Assa Abloy AB

STO:ASSA B

Earnings Call Analysis

ASSA ABLOY Reports Positive Growth Amid Challenging Markets

In Q3, ASSA ABLOY achieved a slight organic growth of 0.3%, complemented by a robust 4% from acquisitions, resulting in total sales of SEK 37.5 billion. The EBIT of SEK 6.3 billion marked an 8% year-over-year increase, with an impressive EBIT margin of 16.7%, the highest in seven years. The company continues to navigate challenging residential markets while expanding in Americas and Europe. Guidance indicates pricing to exceed 2% for the full year, driven by effective cost management. Seven acquisitions were completed, enhancing growth potential. Cash conversion stood strong at 118%, reflecting solid balance sheet management amid evolving economic conditions.

Positive Organic Growth Amid Challenges

In the latest earnings call, ASSA ABLOY reported a slight organic growth of 0.3% for Q3, signaling a positive turn after previous challenges. This small growth was supplemented by a strong acquisition-driven performance, contributing an additional 4% to overall results. The quarter yielded sales amounting to SEK 37.5 billion, showing a 1% increase year-over-year and a 5% rise when adjusted for currency fluctuations. This reflects the company's solid market position, primarily in North America and Europe, despite ongoing challenges in the residential sector.

Record High Operating Income and Margins

The company's operational performance was outstanding, with EBIT reaching SEK 6.3 billion, an increase of 8% compared to the previous year and marking a record for Q3. The EBITA margin also hit 17.7%, its highest since reporting began, underscoring effective cost management and operational efficiencies. The EBIT margin stood at 16.7%, the highest in seven years for Q3. This margin improvement is attributed to successful price realization and lower material costs, allowing ASSA ABLOY to maintain a strong cash conversion rate of 118%.

Geographic Performance Highlights

Breaking down performance by region, North America showcased organic growth of 1%. The commercial side remained robust, while the residential segment experienced flat growth. In contrast, Europe reported a 2% organic growth, driven by improved conditions in Central Europe. However, Asia faced significant challenges, particularly in Greater China, where conditions worsened, leading to an organic sales decline of 18%. The company remains optimistic about a recovery in residential markets correlated with declining interest rates.

Strategic Acquisitions and Future Prospects

ASSA ABLOY maintained a high acquisition pace, completing 7 acquisitions in Q3, totaling 18 for the year. Notable acquisitions included SKIDATA, aimed at enhancing access management solutions, and Level Lock, which will serve as a tech hub for connected products. While these acquisitions are initially dilutive to earnings per share, they are expected to contribute positively over time. The company anticipates continuing to realize synergies from these integrations, with a focus on improving overall margins.

Outlook and Guidance

Looking towards the future, ASSA ABLOY is optimistic about driving pricing power, with expectations to exceed a 2% price increase for the full year. As material costs stabilize and inflation effects normalize, the company aims for continued organic growth. Additionally, they foresee potential improvements in EBIT margins in the EMEIA region, contingent on a rebound in the residential market, anticipated later in 2025 following interest rate cuts. The firm is also focused on maintaining cost efficiencies, ensuring robust cash flows, and adapting strategies to protect margins in challenging market segments.

Earnings Call Transcript 2024-Q3

[Björn Tibell, executive]

Good morning, everyone, and welcome to the presentation of ASSA ABLOY's Third Interim Report in 2024. My name is Björn Tibell, I'm heading Investor Relations. And joining me here in the studio are ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. As usual, we will now start this conference with a summary of the report before we open up for your questions. So with that, over to you, Nico.

[Nico Delvaux, executive]

Thank you, Björn, and also good morning from my side. Q3 results, we can report good results. We went back to positive organic growth in Q3. I would say, small positive organic growth of only 0.3%. But then also this quarter, complemented in a good way to strong growth through acquisitions of plus 4%. And then very strong execution with an EBIT of SEK 6.3 billion, record high level, and an EBIT margin of 16.7%, the highest for Q3 since 7 years. And also, good execution on the balance sheet side. Working capital side, we have an excellent cash conversion of 118%. We continue also our high acquisition pace with 7 acquisitions completed in the quarter, 18 in the first 9 months.

If we look in the numbers, sales of SEK 37.5 billion, 1% up, 5% up currency adjusted. Like I mentioned, it's a very small positive organic growth, 4% net acquired, and then minus 3% on the currency, that's mainly SEK versus dollar. We also want to emphasize the EBITA margin of 17.7%. That's a record high number since we started reporting EBITA margin. And as the gap between EBIT and EBITA margin becomes bigger, you see it's now 1%. We also want to emphasize a bit more the EBITA number as we want to make sure that, yes, you also can compare us with other people on the market in a similar way. Our EBIT margin, like I mentioned, at 16.7%, the highest number in -- for the last 7 years for Q3. EBIT of SEK 6.3 billion, 8% up. Earnings per share, 10% up.

