that is, Erik Pieder. He is today the Vice President, Finance in Atlas Copco Compressor Technique. He will join us as of the 14th of January. He would like to take the opportunity, and I think I can also speak for most of you, perhaps for all of you, to thank Carolina for, I think, a great contribution to this quarterly calls. And I think the good relation we have with the people on the phone, with the investor community is definitely -- also thanks to -- for big extent to all the good work you did over those 26 or 27 quarters. So thank you for that, Carolina. We would have time to celebrate or to say farewell to Carolina at the Capital Markets Day. So we will keep it for the Capital Markets Day.And with that, I think we can open for Q&A. I think the operator will explain how this works.

[Holger Lembrér, Investor Relations Officer]

Thank you very much, Nico. [Operator Instructions]Before we kick off, operator, will you please remind how to ask questions.

[Operator]

[Operator Instructions] And I first have the line of Lars Brorson at Barclays.

[Lars Wauvert Brorson, Director]

I think just 1 question maybe more to you, Carolina, and thanks again for your help over the years and good luck. But before you leave, maybe I can bore you with 1 question on U.S. tariffs. I appreciate it's quite a dynamic picture at the minute, but the last set of U.S. tariffs to be implemented in late September, so that's a Section 301, Level 3, does seem to me to be quite a potential impact on your Americas business in 2019. Can you help me understand how to quantify the expected impact on your business? Have you done the work to break that down? And if you can provide some numbers around that, that will be helpful.

[Carolina Dybeck Happe, Executive VP & CFO]

Lars, your questions are never boring. And now on the tariff end, yes, we have looked into it. The regulations are sort of partly implemented and partly coming just as to say. For us, the effect is on the Americas division and also on the Global Tech division. But that said, it's a pretty limited effect for us and we have -- yes, we have looked into it, but we don't see a significant effect of it, both on the actions so far and what's plan to come. Of course, we don't know how that will pan out in the end, but from what we know now, it's not a big effect. And it's also so that -- it's about being adaptive. So also for Americas, I know that we have already done some resourcing sort of adjust to the new situation and we will continue to do so.

[Nico Delvaux]

That's also in the market we see or we have the ambition to compensate of -- also with price increases but mainly also with surcharges for these tariffs. And we also see that the market is applying similar method. So for most of the players in our field, situation is similar.

[Operator]

Next question is of UBS, Guillermo Peigneux.

[Guillermo Peigneux-Lojo]

Another question for Carolina before she goes regarding the raw mats dilution and your comments, Nico, that this is probably the toughest. Can I just read that the Q4 dilution will be less than Q3 dilution? And whether you can give us some color as to what the Q4 dilution that be? And what do you expect for the first half 2019, if I may? And the same for FX, if I may?

[Nico Delvaux]

Yes. I will start with material and then Carolina can add on material and on FX. It's true that material prices are today on the highest level or material cost for us is on the highest level this year and definitely also, in history the way we can go back definitely the last 3 years. There is always a time lag between material indexes going up or down and us seeing that effect in our cost that delay is around 6 months. I think the good news is that in a month or 2, we have seen some material prices going down, copper, zinc, brass. So that is good news if that trend continues because that's then something that we should see on the positive side going into 2019 with that 6 months delay. We are very much affected, as you know, by steel prices, and they also have stabilized now on a very high level, I would say. So if that trend indeed also continues, then also the continued price increases that we realize should then more and more compensate for the steel prices. And definitely in the Americas, like I said, we are making good progress, and we are confident that towards the end of the year, beginning next year, we will be able to bridge that gap.

[Carolina Dybeck Happe, Executive VP & CFO]

Yes. And if Americas is sort of bridging the gap, I would say -- if you look on all the divisions, the other ones are clearly the one that is still not material than is Asia Pacific, and there, it's going to be a longer journey to try to compensate for the price changes there. So for the fourth quarter, assuming the raw mats stay the way they are, yes, for the whole group, there would be a smaller effect and more better situation for the fourth quarter. And you also asked about currency. The currency, as it is now, if I look at the fourth quarter, we will have 5% top line effect. And I know also just from making simulation assuming the same flows, we would have a flat margin on that. So more in line with what we usually see with the currency. So happy to see that. And a comment on the third quarter, where we did have dilution, that was, as I mentioned, a lot from the Swedish krona or the profit in Swedish krona that was done less in relation to the other parts of the group.

