Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2020-Q2

[Björn Tibell, Head of Investor Relations]

Good morning, everyone, and welcome to the presentation of ASSA ABLOY's Q2 Report 2020. My name is Björn Tibell. I'm heading Investor Relations. And joining me on this call is ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. As usual, we have set aside about 1 hour for this call, and we will get straight into it now with a summary of the report before we open up for your questions. So with that, I would like to hand over to you, Nico.

[Nico Delvaux]

Thanks, Björn, and also good morning from my side. Now the second quarter in a row that we do this from our home offices, because of COVID-19, of course. Like the title says, an extraordinary quarter. Just to remind you, we started the quarter with more than half of the world population in one way or the other, locked down. And of course, many important big markets locked down going from countries like New Zealand and many countries in Southeast Asia and definitely also a big country like India in our APAC region. And then big markets in Europe, like France, Italy, Spain, U.K., completely locked down and going to the Americas with big parts of Canada, locked down, a challenging situation in U.S. and then, of course, we -- the very challenging situation in South America as well. And then gradually, in the quarter somewhat towards the second half of May, markets started to open again and then we saw further recovery going into June. But -- so a negative organic sales development for all our divisions with a negative organic growth of 18% and strong sales decline for all divisions.A lot of effort in the quarter on reducing costs in order to defend the bottom line. And very happy with the cost we could take out in the quarter, more than SEK 1 billion net. And therefore, saw also a contained EBIT margin of 10.5%. And then definitely, good to see that we continue to deliver strong cash flow also in COVID-19 times, a cash flow of SEK 3.4 billion, only slightly below the same quarter a year ago.In figures, sales of SEK 20 billion, 15% down, 18% negative organic growth, 3% positive growth through acquisitions and neutral currency. And then like I mentioned, an EBIT margin of 10.5% versus 15.9% a year ago and in absolute value, an EBIT of almost SEK 2.1 billion, 44% down.If we look at the world map, we obviously see double-digit negative organic growth figures for the quarter in all continents. And I would say that you see a difference between those regions and markets that have been in an official complete lockdown versus the markets who had perhaps a softer approach, the softer approach markets, markets like the U.S., perhaps Germany or DACH; in general, Australia; and then definitely also Scandinavia with Sweden as the biggest markets, where we saw lower decline of the organic growth. And then on the other side, you have, of course, the markets where they were locked down for a long period of time. India, the most extreme example. But then also in Europe, markets like France, Italy, Spain, U.K., where we saw much bigger declines. China, one of the markets that opened up again as the first one. We saw in China still double-digit negative growth in the quarter, although we saw a good steadily improvement over the quarter. And we saw a better improvement on the commercial side than on the residential side. And I would say that improvement is true basically for all markets, where April was obviously very deepest, May slightly better as markets started to open and then June, again, better than May.Some market highlights. We continue to get strong project wins. I will pick one vertical out. Everything that has to do with logistics. As the Amazons of the world continue to build warehouses in a very intensive way, I would say, to fulfill also all those in-home deliveries that we now all do in COVID-19 times. We also continue to get nice project wins. The logistics vertical is, by the way, also one of the good reasons why the Entrance Systems decline was more contained. And we got here also a nice looking solution order for logistics center in Sweden.Then we have had several product launches related to COVID-19. We launched a new video visit solution for our senior care Phoniro business in the Nordic, so that you can, from a distance support and also a virtual visit with elderly people that fall under that Phoniro solution. And then in HID, very excited about this location services for contact tracing, where we can trace for instance, patients in a hospital where we can see how COVID-19 patients move in a hospital, but where we also can trace critical equipment like breathing equipment and so on. And where we now also can measure distances between people and then warn people when they come too close to each other, I mean, 1 meter, 2 meter, and then alarms will go off.Now we have also obviously launched new ranges of contactless hardware that you can retrofit on a doorknob, on a door handle in order to avoid that you have to touch the door handle or the doorknob, very important, of course, in COVID-19 times.Some other product launches, just we'll mention the Incedo access control ecosystem, very excited about that. A new platform where we bring our commercial access control solutions together, important for EMEA but also for other markets, like, for instance, Australia and New Zealand.If we then go to the sales growth, of course, now the second quarter in a row with negative organic growth, compensated partly still with positive growth through acquisitions.And then the operating margin, obviously, with a sharp decline in top line, also operating margins down. We are now on a run rate of 14% over the last 12 months. And top line down, margin down, so also operating profit down 44% versus the same quarter a year ago, but still 25% up in the last 5 years.We continue to be active on the acquisition front. We still have an active pipeline. We completed one acquisition