Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to the ASSA ABLOY Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded.Today, I am pleased to present Investor Relations Officer Holger Lembrér. Please go ahead with your meeting.

[Holger Lembrér]

Good morning, and welcome to the telephone conference with ASSA ABLOY. I'm Holger Lembrér, Investor Relations Officer at ASSA ABLOY, and I will moderate this conference call. This call -- conference call is held in relation to this morning's announcement by ASSA ABLOY concerning the one-off costs for impairment and write-down of operating assets in our Chinese operations. We will start this conference with a brief background from our CEO, Nico Delvaux, followed by a question-and-answer session with our CEO and CFO, Carolina Dybeck Happe.Before we kick off, I would like to remind everyone that we will answer questions related to this announcement. All other questions will be directed to the quarter call that will be held the 18th of July together with our second quarter release.And with that, I'm handing over to you, Nico. Please go ahead.

[Nico Delvaux]

Thank you, Holger, and also good morning to everybody from my side. And this call is related to the report that we sent out this morning, where we reported one-off noncash costs of SEK 6 billion in second quarter, indeed, related to our Chinese operations in the Asia Pacific division. And it's 2 parts in the cost. It's a one-off cost of SEK 5.6 billion related to the impairment of goodwill and other intangible assets and then SEK 400 million related to write-downs of operating assets, mainly inventory and receivables and also some costs related to closing of issues with previous owners in companies that we acquired in China.We know that we have a new manager in place for the APAC division since around 9 months, and obviously, China has been a high priority for him. I also explained in quarter 1 that China is also a high priority for me. I've spent [ through the stars ] already more than 2 weeks in China, in the China federal funds, and together, we have done a strategic review for our China business and came up with a new strategic plan -- a strategic business plan. And in that plan, we have seen that we expect margins to remain lower in China for the short and the mid-term, and therefore, we felt it also now necessary to make these adjustments.That's a bit about the future and about the plan. We are in fact reorganizing our business in China around, I would say, 4 pillars with 3 strong brands, and that has one side the Pan Pan brand with the dedicated Pan Pan organization. Pan Pan is, as you know, a brand that we acquired through different entities. And Pan Pan has a very strong brand name, brand reputation, seen as a quality product in China market and also a very wide distributed network, and we have decided that we will migrate that distributor network more in the future. Where in the past, it was mainly or only used to sell doors, we will use it in the future also to sell hardware and that will offer a more complete solution and complete offering to our customers in China. And we also want to use that channel more to capture also part of the replacement market, where in the past, Pan Pan was mainly focused on new projects. Like I said, we have a dedicated organization, dedicated management. And second pillar is our Yale brand organization. We've installed international Yale brands, and we positioned Yale as an international European -- premium international brand in the -- on the residential side, again, with a dedicated team. And then the third pillar will be our ASSA ABLOY organization, which will offer a total solution to -- for the commercial market. And under that ASSA ABLOY organization, we will have also now a dedicated key accounts organization, where we will work close together with the biggest contractors in China because one of the things we have seen over the last years is also that there is more consolidation of new projects towards the biggest [ competitors, ] where in the past, the biggest [ competitors ] represented a smaller part of the new project today but the vast majority of the business. So therefore, we found also that it's important to have a dedicated organization to serve these important customers.Next to that, we will have our digital key organization that today is still very scattered, and now we will seek to consolidate as well on the operations side as on the development side in order to speed up new product development and also profit from more volume and clear effect. And of course, we will continue to work on consolidating operations and engineering resources in general in China.So as a summary, we believe we have a solid plan for the future. In the past, we have been very internally oriented because we have had our challenges with the acquisitions and that will mitigate a bit our attention away from business development.Now with this action that we announced this morning, we can leave the past behind, and we'll have our organization now focusing on the future on business development. And China market conditions will, of course, remain challenging on the short term and perhaps mid-term also with all the political situation and things happening currently between U.S. and China. But of course, China is an important market for us long term. It's definitely a market we are committed to, and long term, there is, of course, a lot of market drivers that speak for China.Just if you look at urbanization, I think, previously, that it's forecasted that, by 2030, the equivalent of the U.S. population will move from rural areas into cities in China. So that represents a very important opportunity long term. We see also the replacement market now kicking in, in China, and this will give potential for the aftermarket. We also see that China's authorities are increasing regulatory requirement. Now they've become more stringent laws and regulations, which drives also technology up and which could give us an advantage and last bit of this, of course, is [indiscernible] successful in China, but if you are successful in China, you have also a fantastic export product that you can also view in other markets like France and [ Sudan, ] Southeast Asia.So as a summary, yes, we do this one-off cost now. We may need to -- yes, so it's just of the past, and we're committed also to concentrate now on the business going forward. We are committed to the China market. We believe we have a solid strategic plan in place, but for sure, China will, in the short term, remain a challenge. And we'll need to jump on good opportunities medium and long term.And with that, I would like to give the words to Carolina, who will give a little bit more details on the figures.

