Assa Abloy AB

STO:ASSA B

Earnings Call Transcript 2018-Q4

[Björn Tibell, Head of Investor Relations]

Good morning, everyone, and welcome to the presentation of ASSA ABLOY's year-end report 2018. My name is Björn Tibell, and I'm heading Investor Relations. Together with me here, I have our CEO, Nico Delvaux; and our new CFO, Erik Pieder. As usual, we will now start with a presentation before we open up for your questions. And with that, I would like to hand over to you, Nico.

[Nico Delvaux]

Thank you, Björn. Good morning to most of you, and good afternoon to some of you. Quarter 4 results for our company, very good results. We have a strong organic sales development, 6% growth in the quarter with 1 working day less and the way Christmas and New Year's fell in some markets even more than 1 working day less. Very strong growth in Americas and APAC. Strong growth in Global Technologies. And then definitely a very strong performance with electromechanical products up 30%; if you exclude currency, up 24%. A strong EBIT growth of 12%, but the margin diluted by M&A and raw material headwind. We also launched our 7th manufacturing footprint program, MFP 7. I will give details later in the presentation. And then a strong record cash flow of SEK 4.9 billion. A little bit more in detail. Sales of SEK 23.2 billion, 15% up. Like I said, 6% organic growth; 4% gross acquired growth, 3% net; and then 6% positive currency. An EBITDA margin of 16.7% versus 17.1% last year, and an EBIT margin of 16.2% versus 16.7% last year. Here we have to say that the 16.7% was a tough comparison. It was the second best quarter of the last 15 years of our history. On the 16.2%, you see 30 basis points dilution from acquisitions, and that we should split in 2 parts: the, I would say, running dilution of acquired companies where the acquired companies make less margin than our organic business, that's around 15 basis points; and then we had extra costs linked to doing acquisitions in the quarter. You have seen that we have been very active in Q4 with 5 acquisitions that we closed and also most of the costs for the acquisition of Crossmatch, which came at the end of Q3, and the acquisition of KEYper, which came at the beginning of this year, were taken in Q4. And that also affected the result with around 15 basis points. Three of the acquisitions were in the U.S., and you know that it's expensive to close acquisitions in the U.S. Also 30 basis points dilution from volume leverage. And that's mainly linked to Global Technologies and Entrance Systems, and I will come back on that later in the presentation. EBIT up 12%. EBIT at SEK 3.7 billion. Earnings per share up 9%. If you look at the organic growth in the different continents, I would say very good performance all around the globe. Good to see that, in Europe, we are back at good organic growth levels, plus 4%. Strong Africa, Middle East and South America. And then, obviously, the highlights of the quarter, North America, with 10% organic growth. The only negatives figure you see on the slide is Oceania with minus 4%, but there we have to say that this is due to 2 big projects that we got for Global Technologies, for HID. As a matter of fact, in Q4 2017, if you exclude for that and look at the running business, we were also 2%, 3% up in Oceania. So overall, strong performance. The market highlights. Obviously, the strong growth in electromechanical products, especially for the Americas division driven by smart locks. And then also the increasing recurring revenue contribution for mobile keys. In Entrance Systems, we decided to merge our Industrial Doors and high-performance doors business areas into 1 business area, in order to serve our customers better with one face in front of the customer, and then the continued focus on service that slowly starts to pay off where we see acceleration in our service business or service growth. And then Openings Studio, our tool that we use to make life easier for architects and contractors. An upgrade of this Openings Studio software, with a lot of a very nice new features in a 3D environment, strengthening our relation with these important stakeholders. Sales growth now at 23 quarters with positive organic growth. I think this is a very nice track record and then complemented with a nice acquisition growth. Our operating margin for the full year at 15.8%, slightly below the bandwidth where we want to be, the 16% to 17% bandwidth. Working hard to get it back into that range. And then operating profit, record operating profit, 8% up in the year, 68% up over the last 5 years. Then, like I mentioned, we have launched our MFP 7, manufacturing footprint program, where we, depending on union negotiations, will close around 15 factories and more than 30 offices where 1,600 people will be affected. And the total cost of this program is around SEK 1.5 billion where most of that cost was taken in Q4 last year, SEK 1.2 billion, and then the remainder will be taken in Q4 this year. Once the program is up and running at full speed, we will generate annual savings of around SEK 800 million, and the payback for the whole program will be less than 3 years. We also give on the slide an update on the previous programs. And you can see the results we realized since we started with these MFP programs back in 2006. Acquisitions, like I mentioned, it was a very active quarter for acquisitions with 5 acquisitions closed in the quarter, 19 in the full year, with an acquired annualized sales of SEK 3.8 billion. And then we divested the Wood Door business at the beginning of 2018, Wood Door business in U.S. If I pick a couple of the acquisitions. Luxer One, very excited about this acquisition, a leading advanced package locker solution provider in the U.S., market leader in the last mile delivery space, which will reinforce our position in solutions for home delivery, will complement our multi-family product offering and also gives us now access to the fast-growing Click and Collect at retail stores. This company has a turnover of around SEK 335 million, fast