in the second quarter, but then had 2 more now in July. Donimet is a specialty door company in Poland for the EMEA division. And I will come back on FocusCura on the next slide.When it comes to agta record, we still have the ambition now to close that acquisition in the coming weeks. We are waiting there for the green light of the European Commission. Confident it will happen in the next weeks; for sure, in Q3.And then a couple of words on FocusCura. I would say a Phoniro-like company in the Netherlands, one of the market leaders in the Netherlands with a very interesting technology for senior care, also on the alarm side, it's very complementary to Phoniro. Company of SEK 130 million and 100 employees. And this acquisition will be dilutive to EPS from the start.If I then go into the different divisions, starting with Opening Solutions EMEA, a division that was clearly hit in an important way by COVID-19, with an organic sales decline of 25%. While the sales decline was still, to a certain extent, maintained in Scandinavia, we saw very significant sales decline in all other markets. And that top line decline, of course, also had an important effect on the bottom line, an operating margin of 5.7% versus 16% a year ago. We have a negative volume leverage of 1,050 basis points. We had, of course, in that division, many markets that were completely locked down in April, and for a big part of May, we've also all the factories in those markets closed. When we then opened up again, of course, we have to do it with the right social distancing and the right safety measures also leading to lower operational efficiencies.FX was positive 20 basis points and M&A flat. We then go to Opening Solutions Americas, an organic sales decline of 18% with significant sales decline in all business areas and all regions. But I think a very good job well done in protecting the bottom line with an operating margin of 17.5% versus 20.5% a year ago, a negative volume leverage of 270 basis points, helped by FX, 30 basis points and then a dilution from M&A, 60 basis points. That's mainly or exclusively, I would say, an internal move. We moved the zero Perimeter Security from the Americas divisions to Entrance Systems, and we booked that under the M&A column.Another division that also performed well in the quarter, Opening Solutions Asia Pacific, an organic sales decline of 17% with a somewhat contained sales decline in Pacific but a significant sales decline in all other business areas. And of course, with India the extreme example on the negative side, I would say. An operating margin of 7.1% versus 9.3% last year, so very well -- very good job well done there also in taking out costs in the organization. A negative leverage of only 160 basis points, of course, also helped by the mix in a sense that more Australia and less China helps. But we have also seen a nicely improved margin in China despite the double-digit top line decline. So we are really confident that, that new strategy now in China starts to kick in and also starts to show financial results. FX-neutral M&A, a dilutive 60 basis points.Now we go to Global Technologies. Also hit very much by COVID-19, an organic sales decline of 25%, a stable growth in identity and access solutions, declining sales in identification, technology and then significant sales decline in all other business areas in HID and also in Global Solutions. Remind you that in Global Solutions, our 2 main verticals are hospitality, hotel business and marine cruise ships, and we all know what's happening with those 2 verticals. An operating margin of 10.1% versus 18.5% last year, an important negative volume leverage of 740 basis points, of course, because of the 25% decline, but also because of mix in the sense that we saw a much bigger decline in our recurring revenue part on the cards and the credentials side. It's obvious if there is no customers in a hotel, for instance, then you don't need new cards and you don't need new digital credentials on your mobile phone. So that business dropped much more than the 25%, and that's obviously a more profitable business than the rest of Global Technologies. So a negative mix and also a continued weak Citizen ID, where the bigger projects business is missing, lacking and where we have also are now taking the necessary measures to adjust the organization as explained also in previous calls. And this is also definitely a division where we continue to further accelerate our R&D investment in order to strengthen our position also more mid- and long term once we come out of this COVID-19 crisis. FX was dilutive 50 basis points, M&A dilutive 40 basis points.If we then go to Entrance Systems. An organic sales decline, I would say, of only 8%, declining sales in Perimeter Security, residential and industrial. And then a significant sales decline in pedestrian. Also more sales decline in service than in equipment. And in that aspect, therefore, also a negative mix from a profit perspective because we make more margin on service than on equipment, but also a negative mix in the sense that we were more down in pedestrian than in residential. And we know that pedestrian is a much better margin business than residential. But despite that negative mix, a very good operating margin of 11.4% versus 13.9% last year. We have a negative volume leverage of only 190 basis points. This division, like all other divisions, helped also by positive tailwind from material cost of pricing versus material cost, but also a very good job well done in costs reduction in the quarter to protect the bottom line. And FX of 20 basis points negative. M&A, 30 basis points negative, where we have to comment that we took SEK 100 million in acquisition costs, mainly related to the agta record acquisition also partly to the acquisition of the AM Group and some smaller projects.And with that, I give then the word to Erik, our CFO, who will then go a bit more into detail on the financial numbers.