[Guillermo Peigneux-Lojo]

And then for the first half 2019, from the raw mats perspective, we'll be accretive?

[Carolina Dybeck Happe, Executive VP & CFO]

The first half, well, yes, price versus raw mat, yes. But you have to remember we also have other inflation, right? And generally inflows and we have direct labor inflation. The other hand, we also have positive from restructuring programs and so. But just looking at price versus raw mat, yes, assuming it's this -- the raw mat.

[Operator]

Okay, the next question is Andreas Willi at JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

My question is on the digital business. You mentioned that John Lewis partnership of pilots that you're running, maybe you could tell us a little bit more about what kind of business model that has in terms of, are they using your software? What's the payment structure? How does that compare to what you have been doing in the U.S.? And related to that also in terms of August, which, you now said, you will use some of their software for Yale globally. Maybe you could help us better understand some of the financials around August. Obviously, given the -- given you have disposals and the acquisitions in the Americas division, it's a bit hard for us to figure out exactly how August is performing. Do you still expect to get to that kind of SEK 500 million sales number? And what's the breakeven target there?

[Nico Delvaux]

Yes. Perhaps, first, on the in-home delivery in U.K. But I said that it's a pilot, it's a small pilot. So it's not a lot of business yet today. But it's an interesting pilot with those 2 companies. I think the pilot is around 100 families. So basically it works like that, that you, as a family, buy grocery online in the -- a shop and then you ask them to deliver in your home. And they come to your home. They will have a special code that they can type in on to the Yale lock and get into your house. They will have a video camera on their vest that they're filming a film while they come into your home and they will put the grocery on the table -- on the kitchen table or into your fridge if it has to be put in the fridge, or if you give order instructions, they will follow your instructions and they will go out again. That's a bit of the concept. And then the way we make business out of it is obviously, by selling the hardware, our Yale locks, and then it's also regarding revenue part on the software and on the service, the brokerage we do for the keys. When it comes to August, we have said from the beginning that August will be dilutive around 20 basis points for the group. This quarter, it's a little bit higher. As you know, the sales of August is very seasonal. First 3 quarters are lower and then the fourth quarter is normally a big quarter for August. So we are confident that indeed quarter 4 now will be very good quarter for August. But we have also said that this dilutive effect of August will also continue in 2019, and that we only have the ambition by 2020 somewhere to turn that around. August is more or less going according to plan. We also see a lot of synergies with August and the Yale organization in the rest of the world. This software platform of August that we now use for Yale Smart Living in the rest of the world is 1 good example. We also have 1 more products of August that we will also use under the Yale brand and sell under the Yale organization in the rest of the world. So a lot of interesting synergies.

[Operator]

We go to Lucie Carrier at Morgan Stanley.

[Lucie Anne Lise Carrier, Vice President]

I wanted to go back on the Global Tech business and maybe understanding a bit better the underlying margin dynamics and how this is sustainable? I think the 21.4% is probably ahead of expectation. And I was just wondering whether there was -- at year-end, this is a mix effect to a project which led to this performance? And as you are all looking at your current backlog, how do you think that, that level of margin could be? And just on Crossmatch, as you were mentioning it earlier, it is related to size of all -- I would say, for the division in terms of size based on the sales you've provided. How should we think about the impact of Crossmatch on this acquisition, on the profitability as we go into next year?