[Carolina Dybeck Happe, Executive VP & CFO]

Thank you, Nico, and good morning, everybody. Coming back to the impairment itself then, the impairment is built on an updated business plan so to -- for the forecast for this year and going forward for APAC. We have used the same methodology as we always do when it comes to impairment testing on the procedure.The [ rise pound ] due to the impairment is SEK 5.6 billion. Out of that, it's SEK 4.2 billion that is goodwill and SEK 1.4 billion that is intangible assets. Then we have the other part, the write-down of operating assets. It's SEK 400 million, and it consists mainly of 3 things: one, provisions for accounts receivable, and other receivables; two, settlements with previous owners; and three, provisions for slow-moving inventory. The full one-off, both the impairment and the operating asset write-down has no cash flow impact in the quarter.And with that, I give back to you, Holger.

[Holger Lembrér]

Thank you, Carolina. And then I open up for questions. Operator, will you please remind how to ask questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Andre Kukhnin from Credit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Firstly on China. Could you maybe share with us what triggered the write-down in terms of the performance of the country, maybe? And what's changed in the last 3 to 6 months to revisit the goodwill size? And maybe the context of that, could you let us know if there's any goodwill left on the books for China?

[Nico Delvaux]

Yes, that I can talk and then Carolina can give you the details on the exact figures for the goodwill. You know that we have reported since, I would say, 3 years, a strong declining market in China. The markets were declining on year-to-date strong double digit. We saw a strong decline mainly in the project business, and we, today, are mainly on the project business. And I don't remember if we go back 2, 3 years that we were mainly in Northern China and because the acquisitions we did were very concentrated on the northern part of China. And northern part of China is a bit more than the southern part of China. That is today not the case anymore. I think today, the situation is either on the [indiscernible] it's not a -- then towards the end of last year, we thought that the situation in China was leveling out. It was not before [indiscernible] my predecessor for the first time, I think, was more positive and also mentioned that he believed that China was turning. Then in Q1, again, we said that the market was down in China and that it was a short quarter, and therefore, it was difficult for us to touch. But now after quarter 2, we have seen, again, project business down in China. Our own result is also down high single digit in China, and it's well mainly on the door business side but also on the hardware side, and that led also to the conclusion that we are not seeing that turn yet. And therefore, also, previous figures that we put in business terms going forward, terms that were also used to do this here impairment practice are no longer valid. And now with new management in place in APAC, we come up with a new, I think, still ambitious but realistic strategic plan for China going forward based on actual market conditions. And that's the reason why this comes now. And as for the goodwill, Carolina can give an answer.

[Carolina Dybeck Happe, Executive VP & CFO]

Yes. I would sum it like this because we have -- in APAC, we have goodwill and other intangible assets for the whole APAC. And before that was SEK 10.4 billion and now we are then without the SEK 5.6 billion, around SEK 4.8 billion. And if I look at just China, Andre, then China goodwill and intangible assets were about SEK 8 billion before and now with -- right now, we are on SEK 2.4 billion left for China only.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

And on China performance going forward and with the new strategy, will this require an incremental degree of investment to implement that, i.e. should we think about the current margins in China going down before going up, going forward?

