Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the ASSA ABLOY's Interim Report January-September 2022 Conference Call. I am George, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. You will now be joined into the conference room.

[Björn Tibell, executive]

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

[Nico Delvaux, executive]

Thanks, Björn, and also good morning from my side. Our Q3 results, very strong performance in the quarter with an organic sales growth of 14%, with again Entrance Systems and Americas contributing in a very strong way but perhaps also the difference this quarter also Global Technologies contributing in an important way to the top line. Also good sales growth in EMEIA and the sales decline in APAC. Strong EBITDA margin improvement at 15.6%, 60 basis points better than the comparable figure a year ago, very active. On the acquisition side, we grow to acquisitions of 3% net and six acquisitions signed in the quarter. And also, as said earlier and predicted earlier, strong cash flow with a 95% cash conversion in the quarter.

If you look at the numbers, sales of almost SEK 32 billion, 33% up, 14% organic, 3% net acquisition and then helped also by currency, 16%. And EBITDA margin of 16.2% within that bandwidth we aim for. And then an EBIT margin of 15.6% versus 15% corrected for the CERTEGO divestment last year in the quarter. An EBIT of almost SEK 5 billion, 39% up and earnings per share, SEK 3.2 per share.

If we comment a little bit on the different regions, very strong continued North America with 22% organic growth, where we saw strong growth as well on the residential side as well on the commercial side, slightly higher on the commercial side than on the residential side, despite I would say, a difficult comparison with Q3 last year. We still see good momentum, good market dynamics in the market today again, as well on the residential side as on the commercial side. And our [ spec ] business was up in the quarter, high double digits.

Also very good South America. We have a 12% organic growth also here despite a very strong quarter a year ago. And also, yes, we still see good market dynamics. Africa, plus 22%. Also, here a strong quarter. And then Europe, plus 6%. In Europe, we have seen a little bit more mixed picture. I would say, in general, still very strong market dynamics also here on the commercial side and on the residential side. Also, in Europe, our spec business was up double digits. There are some markets where for some channels to market, on the residential side and on the more direct consumer-related side, I would say we have seen some weaknesses. That's for France, for the U.K. And for the Benelux, where the DIY channel has been weak, and where our channel partners, our distributors have also done some destocking activities in the quarter. But overall, still good momentum also in Europe, EBITDA plus 6%.

Australia, Oceania, strong quarter, plus 12%. Also we are still seeing strong momentum on the commercial and the residential side. And also here perhaps if you want to notice a weakness, it's also more on the DIY channel, something we see a bit in general in home depots in the US, in the bar houses in Europe and in the Bunnings in Oceania.

If we then take Asia, minus one. I think, a very different picture between Greater China and the rest of Asia. The rest of Asia has shown very nice positive high growth. And then in Greater China, we have seen a significant double-digit negative growth. And in Greater China, we continue to suffer from the construction crisis and then are also not helped by the continued zero tolerance when it comes to COVID in that country. But overall, I think still a very positive picture.

If we look at some of the market highlights in the quarter. Also, this quarter, nice big project wins. A leading U.S. retail chain, upgrading their loading dock equipment in 20 of their distribution centers. We secured a public transport ticketing system in Australia, including more than 7 million contactless cards. A big win for resort in South-Korea with more -- with delivery of more than 9,000 lock sets, door closer and cylinders. And then a nice senior care project in North America.

As you know, every quarter, we launch, I would say, more than 100 new products. We just picked a couple of them this quarter. The launch of the Yale Assure Lock, our newest U.S. flagship for smart locks in the U.S., very excited about that new product launch. We have, here, in Sweden, signed a partnership with DHL for eCommerce in-home delivery. Launch of a new innovative SMARTair wireless electronic lock and then the extension of our software solution around ABLOY Beat for critical infrastructure in Global Solutions.

So a strong accelerated organic growth in the quarter. That's now again, 7 consecutive quarters with strong positive organic growth. And then a margin [ hit ] that is slightly, slowly improving back towards the 16%, 17% bandwidth. We're now on a 12-month moving trend at 15.3%. So an accelerated top line with a better margin means also a strong acceleration of our operating profit on a record level and 61% higher compared to the same quarter 5 years ago.