If we look a little bit at the different regions and perhaps I comment first a bit on the different segments. I would say Q3 has been very similar as Q1, Q2 in the sense that nonresidential in our 3 main markets in North America, in Europe and in Oceania. Market conditions continue to be healthy on a good level in all 3 regions, whereas residential market in all 3 regions continue to be challenging. And like we mentioned earlier, we are still convinced that North America is further down in the cycle in the sense that in North America, newbuild residential has turned and R&R, at least has bottomed out where Europe then in that cycle is much later in the cycle. If we look at different verticals, an important vertical for us in Entrance Systems is the logistic vertical, where we continue to see also challenging market conditions as well in North America as in Europe.

If you look at the different regions, organic growth of plus 1% in North America. Again, different picture, a good development on the commercial side, a flat development on the residential side and then challenging conditions on the logistic vertical. A flat South America, that's mainly because of a difficult comparison for HID compared to the same quarter a year ago. Plus 2% in Europe, plus 13% in Africa, and minus 5% in Oceania and minus 18%, Asia, where we have seen market conditions further deteriorating in Greater China. We have also seen some spillover of that negative market condition into Southeast Asia. We have seen the government in China making some extra measures to help the construction market. Also, some positive numbers on new housing -- houses being sold coming out this morning. But we believe that in general, those measures are still, yes, moderate, and it will take some time before we see market in China recover.

Some market highlights, I will not go through all the project wins, but if I take a couple of them. We were also present at the Olympic games. We were able to sell 30,000 locks, handles and cylinders for the Olympic Village in Paris. And then we were able to sell dock levelers and doors to the European's largest logistic center. Product launches, let me also only pick one here. Kwikset UNITE, mobile-enabled wireless smart lock for multifamily properties. I'd say the first new product family that we launched now since we acquired Kwikset, very excited about that product range. And then on the award side, we've also picked one there. Good to see that also our branding, marketing activities pay off, ABLOY in Finland and Fichet in France were voted as the most valued brand in their markets. If you see that ABLOY in Finland is overall seen as the strongest brand in that country, something we can be really very proud of.

So the quarter, again, a slight positive organic growth, complemented with good growth through acquisitions. Our sales now 46% up on a 12-month moving trend versus 2019. A good improvement of the operating margin with the run rate, 12-month run rate now at 15.9%. So very close to the bandwidth we aim for and an EBITA margin of 16.8% on a 12-month moving trend. So better top line, improved margin, therefore, accelerated operating profit, record operating profit in the quarter and run rate of EBIT up 61% versus 5 years ago. We continue to be very active on the acquisition side with 7 acquisitions completed in Q3, 18 acquisitions in the first 9 months of the year. Those acquisitions represent an annualized sales of around SEK 7 million. And you might have read a couple of days ago that we also are divesting our Citizen ID business, our passport business, you could say, in HID. That transaction is expected to close somewhere in Q1 next year. And that business represents an annualized sales of around SEK 1.3 billion.

Some highlights on the acquisitions. Level Lock, excited about this technology acquisition. Will be integrated in the Americas division, and we will run it as a technology hub for connected wireless locks. They had a sales of SEK 170 million last year. They will be dilutive to EPS from the start. And the bigger acquisition, SKIDATA, an Austrian provider of access management solutions for parkings, for ski resorts and for concerts halls and stadiums and so on. They had a sales of SEK 3.5 billion last year. And they will also have a small dilutive effect to EPS as from the start. They will be integrated into Entrance Systems into the Pedestrian segment. If we then go into the different divisions, starting with Opening Solutions EMEIA, positive organic sales of plus 1%. Good growth in Central Europe. Good growth also in the Nordics against an easy comparison last year, I would say, stable sales in South Europe, but then sales decline in Middle East, India, Africa and also in U.K. and Ireland.

Strong execution with a good operating margin of 14.5%, with good operating leverage, helped by currency, 50 basis points because of the stronger SEK and then also helped by M&A accretive 20 basis points. Americas, another very strong quarter with an organic sales increase of 4%, very strong sales growth in LatAm. Strong sales growth also in North America, nonresidential. And then a stable sales in our North America Residential business, you could say, the HHI business. Very strong operating margin of 19.2% with a very good operating leverage, 80 basis points accretive. Good price/cost, good margin improvement in general and definitely also a continued margin improvement in our North America Residential business where, again, we have seen an improvement versus previous quarter, had an improvement also versus the same quarter a year ago. And we are confident that, that trend will continue as synergies continue to kick in.

FX has been dilutive 10 basis points and M&A, 160 basis points accretive. That has to do with all the costs that we booked for HHI a year ago. So in the bridge, it gives us a onetime, you could say, positive effect of SEK 205 million year-over-year. And more important, underlying the HHI business had a stable top line development and an improved bottom line. Opening Solutions Asia Pacific, organic sales decline of 6% with only stable sales in South Korea and negative sales growth in the rest of the division. Well, like I mentioned earlier, market conditions in China, further declining. Despite the strong organic negative sales evolution, good operating margin of 7.9%, where we only had a smaller dilution because of the negative volume because we were able to offset that to a big extent, I would say, through efficiency improvements and then FX stable. And we didn't do any M&A in this division.