[Nico Delvaux]

I don't think that the margins will further go down, but it will -- yes, take longer time for the margins to go up to a level that we expected previously. And of course, we -- when we look at our figures, we look at APAC figures. In the APAC figures, China represents around 60%, so it will be also very important to see how China market will develop in the future vis-à-vis the rest of APAC. Because, of course, on the longer term, we expect China to grow faster than the rest of APAC, and we have also said in the past that margin in APAC is, exception of China, on a healthy -- a normal level, whereas, the margins in China are very low single digit. So depending on how fast China grows vis-à-vis the rest of APAC, is it has an important mix effect, which, of course, will determine in an important way the overall EBIT margin for APAC. But going back on China, no, we don't expect China margins to go fairly down. We expect margins to gradually improve. We have a lot of self-help do in that, but we still have a lot of actions that we can do irrespective of market conditions. That should help us to improve those market margins in China. And then, of course, if and when the markets for a new project in China will turn, we will, of course, also see there and the help of additional colleagues. We will do the investments gradually as we recover and as we grow. We will, of course, invest in salespeople. We will invest in R&D people. We will invest in service support people, but that will happen gradually as the business comes back.

[Operator]

Our next question comes from the line of Lucie Carrier from Morgan Stanley.

[Lucie Anne Lise Carrier, Vice President]

I just have -- actually, Andre has already asked some of my questions, but 2 more, please. The first one is, I understand, of course, that you had done quite a lot of review around China considering the issues that the company bear over the last 2 to 3 years, but just for us to understand considering the magnitude of the impairment today, which, I guess, is surprising most people because of the size, are you also carrying similar type of review and reassessment of assets at other calendar assets of the company, other region of the company? So that's question number one. And then question number two, I think, Nico, you mentioned in your opening comment that the market in China was still quite difficult at the moment. You also mentioned, I think, some tension from, kind of, what's going on with the tariff, and I was wondering if you could give us a bit more information there in terms of the impact of the latest tariff policy that has been announced, please.

[Carolina Dybeck Happe, Executive VP & CFO]

I can take the first one then on the impairment, and then Nico will answer the second one. When you have duty like this, you are sort of on an annual [indiscernible], always reviewing all the main units on goodwill versus sort of whatever cash you expect to get out of that business. So that we do as part of our normal procedure, but there's no other significant review on a goodwill basis that is done.

[Nico Delvaux]

And perhaps, I can add on this assessment. When I started, we looked at Bluetooth integration in general in the different regions. And that was also around the time that we made the impairment check in general because we did it on a yearly basis. And we can confirm that we don't have any issue, and we don't foresee any issue in any other regions. It is really only related to our China business. And then when it comes to the second question from the market, like I said, we have seen 3 years of decline of the new project build in China, and we have seen that going down this also double digit in the first week starting with a 2 for several quarters. We have seen that decline becoming less significant over the last quarters. Then again, it's still down. In quarter 2, our result is high single digits down in China, and we, for sure, don't gain market share in China, but we also don't lose significantly again -- and we also don't lose significantly market share in China, so we believe that also the market is down in China around these numbers. And it's, of course, difficult to predict when this market will turn, but we don't see signs that this will become a positive market on the very short term. And when it comes to the tensions between China and U.S. in trade conflicts in general was difficult, and we definitely don't want to speculate, but you also hear and see what is happening and what measures China wants to take. I would say that, perhaps in our business -- one of the most important question there is on, of course, 2 things, what is happening with material prices? I will come back also on that in our quarter 2 call, and then what direct effect will it have on China? But very difficult to predict. Let's say that the situation definitely does not help in a positive way.

[Lucie Anne Lise Carrier, Vice President]

Can I have a third question, please, for Carolina? Can you let us know if you already have an indication of the tax accounting around the goodwill for this year?

[Carolina Dybeck Happe, Executive VP & CFO]

No, not yet. We will come back to that during Q2.

[Operator]

Our next question comes from the line of Guillermo Peigneux from UBS.

[Guillermo Peigneux-Lojo]

I was trying to get a little bit more granularity as which parts of China are weak, so it's -- traditionally has been for you northeast, and I wonder whether this could be -- used to be the case or the weakness has been spread into other regions of China. Similarly, regarding segments, is this residential, is commercial? Can you give us some insight as to what parts of China are weak again or if it's broad based?