On the acquisitions, we continue to be very active. Six acquisitions signed in the quarter. 11 acquisitions closed year-to-date, representing sales of around SEK 3.3 billion. So adding almost 3.5% to the bottom line. And then we have four additional acquisitions that we closed now in the beginning of Q4.

If we zoom in on two of them in a bit more in detail, DoorBird, a German manufacturer of high-quality IP door intercom. We're excited about this acquisition for our EMEIA division. They represent sales of around SEK 220 million last year. And then Control iD in Brazil, which will be integrated in the Americas division, developer of hardware and software for access control and time and attendance, reinforcing our current access control and biometric offering. Very nice company, very excited about this one as well. They had the sales of SEK 250 million last year.

And then you have seen, of course, that DoJ has tried to block our HHI acquisition. We, together with Spectrum Brands, are now contesting that DoJ position in court. We will have our case in court somewhere second quarter next year. And as a result of the concerns DoJ had on the acquisition, we have also initiated a sales process to divest our EMTEK business in the U.S. and our smart resi business in U.S. and Canada. Together, they represent sales of around USD 350 million last year. It's very nice businesses. It's unfortunate we have to divest them, of course, condition on approval by the judge of our HHI acquisition. But also with that divestment, we still are very convinced on the HHI acquisition and the strategic rationale behind it. And we reconfirm the $100 million EBIT synergies in year 5 after the acquisition. That figure remains valid also after the potential divestment of these businesses.

If we then go into the different divisions, a little bit more in detail, starting with EMEIA, and organic sales of 4% with very strong sales growth in Scandinavia, Middle East, Africa, India. Also, good sales growth in East Europe. And then like I mentioned, a bit weak in U.K., France and Benelux on the residential side with the distributor channel and DIY channel. And in those three markets, for those channels to market, we have initiated some contingency actions to protect the bottom line. An operating margin of 14.3% versus 11.3% last year. But of course, last year, we booked a capital loss related to the CERTEGO divestment. The comparable figure is slightly above 15%.

We saw good operating leverage, 40 basis points in the quarter, and I would say despite continued significant higher inflation continued material inflation, labor inflation, logistic inflation, energy cost inflation and general inflation. FX was strongly dilutive, 110 basis points. That is because of the weaker SEK, obviously. And then the M&A, 370 basis points accretive linked to the CERTEGO capital loss booked last year.

Americas, another very strong quarter with an organic sales of 17% in all countries and all business areas, contributing in a very strong way. Good performance on the residential side as well as on the commercial side. And operating margin of 20.9% versus 20.6% a year ago. Very strong operating leverage, 170 basis points up. Very strong operational execution and good strong price realization. FX diluted 30 basis points and M&A diluted 110 basis points, that is mainly or only acquisition-related costs for HHI, which amounted to around SEK 80 million in the quarter.

Then go to APAC. And again, a sales decline of 2% and a very mixed or different picture between Greater China and the rest of Asia Pacific. The rest of Asia Pacific showed very strong sales. Growth is performing on a good level as well in Southeast Asia, South-Korea specific. And then a strong double-digit sales decline in China, like I mentioned, because of the weak construction markets and the continued zero tolerance when it comes to COVID. An operating margin of 4.5% versus 5.8% a year ago. And also here, you should make a difference between the rest of APAC, where we see strong operating leverage, good margins and good execution. And then we see a loss in Greater China with a strong negative operating leverage for the division of 200 basis points due to, I would say, subdued volumes in Greater China. FX accretive 60 basis points M&A 10 basis points when we consolidated the Caldwell acquisition in Australia in the quarter.

If we then go to the global division, starting with Global Technologies, a very strong quarter with an organic sales growth of 19% with all business areas in HID and all business areas in Global Solutions, contributing in a strong way to the top line. What I think is different this quarter to previous quarters is the PACs, physical access control business came back, and we were able to invoice part of the backlog that we built up because of shortages in the past on chips for our readers and our controllers. You might remember that we redesigned some of our readers and our controllers to be able to use chips that were more readily available. And that production started at the end of Q2 and our full speed Q3, giving a good recovery of the PACs business, which is important top line wise and also bottom line wise, because it's also an important margin contributor.

And I mean, the second difference is in Global Solutions, where we saw a good hospitality business, with also a good Citizen ID business, by the way. So they have related sectors coming back from a low level. And that hospitality recovery is obviously also important bottom line-wise. And therefore, we can show a strong operating margin of 17.3% versus 15.8% a year ago. We have a good operating leverage of 50 basis points. And FX helped 120 basis points because of the stronger U.S. dollar and then M&A and dilutive 20 basis points.