[Nico Delvaux]

On Crossmatch, we have said that Crossmatch is accretive as of the start. If you look at the performance of Q3 -- and it's a good question because we can then also tempt a little bit ambitious. Of course, if you realize the results we realized for Global Technologies in quarter 3, all the stars have to be aligned and that is what happened in Q3. We had the solid growth in all different business areas as well on the HID side as on the ASSA ABLOY Global Solutions side. And we had also strong profit performance in all different business areas. We are still very optimistic when we go into Q4, and for the foreseeable future for Global Technologies, we believe that division has to grow higher than the 5% growth ambition we have as a group. But of course, it cannot be every quarter, the same high performance as we had in Q3. And that is true for top line as well as for bottom line. We expect in Q2 also that we grow normally on HID side faster on all the other business areas than physical identity. This quarter, it was a little bit different, but normally, that is the trend we see. And if we grow faster on the other business areas, we know that the margins are lower there. You also have then a dilutive mix effect, of course, on a very high level. So at summary, I think we are still confident for Q4 as well top line as bottom line, but don't expect the same high performance as in Q3.

[Operator]

We go to the line of Ben Szekeres at Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

This is actually Daniela here. Thanks for taking my question. I wanted to ask sort of what are -- can you comment on the U.S. about residential versus nonresidential? What sort of drove the acceleration versus the 9% of growth in Q3 to this quarter? And then how do you see that going forward? What's sort of your confidence on the market continue to accelerate there from here after several very strong quarters there?

[Nico Delvaux]

If you realize the result that we realized in the Americas for Q3, again, there, of course, we -- you have to have strong performance in most markets and in most business areas. And that was the case in Q3 as well in South America. As in North America, the only lower performance countries were Columbia and Chile, but the rest of the America was strong. And then definitely a very strong North America as well Mexico, Canada, as U.S. And in U.S., we had a very strong growth on the commercial side and on the residential side. And I would say, it was very similar as Q2, where we had a strong growth on the commercial side and even a stronger growth on residential side. And if you then zoom into residential, we had strong growth on the electromechanical in general and even a stronger growth then on our smart, digital solutions.We had a good contribution, again, from Google Nest. We also had -- and that is new in Q3. We start to invoice now also the Walmart order that we reported about in Q1. And that also had a positive contribution to the overall result. We see market conditions still very healthy. We foresee that market conditions will remain on similar levels in Q4 as Q3. So we also expect a good Q4 for Americas. But again, you have the results we had in Q3. Also here, most of the stars were aligned. Let's see if that is also the case in Q4.

[Operator]

We now go to Gael de-Bray at Deutsche Bank.

[Gael de-Bray]

What's your take on the French market right now? I think you had said orders were pretty weak in Q2, but eventually, you delivered stable sales in France this quarter. So what are you seeing this market right now? This is actually question number 1. Can I have a quick second question on the margin momentum, because if we exclude Global Tech, 4 out of your 5 divisions have actually shown a negative margin momentum in Q3. So outside Global Tech, are you able to quantify what was driven by the negative mix effect related to the faster growth of your digital and residential solutions?

[Nico Delvaux]