Global Tech, organic sales back to positive, plus 2%, where in HID, now the whole story of the backlog we built up and then invoicing on the backlog of PACS, card and readers is over since September. September was the first, I would say, normal month again for PACS. And therefore, we have seen also, again, a growth of that business area in HID. Also, very strong sales growth in Global Solutions. And a, I would say, strong operating margin of 18.9% with very good operating leverage, 110 basis points, driven by efficiency measures but also a positive mix where we get, again, more relative sales of PACS, which is a more profitable part of the business in Global Tech. FX and M&A dilutive 30 basis points and 40 basis points, respectively.

And then last but not least, Entrance Systems, an organic sales decline of 2%, where we have seen good sales growth in Pedestrian and in Perimeter Security. But then sales decline in Residential. Residential is first mainly a North American business and there the story I told about the residential market. And on the industrial side, very exposed to that logistic vertical, where the loading dock business continues to be challenging. Good to see that our service growth continues in line with our ambition to grow high single digits. Strong operating margin of 17.1%, definitely we've taken into account that we acquired SKIDATA in this quarter and had a rather higher acquisition-related costs for SKIDATA that gave a dilution of 110 basis points. FX, up 10 basis points, but then it's a very strong operating leverage, 110 basis points. Very good price/cost realization and then also a positive mix. And with that, I give the over to Erik, our CFO, to give some more details on the financial numbers. Erik?

[Erik Pieder, executive]

Thank you, Nico, and also a very good morning from my side. As you heard from Nico, we now turned to actually had a positive organic growth in the quarter, a small one, but still it was positive. And in total, the sales increased with 1%. Of course, we like also to mention that we had some records, like, for instance, that we had in EBIT value, the SEK 6.3 billion. It's a record for Q3, and it's up with 8% versus the same period last year. We also had a record EBITA margin of 17.7%. It's up with 1 point. And we had the best EBIT margin for a Q3 quarter since 2017. It ended on 16.7%. We had slightly less impacts on the interest rate. We also sort of we also see a bit, of course, interest rates slightly going down. So income before tax is up with 10%. It's the same with the net income as well as with the EPS versus the same period last year. .

Operating cash flow is lower than what it was sort of a quarter ago, but remember that we had a very strong operating cash flow in Q2, Q3 and Q4 last year. But if you compare the SEK 6.3 billion then historically and with a cash conversion of 118%, it still is very strong. And it's also good to see that return on capital employed improved sequentially with 20 basis points and ended the quarter at 14.2%. If we dissect a bit and go a bit to the bridge. If you look on the organic part, price is a strong one, which consequently means that volume is negative with about 1%. The flow-through, as you can see, is very strong and helps the result with 90 basis points. This comes from strong price realization, we had lower material cost with MFP savings of roughly SEK 130 million in the quarter as well as good cost control. Slight negative impact on the currency, where, of course, we see that weakening of the dollar.

M&A looks a bit strange this quarter. Nico mentioned it before. The main reason is, let's say, the mechanism of the bridge, where we sort of had integration costs and costs related to the HHI acquisition a year ago, which was negative. And then, let's say, this year, it turns positive, just purely, let's say, due to how the bridge works. However, as you have seen -- we have seen before that we have done some acquisitions, which in reality have a dilutive impact in the acquisition column, SKIDATA as well as Level Lock. Going forward, SKIDATA is estimated to have on group a negative dilutive impact of 40 basis points and on Entrance Systems, consequently, roughly 120 basis points.

We had a good momentum still on direct material price versus cost. The mix in total is 240 basis points. Roughly 100 basis points of that comes from the mix with a stronger Global Technologies, weaker APAC as well as the interdivisional mix, where you heard Nico mention before regarding that service was strong within equipment in Entrance, which sort of helps from a mix perspective. However, if you look sort of the total, then roughly 140 basis points is, if I call it, the true price versus cost. So we still have a strong tailwind. We sort of -- we see that we're also going to have a tailwind also for Q4 as well as for Q1. They're going to sort of go down slightly, but that is sort of the estimate that we do today.

Conversion cost is impacted by inflation and higher wage cost. It's down with 130 basis points. Sequentially, then if you look on SG&A, it is sort of better than what it was in Q2. In Q2, we had roughly a negative impact of 80 basis points where as then, as you can see in this quarter, it was 30 basis points. So we can see sort of despite that we continue to invest in R&D as well as continue to invest in sales. We have -- we are sort of still finding efficiency measures in order to, let's say, reduce the impact that we have there. I mentioned before, the cash flow of SEK 6.3 billion, a cash conversion of 118% in the quarter. We still sort of see that, okay, we had sort of a good EBITA flow value as -- but we continue to sort of see that working capital is going down, which is good, let's say, from our cash flow position.