And then last but not least, Entrance Systems, another very strong quarter. Organic sales up 20%, with all four segments contributing in a strong way. And as well on the equipment side as on the service side, showing nice growth. Service had good double-digit growth in the quarter, a very good operating margin of 15.7% versus 14.8% a year ago, very strong operating leverage of 110 basis points, FX neutral and then M&A dilutive 20 basis points.

If we then go a little bit more into detail on the financial numbers. I already talked about the 14% organic growth, about a 3% net acquisition growth and the 16% growth because of currency. Then EBITDA margin of 16.2%, 140 basis points up. And then the EBITDA -- the EBIT margin, sorry, 15.6% versus reported 14.2% a quarter ago, but again, corrected for CERTEGO, 15%, 60 basis point improvement.

EPS, SEK 3.2, 48% up. Operating cash flow, very strong, 25% up compared to a strong quarter a year ago, cash conversion, like I mentioned, of 95%. And then the ROCE on a 12-month moving trend at 16.8%, 220 basis points better than the same quarter a year ago. We also give you the run rate effects for Q4 now on FX and acquisitions. For FX, 70% accretive and then M&A, 3%.

If we then look a little bit at the bridge. 14% organic growth where we have, I would say, high 5% price and then an 8% volume, a very strong volume leverage of 23% giving us 100 basis point accretion, 30 basis points positive currency and then base point positive acquisition. Again, it's the net between on one side of CERTEGO, comparison with last year and then the SEK 80 million we had to book for HHI-related costs in the quarter, giving us the 15.6% EBIT in this quarter.

If you look at the cost breakdown, good progress on the direct material side, where we continue to compensate through price increases for the higher inflationary costs. We have still 110 basis point dilution. That is partly because of the negative mix, 70 basis points and then the higher material costs, 40 basis points. You might remember that in Q2 that was 80 basis points, so we are really bridging that gap. We are confident that, that will continue now, price versus cost. And somewhere towards the end of the year, we should then be able to get tailwinds from price versus cost and work away that 40 basis points dilution.

Good operational efficiencies seen on the conversion cost, 150 basis points. We continue to execute on our MFP program where we had a saving of around SEK 130 million in the quarter. We estimate to do around SEK 500 million for the full year. And I believe we have around SEK 300 million still to go with the existing programs for next year. And we will then launch, like we mentioned earlier, the MFP 9 program now in Q1 next year. We are still further consolidating all the different projects. It will be a similar project than the earlier ones, most probably a little bit lower in total amount but a little bit better probably in payback. And then the conversion costs, of course, we have also seen very good efficiency gains in our operations through VAVE activities, and further negotiations in the supply chain.

And then SG&A, also here, good operating leverage on the sales and admin side, 90 basis points gain compared to the same quarter a year ago.

Operating cash flow, like I mentioned, 95% cash conversion on the 12-month trend. Now, 76%. We see that recovery from a weaker Q1 into a good Q2 and a very good Q3. And we are confident that, that cash flow recovery will now continue going into Q4. Gearing and net debt/equity ratio of 35% coming from 38% a year ago and net debt versus EBITDA, 1.4 versus 1.5 a year ago. Strong balance sheet that we can continue to execute on our acquisition strategy. And then last but not least, earnings per share significantly up in the quarter on a very high level.

So as a conclusion, it was a good quarter. Very strong sales growth. Organic sales up 14%, complemented with growth through acquisitions of 3% and strong EBIT margin improvement from 15% to 15.6% comparable. And then our operating profit up 47%. And if we correct for the CERTEGO divestment, up 39%. Strong cash flow with a cash conversion of 95%. So overall, I think a very good financial result. But then it's clear that we live in an uncertain economic climate.

Again, in general, we still see good momentum in our markets, apart from some slight weakness in some markets in Europe on the residential side in some channels. But overall, still good momentum as well on the commercial side as residential side. It's clear that we are not immune to what's happening around us. And therefore, we have to make sure that we are agile and stay alert and that we can react fast if and when the market goes down. And that's what we do. We have updated contingency plans. We are ready to push the bottom if needed. And the fact that we are very decentralized in our setup is, we believe, also a very strong advantage because if the time comes, obviously, it will not hit us everywhere at the same extent. And therefore, being able to take those decisions locally in the different local markets is a strong, let's say, competitive advantage.