growing with 130 employees. And then Lorient, a U.K-based manufacturer of door sealing systems, complementing our acquisition of Planet that we did earlier in the year, a Swiss company also specialized in door seals. And this is really a good example of how we extend our core. Lorient has a turnover of SEK 220 million with 135 employees. If we then go into the different divisions. EMEA from Q3, with a low organic growth, below 2% to an organic growth of above 3%. So very happy with that performance. Strong growth in Finland, Germany, U.K., and Middle East, Africa with high single-digit growth, good growth in Eastern Europe. And then operating margin of 16.6% versus 17.3% last year. Dilution from FX for margin and acquisitions. And then on the volume side, some onetime items, the biggest one, pension costs in U.K. There's a new ruling, we have to provide pensions for male and female, equal level, and that had an extra cost for us in the quarter of more than EUR 2 million. If you take this one and a couple of smaller one-offs out of the equation, then the volume leverage would have been on a normal, healthy level for EMEA. So a good performance for EMEA. Very good, excellent performance for the Americas, with an organic growth of 14%. A very strong U.S. and Mexico for all different business areas, and I would, say a better South America. Very strong operating margin of 19.9%, with very good volume leverage despite the fact that we had 1 working day less, despite the fact that we had a negative mix with our digital door locks, our residential business growing faster than the rest and despite the fact that we still have strong dilution of -- or strong pressure from raw material costs. But we also have to notice here is that, in Q4, August moved from acquisition column to organic column in the middle of the quarter, so also that had a negative effect on the on the volume column. So all in all, a very strong performance. You really see that the price increases and the operational efficiency measures that we took in the Americas start to kick in and give good results. Asia Pacific, also very strong organic growth of 11%, where we have to say that most of the growth comes from intercompany sales, mainly sales into EMEA and Americas. The external organic growth for Asia Pacific was 4%. We have a very strong growth in Japan, South Asia and India. And also since a long time again, a positive growth in China, plus 4% in the quarter in China. Where I have to say that it's definitely too early to start talking about a change in trend in China, China will continue to go up and down in the coming quarters. Like I mentioned earlier, it will take much more time for the new organization and the new strategy to kick in and deliver lasting results. That is more a matter of years than a matter of quarters. Also good operating margin in Asia Pacific, 9.6%, with good volume leverage because you should see also that we grow again in China. We know that we don't make too much money in China, so that had a negative mix effect on operating margin, but despite that, 10 basis points positive volume leverage. And then Global Technologies, strong performance as well for HID as well as ASSA ABLOY Global Solutions. Very strong growth in secure issuance and identity, access solutions for HID and our ASSA ABLOY Global Solutions, I would say, strong growth for all verticals that they are active in. Operating margin of 19.9%. Where now, of course, Crossmatch is in for the full quarter. And we know that in Crossmatch, once they are in the running business, the margin will only be low double-digits, so that brings the operating margin down with all the extra costs for closing that acquisition in the quarter, which affects the dilution from margin and acquisitions. And then on the organic side, we had a negative mix as well in HID where we grew more in other business areas than in physical access, and we know that margins in physical access are higher than the other business areas. And in ASSA ABLOY Global Solutions, we had a higher growth for projects than the running business. And traditionally, projects have lower margins, but of course, you put install base into the market, then afterwards, you can serve in -- as recurring business. So it's a dilution, I would say, that we like. And of course if you can grow 8% organically with an operating margin of 19.9%, close to 20%, we believe it's a very good performance. And then Entrance Systems, perhaps the division where we're all a bit disappointed with the results. Although, I must say that the organic growth was better than 2% -- or the underlying organic was better than 2%. Because as you remember, we changed the reporting of one of the business areas in U.S. Where in 2017, they were reporting in weeks, so 4 weeks or 5 weeks per month where we then changed that to reporting in months. And that had a positive effect in Q1, where we informed you about in April, and then had a negative effect now in Q4. So if you look at the underlying organic growth, it was above 3%. With strong growth in U.S. residential doors and good growth in industrial doors and pedestrian doors. And a lower operating margin of 15.1%. Again, a tough comparison because the 15.9% was the highest quarter from the last 4 or 5 years for Entrance Systems. And margin definitely affected by mix where, yes, we grew faster in residential doors than in high-performance doors. And obviously, we make much lower margins on residential doors than on high-performance doors. We also had inflation -- we had also pressure from material prices. We invoiced several projects that we took 1.5 years, 2 years ago even, at quotations with still lower material prices. We invoice them now, of course, with high material prices. We also had a little bit negative effect from import tariffs from China to the U.S. where we don't see a problem in compensating for them, but where of course, you always have a bit of a timing issues when those tariffs kick in. And with that, I give the work to Erik to give a little bit more details on the financials.