[Erik Pieder, Executive VP & CFO]

Thank you, Nico, and good morning, everybody. As outlined by Nico, the sales decreased by 15% in the quarter, and the operating income decreased by 46%. The operating margin declined by 5.4 points and the EBITDA was down with 5.2. On the positive side, our operating cash flow was only down with 6% and ended at SEK 3.4 billion, which was mainly driven by a positive working capital evolution.Finally, the return on capital employed ended at 9%, which is due to the lower earnings and the higher capital employed. To mitigate the significant lower revenues, we have initiated a number of cost actions throughout the entire group. After direct material, employee cost is our largest cost component and represents roughly 29% of our cost. We have done far-going cost reductions when it comes to reduce of working hours, temporary layoffs as well as permanent layoffs. In fact, about 20% of our workforce has in one way or the other, been impacted by temporary layoffs and about 2,500 employees have been permanently been laid off during the first half year. This is a combination of manufacturing footprint activities as well as actions related to the COVID-19.On the other cost, we have reduced our marketing and trade shows activities and thereby also, we will not participate in any trade shows for the rest of the year. Our travel was reduced in the quarter with more than 80%, and we have also taken measures to reduce the use of consultants, and we've also reduced the cost for premises as well as renegotiated our terms. However, we have not reduced our R&D. And if you look in total, our net conversion and SG&A costs reduced net with more than SEK 1 billion in the quarter. Looking ahead, one should note that some of these costs will gradually then increase when production and so forth opens up.If you look on to the organic decline, the 18%, we still had a positive impact from the price with about 1%, and the volume leverage was actually down with 19%. The organic leverage was significantly better than what we had in Q1 and ended at 38%. Thanks to the previous mentioned cost-cutting measures that we have done. The operating leverage was, I would say, on the weaker side on EMEA and Global Technologies, while APAC showed a clear improvement. And there was a positive trend in the operating leverage during the quarter of all implemented savings. On the FX side, they were pretty small the impacts in the quarter. M&A activities had a positive impact on the sales, but dilutive effect of 60 basis points on the EBIT result. The dilution comes predominantly from the acquisition and integration cost from agta record as well as the integration cost of AM Group as well as Biosite. Looking ahead, we expect this number to improve as we have taken most of the costs related to the agta record acquisition.If you look into the cost breakdown, the direct material had a positive impact of 30 basis points, which is related to and that had a -- still a strong tailwind from the raw material prices in the U.S. Our conversion cost increased by 2%. This is, of course, mainly related to the lower revenue in that we have, but in absolute terms, the cost went down double digits. The gross margin that decreased with 1.7% (sic) [ 1.7 points ]. The SG&A were 3.1 points, but higher than last year, also, of course, due to the volume leverage drop, but we continued to invest in R&D as well as part of the sales organization. If you take the A&M cost, they were, in absolute terms, down more than double digit. And as a result of this, our EBIT margin decreased with 4.8 points. The operating cash flow was strong at SEK 3.4 billion, and which we think it's a good result. It was mainly driven by good working capital management. And I specifically, then if you look into our accounts receivable, where we had a strong collection. The cash conversion rate was strong at 181%.If you first start with our cash position, it increased to SEK 3.4 billion, which is more than what we normally have. This is due to, of course, preparation for the payment of the agta record acquisition as well as it is also a combination of the -- let's say, due to the times that we have now and where we have decided to have a little bit higher cash level on our bank account. The gearing level is at 58% and is down from 70%. The net debt also decreased with SEK 3.3 billion, which is a combination of a stronger Swedish krona as well as the strong operating cash flow. The net debt versus EBITDA ratio is at 2.1, which is down 10 basis points versus last year. All in all, I would say that our financial position is robust, and we can continue our acquisition strategy even after we have concluded the agta record acquisition.Finally, the earnings per share decreased with 45% in Q2 and ended at SEK 1.26. With that said, I would like to hand it back to Nico. Thank you.

[Nico Delvaux]

Thank you, Erik. And yes, indeed, like we started an extraordinary quarter, where sales declined strongly in all divisions, but where also over the quarter, we have seen a gradual improvement, May better than April, June better than May. And then, of course, also a quarter where we reduced costs in a very important way. We took more than SEK 1 billion net cost out of the organization in 1 quarter. And then good to see that also in COVID-19 times, we can continue to deliver solid cash flow, a cash flow of SEK 3.4 billion.On the short term, of course, the high uncertainty in the market will continue. There's going to be new lockdowns, to what extent are they going to be, which markets are going to be affected, how is the U.S. going to evolve. So a lot of uncertainty. And therefore, we continue, of course, strongly with our cost actions also in the coming quarters, and we continue to focus on cash flow as first priority; margin, second priority; and top line, third priority. But we also expect our financial performance to further gradually improve, of course, subject to no new negative events in the market.And on the long term, it's clear that the attractive fundamentals of our industry remain intact and that the strong long-term growth drivers remain valid. We will continue to see urbanization and security will become -- remain and become more important. We will see the shift to more green environmental friendly buildings driving technology up in our industry. And if already something with COVID-19 will change, we believe that it will accelerate also further the move from mechanical to electromechanical and digital, which again is a positive trend for our industry. And therefore, also, we reconfirm that our financial targets remain unchanged.And with that, we can open up for questions, and I give back to Björn for the instructions.

[Björn Tibell, Head of Investor Relations]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Lars Brorson of Barclays.