And then last but not least, just to remind you that we have our Capital Markets Day now on November 16th in London, and we look forward to meet many of you there again face to face.

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

[Björn Tibell, executive]

Thank you, Nico. We'll start the Q&A now. Just a quick reminder before. There are more than 10 people have who are in the queue [Operator Instructions] So with that, operator, we are ready to kick off the Q&A session. Please go ahead.

[Operator]

[Operator Instructions] The first question comes from [indiscernible] Goldman Sachs.

[Daniela Costa, analyst]

This is actually Daniela here and I have two questions, please. So the first one, wanted to ask you regarding sort of how do you think the balance of the carryover on pricing versus cost as we kind of start looking into the end of the year in 2023. I think in the past, you have comments sort of about balance around Q4. I wonder sort of whether that's a bit more positive now and whether it can get you into the 16% to 17% corridor soon? That's the first question.

And the second question, assuming, obviously, we don't know regarding the HHI, but if the case doesn't go through and you can't complete the deal, can you tell us a little bit about what's your strategy for the U.S. in terms of resi? Will you pursue more aggressive organic investments? Are there other similar opportunities on the inorganic side? Sort of how should we think about the resi positioning in the U.S. if the deal doesn't go through?

[Nico Delvaux, executive]

Daniela. On the price, like I mentioned, we had a dilution still of 40 basis points, cost versus price in Q3. That was 80 basis points in Q2. So we are making good progress. We continue to increase prices, I would say, for most of our products and most of our markets and most of our businesses. Where it becomes a bit more difficult I would say, even impossible to further increase prices is on those products that have a very high steel content like residential doors, like fences and perhaps also steel security doors. But there, we so far can keep the prices. And of course, our ambition is there to keep that price also going forward even if steel is declining again from a material cost perspective.

But all the rest, as we continue to see material prices for other products like copper, zinc, nickel, aluminum still on a high level as we continue to see labor inflation, general inflation, logistics inflation. We have an ambition to further increase prices. So we are confident that we will be able to bridge that gap cost versus price now somewhere towards the end of the year. And then if indexes stay where they are, that would give us an accretion as of 2023 and then 40 basis point dilution good -- should go away.

When it comes to HHI, we remain convinced that we will be able to convince the judge that this is a very good deal for the American consumer, and that this deal will go through. As you know, we are very small on the residential side in the U.S. and acquiring HHI is a, I would say, once in a lifetime opportunity for us to become also a leader on the residential side, which is something that is very, very difficult to do organically. HHI has a nice installed base, has a nice channel to market that we miss today on the residential side in the U.S. So we still go, I would say, for Plan A, which is the acquisition of HHI. We expect a decision of the judge somewhere Q2 next year. And yes, if -- what we don't believe, but if we would have a negative decision, then at that moment, we will go for plan B and continue our organic journey like we are doing today.

[Björn Tibell, executive]

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

[Nico Delvaux, executive]

So what we have said is that the moment that we close HHI, the first 12 months, HHI will be dilutive around 70, 80 basis points. We have said that we have seen clear synergies of around $100 million bottom line that we aim to realize within a 5-year period once we own HHI. And we can reconfirm that $100 million now also even with the divestment of the EMTEK business and the smart resi business in the U.S. and Canada, those synergies remain intact.

That is clear that interest rates are indeed more expensive today, interest cost is more expensive today than a year ago. But we bought HHI a year ago, we are not negotiating today.

[Operator]

The next question comes from Mattias Holmberg from DNB.

[Mattias Holmberg, analyst]

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

[Nico Delvaux, executive]

And the question was on the cash or on...

[Mattias Holmberg, analyst]

On HID and global tech from the improved production that's mentioned from the...

[Nico Delvaux, executive]

Yes, on the sales side. So as you remember, in Q1, we had mentioned that we lost around SEK 300 million for PACs business because we didn't have the chips to produce and therefore invoice. And we mentioned a similar figure for Q2. We estimate that today, we were able to recover around 1/4 of that backlog, perhaps a little bit more than 1/4. So there is still quite some backlog that we further have to invoice now in the coming quarters. And we have now secured chip availability for that backlog for the coming quarters. So we are confident that, that recovery will continue now in the coming quarters.