[Erik Pieder, CFO & Executive VP]

Thank you, Nico, and good morning, everybody. My name Erik Pieder, and I joined ASSA ABLOY here mid of January. I come from Atlas Copco where my last position was as Vice President, Business Control for the Compressor Technique business area. I will guide you a bit through the financial highlights, where you can see that the organic growth was strong with 6% despite that we had 1 working day less. We also had the way that the Christmas holiday, with the Christmas Eve on a Monday, affected negatively some of the regions, and also the cut-off procedures in Entrance also had an impact. The organic -- the acquired net growth was 3%. Gross, it was 1% higher, so actually at 4%. In total, during 2018, we acquired 19 companies with an annual revenue of about SEK 3.8 billion. The exchange helped with 6% in the growth. And all in all in Q4, we had a growth of 15%, whereas then the year-to-date growth was 10%. If we look into the operating margin, it's up in value with 12%. But as you can see, if -- the margins were a bit under pressure due to the raw material and the acquisition cost. And also, as mentioned by Nico, we also have a tough comparison with the Q4 from 2017. The EBITA margin, where we then take out the amortization for the technology companies which we have bought, was 10 basis points higher but minus 40 basis points. Income before tax was up with 9%. There was an increase in the interest because of higher interest rates and higher interest-bearing liabilities. That amounted to SEK 97 million. So the net income ended up at SEK 2.6 billion, up with 9% again. The earnings per share ended at SEK 2.33, also up with 9%. And the cash flow was strong. It was a record cash flow SEK 4.9 billion, and that is despite the balancing actions, which we have now initiated in the Q4. And I will give you some more details when it comes to the margin. If you look into the margins, the organic part was 6%, which was then -- if we try to divide it, 2% comes from price and 4% comes from volume. The positive development was, as mentioned here before, was driven by Americas and Global Technologies. There is also a strong growth in APAC, but as mentioned, a lot of that is driven by the -- in the group sales. The drop through on the organic part is minus 30 basis points, where we see then that we still have an impact on the material cost but it's less than what it has been in the quarters before. And also, we had the impact of the result of Entrance Systems, which also affected the organic part negatively. Currency, yes, I mentioned before it was up by 6%. If you look on the bottom line, it's slightly up with 10 basis points. This is mainly related, of course, to the weakening of the Swedish krona. If we apply the rates then, looking into the Q1, we expect a 5% growth due to the currencies, but this is, of course, pending on the currencies. Yes, that there is not any real change in the currencies. Acquisitions was net 3%, in value you can see it's about SEK 700 million. There is a dilution of 30 basis points in this. One part is related to the 5 acquisitions that was done during the quarter and costs related to that. The second part is then related to, let's say, the ongoing acquisitions that we have done like, for instance, Crossmatch, which was done in Q3 where we then see costs moving over into Q4. If we look into the Q1, you can also see here that we give guideline of that the acquisitions in the quarter would add 4% to the growth. If we look on a full year right now, we see 3% run