[Lars Wauvert Brorson, Director]

First of all, Nico, on your exit rate from the second quarter. You talk about a gradual improvement through Q2. I gathered June is still down in the teens, a bit slower recovery perhaps than I would have expected given the quarter overall was down 18% organically. Can you help me a little bit with the dynamics around that, if that's true? And specifically, whether some of the very strong growth you appear to have seen in your logistics and warehouse segment is starting to fade? I'll start there.

[Nico Delvaux]

Yes. If I start with the exit rate, of course, we were helped in the quarter with the fact that May had 2 working days less and June had 2 working days more in a normal quarter, it's neutral, 0. So it doesn't matter. But of course, in this quarter, May was still very much a lockdown market. So it didn't really matter too much to have the 2 working days less. Where in June, it was, you could say, a recoveryment, and therefore, the 2 working days more really mattered. And that you see more outspoken in Entrance Systems because we know that Entrance Systems is the division most affected by the number of working days in a quarter. But if you look at June to be specific on your question, we have seen in June, a higher single-digit negative organic growth still. But if you would correct for the working days and you would look, and let's say, normalized days, the organic growth in June would still have been double digit negative. But clearly, very good improvement versus May and definitely versus April.What you see is that those markets that were completely locked down, markets like France, U.K. and so on, obviously, the day they locked down, their business went from 100 close to 0 in April. But then also recovered obviously much faster when you open up again, where a market, for instance, like Sweden, that has never been in formal lockdown, obviously, the decline was more contained, but then, of course, also the recovery is much less. It's a bit V versus U, I guess.And then on the second part of your question on Entrance Systems, I would say there is perhaps 2 positive aspects. One is the residential garage door business, so the residential segment, which kept up much better than expected. That's for us a big part of the business is in the U.S. and then the second one, indeed, everything to do with loading docks for logistics, where we still saw good positive growth in the quarter. And that logistics business that falls under the industrial manufacturing part in the industrial segment of Entrance Systems.

[Lars Wauvert Brorson, Director]

Nico, my question specifically whether -- was whether you see that growth in logistics and warehouse be sustainable or whether perhaps there's been a bit of a, should we say, temporary boost to your business? So specifically, I was just wondering whether as you exit June into July, I know it's a slightly longer lead time business, but whether you think that, that growth you have seen in that part of your industrial business within ES is sustainable into the second half.

[Nico Delvaux]

Yes, of course, we don't have a glass ball, but there's nothing special in the quarter. It's not that we got 1 or 2 very big orders that made the figures in the quarter special. So we are confident that, that trend will continue as the logistics business, the warehouse business continues to grow. Yes.

[Operator]

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

[Guillermo Peigneux-Lojo]

I have a question regarding the savings as we see basically activity recovering to a certain extent, as you alluded to your exit rates. How much of that SEK 1 billion will be sticking to the bridges in the future quarters or at least how much of those savings you would keep if activity goes back to normal, I guess, by Q4, presumably?And then second question probably is regarding China. How would you define the recovery there as we speak? And how far are we from normal levels from your business model?

[Nico Delvaux]

So if we start with the costs. So more than SEK 1 billion net, that is, of course, a combination of short-term cost measures. To a certain extent, also taking advantage of all the local support programs that different countries put in place. And obviously, if a country is in lockdown, we send all the people home, the factories are not working. So to a certain extent, you can say that's an extreme of how low the cost can get. But next to the short-term cost actions, we have also initiated more long-term lasting and sustainable cost actions. Because we also are working on lowering our run rate, cost base, let's say, going into 2021 because for us, it's clear that after the corona crisis, for sure, we will also have an economic crisis. And I guess the real question is to what extent that economic crisis will hit. And I guess nobody knows, at least we don't know. But we said that doesn't mean that we should not take action today, and that's why we are lowering our run rate cost because we know that in many markets, if you take for instance a country like France or Spain, if you make a person redundant today, of course, you will only see the return on that in 9 months or a year from now. So if you want to reduce cost base, let's say, for 2021, we have to start acting already today. And as you can see a little bit in the numbers also of the people, where we said that we have around 10,000 people affected in either short-term laid off or permanent laid off. And from the 10,000, we have year-to-date close to 3,000 now that, unfortunately, we had to let permanent go. And that 3,000 is then in the category of long-term cost savings. On the others, of course, some of that cost will no longer -- or some of that cost reduction will no longer be there in Q3 and Q4, hopefully, I would say. Because when business comes back, of course, we will ramp up again our operations and therefore, also add again cost in those operations, but that will be more variable costs related to the business volumes that we will hopefully see go up again in the quarters to come.When we go to China, we have seen perhaps a lower recovery in China than some other industries. We have heard about other industries like elevator industry, for instance, talking about double-digit growth levels again versus same period a year ago. We definitely don't see that. We have seen good improvement May over April and June over May. And on the commercial side, I would say that today, we are back more or less on similar levels as a year ago, where, obviously, on the residential side, we are still double-digit behind last year. It's clear that if you have been as a Chinese locked down in your home for more than 2 months, perhaps even 3 months, it's not your first priority to replace your front door with a nice new PanPan door or replace your lock with a nice new Yale digital door lock. And that we see a little bit -- that are the businesses that are still more affected than our commercial side.On the commercial side, obviously, Chinese government is also putting money in stimulating also bigger projects. We got some nice orders for transport for instance metro stations and so on. But you know that in China, we are still much more exposed to the residential side than to the commercial side. But we are confident that situation will gradually further improve now also in the coming quarters.