[Mattias Holmberg, analyst]

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

[Nico Delvaux, executive]

Yes. Like I mentioned, it's still very limited. It's only in France, U.K. and the Benelux. And even in those markets, if you look, for instance, on the commercial side, we still see good momentum, good sales development. It's really on the residential side and then specifically on the DIY channel that is weaker, in general, in the world, I would say. And then specifically also in the distributor channel in France with a [indiscernible] where we have seen that channel destocking because of the uncertainty in the market.

So I would say the cost measures are not significant yet. It's just to adapt and to protect the bottom line and it's, I would say, a dynamic moving target depending on how those markets will further evolve now going forward.

[Operator]

The next question comes from Brorson Lars from Barclays.

[Lars Brorson, analyst]

Nico, it's Lars from Barclays. One question on Europe and one question, please, on HHI follow-up. On Europe, Nico, I wonder whether you could help us with the magnitude of the decline in the resi businesses in these markets and indeed the trend as you exited the quarters. My assumption is that these markets U.K., France, Benelux, were down, call it, mid-single digit in volume terms in the quarter. With numbers is still good, as you just said, should we think of the resi segment down in the sort of low double digits in these regions? Did that accelerate through the quarter?

And related to that, if I can, you're obviously now actioning some contingency plans, some others that have called out DIY and distributor destocking have seem to have implied that is largely behind us. I presume that's not what you're seeing given the initiations of cost-out actions.

[Nico Delvaux, executive]

Perhaps a little bit a different picture between U.K. and then France and Benelux. I think U.K. has been challenging throughout the year. It has shown a rather flat development, I would say, since the beginning of the year. I think U.K., as a country, has bigger challenges. We haven't seen a bigger decline, if that's the question, in September or now beginning of October. The decline has been similar throughout Q3 and now also in the first weeks of October. And it's somewhere at that mid-single-digit negative growth, which is the same for France and Benelux. Also here, we don't see that it improves or it goes down in September or now in the first weeks of October. It's a rather similar lower level than in Q1 and in Q2. And it's around that mid-single-digit decline.

[Lars Brorson, analyst]

Understood. If I can please allow a follow-up on the HHI deal and the remedies, and you're proposing the $350 million of sales to be divested from EMTEK and Smart Resi. I mean, that's more than half of your current U.S. residential business. I understand that the Smart Resi piece includes both Yale and August Home. I wonder whether you can explain the logic behind that, specifically on August Home? I'm a little bit surprised. That was the key strategic acquisition 5 years ago in the U.S. Smart [ dock ] market. You've been globalizing that business, rolling out the software and applications from software from August globally. What are the implications on your non-North American business from having to divest that asset piece?

[Nico Delvaux, executive]

Yes. So the divestments only concerns U.S. and Canada. And it's indeed the Yale Smart Resi and the August Home Smart Resi business. It has no effect whatsoever on the rest of the world. So our Yale business in South America or in Europe or in Asia remains intact. And it's so that we divest two nice Smart Resi businesses, the Yale and the August, U.S. and Canada. But on the other hand, we get a much bigger, very interesting residential business under the Kwikset brand with HHI. We have a strong installed base and strong channel to market that we believe we can leverage on and to our R&D efforts, new product development, we can further lift that business in an important way once we are the owner of that business.

[Lars Brorson, analyst]

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

[Nico Delvaux, executive]

No, that is correct.

[Operator]

The next question comes from Guillermo Peigneux from UBS.

[Guillermo Lojo, analyst]

And a speedy recovery to Erik. It's a follow-up actually on the last question. So how do we think about the technology patents that will be set on your company now, but you're probably selling on the remedies to -- that you will deal with on the U.S. and Canada smart businesses. Is that something that is transferred as well? Or do you keep the patents to yourself, i.e., basically, the strategy here is do you have the technology, do you own the patents. And as soon as you own Kwikset , then you roll over that technology into the installed base of Kwikset and therefore, basically incorporate that at a fast speed?

[Nico Delvaux, executive]

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

[Guillermo Lojo, analyst]

And can I confirm that Kwikset has a very limited -- negligible actually exposure to smart locks?

[Nico Delvaux, executive]

No, that is wrong. I think Kwikset has also a good business on digital door locks today. The business that we believe that we, with our technology clearly can further accelerate and build a pump. But it's so that it's neglectable. It's a good part of their business today already.