That sort of leaves that we -- on the gearing, the net debt to EBITDA is now at 2.3. And despite that we have been rather active, I would say, on the acquisition front, we were able to reduce our net debt in total with SEK 1.3 billion. Yes, we had some help from the currency, but we also sort of could see that the strong cash flow were able then to sort of to be able to sort of do the acquisition payments that we have done, which means that at the end of the day, we have sort of still a very strong balance sheet and financial position, so we can continue with our acquisition strategy also going forward. Last slide for me is the EPS, which I mentioned before, is up with 10% versus the same period a year ago. And with that, I hand it back to Nico for some concluding remarks.

[Nico Delvaux, executive]

Thanks, Erik. So Q3 quarter where we went back to positive organic growth, slight positive organic growth. But if you look at total, a currency adjusted sales growth of plus 5%. The very strong execution with record operating income, SEK 6.3 billion. And also a very strong EBITA and EBIT margin, excellent cash conversion of 118%. It's clear that we continue to operate in an uncertain economic climate where definitely on the residential side, market conditions remain challenging. Therefore, we continue with our approach like in previous quarters to take advantage of the opportunities that we see in the market.

We will continue to invest there where we see that there is potential to grow. But then in those markets or in those segments where we see that market conditions are more challenging, we, of course, will adapt cost, protect bottom line and cash flow. Therefore, we will remain agile to our decentralized organization and make sure that we continue to realize efficiencies. It's clear that the lower interest rate trend that has now started, especially in North America and Europe, will help us over time. And over time, we will then see also the residential market coming back. And with that, I give the word back to Björn for Q&A.

[Björn Tibell, executive]

Thank you, Nico. Well, this means that we are ready to open up for questions. [Operator Instructions] Operator, this means that we are ready to kick off the Q&A session. Please go ahead.

[Operator]

[Operator Instructions] The first question is from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I will take the question and a follow-up opportunity, but starting with the question. I was wondering if you can comment like you normally do on start of the existing quarter and whether you see any signs of those potential recoveries that you mentioned on your kind of outlook statement in the second page of the press release?

[Nico Delvaux, executive]

I guess you are after the exit run rate and then run rate in October. If you look at the quarter, obviously, it's a little bit difficult to talk about the run rate because July and August are holiday months, it's always very difficult to judge then the holiday month, in the sense that Q3 is mainly made in September. So it's difficult to comment on September versus July, August. But if you look at September and October, you can say that run rates, if you correct for working days are similar. So going into October, we haven't seen up or down, it's a similar run rate as September.

[Daniela Costa, analyst]

Got it. And then a second question, just regarding just can you give us a little bit of context of like what prompted the Citizen ID divestment and whether sort of you're more actively looking at parts of the portfolio? Or was that just like a complete one-off thing?

[Nico Delvaux, executive]

Yes. As you know, we constantly look at our portfolio. And from time to time, we decided that something does not fit in our portfolio. I think if you look at the time that I'm here since 2018, I think we did 4 or 5 smaller divestments so we are clearly a net acquirer. And the reason now to divest Citizen ID is that we have always the ambition to be the #1 or at least the #2 in the market. With Citizen ID, we were, you could say, a far #3. We were definitely not the #1 or the #2. They were much stronger than us. It's very different to play a game where you are a market leader versus where you are a follower. We have also seen that the market leaders in this segment at best make high single-digit EBIT margins. So very difficult for us to realize the financial ambitions we have as a group and having businesses within that 16% to 17% EBIT bracket.

That's one thing, the second thing from a sales dynamic perspective, this is also very different from what we do in the rest of the group in the sense that these are much more long project-based sales cycles where when a country decides to do a passport business, you will engage with that country for 2, 3 years, then an RFQ comes out. And then when you get that RFQ at the beginning, it will be a cash negative project. And then over time, over the 10 years or the 15 years that you have the project, then slowly, you will then start to make better margin. So it's a very lumpy on and off project business, which is very different from what we are used to in the group. So I would say that is the 2 main reasons why we decided to divest the Citizen ID business where definitely after COVID the weaknesses of that segment became more obvious. I would say that we have done a very good job in bringing the profit from high double-digit losses back to positive. But we didn't see a way to get to that 16% to 17%. That was the main reason.

[Operator]

The next question is from Andre Kukhnin from UBS.

[Andre Kukhnin, analyst]

I will ask that first one and see if I have a follow-up. Just this time of the year, we usually try to think about 2025 or the following year as some of the indicators start coming out. I just wondered if you could share your thoughts, any color on how you think your major end markets will evolve across Europe and North America in 2025?