[Operator]

Our next question comes from the line of Alasdair Leslie from Societe Generale.

[Alasdair Leslie, Equity Analyst]

Just on EMEA. I was just wondering how much of the 50% drop-through in the margin decline there reflects the kind of impacts of factory closures, operational disturbances, so kind of more exceptional COVID-related factors. I'm wondering if you see a kind of more fundamental issue here in terms of the operational setup in EMEA and whether you're kind of thinking of ways of making perhaps the business there more structurally agile from a cost perspective going forward. I suppose I'm interested in whether you think this crisis has kind of revealed any deeper issues with the EMEA organization that can be changed going forward?

[Nico Delvaux]

Well, if you look at the EMEA -- I guess your question is about the EMEA division, right?

[Unknown Executive]

Yes.

[Alasdair Leslie, Equity Analyst]

Yes.

[Nico Delvaux]

Yes. So indeed -- perhaps it's interesting to compare EMEA with the Americas, and you will see that, indeed, the volume leverage that you realize in Americas is better, more favorable than on the EMEA's. I think the volume leverage in Americas was around 32%, 33%, where the volume leverage in EMEA was 47%, 48%. I think there's a couple of reasons for that. The main 2 reasons, I would say is, one, of course, that in Americas, you only dropped 18%, whereas in EMEA, we dropped 25%. And when you are in the 18%, obviously, you have a much better chance to keep your volume leverage under control than once you go into the 25% or above. But more important to that is that how equally spread is that drop. And in Americas, if you look, you have, of course, one big country U.S., which had that drop of around 18%, whereas in EMEA, the 25% is the average, where you have some markets like Scandinavia, DACH, which had much lower negative organic growth. And then you had other markets like France, U.K., Spain, who had much bigger organic drop. And if you have 2 markets and they both go down 25%, it's one story. If you have 2 countries and one goes down 15% and the other one goes 40%. Of course, your results will be much worse because the 15%, you can maintain and get good operating leverage. If it's minus 40%, it's almost impossible. And we have had markets in EMEA that over the quarter are down more than 50%. It's clear that in a market where you're down more than 50%, especially as that 50% is even not uniform because it was then in March, perhaps minus 70% and then in June, a little bit better. But a market that goes minus 50%, obviously, you can't defend your bottom line and still show good operating leverage. So that's the 2 main reasons in the difference between EMEA and Americas. Yes, it's also true that it's easier to realize permanent cost savings in the U.S. than in many markets in Europe. But as we have these subsidy programs in place in EMEA, that is not a real issue for the quarter, at least.

[Alasdair Leslie, Equity Analyst]

Very helpful. If I could just have a quick follow-up on the permanent cost savings, the 2,500 permanent headcount layoffs that you highlight. I guess you probably not have much of a benefit so far in H1 from the savings related to that program. Can you help us maybe a little bit with the phasing and how the cost savings ramp up over the next couple of quarters?

[Nico Delvaux]

Yes. Of course, it depends again a little bit if you take a country like China or the U.S. Obviously, you have the savings quite fast. If you take a region like Europe, yes, there you have the cost and you don't have the savings yet. But what we have said is that, again, for us, the most important question is what will be the run rate after COVID-19, if the economic consequences of COVID-19. And we have said we don't know, but we will adapt our cost structure in a sustainable way long term to a level x percent below the cost level prior to COVID-19. And I don't want to say what x is, but the x is a single-digit number and the single-digit number will rise a little bit division by division. But we have chosen the x in a sense that we say we can do that without cutting into the muscle in a sense that we want to continue our R&D investments. In some ways, we even want to further accelerate R&D investments because we really believe this gives us today a competitive advantage. We obviously want to maintain our spec people, our specialized salespeople, our engineers. So the execution in such a way that we can reduce those costs in a sustainable way without jeopardizing all the investments we want to do, mid and long term. And that's how you should see the long-term versus short-term cost actions. The short term, how fast will a country recover? Yes, it's important. I understand it's in the first place also important for you. I would say we are less concerned in the sense that if it takes a little bit longer or it goes a little bit faster, yes, it will affect, of course, short term, our results, top line and therefore, bottom line. But in the coming months, in the coming quarters, the local incentive programs are still there. It's much more important to understand what is going to be the long-term run rate.