[Operator]

The next question comes from Andre Kukhnin from Credit Suisse.

[Andre Kukhnin, analyst]

Can I just go back to Europe? And could you quantify the size of that destock in the quarter, please, for us? And then just on the margin side related to that, is that really all volume driven? Or is there anything else in the quarter that drove that kind of negative operational gearing?

[Nico Delvaux, executive]

On the first question, like I mentioned earlier, in those markets, France, U.K., Benelux, if you combine them together, you should think about a mid-single-digit negative growth in the quarter. And that is a combination of a weaker DIY channel and destocking. It's very difficult to break them up. But I would say it's not something radical. It's just a slowdown.

I think on the second one, I don't understand the question because I think we have very good operating leverage in the EMEIA division with a good margin. So perhaps you should explain a bit better what you mean with your second point.

[Andre Kukhnin, analyst]

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

[Nico Delvaux, executive]

No. I think that is wrong. You should look at the bridge, which is included in the deck. And I think you will see a good strong operating leverage. Out of my head, I think it's around 25% or so. The big difference is the big dilution because of FX because we had obviously a weak SEK and a very strong Sweden in the quarter. So strong Sweden -- strong SEK gives us a strong dilution on the FX. I think it was around 150 basis points.

[Björn Tibell, executive]

A bit more than 100 basis points.

[Nico Delvaux, executive]

Basis point dilution. But you can see it in the bridge. The operating leverage, I think, was good on the growth.

[Andre Kukhnin, analyst]

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

[Nico Delvaux, executive]

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

[Operator]

The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

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

[Nico Delvaux, executive]

Yes, of course, I guess, if you ask us and all our colleagues, the market will be on 120% or 130%. Everybody will say that they grow market share. I can only say that I think we are happy with our development. I think we have done good work in general. And I mean, if you look in some markets, of course, most probably our market, our growth has been higher than the market. Perhaps if you look at markets like North America and South America that is most probably the case.

I think we have invested a lot in feet on the street in this market. We have also continued to invest heavily on new product development throughout COVID-19 crisis and not only in those markets in general. And I think that is bringing fruits now that we come out of that COVID-19 crisis.

[Andrew Wilson, analyst]

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

[Nico Delvaux, executive]

So I think if you go back to the beginning of the year, we said that there was a challenge with components shortages in general. I would say that, that today is over today. That's perhaps still an excuse, but not a real reason anymore.

What is still a challenge today is semiconductor component shortages. And then we must say that we have seen a slightly improvement in the last weeks, perhaps the last month. But it remains a very fragile situation in the sense that, yes, we see easing up for some chips and then other chips still have a problem or have a bigger problem. So I would say that we are not out of the woods yet when it comes to semiconductor shortages, but definitely in the last couple of weeks an improvement, not because there's more capacity coming on board or not because people change their unrational behavior but more, I guess, because there is less demand in the market on the consumer side and therefore, more capacity available to buy.

But I would say with specifically HID, the PACs business, it's mainly because of our redesign on the reader and on the controller side through which we could now invoice an important part of that backlog that we built up in Q1 and in Q2.

[Operator]

The next question comes from Gael de-Bray from Deutsche Bank.

[Gael de-Bray, analyst]

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

[Nico Delvaux, executive]

I don't think there is a real correlation. It's not that in previous crisis the same thing happens. So I don't think we can take that as a sign that tomorrow, the U.S. is going to go down. No, I don't think so -- forget that we are late in the cycle. So perhaps you should look more at, I don't know, the cement guys that put foundation into the soil and when we start building new buildings. We often do projects that started a year ago, 1.5 year ago. But I don't think there is a correlation between U.S. lagging Europe. No.

[Gael de-Bray, analyst]

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

[Nico Delvaux, executive]

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

[Gael de-Bray, analyst]

But do you think the destocking process is completed now? Or is it still yet to continue into Q4?

[Nico Delvaux, executive]

I can only say that in the first 2 weeks of -- or the first 3 weeks of October now, we have seen a similar trend for those markets. And of course, you can, as a dealer, only destock so much. At a certain moment, you have no stock left. It's not something that will go on, obviously.

[Operator]

The next question comes from James Moore from Redburn.