rate. And the margin in the Q1 from the acquisitions, we still expect it to be slightly negative. On the next slide, you see the components in the P&L. But this is the full year, so it's January to December 2018. And as mentioned before, you see the impact that we have on the raw material, which is the main reason why we have the 50 basis points down. I mentioned before that prices increased 2%, but the material price has increased with 3%. Where we see most impact from the raw material is in the APAC region and the Americas. We continue to work to offset this by increasing the prices, and hope that we should be able to offset it early next year. The conversion cost is, for the year, 10 basis points positive, which brings us to a gross margin of minus 40 basis points. The SG&A is slightly positive, but we'd like to emphasize that we still invest in sales and R&D. Excluding the acquisitions, you can see that the dilution is minus 20 basis points. The acquisitions is about the same, so all in all, you can see for the year-to-date that the result was down with 40 basis points and ended at 15.8% for the full year. Turning over to cash flow. We had a record cash flow, almost generating SEK 5 billion, SEK 4.9 billion to be exact. You can see in the graph that there is a strong seasonality. And already, in the last call in October, we mentioned that we have put actions in place to balance that a bit. Those actions have actually been put in place. So despite that, the cash flow is very strong in Q4, but we expect the actions then to help when it comes to the cash flow generation in Q1. In the fourth quarter, the DSO was 51 days, which was 1 day lower than what we had in Q3. The DPO for the group went down with 5 days, ended at 59 days. So you still see that we have a positive gap between the DPO and the DSO. Inventory went up with 5 days to 97 compared to the 92 that it was before. All in all, strong cash flow SEK 5 billion in the quarter, and for the year, it ended up with SEK 11 billion. If we look into the gearing, although the cash flow was very strong, we bought 5 companies in Q4, with a total payment of about SEK 1.6 billion. The net debt has increased versus last year. It's now at SEK 29.2 billion, which is up SEK 3.9 billion versus end of 2017, but in the quarter, it went down. You can see that the net debt versus EBITDA is at 1.9, so we still consider that we have a pretty strong financial situation. The last slide for me is the earnings per share, which in the quarter, went up with 9% and ended at SEK 2.33. Full year, it reached SEK 8.09 per share, which is an improvement of 4% versus 2017. So that was my last slide, so now, I hand it over to you again, Nico.

[Nico Delvaux]

Thanks, Erik. So as a summary, we can say it was a good quarter 4 with strong, accelerated organic sales development, 6% up. We have very strong growth in Americas and APAC, strong growth in Global Technologies and then definitely the electromechanical products as the highlight when it comes to growth. Strong EBIT improvement of 12%. We launched our seventh manufacturing footprint program. And then strong record cash flow in the quarter, SEK 4.9 billion. And we also proposed a dividend based on the approval in the annual shareholder meeting of SEK 3.5 per share, which is 6% up compared to 2017. And with that, I'll give back to Björn for the Q&A session.

[Björn Tibell, Head of Investor Relations]

Thank you, Nico. [Operator Instructions] Operator, that means that we are ready to start the Q&A session. Can you please go ahead?