[Nico Delvaux]

Yes, Guillermo, on region. Indeed 2, 3 years ago, it was definitely more the north, which was going down much more than south. And that we were much more exposed to the north, this -- it has our tech-wise. That is no longer the case today because, today, our business is not so much Northern China exposed anymore because we have so much done over the last couple of years that is now [indiscernible]. And we see also not so big differences anymore in market going down between north and south. It's very, very similar. We've already something perhaps you could say that the south is a little bit more affected than the north. But I don't think it's evident, and let's not make a difference between north and south. And then I talk about the market going down. I talk about the markets for newbuilds, newbuilds in general. And, of course, what is residential, what is commercial. You know that in China when you talk residential, it's about 1,000 or 2,000 houses. So I talk about this project and then the commercial project. And though we see -- we believe the market is further down, I would say, high single digit, we believe though that replacement markets might be stable or even slightly up, but that's a market where we, today, only play in a very little way. And that's, of course, one of our focus points now for the future, but we also want to capture more of that replacement market.

[Guillermo Peigneux-Lojo]

And I have a follow-up that's regarding your tariff, that -- what you said about the tariff and the trade situation. I'm wondering whether this would have an impact on ASSA ABLOY to reduce ASSA ABLOY low-cost production assets to actually export into the Americas. Is that something that we should be concerned about? Or is completely at the moment negligible and almost shouldn't think about it?

[Nico Delvaux]

Yes, of course, for China, it's south. And this call is about China. I don't think this has an important effect or an effect at all on the material, perhaps it's not significant for China. We know that material prices are a challenge in China, and I also explained in quarter 1 that they will remain a challenge for several quarters in China. Where our price increases are lagging and the material price increases and that we are working also on new product development to cope partly with that material price increase versus price increase. But there's definitely one additional factor in China, and the market was down. We have had our internal issues, and then of course, there is a material price increases which also makes the business that we have today at a level we have it today with the margins we have it today, meaning very low single digit. And that's, I would say, the reason also why we have this going up.

[Operator]

Our next question comes from the line of Mattias Holmberg from DNB.

[Mattias Holmberg, Analyst]

Nico, I just want to ask because, in relation to the Q1 results, you said that you saw overall positive signals in the markets that have been troublesome. You mentioned China in particular, and you've already elaborated a bit on what issues you see in China, but I'm more curious as to what changed so rapidly since April? If you please could elaborate on what factors have changed since then and what triggered this announcement today.

[Nico Delvaux]

I'm not so sure that I said that China was positive in quarter 1. What I've said in quarter 1 is that I was very positive about all markets except about China. But in China, I said, we had seen the markets on newbuilds fairly going down in Q1 but at a lower deceleration rate than before. And I also said that quarter 1 was perhaps too short to come to real conclusions on China. So in quarter 1, we [indiscernible] that the market will slow down in China. We are now seeing quarter 2, and after 6 months, there is not the recovery that perhaps some people were hoping for or thinking about towards the end of last year. And I would say that is the biggest change where perhaps quarter 4 gave some hope that the market was indeed turning and that we were also turning. We see now after 6 months in the year, in 2018, that is not the case for our business, and I don't think it's a big change.

[Mattias Holmberg, Analyst]

Great. Yes, that's fair enough. You didn't say that the market actually was improving in China. More just the sentiment to maybe turning a bit. And I know you said you didn't want to comment on Q2, but I think I'll give it a shot anyways. If you would like just all comment on the margin, which seems a bit weak in Q2. What's that maybe you relate it to?

[Nico Delvaux]

Yes, let's be consistent. It should be said before I said at the beginning, this call is about China. We will have another call to get more details on Q2 in 2 weeks. Let's keep it like that.

[Operator]

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

[Gael de-Bray]

I have a few questions, please. The first one is, you've indicated in your opening remarks that you were committed to the Chinese operations, which, I guess, makes sense. But is that the case for all your operations in China, including the door business? And could you remind us how important the door segment is to your strategy in China? So that's question #1. Question #2 is on the margin performance. Out of the 40 bps decline for the group margin in Q2, how much of that was actually related to Asia Pac? And the third quick question is about the sort of sequential deterioration you've seen in the construction market in China. What's actually your exposure to Tier 3 cities in particular, where it seems that the current property boom could perhaps come to an end relatively shortly now?

[Nico Delvaux]

Okay. So we have the 40 bps on Q2, we had the third-tier cities. And what was your first question again? Sorry, Gael, I forgot.

[Gael de-Bray]

For the margin in Q2, well, I think the group margin dropped...

[Nico Delvaux]

No, your first question, your first question.