[James Moore, analyst]

Nico, could I go back to HHI and ask a couple on that, please. One, just to follow up on the synergies. Can you explain how you still get $100 million of synergies despite selling EMTEK and smart locks?

And my main question really is on the antitrust. I'm led to believe that the DoJ has indicated to ascertain spectrum that selling EMTEK and smart lock to private equity is insufficient to satisfy their concerns as they believe private equity doesn't replicate competition -- under invests. Is that correct? And does it mean that you need to dispose those remedy assets to an industrialist that has no lock revenues?

[Nico Delvaux, executive]

So I think on the first one, the synergies we have, of course, sales synergies. We see HHI and Kwikset as a very interesting platform to accelerate our digital journey. They own, to a big extent, the hardware in the house. So a place where we are not at all today. And we believe we will also see a digitalization of not only the[indiscernible] but a lot of other hardware in the house. And therefore, HHI and Kwikset is a good platform with a good installed base and a good channel to market for -- to start from.

We believe also through our innovation, new product development, we can, one, further lift the brand equity of Kwikset and offer wider, more solutions to the American consumer. And then two, HHI is, of course, a very competitive operational footprint with nice factories in Mexico and in Asia that we can then further leverage for more business. I would say that is the main components of those synergies, and that's also why the $100 million remains intact even if we have to divest the business that I mentioned earlier.

Then your question specifically on antitrust around Smart Resi, we are very convinced DoJ is completely wrong and it's an irrational behavior even of DoJ. And definitely, now with the divestment, I would argue that nothing will change in the competitive landscape because we will acquire a bigger business from Kwikset and we will divest a successful business, our business to a new owner. So from a market dynamic perspective, in the global markets in U.S. and Canada, nothing will change. So that's why we are also confident -- or very confident that this divestment proposal will solve, I would say, more hypothetical concerns that DoJ has.

[Operator]

The next question comes from Rizk Maidi from Jefferies.

[Rizk Maidi, analyst]

So I'll start with still follow-up on HHI, please. Can you just help us with the cost analysis that perhaps you've gone on separating EMTEK and the Resi Smart business in North America? And how separate is the manufacturing footprint of those businesses versus the rest of ASSA?

And you said that the -- you're looking for an outcome by the second quarter of next year. How do you make sure HHI will run? I think we've had long enough sort of period where you're trying to conclude on this deal? And how do you make sure that business still well on?

[Nico Delvaux, executive]

I'm not sure I understand completely the first part, but I will start to answer and then if I answered wrong, you correct me. But it's around $350 million business that we will divest. And the margin is slightly below Americas' margin. So that gives you an indication of top line and bottom line. It's a rather straightforward carve out that we can do. And we will divest the whole value chain from supply production, sales, aftersales to the new potential owner. So that was the first part of the question. The second one was?

[Björn Tibell, executive]

HHI, how it's run.

[Nico Delvaux, executive]

Yes. So I mean, the -- HHI has a very mature seasoned management team that is very excited to become part of the ASSA ABLOY Group. HHI was and is run in a rather independent way within the Spectrum Brands organization. And as that whole management team will come over, they, of course, do all the right things to keep business up and running in a good profitable way.

I know that they are doing cost measures to adapt also the cost structure to the reality. I mean you have seen their figures, I believe, in the first half of the year as they're, of course, much more exposed to DIY. And as they have seen that weakness on the DIY side more than us.

If your question is, yes, but why would they do big restructuring payback? If the payback is very long, why would Spectrum do that? I think the advantage is, of course, that we are in the U.S. We are not in some countries like in Europe, where it's more difficult perhaps to adapt cost -- personnel cost to new reality. It's much easier in a country like the U.S., and therefore, we are very confident that they are doing the right thing to run that business in the best possible way in the transition phase. And I can tell you, everyone is frustrated that this acquisition didn't go through yet.

I think it's a shame for ASSA ABLOY people, for the Spectrum people and definitely for the HHI people that are left in a vacuum for too long, but I think it's also a shame for the American consumer because we will bring a lot of innovation and a lot of good things to that American consumer. How would argue that even it's the shame for the American taxpayer because somebody, of course, pays for this whole investigation. So therefore, we are hoping and we are confident that soon this whole project will be behind us, and we can embrace the HHI organization, the HHI people in the ASSA ABLOY family.