[Operator]

Yes, of course. Thank you, very much. [Operator Instructions] And we go to the line of Guillermo Peigneux at UBS.

[Guillermo Peigneux-Lojo]

Guillermo Peigneux from UBS. Question regarding the Americas. Can you remind us of the split, end of the quarter, between non-resi and residential? When you talk about strong growth, can you give some granularity as to what kind of growth you saw in residential versus what you saw in nonresidential?

[Nico Delvaux]

If you look at the growth, we can say we had strong growth in general in the Americas and stronger growth in U.S. and Mexico than in the rest of the Americas. And then if you split commercial and residential, obviously, a stronger growth in residential than in commercial. If you take the wider family of digital door locks, you can say that, that was around 4% of the total growth that we showed for the division. So that gives a little bit of flavor of the split between residential and commercial.

[Guillermo Peigneux-Lojo]

A follow up on raw materials. I think you alluded to, this year as the year in which you expect some of the price actions to be offsetting the raw material pressure. Can you give us guidance as to how diluted will be raw mats this year, if any? And acquisitions as well, what is that the dilution to be expected with what you have on hand?

[Nico Delvaux]

Yes. If you take the raw materials, you can see in the presentation, in Erik's part, that the dilution because of raw materials was around 50 basis points for the full year. But then, over the year, the dilution became smaller. In Q4, the dilution was only 20 basis points. And if material prices continue to evolve like they have been evolving over recent months, and if we continue to be successful in implementing price increases, we are confident that we can further bridge that gap now coming into the first half of 2019. So that's a little bit the gain that you could see on the on the raw material part. On acquisitions, as I explained, we had the dilution of 30 basis points in the quarter. And like I mentioned, more or less half of that is running business of acquisitions and the fact that we make less margin on acquisitions than on our organic side. And half of that dilution was linked to the acquisitions that we did in the quarter and costs related to closing those acquisitions. Also because we did 3 acquisitions in the U.S., and it's more expensive to close acquisitions in the U.S. than in other parts of the world. So you could say that, that running part between 10 and 20 basis points, that's a little bit an idea of how much it will dilute now going into the next quarters. The first part on costs for doing acquisitions, of course, depends on how successful we will be on doing acquisitions in 2019.

[Björn Tibell, Head of Investor Relations]

Thank you, Guillermo.

[Operator]

Yes. We are over to Lars Brorson at Barclays.

[Lars Wauvert Brorson, Director]

Just a quick follow-up, if I could, but my main question is actually on your manufacturing footprint. But just on Americas, so you're saying, Nico, 4 percentage points in total growth if resi is 15% of Americas, that's growth in the high 20s, low 30s. Is that accelerating? And can I just ask to smart locks and Q4 seasonality? When folks like me buy their loved ones a nice smart lock for Christmas, is that something we should start to think about as being more material for your fourth quarter in Americas, specifically of course, where you've got a bigger component of smart locks driving growth this quarter?

[Nico Delvaux]

That's correct that the growth in residential was higher than commercial. And within residential, the main growth driver is indeed digital door locks, the business we do with the Google Nest, the business we do to Amazon but also the business we do directly with August and with Yale. And we have seen very nice, strong double-digit growth for all the different families of the digital door lock business in the U.S. Like we mentioned at earlier occasions, if you take total digital door locks in the world, we talk about around -- a run rate of 2.5 million locks per a year, and it represents around SEK 2.5 billion business on the run rate per year. And that is definitely the fastest growing part of our business.

[Lars Wauvert Brorson, Director]

So just to be clear, a greater Q4 seasonality? And specifically, just going into Q1 is U.S. government shutdown something we should be mindful of on the non-resi part in your Americas business as we begin this year?