[Nico Delvaux, executive]

We all think about next year then it's thinking and having a good idea is something else, I think it's still very difficult. And like I also mentioned earlier, I think we are still working in a very fragile and dynamic market environment. You have from one side, the political risks with all the conflicts going on in the world, and we don't know in which direction they will go. We have important elections that have taken place and will take place soon where the outcome is still uncertain. So these are a lot of moving parameters that can change direction in a positive way or in a negative way. I think what definitely will happen is that we will continue to live in a higher inflationary world now after COVID also, next year then prior to COVID, which means like we always said that we live in a market where we can push through inflation through price increases in the market. So that should be a positive effect. I think there's also a consensus that interest rates will further go down as well in Europe as in North America.

And hopefully, they are confident that they will start to reduce interest rates also in Australia, which, over time, should give us a positive effect. With that footnote, if you take, for instance, the U.S. and as most people have a loan on their house, the people that have a loan on their house, sorry, have an interest rate at around 5%. So we need some more interest rate cuts to come to that 5% level to really start moving things in North America so that people really start to sell and buy new houses. But ultimately, that will come. I think you will see first positive effects on the more retail-related business and then later on the R&R side. And like I said, I think we will see first an upturn in the U.S. and then later in Europe. HID will also be back to a more normalized business where the whole PACS story is behind us now as of September. And in that aspect and also next year should be a more, you could say, normal year for HID. But -- so like I said, a lot of moving parameters and perhaps too early to really have a good view on -- of what's going to happen next year.

[Andre Kukhnin, analyst]

And if I may just use the follow-up to ask about SKIDATA now that you've closed the deal and had a chance to look under the hood. Could you comment on how quickly you can get the margins up in that business towards what you see acceptable for us around that 15%, 16%? And whether now that you've seen more inside the company, how has that turned out to be versus the original assessment?

[Nico Delvaux, executive]

Yes, I would say time frames are very similar to what we said for HHI. I think we have a first plan to come to double digit. And I think that we should be able to do in the first 3 years. And then from there, we will then further move and see how high we get. So a bit of different acquisition than many of the others in the sense that SKIDATA today, it's a business of around EUR 300 million, but they make very low single-digit EBIT margin today, whereas normally, our acquisitions have a little bit higher EBIT margin. So a lot of the payback will indeed come from that improved EBIT margin from very low single digits in the first place to double digits.

[Operator]

The next question is from Midha, Vivek from Citi.

[Vivek Midha, analyst]

Following up from Andre's question, would you mind commenting on the latest trends in the specification activity by region?

[Nico Delvaux, executive]

Yes, so if you look on the group level, specification is up mid- to higher single digits. If you look at the 2 main regions in U.S., it's a low to mid-single digit negative in the quarter and so a bit details. We have the normal suspects that are negative, multifamily offices. We have the normal suspects that are strongly positive, education, K-12, data centers, although a lot of business for data centers also doesn't go through the normal specification channel. I think the big deviation this quarter and also previous quarter has been on the health care side, where we saw negative development. And we still believe that is a timing issue because we don't see any reason why health care would slow down. In Europe, we have seen a high single-digit growth, and we have seen a continued positive trend shift from mechanical to electromechanical and good development on the sustainability type of spec business.

[Operator]

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

[Alexander Virgo, analyst]

I wondered if you could talk a little bit about HHI for us. Obviously, that's now in the organic growth. I'm just wondering if you could give us a sense of what that growth is in HHI versus the underlying growth in the Americas, particularly given the drag that resi markets are having on Entrance Systems in the U.S. That's the first question. And then as a follow-up, I wondered, Erik, if you could just comment a little bit on the regional differences in pricing dynamics and the fact that things have slowed a little bit as you'd indicated they would. Just wondered if you could give us a sense of pricing dynamics in the market now and thinking, I guess, back to Andre's question around exit rates into '25.

[Nico Delvaux, executive]

Yes, I think on top line, HHI was flat compared to same quarter a year ago. When it comes to pricing, Erik mentioned a strong one so it's -- you could say, it's closer to 1.5%. Region-wise, there is not so much -- difference is perhaps more material-based or related, where I said the same thing in Q1 and Q2 on everything what is steel related, so steel doors, fencing business, loading docks, we are happy that we can keep the prices. So there, we don't see a possibility short term to further increase prices. Although with that footnote that still has been stabilizing now and definitely going into next year, we will look into possibilities then to again increase prices there. But for time being, everything what is steel related is flat.

All the rest, we continue to increase prices, and we also will now continue to increase prices beginning next year when it's copper, zinc, aluminum, you name it, because we also continue to see general inflation, energy inflation, logistic inflation, definitely labor inflation, which is high this year, and will continue to be high also next year. So it's not so much region. The only exception is perhaps China where it's very difficult to increase prices. And also DIY channel, where it's difficult to increase prices, in DIY channel you indirectly increase prices more through new product launches and new product development. So we think more of the divisions that are more steel related so Entrance Systems and Americas, they have the lower price component and the others have a higher price component.