[Rizk Maidi, analyst]

Okay. And then, Nico, very quickly, where would you assess the risk of destocking on the non-residential side given the supply change constraint that we've seen in the last 2 years? Is there any risk that you see similar trend on non-resi as well? They are from your channel partners in destocking on the non-resi side?

[Nico Delvaux, executive]

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

[Operator]

The next question comes from Denise Molina from Morningstar.

[Denise Molina, analyst]

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

[Nico Delvaux, executive]

Well, first of all, I think the market is going in that direction. If COVID-19 already changed something, then it's definitely the further acceleration of the move from mechanical to electromechanical and digital as well on the residential side as well on the commercial side. Because it's clear that with an electromechanical solution, you can do so much more in a building than in a pure mechanical solution. You can much better control flows on the floor, access to a building, access to a meeting room and so on. So we see that acceleration of the market. We see that in our spec business. We see that in our numbers.

We grow much faster on the electromechanical side than on the mechanical side. I think if you look over the last 5 years, perhaps our mechanical business was growing around 2%, where our electromechanical business was growing double digits. And it's no different this quarter. Also this quarter, our electromechanical business was growing faster than the group, 14%.

What are we doing? We are investing in an important way in R&D for new products, new solutions, new software platforms. Our Incedo platform in EMEIA that we also use in other parts of the world is a good example. It's a software platform where you hook up all the electromechanical hardware, one of the same platform and then can offer a total solution to the channel partners to end customers in the market. We are investing in specific verticals in the U.S., for instance, around electromechanical. So a lot of investment on R&D.

Also a lot of investment on feet on the street because it's clear often we need a different type of person with different qualification to sell electromechanical solutions than mechanical products. And that's something we have been doing since quite some time, and we continue to do as we speak.

[Björn Tibell, executive]

Can we move to maybe one last question, operator.

[Operator]

The next question is from Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

It was just a quick one really to ask if you can give us any commentary around the continued strength of the Entrance Systems business, particularly given what we've heard from other sources around the CapEx going into warehouses. And I just wondered if you could give us a little bit of a regional commentary maybe and whether or not you've seen any signs of any sort of meaningful slowdown there? That would be great.

[Nico Delvaux, executive]

Yes. So I think we have four businesses in Entrance Systems. And that's what I said about the Americas that the comparison now going into Q4 becomes more challenging because we grew Americas, 17% in Q4 organically last year. I think we grew 14% last year in Entrance Systems. So also for Entrance Systems, the comparison is more challenging, and therefore, we should perhaps expect a more leveling out of that high growth number.

But if you look at the four businesses, Perimeter Security is a U.S.-only business. I think we have done a very good job there in segmenting the market and having specific solutions for different verticals like data centers, warehouses and so on. They have shown very high double-digit growth on top of high double-digit growth. Of course, there, we see a leveling out now because it's clear that you can't continue double-digit growth on double-digit growth on double-digit growth. And again, that's on the U.S. market.

If we take our residential, garage door business, it's mainly a U.S. or North American business today. There, we see still good momentum. On that residential market, we don't see too much weakening yet. And then if we go to pedestrian, I would say it's driven by different things, definitely our service business, which is a growth accelerated through the acquisition of the record business. We got also access to a wider product portfolio that we can cost synergize among ASSA ABLOY and the record brand. And we see still good momentum in different verticals, if you take food retail, if you take, what do you call it, medical -- hospitals and so on vector. So we still see good momentum on the pedestrian side.

If you take industrial, so that loading docks is important -- was an important and is an important contributor to the sales growth. It's true that Amazon has announced that they are slowing down their investments. But obviously, it's not only Amazon that invests on the warehousing side. There is many other players. And we still see good activity from those other players with loading dock business, we also have the highest backlog because it's the longest delivery cycle in Entrance Systems. So we are confident that we will be able to continue good business on the loading side for quite some time.

Another contributor on the industrial side is all our high-speed doors that we also use in automotive and other applications. What is important for us in automotive is that people change models and build new assembly lines because then December launch Tier 1, Tier 2, Tier 3 has to adapt and has to buy new high-speed doors. And that's what we see. And then service is, of course, also on the industrial side, an important contributor.

And then price as Entrance Systems has a lot of steel, the price component for Entrance Systems has been higher than the average, the high 5% I mentioned for the group, I would say, are the main items.

[Björn Tibell, executive]

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

[Nico Delvaux, executive]

Thank you.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.