[Nico Delvaux]

On the first part, of course, Q4 is always a little bit skewed when it comes to digital door locks because a lot of people buy additional door lock as a present/gift for friends and families. We like that. When it comes to U.S. shutdown, yes, of course, it affected our business at the moment then when there was a shutdown because there were no purchasing people to write purchase orders. We believe now that the shutdown is over, the effect on our business will be very limited. Of course, everything depends what will happen after the 3 weeks. Is it going to stay open or is it going to close again? But all in all, government -- specific government business for us in the U.S. is a smaller part of our overall total business, so it will not have a significant effect on our result.

[Lars Wauvert Brorson, Director]

The question I wanted to ask just very briefly was on your manufacturing footprint program 7. I'm a bit surprised to see how small the divisional contribution is from Entrance Systems, less than 10% of the cost taken out at this point. It was also a relatively small part of you MFP 6. Now you have been more active from an acquisitions standpoint at Entrance Systems over the last 5, 6 years so footprints savings should be quite meaningful, it's also a division with 2/3 sales into Europe where, arguably, growth, at least outside of services, should be slowing down. Could you help me a little bit understand -- what am I missing here? Why isn't ES, Entrance Systems, a bigger part of the MFP 7 at this point?

[Nico Delvaux]

I think if you look at Entrance Systems in the last 3, 4 years, we were not so active in doing acquisitions in Entrance Systems. Most of the acquisitions came between 5 and 10 years ago. That's when you've seen the big growth to acquisitions for Entrance System. We evaluate, of course, project by project. And if an idea has a good payback, we include it in the MFP program. If there is no good idea, then we don't have a have project. And I can only say that what we have today is what came out of that exercise we did for the different divisions. In some MFP programs, one division will be a bit more contributing than the other. In this MFP program, you will see that U.S. or the Americas is contributing a bit more where, traditionally, Americas was lower. I would not read too much into the fact that you think Entrance is a little bit lower. I think we do what we have to do in Entrance Systems with a pace we believe is realistic.

[Operator]

Okay. We're now over to the line of Daniela Costa of Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I wanted to follow up on the comments on the free cash flow and the actions you are doing there. I know you mentioned things like DPO down, and inventory up, and how shall we see that progressing and where are the main regions, I guess, it's possibly Asia where you're mainly moving this. If I could just ask that. And then a very quick question related also to cash flows. I know U.K. is not a very big part but it's 4% or 5% of your sales. Some other companies have talked about building up inventories heading into Brexit. Is that -- can you comment on that?

[Nico Delvaux]

Yes. Of course, if you see, working capital is a small part of our capital employed. Of course, the biggest part this the goodwill that we have on the balance sheet. But if you take working capital -- well, indeed, we didn't do at the end of the year is -- we had a habit in previous years of delaying payments to suppliers and, perhaps, also delaying ordering of goods for the different factories. We have decided not to do that this year and really see it more as a running business. That's why you see that our DPOs went down. But we made very good progress, I think, on receivable side, we have good collection in all divisions, I would say. Inventory was up. And inventory is up, of course, in the first place because higher raw material, the higher raw material also translates in higher inventory in value. We believe we still have good margin for operation improvement in general on working capital and on inventory in particular. And then when it comes to U.K. So that -- we don't exactly know what's going to happen with Brexit, but most of what we sell in U.K. we also produce in the U.K. In that way, perhaps, we could also have a competitive advantage vis-à-vis some of our colleagues in the market. And we have started to ramp up inventory levels in the U.K. We started doing that in Q4, and we will continue to do that now in Q1 to be prepared, I would say, for any scenario in U.K. And when the Brexit will happen for sure, it will have an effect on delivery times, on supply chain, and that's the reason why we increased our inventories. But like you mentioned, it's a smaller part of our business so that the increase in inventory for the group is not significant. The main contributor of the increase is really the material prices, which went up.

[Daniela C. R. de Carvalho e Costa]

So just to sum up that, do you think, in the first quarter, we should factor in slightly weaker free cash flow than normal, given the U.K. situation, and maybe higher inventories because of the U.S. shutdown?