Yes, we can -- we can do that. For question on France, perhaps I will answer also a bit more in general on EMEA, it's clear that we were not happy with our result in Q3 in EMEA. It's true that KPIs construction indexes are pointing in the wrong direction of several markets, bigger market like Sweden, if you take a market like U.K., and definitely also if you take like -- a market like France, you see indexes going down. Performance in France was, let's say, flattish in the quarter. And we don't see a real improvement for France with the visibility we have. You know that we have rather short visibility, also looking in France, more than 50% of our business is residential. And there the visibility is shorter, but we definitely don't see an improvement in France. That being said, I think -- and irrespective of indexes and market indications for the future, I believe, we should be able to do better in EMEA in quarter 4. And let's say that we would be very disappointed if the organic growth figure will be on the same level again in Q4 as in Q3.Then -- but it's true, definitely, that some of the bigger markets in EMEA, the overall market conditions are weakening or definitely not strengthening. That, I think, is the big difference between Americas and EMEA, being Americas the biggest markets. So the U.S. is strong and continues to be the strong dynamic, the bigger markets in EMEA are definitely improving if something they are weakening. When it comes to the second part of the question, the negative volume flow-through, I think it's a very different story division by division. If I stay with EMEA, I would say, the main reason is the lower organic growth. If you only have 2% organic growth and you have your general cost inflation, and on top of that, you have, also in EMEA, the highest material cost in the quarter, then it's very difficult to compensate for that -- with only 2% organic growth. We're also taking measures in EMEA on the cost side further, realize more cost efficiencies because that's what we have to do, obviously, if the organic growth is lower. But that, I would say, is a main reason in EMEA. And then let's not forget, we had very strong dilution of FX in EMEA, around 80 basis points. I think it was 20 basis points volume flow-through, but then 80 basis points FX. If you go to the Americas, like I said before, we're very happy with the progress we make in compensating for the material price increases through price increases and through efficiency gains. We are really bridging the gap between the 2, and we are confident that the gap will become smaller towards the end of the year, towards beginning of next year. But obviously, in Americas, we have a higher exposure to steel because of our steel Doha business. I think on APAC, we should not further elaborate. We know the challenge is mainly China, and we have also said that China will take longer to fix. Also in this quarter, profit in China was slightly -- very low. And we then go to Entrance Systems, like I explained, the main reason is a mix effect, where we grew much faster in residential doors in U.S. versus High Speed Doors but also versus just the standard sliding doors, the core of our Entrance Systems business. And we make higher margins on sliding doors and on high-performance doors than we make on residential doors. So it's really a mix issue, but again, we don't see this mix to be a structural thing. It's more a quarter, you see, what I would say. If you look year to date for Entrance Systems, you will also see that they have very nice volume leverage. And then I think Global Technologies was also -- was a good volume leverage. So I don't think we should explain there anything.

[Operator]

Yes, we go to the line of Markus Almerud at Kepler Cheuvreux.

[Markus A. Almerud, Senior Research Analyst]

I would like to continue on the U.S., and I mean, the electromechanical locks have grown extremely rapid. I mean, you saw 37% growth year to date and then 55% in the quarter. So I'm just interested to know how much of that is -- first of all, how much of that is the smart locks? And then how much of that growth could be attributed to Google? And also, on that topic, if you could give us an update on Amazon, you said you started to invoice Walmart, but is anything at all happening with Amazon and the Amazon Key?

[Nico Delvaux]

If I start with Amazon, I think we should indeed make a difference between Amazon Key and just Amazon as a retail channel. I think Amazon as a retail channel is, I would say, performing on a good level, mainly for our August lock because they are the main channel for the August lock. When you go to Amazon Key, my comments of quarter 1 and quarter 2 remain also valid now in Q3. It's on a lower than, by us at least, expected level. We see that it does not take off that fast. Definitely, it takes off much slower than the Google Nest solution. And perhaps it has also to do with the approach with the Amazon Key. Amazon really wants to own the entrance to the consumer in U.S., where Google Nest just more an approach of, we add another hardware component to our ecosystem. And indeed, we are happy with the orders we get from Google Nest. We see also that it's repeat orders. We see that the stuff on the shelf in the stores moves, and therefore, that we get these repeat orders. So very -- a very positive. Of course, when you have 17% growth, you have to have strong growth on a traditional business as well on the -- as on the digital and the smart business. And I would say that it's very high growth on the traditional side, it's higher growth on digital, and it's of course, the highest growth with Nest, but obviously, Nest starts from a lower level.

[Markus A. Almerud, Senior Research Analyst]

And out of the 2.7 that you had for electromechanical locks, how much of that is smart in Americas?

[Nico Delvaux]

Out of the -- I don't -- I'm not sure I understand the question.

[Markus A. Almerud, Senior Research Analyst]

So out of the -- how -- what part of the electromechanical sales in the U.S. is smart locks? Just to get an idea.

[Nico Delvaux]

We have said that in the worlds, our digital locks is around, we have said that 6 months ago, around 2 million locks and around SEK 2 billion business. We can say that today, this is more also SEK 2.5 billion. That's the digital part of our business in the world. And obviously, in that business, Korea is an important contributor and U.S. is a second important contributor.