[Operator]

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

[Gael de-Bray, analyst]

So maybe just a follow-up on the question that was just asked about pricing. So do you still expect pricing to be at least 2% for the full year? And then the second question is about Global Tech, which obviously had a very strong performance this quarter margin-wise. So do you still see Global Tech as a 17% to 18% margin business on a normalized basis? Or is there perhaps now a bit of upside following the strong Q3 performance and the divestment of Citizen ID?

[Nico Delvaux, executive]

Yes, on the pricing, yes, we will be more than 2% for the full year because again, you will remember in Q1, we said that price component was 2%, but we said strong 2%. So 2.5% you could say in Q1. On Q2, it was a strong 2%, between 2% and 2.5%. Now we said it's a strong 1%, so 1.5%. So we don't need that much price increase, you could say, now in Q4 to realize the minimum 2%. So yes, we are confident that we'll get the 2% this year. The 1% or the 1.5% in Q3 is more because of the comparison with last year. So that's on the pricing side. The other question was?

[Björn Tibell, executive]

Global Tech and margin.

[Nico Delvaux, executive]

Yes, Global Tech and margin. Yes, we still want to hold on the 17% to 18% margin. It's true that Q3 was high and higher than that ambition. But you should not forget that it's very seasonal. Q3 is always a good quarter for Global Tech. And we had now in Q3, also a bit that positive mix where PACS as of September came back. So that Citizen ID will help us, I would say, marginally on the margin for Global Tech, around 10 basis points. But we -- it's also true that we continue to invest heavily in our different verticals in Global Solutions, where we continue to see high double-digit growth and where we want to bring them to a higher critical volume. Same is true for some of the other business areas in HID where we continue to invest so that 17% to 18% EBIT margin remains our ambition for Global Tech going forward, yes.

[Operator]

The next question is from Mattias Holmberg from DNB.

[Mattias Holmberg, analyst]

I'm going to stick a little bit to Global Tech regarding the margins. As you point towards the improvement not coming until September in the PACS business, and I hear your sort of mentioning here of the seasonality. But I'm just curious to hear, if we, in Q4, get the full benefit of the PACS recovery, would not that imply that you should get an even larger support from the PACS business going forward?

[Nico Delvaux, executive]

Yes, that is true. Then of course, there is a lot of other moving parameters in Global Tech. You should say Global Tech is around 70%, HID is around 30% Global Solutions. And in HID, 45% around is PACS, which is the most profitable part of HID. In Global Solutions, we have Hospitality, which is also around 45%, and which is a more profitable part of Global Solutions. So depending on the mix, how much Hospitality you have in Global Solutions versus the rest or in PACS or in HID how much PACS you have versus the rest affects the margin in an important way because all the other business areas have still lower margin, but we are investing in those other business areas to make them grow faster than PACS and definitely also make them grow faster than Hospitality. And if we succeed in that, that, of course, gives then a negative mix overall.

[Mattias Holmberg, analyst]

Understood. So just to be clear, if you had the full benefit in the entire quarter of Q3 from the PACS recovery, then margin would have been even higher all else equal?

[Nico Delvaux, executive]

Yes. That's correct. Yes.

[Operator]

The next question is from James Moore from Redburn Atlantic.

[James Moore, analyst]

I've got a couple, if I could. I wondered if we could talk about Europe and the EMEIA margin. It's a bit below where it sort of was for some time. And obviously, Europe has been really hit by a negative construction environment. And typically and historically, you've made really great margins in Scandinavia. I'm just wondering, when you think about Scandinavia or Europe as a whole, kind of where are volumes now versus peak? And if we get volumes back, do you think profitability can go back where it used to be? I'm just trying to think about capacity utilization and what the path could be if we had a favorable 2 or 3 years of European construction recovery.

[Nico Delvaux, executive]

Like we had also said on previous occasions, we have the ambition over time to bring EMEIA to that 16% EBIT level. I think there's 2 important things for EMEIA, one is the SEK, you could say, dilution, which if you look over the years costed us at least 150 basis points. It was a bit positive this quarter. But if you look on the longer period, that has diluted the result. And then the second thing is, like you said, the whole volume growth or negative volume growth effect. The Residential segment in EMEIA is around 45% of EMEIA. And EMEIA is a strong market leader, you could say, in most markets on the Residential side. So if the residential market goes down in a very significant way, it's very difficult for EMEIA to do much better than the market. So they are affected in an important way by that downturn of the residential market.

I would say, for us to go back to 16%, definitely, what has to happen is that the residential market comes back. And we are confident now that with interest rates going down over time, that market will come back. Like I said, I think you should at least expect 6 to 9 months between interest rate going down and us seeing that in the numbers. So as EMEIA is later in the residential cycle, it is definitely not something that will happen in Q4 and Q1. It will be hopefully and confidently, then later next year. And when that happens, when we get, again, positive volume growth organically, then you will see that, that leverage really will kick in, in an important way, and therefore, will improve margin further in an important way.