[Operator]

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

[Gael de-Bray]

I've got 2 questions, please. First of all, as we are gradually coming out of the lockdowns, have you started to see a trend that your clients would move to more mobile keys? And I mean, do you think we could actually start to see an upgrade cycle in buildings related to COVID concerns towards perhaps more touchless products, more automatic doors, tracking and location services, [ probably ] more advanced Entrance Systems? That's question number one.And the second one is about the margin performance, which was obviously a bit better than here in the quarter. [indiscernible] where margins recovered extremely rapidly and are now nearly back to pre-COVID level after being in negative territory in Q1. So I'd like to understand a bit more what drove such a quick improvement in margins and whether there is anything that can be applicable perhaps to the other regions, whether we could expect to see a similar kind of improvement elsewhere, even with the time lag?

[Nico Delvaux]

The line was not very clear. So you were talking about one division specifically, where the margins were almost back to pre-COVID-19 level or which division were you talking about, you said?

[Gael de-Bray]

Yes. I was talking about ASSA [ batch ] Asia Pacific.

[Nico Delvaux]

APAC.

[Gael de-Bray]

[indiscernible] and if we could see a similar trend [ in that piece ] that could be...

[Nico Delvaux]

Yes. Clear, if I start with the first question on mobile keys. Of course, the answer is on mobile keys definitely not or not yet, but if I answer a bit more in general, yes, we have launched now this retrofit ranges in all 3 geographical divisions that you can retrofit hardware on a door and don't have to touch the door handle or the doorknob anymore. We see very good traction on those new hardware lines. But of course, in a bigger picture, the fact that we do EUR 9 billion top line, this is a smaller part of the business, obviously. We see something similar in Entrance Systems and in the 3 geographical divisions, where, yes, openings are now being more automated. We have automatic door openers that you indeed don't have to touch the door anymore. The door opens automatically. In Entrance Systems, for instance, we have many different systems. Now for instance, that door opening is linked to a sanitizer equipment. So the door will only open if you first sanitize your hands and then the door will open or the door will only open if you wear a mask. We have also these systems now that count the number of people that are in an office or in a supermarket. If you say that in a supermarket it can only be whatever 10 people, then the door will only go open when it's less than 10 people or if it's 10 people, the door will only go open after somebody comes out and then let somebody new in. All these systems, of course, take traction now. And there we see good growth. On the HID side, same thing, I mentioned under the highlights of the quarter that we have these new systems now in HID that can track and trace equipment of people in an hospital, in an office, we can track and trace people if they're coming too close to each other, making sure that we guarantee that social distancing -- distances are respected and so on. And all that starts to generate business. And we see, of course, very nice impressive growth in percentages, but it starts, of course, from a low level. So again, in the complete picture of the EUR 9 billion, that is not moving the needle to a big extent yet. We are convinced, however, that through COVID-19, for sure, we will see now an acceleration if I don't talk in general from the move from mechanical to electromechanical and digital because you can do so much more with an electromechanical system than with a mechanical system. You can control things better. You can do it more hands-free. So yes, that trend will definitely accelerate now after COVID-19, and that's good news for us because it drives, obviously one technology up in our industry, and that's what we like because we like to make a difference through technology, but too, also, we know that like-for-like an electromechanical solution is a more expensive solution than a mechanical solution. So the total buy, the total markets will grow. And if we can then get a bigger part of that buy first and that will have a double positive effect for us.If we then go to APAC, yes, we are very happy with the margin improvement for APAC in the quarter. Of course, it's a little bit difficult to extrapolate APAC to the rest of the world because we know that we had our challenges in APAC and in China, in particular. I would say there's 2 things that make the results better in APAC. That is one, of course, the mix in the sense, we had more Australia and less the rest of APAC, less China, in particular. And we make much better margins, as you know, in Australia than in China. So that helps. And two, indeed, we have always said that we make single digits, low single-digit margins in China. We have seen a doubling of that low margin in China through all the things we are doing in our new strategy for China, consolidating operations, consolidating R&D, consolidating sales organizations and also going more after profitable deals in China.There's, of course, 2 specific items for APAC that you can't easily translate to the other divisions. It's clear that the lower your organic drop, the easier it is to get a decent volume leverage and therefore, the easier it is to protect your bottom line. And again, it's mainly the spreads in that organic decline that makes the difference. If you have a drop of 15%, and it's equal, it's much easier than if you have a drop in one country of 5% and in the other country of 30% because a 5% will be very easy to get your volume leverage and 30% will be much, much more challenging. And unfortunately, that's what we have seen in Q2 for instance, in EMEA or in Europe, in general. That's very big variation in organic declines country by country. And going forward, under the assumption that we don't get second waves of shutdown and so on, obviously, confidently, we will see less of that wide spread in spectrum of organic declines. And so that should help.

[Operator]

And our next question comes from the line of Andreas Willi of JPMorgan.