[Nico Delvaux]

No, I would say the opposite because I would be disappointed if, I would say, the actions we didn't do in Q4 towards our suppliers would not pay off in a positive way and contribute in a positive way to our cash flow in Q1. So I would expect a better cash flow Q1 versus Q1 last year.

[Operator]

We're now over to Matthew Spurr at Exane BNP Paribas.

[Matthew Spurr, Research Analyst]

So I had a question. First, with the sales growth and margins in Asia Pacific, so you flagged the contribution from internal sales growth being about 7 percentage points of the total organic you saw there. Could you give us a bit of color of why you built up the internal sales there? Is it to prop up that region in the short term a bit whilst it readjusts? Or is this a change in strategy? And then can you say whether the margin in Asia Pacific was boosted by having a higher margin on that internal sales?

[Nico Delvaux]

So our external sales, organic growth for APAC was around 4%. We flagged, like I mentioned, the strong performance for Southeast Asia, for India and also positive growth in China after 4 quarters with negative growth. We had 4% positive organic growth in China to the outside world. The intercompany boost came from more sales to EMEA and Americas in particular. And a lot of the digital door locks that we sell in EMEA and Americas are produced in China. And as Q4 is seasonally by far the highest the quarter when it comes to digital door locks, that is the main reason for that increase in the intercompany sales. When it comes to the margins, the shift to more intercompany sales did not really have a significant effect on the margin. It contributed a little bit positively. But on the other hand, as China grew faster, the 4%, like I mentioned, versus negative growth in the first 3 quarters in the year, that then had a negative effect on the mix because in China we make very low single-digit margins.

[Matthew Spurr, Research Analyst]

And then my quick follow up was in Americas. So you had 14% organic, the resi added 4 -- I think you said 4 percentage points of that growth, so 10 percentage points of growth. It still looks like above trend number. So is there some restocking by your customers in there, or perhaps project activity in the quarter or is it all underlying?

[Nico Delvaux]

So if you look at the big items -- if of course, on the digital door locks side, the business we do with Amazon and with Nest in the first place is the 4% I mentioned. And then we still have, of course, the sales of that big Walmart order that we got and that we informed you about at the beginning of the year. And that has started, I think, delivering out end of Q2 and will now continue also into Q1, Q2 of this year. That, I would say, are the 2 special items, I would say, boosting organic growth in general. But apart from that, the rest was good, organic growth in daily business for all different business areas, as well on the commercial side, as on the residential side, as well from mechanical as for electromechanical. And it was, in the first place, the U.S. and Mexico, which had the strongest growth but also solid performance in most other markets in the Americas.

[Operator]

We are now over to Lucie Carrier at Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I have one question and one short follow-up. On the first question, I mean you've had a strong finish, of course, to 2018. Can you comment maybe a little bit on the current trading -- current trends you are seeing now at the beginning of '19 and how you all see 2019 in terms of the top line? And maybe more importantly, in terms of the profitability dynamics, considering that we are seeing the mix and PPA continuing to erode profitability, and you're now below your kind standard range of 16 to 17? So that's my first question.

[Nico Delvaux]

So when it comes to the market's outlook, we, of course, live in a very uncertain economic situation where macro figures change every day. I must say that for us, in general, market conditions have not really changed today compared to 3 months ago with a couple of exceptions. Exception is definitely France where we have seen a strong slowdown of market conditions at the end of last year and now definitely also going into 2019. We see a little bit of uncertainty in the U.K. because of everything around Brexit. But apart from that, we still see good, strong market conditions in general. If you look at, I would say -- the longest forward-looking KPI that we perhaps have is our spec business where we spec in for projects. We still see healthy development there on similar levels as in Q4. If you look a bit into the different regions, North America, U.S., Canada. And also there, if you look at KPIs, definitely on the commercial side are still positive. Several markets in South America and also Brazil, still positive sentiment. And then in Europe, I must say, despite a lot of indicators pointing in the wrong direction since several quarters -- if you take our biggest markets, Scandinavia, KPIs have been down since more than a year. We still see healthy markets dynamics. So yes, of course, we continue to follow from very close because we know it's a fragile overall market. And we cannot change the overall market, we can only make sure that we are agile enough that we can react fast when it goes up or when it goes down.