[James Moore, analyst]

That's very helpful. Can I follow up on the guide, Nico, the synergies, could you say roughly what percentage is done and whether you now think that you can exceed the original target?

[Nico Delvaux, executive]

Like I said, we made good improvement. You can see that also on the Americas margin in the quarter, where we said, over time, we have that ambition to go to 20%, in the quarter we were not so far off. So we continue to make improvements on the EBIT margin for HHI quarter-after-quarter in the sense that the quarter is better than the quarter before and the quarter is better than the same quarter a year ago. We are confident that we can continue that trend as synergies continue to kick in. Can we do better than what we said initially? I would say that we're definitely much more confident today that we can do what we said at the beginning. And we are also confident that we must -- probably we will be able to do it faster than what we said at the beginning.

[Operator]

The next question is from Maidi, Rizk from Jefferies.

[Rizk Maidi, analyst]

I have 2, and I'll take them one at a time. So Nico, maybe just on your earlier comment around the residential sort of rebound and I think earlier you mentioned mortgage rate needs to reach 5%. I think that was related to the U.S. Just in your head, how you're thinking about the pace of interest rate cuts to actually see an R&R sort of rebound within HHI business. And also, I think you talked about 6 to 9 months. So are we sort of talking second part of 2025 here at the earliest?

[Nico Delvaux, executive]

Yes, it's perhaps a question we should ask the President of the Fed or the ECB, and perhaps he has a better view even than me. I can also only read what -- in the newspapers, what people say. But I think there is consensus that interest rates will further go down. And what I can say is that if interest rates go down, I think you see -- you will see the first effect in the U.S. just because of the way Americans are versus Europeans. If they are confident that things are going to improve, they start to invest. So you will see in the U.S. in the first place, retail I think coming back. But then like I said, on R&R, the big R&R happens when people move houses because you refurbish your old house, because you want to sell it at a better price or you refurbish the new house that you bought. And for that to happen, kind of people must see that they can finance it in a similar or a better way than the finance they have today. And 70%, 72% to be exact, of American people that have a loan on their house have an interest rate at that 5% level.

So for R&R, really to move, for people to move houses, interest rates have to be on that level. So it will need some more interest rate cuts before we see R&R really coming back. And depending on how fast that goes or how slow that goes, we'll see faster or slower recovery of the R&R side for our Residential business in the U.S. I think in Europe, it's a bit different because we don't -- in the U.S. also when you have a loan, it's easy. You take a loan at, whatever, 4%. You can -- if then 6 months later, it's 3.5%, you can refinance in an easy way. Many markets in Europe is a little bit different because you have a fixed interest rate for a period of time and then you're stuck to that. So in Europe, perhaps you have a little bit the opposite, if people see that interest rates go down, they wait a little bit longer because they hope then that the interest rates further goes down, perhaps short time you could even say it has a negative effect. And then midterm, long term, it will have a positive effect. That's also why we say that we are confident that U.S. is further down in the cycle than Europe.

[Rizk Maidi, analyst]

The second one is just on the underlying growth within Global Tech. After this whole PACS story, I think you said September was a clean month. Are we running at the average sort of 5% that you're targeting for this division?

[Nico Delvaux, executive]

So if you take PACS historically, let's say, even prior to COVID to make it easy, PACS has been, I could say, a diesel that has been growing on that mid-single-digit organic growth with a stable, good, high margin. And we are confident, let's see now in the months to come that, that diesel type of business will come back now that we are back in a normalized situation.

[Operator]

The next question is from Andreas Koski from BNP Paribas.

[Andreas Koski, analyst]

So just maybe a short-term related question coming back to your comments about exit rates. So it sounds like October is similar to September. And I guess that means roughly flat organic growth also in October. Do you see easier comps in November and December, which should make it possible for organic growth to clearly accelerate in Q4 versus Q3? Or is it fair to assume flattish organic growth also in the fourth quarter?

[Nico Delvaux, executive]

As you know, we don't forecast. What I can say is that if you look at the organic growth that we had in Q3 last year, and the organic growth we had in Q4 last year was very, very similar. There was only a 10 basis points difference. So from a comparison perspective, the growth rates are very similar. I think there is then some deviations. Obviously, we will have a clean quarter for PACS in HID, which should help us. China is small in the bigger picture, but China definitely has deteriorated like I mentioned in Q3, and we don't see an improvement yet in Q4. And then the rest, well let's see how the markets are evolving, that will be the main drivers, I would say.

[Andreas Koski, analyst]

And then on the M&A dilution in Entrance Systems of 110 basis points, how much of that can be seen as sort of one-off because I think you had to take some extra costs related to the SKIDATA acquisition in this quarter?

[Nico Delvaux, executive]

No, we said 120 basis points on Entrance Systems, 40 basis points for the group. And I mean you can make the calculation yourself, SKIDATA is around EUR 300 million top line with a bottom line last year of around, let's say, between 3% and 4%, depending a bit on which costs you take in or not. Once the PPA kicks in, and we are still finalizing the exact amount of the PPA, you will see that we are close to 0. That's also why we said at the beginning, dilutive to EPS. If you take EUR 300 million top line with, let's say, 0% EBIT, then you can calculate yourself the dilution on Entrance Systems and on group.