[Gael de-Bray]

Oh, the first question is just about your commitment to the Chinese operations...

[Nico Delvaux]

Okay. Yes, perhaps, on the commitment to China, we have the ambition to be a worldwide leader. And it's clear if you want to be a worldwide leader, you also have to be one of the leaders in China. China, long-term investment would be -- is going to be a very important market in general, and it's also a very important market for us. So -- at ASSA ABLOY, so it's strategically important for us to be successful in China. And we believe with the information we have today that our metal door business is also part of that strategy. You see that there is a strong link between selling doors and selling hardware door -- and selling hardware. So you should normally say selling doors means we sell the high-end doors, so fire-protected doors, security doors. And so those doors, more and more, you see that people want to have a complete offering including the door and including all the hardware. Because also as higher specs kick in, you won't have to certify the complete opening, let's say, door including hardware. And in that aspect, they both grow hand in hand. So yes, we are committed to China. And in that strategy of China, the metal doors are part of that strategy. When it comes to the exposure, Tier 3 cities, of course, the more you go down in the market, the less people go for the higher-end solutions, and they go more for a local China alternative. And in that aspect, of course, our exposure is higher in Tier 1, I would say, medium in Tier 2 and lower in Tier 3 cities. But with our Pan Pan organization, of course, we have a very wide and dense distributed network, so those really goes into those Tier 3 cities. So I told you it's mainly on the Pan Pan side. I would say it's very limited this year, very limited to ASSA ABLOY. And then when it comes to our EBIT for quarter 2, I would say the same amount as I gave to Guillermo. We will come back on the results of Q2 in 2 weeks. But I can say that APAC, definitely, we can contribute in a positive way to the result. We already told you that our margins for China were under that very low single-digit level.

[Carolina Dybeck Happe, Executive VP & CFO]

Gael, you want to ask about how much our door exposure is. Today, doors in our China business is less than half of our total China sales.

[Operator]

Our next question comes from the line of Denise Molina from Morningstar.

[Denise Molina, Equity Analyst]

I have 2 questions for Nico. So just to talk about the exposure to pricing pressure, even on the premium brands because you've seen that in other cap goods in China that there's just pricing pressure even when you're looking at the high end, especially when you got a weak market. So I wonder if you could talk about that. And then second is, now you're looking at an impairment on a previous acquisition from a previous team. And if you think about the pace of acquisition for the company as a whole, it's been pretty astounding. So if you want to redo or rethink your due diligence process, it seems like a good jumping-off point, especially with the accounting problems that were reported, I guess, about 1.5 years ago. So -- with the China business. So I'm just wondering if this has triggered internally a rethink about how you go about making acquisitions.

[Nico Delvaux]

That's actually why we start with the first question first, the question on pricing in China. It's, of course, a very competitive market because all the international players are there. And then above that, there are still many local Chinese players. And then let's say that, in general, the pricing on the hardware is not such a big issue. We can manage that on the hardware, and we can make good margins on the hardware. The challenge is really on the metal door side, where those very high material cost increases cannot be calculated directly to price increases in the market. It seems that it's very difficult for Chinese people to digest that a material price increase of 16% or 20% must be translated in real equivalent price increase. So the way we try to do it in China is done to come with new development of new doors, new models of doors that we then can price in a different way and then indirectly get those price increases through into the market. But that, of course, takes a longer time. And then, therefore, you lack -- your price increase starts to show material price increase, and it's a more difficult exercise. And it's fair to say if you look in the 3 regions -- Americas, Europe and APAC -- it's so clear the biggest challenge now in China to get those price increases. That being said, the other way around is also through when the more material prices go down, it's also easier to keep the price. But look, on the summary, price is mainly an issue on the door business, and it's directly related to the material price increases, metal price increases on the door. When it comes to acquisitions, I often say when you do 10 acquisitions, there is 1 or 2 you definitely want to talk about because it's fantastic acquisitions, so there's 8-or-so that are good acquisitions. And then there is 1 or 2 that you avoid to talk about, and it's clear that the acquisitions recently in China fall under the last category. We bought these companies at the peak of the cycle in China, the moment both those companies mark start to go down in a significant way. On top of that, you're geographically exposed, like I explained in this acquisition in the north of China mainly and as a businessman, you go down even more than in the south. On top of that, when we acquired the companies, we had several compliance issues that we also reported a couple -- or 1 year or 2 years ago. That made us very much internally focused. We look at that every year, forgot to give attention to the market and to the business development and asked for us a lot of effort to resolve those issues. And then, of course, on top of that, we got then the material price increases. So in a way, it was, I would say, a perfect storm for those acquisitions. Of course, we have learned from what we given to do right when we acquired these companies in China. And as we do acquisitions all the time, it's of course a continuous learning process. And we're also confident that if tomorrow we will do acquisitions again in China that we are much better prepared to be successful than we were 3 years ago.