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

My question is around your kind of specification business where you get some visibility into future demand. If you look at activity there in June into July in terms of discussions with customers on kind of new construction, new projects, new offices, new hotels, what do you see there? And how does that help you with your determination of what that x should be where business normalizes next year? If maybe you could give us some indication maybe on how the activity level in that part of the business compares now compared to where it was 6 or 12 months ago?

[Nico Delvaux]

Yes. What it is as a result, I think, is different than what it tells us. When you look at our specification business, I must say, it's still very healthy, it's still double-digit up as well in the Americas as in EMEA. But that is, of course, architects specking in our products for potential future projects. And I would say that's, of course, a positive news because that means that at least that part in very early in the chain continues to be, I would say, even very positive. But the real question is, of course, how many of those theoretical projects will then also become real projects? How many projects will they really decide to start and execute through? And how much delay we will get in some of those projects? And there I think is a little bit too early to say, but that is definitely an important thing to monitor because that will decide on the business levels in a year from now. So going into 2021. Because if you look at architecture billing indexes and construction indexes, of course, they are down in April, May, very significant. Nobody expects something else. I would say it's more important to look at those indexes now in July, August, September, what's going to happen with those indexes because that will give us a better indication then for the quarters to come and definitely for 2020, 2021. Because definitely, in the Americas, there was stretch on the supply chain in the sense that it was difficult to find people and so on. So you can live a couple of months without -- or with a decline in new project because you will just pick up on that backlog. But then, of course, at a certain moment, those new projects have to start and have to kick in to guarantee the business also going forward.

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

My follow-up question on agta record. You said earlier on the call that most of the acquisition costs have been paid and that we should see consolidation starting relatively soon. Maybe you can provide an update on what the underlying impact will be in terms of maybe also what the agta record financial performance is relative to the expectations before? If you already have updated data? And maybe some indication on what to expect in terms of the PPA impact or the difference between the EBITA and EBIT impact once we get consolidation?

[Nico Delvaux]

Yes. We have said that agta on a 12-month moving trend would have a dilutive effect between 30 and 50 basis points that we have said prior to COVID-19. Obviously, now in COVID-19 times, it's -- might be or probably will be a little bit higher. When it comes to PPA and so on, it's still too early, we are still not the owner of agta record, so we should be able to give there more details, hopefully, confidently in the next quarter. And when it comes to the financial performance of agta record, okay, we only have the finance -- the official figures, the reported figures like you have those public figures as well. Obviously, agta record is also active and an important market for them is France. And we also know that France was locked down for a long period. And our business in France was affected in an important way. So also their business was affected in an important way.

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

Should we still expect the SEK 2 billion gain? Or is that impacted by the disposals you had to do?

[Nico Delvaux]

What do you mean with the SEK 2 billion gain?

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

On your -- the accounting impact of your own stake that you had in agta record.

[Björn Tibell, Head of Investor Relations]

I think Erik is muted, but he's trying to say, yes, the SEK 2 billion in capital gain is still expected to be the case. Yes, Andreas.I think we can move to the next question then operator.

[Operator]

That comes from the line of Lucie Carrier at Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I just have a couple left. I was thinking maybe if you could help us understand what you are seeing in terms of pipeline in conversation with your customer on the office space and also to some extent, HID and maybe put that in light in terms of the size of that business versus the size of what you were highlighting earlier, your contactless businesses for us to have a view on what potentially could be lost or impacted? And how much on the other side is the opportunity?

[Nico Delvaux]

Yes. So short term, obviously, let's call it, recurring revenue, the cards, the credentials as well as for HID as for Global Solutions is affected in a very important way. If I take the extreme example, the hotel business, obviously, that recurring revenue part, cards and credentials dropped to close to 0 because there is no people going to a hotel. And if there's no people going to a hotel, they don't need a card to check into the room. And to a certain extent, things are -- similar things are true for people going to the office. If people don't go to the office, they don't lose their cards and they don't upgrade the cards and they don't hire new people and so on. That being said, we obviously believe -- are confident that, that gradually will come back now. As now in summer period, people will start to go on vacation, will spend some time in hotels. If I look at our people also, our salespeople start to travel again locally visiting customers, sometimes also staying overnight in hotels. So that recurring revenue part, the cards and the credentials is gradually going to come back, that will help top line, and it will help, obviously, bottom line in a more important way.When it comes more to the long-term big shift again, I think if you take the macro driver, I believe that we will see that acceleration from mechanical to electromechanical, digital, which is the biggest and the most important trend. When you then zoom in and more specific on offices, I think everybody has his own opinion. Some people say, yes, there's going to be much less people in the office. There's going to be much more working from home. There's a lot of people say -- that say, once the COVID is over, everything is going to be back to normal, and perhaps we even need more office space because people have to sit further away from each other, so we need also more rooms and more openings. We will see how that evolves. But I think this is a smaller aspect in the bigger picture. I think the bigger picture is that, for sure, we will see further acceleration from the move from mechanical to electromechanical and digital.