[Andreas Koski, analyst]

Okay. So you didn't have any extra costs related to closing the acquisition in the quarter diluting margin even further?

[Erik Pieder, executive]

Andreas, remember that SKIDATA was closed in September, which means that you only have 1 month of, let's say, the dilution impact that Nico talks about. And then you can say the rest then would then be acquisition-related costs because it's not -- I mean, it's about the same, as we said, if I look, as I said, on the run rate. But remember that SKIDATA was only in for a month.

[Björn Tibell, executive]

Can I just also indicate that we have one person left in the queue. [Operator Instructions] Operator, please go ahead with the remaining one now.

[Operator]

[Operator Instructions] The next question is from Jonathan Day from HSBC.

[Jonathan Day, analyst]

It's about EMEIA, and I was just wondering if you could comment a little bit more on what you're sort of seeing and expecting in the Nordics, given that rate cuts were perhaps a little bit earlier there for, in particular, the Riksbank and then the ECB. So just wondering about the timing of recovery in the Nordics.

[Nico Delvaux, executive]

So like we said, we had positive organic growth again in the Nordics. That was mainly because of an easier comparison compared to the same quarter a year ago and that comparison will even become easier now in Q4. We see Sweden a little bit ahead of Finland as being the 2 main markets here in Scandinavia. So we are confident that we will continue to see perhaps a bumpy, but at least a gradual continued recovery of our business in -- as well Sweden as in Finland. As indeed, now interest rates have been cut 2x in Sweden and confidently that trend will continue. And the first cut was 6 months ago so we are now in the time period that we start to see -- we should start to see the first results of that.

[Jonathan Day, analyst]

And maybe just a quick follow-up on the SKIDATA deal. Could you sort of talk a little bit about -- more about the synergies and whether you see some more revenue or cost synergies from that deal?

[Nico Delvaux, executive]

So SKIDATA is one of the market leaders in the field where they operate. They have a high recurring revenue part. So as such, as a company on their own, we believe we must be able to do much better margins than what they have done last year. Obviously, if you compare with colleagues of them in the market, we are confident that just stand-alone, the margin should improve. And so the biggest return comes in the first place for margin improvement. But it's also an industry they operate in where the market grows around that 5% -- 4%, 5%. So we should be able also to realize organic growth in line with our 5% ambition.

When it comes to synergies, we see synergies on the Entrance Systems side and on the HID side. On the Entrance Systems side, using service technicians in both directions, using some of the products that we have in Entrance Systems like turnstiles and so on and then also the cross-selling because often, I mean, if you take a ski resort, they also need sliding doors. If you take a parking environment, there is a lot of other Entrance Systems' products that are sold to that garage entity. And then definitely also on the HID side with our readers, our cards, our credentials and some of the software technology we have.

[Operator]

We have a follow-up question from Maidi, Rizk from Jefferies.

[Rizk Maidi, analyst]

Just a quick one on the savings. I think you talked about MFP savings being SEK 130 million in the quarter. How we should think about sort of this number heading into Q4 and Q1? And same question with -- related to the price/cost, I think the number you mentioned was 140 basis points.

[Nico Delvaux, executive]

Perhaps I'll take the price/cost, and then Erik can take MFP. I think on the price/cost, we are definitely more optimistic and positive today than after Q2 and after Q1. Because previously, we said that towards Q4, we would see a more neutral situation. As material prices have stabilized, steel initially went down and then stabilized. And also the other materials are on a good level, and we were able to continue to increase our prices. We are now very confident that also Q4 will still give us a very good accretion price versus cost, whilst probably not any longer on the same level as in Q3, but still on a very good level.

I think the same still should be true in Q1. Then going further into Q2, Q3, it's more difficult to say because we don't know what will happen with material indexes. And you know that there's a 6-months lag between material indexes going up or down and us seeing it in the income statement. And we also don't know yet how successful we will be with the implementation of the price increases that we have as an ambition in the different markets. But definitely Q4 and Q1 will still be better and more accretive than initially or previously said.

[Erik Pieder, executive]

And for the MFP, you could calculate with, let's say, about SEK 100 million in Q4. And then we will come in Q1 next year, we will come with the next program, the MFP 10. So then, of course, we're going to generate synergies then for 2025 coming out of that program.

[Björn Tibell, executive]

Thank you. Well, it's time for us now to roundup this conference. If there are any follow-up questions, feel welcome to reach out to Isabelle or myself at Investor Relations. And with that, it remains only for us to thank you for your interest and participation. And we look forward to speaking and seeing many of you in the coming weeks. Thank you.

[Nico Delvaux, executive]

Thank you.

[Erik Pieder, executive]

Thank you.