[Operator]

Our next question comes from the line of Alexander Virgo from Bank of America Merrill Lynch.

[Alexander Stuart Virgo, Director]

Carolina and Nico, I wondered if you could just, in the context of China, give us the drag on Q2 that this -- that China represents. Was it sort of 50 bps to your organic growth or something like that, if it's high single-digit decline? And then I wondered what, medium term, whether you could share with us some indication of what those target -- profitability targets would be from that low single-digit level at the moment? What are we looking at on a medium-term view that underpins that goodwill impairment or maybe an indication of how different they should be from the prior plan?

[Nico Delvaux]

If you look a bit perhaps on the second question, perhaps, and maybe I can take the first one. But if you look on APAC level reported margin, it's, let's say, around 10%. And if you look in that APAC region, the China market is around half of the APAC business. So going forward -- actually, and we also said that in China, we make very low single-digit bottom line. Then the rest of APAC has very healthy margins, in line, I would say, with the group. And that's also why we come then to that around 10% margin for APAC. Now going forward, everything will depend, as explained before, on how fast China markets will recover. Because the faster China grows, the more we're going to have a mixed effect towards China, a market with low single-digit margins. And as China grows more, of course, we have a mixed effect toward the rest of APAC. That is the best of our knowledge today. We believe that margins in APAC still remain on more or less that level where we are today for the short term for the coming quarters.

[Carolina Dybeck Happe, Executive VP & CFO]

Yes, and into the quarter [indiscernible] year is saying that it's high single digits for China, which is about half of APAC. And since the overall group is around 5% organic, so then like we have around 40%, 50% valuations from that on the top line.

[Alexander Stuart Virgo, Director]

Okay, Carolina. So Nico, does that -- so that mean you can get the low single digit up to double digit? Or -- I'm just trying to get a feel for how we can -- what profile that recovery can take.

[Nico Delvaux]

That's good dimensions, and to answer to that, like I mentioned before, I believe it is a lot of self-help we can do in China. So they definitely, irrespective of the market, can improve this low single digit, in important way by doing the right things internally. But again, that will take time. It's not that we put a new organization in place today that tomorrow you will see the results. I know that you want that, and I also want that, but we have to be realistic. It will take time for that to happen. And then the more important thing I would say is, it depends on the market, how fast the market will come back. Because obviously, the volume market growth also plays an important role here for the margins.

[Operator]

Our next question comes from the line of Peter Reilly from Jefferies.

[Peter Reilly, Head of Capital Goods of Equity Research]

I've got 2 questions, please. Firstly, could you help us understand a bit more about the asset write-down. It's the second time you're taking an asset write-down in China. You took one in late 2016. So what's happened since then? Have you continued to build up inventory and assets which you're not having to impair? Or is most of this, say, not having to pay one out you've previously written off earlier in 2016. And then secondly, in terms of your product portfolio in China, you said that you're obviously overweight steel doors and underweight hardware. Medium term, can you fix this organically? Or do you need to make acquisitions to improve the scale of the heart of business? Or are acquisitions just off the table for the foreseeable future given all the problems you're having there?

[Carolina Dybeck Happe, Executive VP & CFO]

Okay, so I will answer the first question on the asset write-down. The total, SEK 400 million. So we have provisions for accounts receivables, settlement with previous owner and a provision for slow-moving inventory. And to give a little bit flavor on that end, on the accounts receivable, I can say that, today, we are collecting more than 100% of our sales in receivables every month in China. The really old receivables are already provided for, as you noted, but due to the slow market with the continued challenges to get paid, we have done some further provisions on the receivables side. Then we've had some issues with previous owners, where, well, we obviously believe that we're in the right. But with the system in China and so on, we have decided that we will put this behind us and move on. And on the last part, on the inventory side, with the slow market reducing a risk that the inventory that we have is taking a bit longer to get out, and therefore, we have taken additional provisions for slow-moving inventory. And I give over to you then, Nico, for the second one.