[Lucie Anne Lise Carrier, Executive Director]

Okay. And I guess my second question is just a follow-up. You were mentioning earlier that you had benefited from local government program in various countries. Are you able to provide what was the contribution to your P&L from those programs? And also, if as part of that, it creates some, I would say, requirements from your standpoint in terms of keeping employment in specific area or restriction on restructuring or maybe also kind of dividend payments and so on?

[Nico Delvaux]

Yes, we can't give an exact figure, but we can say that it's a smaller part of the SEK 1 billion. And in that way, I would say it's good news because it makes the savings, I would say, also more sustainable. And I would also say that on the second part of your question that these programs don't limit our possibilities in an important way to do the long-term cost-cutting actions that we have in mind and that we are executing. So we are still flexible enough even with those programs in place to do the things we have to do long term.

[Björn Tibell, Head of Investor Relations]

Operator, I think we have time for one more question, please.

[Operator]

Then the final question comes from the line of Andreas Koski of Nordea.

[Andreas Juhani Koski, Analyst]

I would like to come back to the discussion about the Architecture Billings Index because when reading the ABI reports, many respondents are already talking about a very weak outlook for 2021, and it does not look like that they expect a strong recovery. And looking at your recovery in China, it has not been as strong as for other manufacturing industries. So my question is really, do you see a reason why the pace of your recovery in other parts of the world should not also be slower than for many other industries?

[Nico Delvaux]

Well, of course, if -- again, if you look and compare China with the rest of the world, we have always said that one of our challenges in China is that we are very skewed towards residential, and we are also more skewed towards new-build in residential. So taking China as an example, where it can extrapolate for the rest of the world would perhaps be a mistake in the sense that in the rest of the world, definitely, if you take EMEA and if you take North America, in particular, our residential exposure in North America for the Americas division is very small. When we talk about spec business in EMEA or in Americas, we talk about the commercial side. And of course, new-build projects on the commercial side is only one part of our business for Americas or of EMEA. A very big part in both divisions is, of course, the aftermarket, the smaller projects, the refurbishments and then just the replacement aftermarket business. So yes, Architecture Billings Index is an important indicator for a part of our business in the U.S., but we have a very big other part in the U.S. as well.

[Andreas Juhani Koski, Analyst]

All right. The reason for asking is because when looking at your organic growth recovery after the financial crisis, I know you don't -- didn't drop as much as many other companies, but it was significantly slower back then and now looking at China, it's slower. So that's why I was asking. Could I just try? You mentioned that June was down double-digit for you still in terms of organic growth. Is that what you have seen also in the beginning of July? Or is it back to at least single digit declines?

[Nico Delvaux]

So I said that in June, if you take June, it was a high single-digit decline. But if you would correct for the working days, the fact that we had 2 working days more, then indeed, it was still double-digit decline. And what we have seen when people came out of the lockdown, perhaps 2 things happened in some markets. We saw some destocking at the beginning of the channels because, obviously, they could not destock prior to shutdown because the shutdown happened suddenly from 1 day to the next and say they wanted to be more prudent because they didn't know how things would recover. They were also asking for very short delivery times. And therefore, we had to deliver in short times. And then too, we saw in many markets, opening up of construction sites going much slower than we had thought for. We thought, yes, today, the market is open again, okay, we start to see business coming back. That was not the case because, of course, on all those construction sites, people had to organize themselves with new way of working with social distancing, less people on site. And also in many markets, they had to wait for the health and safety inspector to come and inspect, decide and give the green light that they could start and could start with more people. And as there is only limited number of inspectors, there was also a delay there. And that acceleration, we have then seen gradually improving more in the second half of June and the beginning of July. Then how it will evolve now? I think it will depend very much -- we go into a holiday period, July, August, but I'm not sure, and it's also not clear to me if people are going to take similar vacations as a year ago. There might be some upside in the sense that perhaps some of those construction companies say, hey, we will not take 3 weeks or 4 weeks off in the south of Europe, let's take a week off or 10 days off because we lost already 2 months under lockdown, we will continue to work. But it's too early to have a good view on that.

[Andreas Juhani Koski, Analyst]

Okay. But July sounds good. Yes.

[Björn Tibell, Head of Investor Relations]

Andreas, I'm sorry, we will have to finish off the conference now. We can maybe take this off-line. Thank you, everyone. It's time to round up this conference. I'm sorry about some of the audio issues we had earlier in the call. We will record the cost slide again. So you can hear the commentary, and it will be made available via our website. Nevertheless, on behalf of the ASSA ABLOY team, I would like to thank you for your participation and interest. We look forward to speaking with many of you in the coming weeks again, and we hope you will have a safe and enjoyable summer break now. Thank you.

[Nico Delvaux]

Thank you.

[Erik Pieder, Executive VP & CFO]

Thank you.