[Operator]

Yes. We go to the line of Mattias Holmberg at DNB Markets.

[Mattias Holmberg, Analyst]

So when I look at the Americas division, you, in the last quarter Q2, had 9% organic growth, but if 150 basis points organic EBIT margin dilution, where if my notes are correct here, you said that 50 basis points were related to mix and 100 basis points of dilution were related to steel. And now when I look at Q3, you have a still strong organic growth, 10%, but only a 30% organic EBIT margin dilution. So what I'm wondering here is how do we get from the 150 basis point dilution in Q2 to only 30 basis point dilution in Q3? So where does this sequential improvement come from?

[Carolina Dybeck Happe, Executive VP & CFO]

And what we are talking about is, there are really 2 parts. First -- one part is on the residential and on the mix side. And it was even stronger in the second quarter than it is in the third. So that's part of the explanation. And the other part is the closing-in gap on the direct material part for Americas.

[Mattias Holmberg, Analyst]

Okay. So could you, at all, quantify if it was 100 basis point headwind in -- from raw mat in Q2. And we're down at 30 for the group or sort of for the division in total organically? It seems like a quite major improvement compared to Q2 then.

[Carolina Dybeck Happe, Executive VP & CFO]

We don't separate it out, but it's significantly lower. And I think that also relates to Nico's comment that he was very happy with the actions that Americas has taken to work on closing this gap. And that's also why we believe that towards the fourth quarter, beginning of next year, we hope to have close the gap. Of course, that is also depending on how the raw mats themselves develop, but if they stay stable and hopefully don't go down.

[Operator]

Yes, we go to Andre Kukhnin at Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

I wanted to talk about where you expected or make residential profitability to settle in the U.S. or Americas? Clearly, it's ramping up fast right now and you're investing a lot in getting new customers and channels and product range. But do you expect even with those higher ASPs, electromechanical resi to still be diluted to your overall Americas profitability once we've had maybe a year or 2 of growth of this space? Or do you think we can ramp up the productivity, savings and efficiencies to get this margin structurally higher?

[Nico Delvaux]

It's, of course, very difficult to speculate 2 years down the line because it all depends, of course, on the competitive landscape, one. And two, also where, on Elmech, we will see the biggest growth or the mix will move because it's clear that on the traditional Elmech, margins are very healthy then, of course, if you take the complete other side, if you have people like Amazon or Nest and the margins are lower. So it really depends on mix and on competitive dynamics. It's true that today, margins on the residential side are lower than on the commercial side, but it's true that they are, according to us, on a very nice healthy level contributing in a very important way to shareholder value. And we also see that as we grow, there is definitely also on the residential side rooms to further improve operational efficiency, and that's what we are working on every day. But going 2 years down the road in such a fast market, where things happen with a very high speed, I think, is too speculative.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

All right. And can I just follow up quickly? On August, so what we said earlier, do you expect 2020 to be nondilutive to good profitability or to become non loss making?

[Nico Delvaux]

We have said that August would come into the black figures in 2020, yes.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

All right. That's still loss making 2019 but at a lower level of loss than 2018 and hence, small positive on the bridge. Is that the right course of action?

[Nico Delvaux]

Correct. That's the ambition. We have said that this year, August would be dilutive 20 basis points, like I said, in quarter 3, it was a little bit higher. We still believe that the 20 basis point on a full year is realistic. And then obviously, as we go into 2019, we should have the ambition to lower that dilution and then go by 2020 into the black figures, yes.

[Holger Lembrér, Investor Relations Officer]

Thank you very much, Andre. I think that's concluding our questions and answers today. And I would like to hand back to Nico for his closing remarks.

[Nico Delvaux]

Yes. No, I kind of always say that we're happy with the results of quarter 3. I think it was also in line with most of your expectations. Thank you for the call. See, hopefully, all of you also at our Capital Markets Day here in Stockholm soon. Thank you, and have a good day.

[Operator]

This now concludes the call. Thank you very much for attending. And you can now disconnect your lines.