[Nico Delvaux]

Yes, on the acquisitions, of course, we stopped all acquisitions in China 3 years ago when we started to get the challenges with the companies we acquired at that time. We believe that, from a product portfolio point of view, today, we have a good offering in high-end segments where it's missing a little bit. Today is a good offering in the medium segment. That is not quite the value segment, but we can also then use in the replacement market. We are working on that product range as we speak, so we believe we can do that organically. But it's clear that China is definitely for us also a target market to do acquisitions in the future. But don't expect us to do acquisitions in the coming months in China. We believe we have to first further stabilize the situation in China, have the new organization up and running in a solid way. But once that it is the case, then, for sure, we're going to look again for potential acquisitions. And they can be either for complementary product rates, or they can also be to further identify our network in the market.

[Peter Reilly, Head of Capital Goods of Equity Research]

That's very helpful. If I can just come back on the issue of the settlement with [indiscernible]. I get the impression -- and this may be wrong, but a lot of the charge, the asset write-down is effectively reversing your decision to write off the earlier earn-out. Is that fair that you're having to pay most of the money you'd previously decided you weren't going to pay?

[Carolina Dybeck Happe, Executive VP & CFO]

No, it's a different issue.

[Operator]

Our next question comes from the line of Peder Frölén from Handelsbanken Capital Market.

[Peder Frölén, Head of Equity and Credit Research]

Let me just stick to the earn-out situation. Maybe, Carolina, you could share with us how that looks right now for the group in total but, of course, also if there's anything left when it comes to China and Pan Pan in particular? And tied to that, maybe, Nico, given the -- one of the problems in China, which has been the compliance issue, you talked about market metal prices and compliance issue, how do you see from earn-out model as such given your experience from other companies and so?

[Nico Delvaux]

You want to start, Carolina?

[Carolina Dybeck Happe, Executive VP & CFO]

Yes, sure. So well, on the goodwill and on the earn-out side, I think for the group, let's leave that question till we have the Q2 call as planned. When it comes to China, no, we don't have any earn-outs left to be taken or not taken for China and also not for Pan Pan. That is long gone.

[Peder Frölén, Head of Equity and Credit Research]

Yes, but if I could just reflect or repeat what's on the annual report, I don't have it in front of me. But if you just look at historic figures, and what could you say about the group earn-out then? Don't need to comment on 2018 here.

[Carolina Dybeck Happe, Executive VP & CFO]

No, I don't have all the annual report here with me either. And I mean, there are different earn-outs in different business areas, and we value them at -- regularly, as we go to see sort of what do we actually believe that we will have to pay. And maybe [ represented ] to the question we got before then, this was a legal dispute that we had with 2 of the sellers, and we have seen that we're in the right. But to get right and to get paid even if you're right will take a long time in China, so we decided that we will just not have that as an asset. We will write that down and move forward instead. And I don't have the details on the other parts, but they are specified in each of the annual report in the details, so we just have to get that and come back to that later if you want to.

[Peder Frölén, Head of Equity and Credit Research]

Okay, Carolina. Okay, on the earn-out, it's not just tools when it comes to acquisition, Nico?

[Nico Delvaux]

Yes, of course, an earn-out as a tool can be a good tool to be, it's an acquisition. But it's like, any tool, you have to use it, of course, in the right way. Why do we sometime use earn-out is, one, of course, because expectations from sellers and buyers are not the same, and an earn-out is a good way to bridge that gap. Again, a second good reason to use earn-out is that you have some time that previous management will stay in the organization, and it gives you time to show to the people that ASSA ABLOY is a good company to work for and that they have a future in our company. Of course, it doesn't so -- it's not just in the right way but also has a negative effect. If the earn-out parameters are not the right ones, then you'll never have earn-outs and never succeed. You should have earn-outs only on sales because that obviously the right -- you can't have wrong behavior. And then also if a lot of your synergies come from changing the organization, integrating the organization, eventually closing factories and integrating another operation, of course, you should also not have too long earn-out because that just delays your possibility to realize those synergies. So it's like with every tool you use, you should use it with common sense and use it in the right way. And of course, there, we have also learned in the past, and I think it's fair to say that we're going to more selective when we use earn-out in the future and it also be more precise on the earn-out KPIs, parameters that we use in the future.

[Operator]

Our next question comes from the line of [ Martin Lindgren ] from [ Baggins Industry ].

[Unknown Analyst]

Thank you for taking my question. I have a few of them, and the first relates to the final interview that your predecessor gave for my colleague. He was asked whether there's some waste left after him, and he said that time will tell. I don't -- we have sadly left over -- left any waste behind us. I've always had a conservative view, and I will continue to have that. In your opinion, Nico, is this goodwill impairment -- or was the goodwill impairment test in China during his stewardship not conservative enough? That's my first question. And my second question is, what is this goodwill write-down actually related to? What acquisition in particular? I don't think I've really understood that. Is it Pan Pan? Or is it a few companies? And the third question is, I understood that the new APAC head started in September 2017. Why has today's issue not been discovered until now? And the final question is related to the identified accounting issues during 2016. Do you have any more of that?

[Nico Delvaux]

Okay, let's start with the first question. I'll take -- answer the first -- maybe it's a question best asked to Johan [ and how ] because I don't -- I cannot read the brain of Johan. But for sure, Johan has done a fantastic job in this company. And he understand the company, I think, in a conservative way. So most probably, he had a good reason not to do this earlier. And like I said, in Johan's defense, quarter 4 last year gave perhaps some hope. I don't know if hope is the right word. But quarter 4 is the first quarter in many, many quarters where we saw some positive signals in China. And I think [indiscernible] of the quarter that was based on that area is not seen and repeated in quarter 1 and quarter 2. So I think it's now fairly [indiscernible] also not an important question because we didn't do it at that time. We do it today, and then the reality. When it comes to which acquisitions we do this write-down, it's in the first place on our door business, so the Pan Pan business, which has been affected the most by the China situation. To you give you an idea, our door business is today more or less half of what it was at the peak, even a bit lower. It's mainly the door business, but there's also some hardware companies involved. And then it's only too that Anders, our new head of APAC, started [ September ] last year. Then again, the expectations from your side and our side is a little bit different. It takes time, of course, for people to widen out into business and really understand the details. Anders is now 9 months into the role, and he [ foment ] into the role. We have spent a lot of time together on China and on the China strategy. And Anders out now confident to come out with that new strategy for the future. And then your last question on 2017, I'm sure Carolina can add more flavor because she was there at that time. But like I said before, at that time, it was a perfect storm. We bought the companies at the peak of the cycle. We had these compliance issues. And on top of that, we had the material price increases and so on. To the best of our knowledge, we don't have any, I would say, significant compliance issues outstanding in a sense. Okay, China is, of course, a market that, by itself, has probably a higher risk for compliance issues than other market. You should also not forget that we have 10,000 people working in China for us. So of course, we have regularly think that we investigate. I would say that is also on an ongoing basis. But again, to the best of our knowledge, nothing significant.

[Carolina Dybeck Happe, Executive VP & CFO]

And maybe comment then on the accounting issues that you talked about, and just to be clear that, on the SEK 400 million that we have now, that is the write-down of operating asset. That is where we are today. Because the old [indiscernible] they are provided for, and the holding [indiscernible] as well, and the collection is sort of moving ahead in a good way compared to the sale. But due to the sort of continued slow market and the continued challenges to get paid for the sort of semi-old, we have taken these extra provisions now on receivables, and it's a little bit the same on the inventory side, but since the sales are so slow, with time, the inventory gets older, and therefore, we have taken additional provisions for those as well. And the issue with the owners, well, it's another nonrelated issue to receivables. But there, we have a discussion with them, and we are pretty clear that we are in the right here. But to get right and to actually get paid with for this in China, that will take time, so we have decided that we will put this behind us and make a provision for them, move on.

[Holger Lembrér]

Thank you, Martin, and thank you everyone for this session. We are concluding the conference call today, and you will hear more from us when we are reporting out the second quarter at the 18th of July. Thank you very much.

[Carolina Dybeck Happe, Executive VP & CFO]

Thank you.

[Nico Delvaux]

Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.