[Lucie Anne Lise Carrier, Executive Director]

Sorry, and in your view in terms of the profitability dynamic between the mix effect, PPA that are continuing to erode the profitability, how should we think about '19?

[Nico Delvaux]

Yes, we reconfirm that we have the ambition to have an EBIT margin between 16% and 17%. We are now at 15.8% for the full year 2018. We will work very hard to get it back into that bandwidth. There is positives and there is, of course, negatives. We believe that material inflation will ease and as price increases kick in, as operational efficiencies kick in, that should have a positive effect on bridging that gap. We still foresee good market conditions in the Americas and for Global Technologies, which of course, also positive contributor in the mix. Then of course, we have inflation, general inflation and general labor inflation -- and general inflation, which continues, and therefore, we need a certain minimum organic growth to compensate for that. And then it will also depend a little bit on how some markets and how some product ranges will evolve. Clearly if grow -- we continue to grow faster on the residential side than on the commercial side, that will have a negative mix effect. Clearly if China would grow faster like it did in Q4, it would have a negative mix effect. But that will depend a little bit on how the different items, positive and negative ones, play out in 2019. But again, working very hard to get the margin back into the 16% to 17% bandwidth.

[Lucie Anne Lise Carrier, Executive Director]

And just my follow up on the previous question on the -- in the U.S. How much visibility do you really have on the inventory level of your distributors? Because, as you were mentioning, we've seen some leading indicators pointing down, and I guess there's maybe a bit of concern that some of the distributors are slightly heavy in terms of their inventories.

[Nico Delvaux]

But when you say some of the indicators are pointing down, I gave you for that it's on the residential side. And...

[Lucie Anne Lise Carrier, Executive Director]

And so even, to some extent, the ABI has moderated a little bit or the Dodge index has moderated a little bit.

[Nico Delvaux]

Yes, okay, if you look at one month, then that is the case, but then how much has the government shutdown to do with that, how much has the bad weather conditions to do with that? I think we should look on indexes a bit longer than just a month. And if you look a little bit longer there, I think, on the commercial side, you'll still see positive development. And most of our business in the U.S. is on the commercial side. The story on the residential side, indexes are pointing in the wrong direction. But for us, the residential business is mainly smart digital door locks where we believe that is less -- or where the indexes that we follow are perhaps less relevant for that type of business because it's a different type of investment. So overall, we are still, like I said, positive about the market dynamics, in general, in the U.S. We also don't believe that the growth we had was because of dealers/distributors overstocking and that there is now a destocking problem. We don't see that being the case.

[Operator]

We now go to Sébastien Gruter at Redburn.

[Sébastien Gruter, Research Analyst]

I had an issue on my line so maybe you already gave the answer during the presentation. But I just wanted to know and to dig a bit more in the Elmech growth, plus 30% in the quarter. How much of that was organic and how much for resi versus non-resi at the global level? And I have a follow up on those questions.

[Nico Delvaux]

So the 30%, if you exclude currencies, it was 24%. If you look at the different geographical divisions, it was strong, double-digit in all 3, with the strongest growth in the Americas. And in the Americas, we had strong double-digit growth in South America and North America, we have the strongest growth in the U.S. And if you look down in U.S., clearly, the digital door locks, the business with Google Nest, with Amazon and the business we do through August and Yale had the highest growth of all. So that's a little bit how it's put together.

[Sébastien Gruter, Research Analyst]

Okay. If I rephrase, usually your electromechanical growth is about 10% on average for the last 10 years. Now we are talking about 24%, but that's excluding the FX. I don't know if there are acquisitions that add a bit the number that quarter. Do you think the step up from 10% to, let's say, high teens on an organic business is driven only by residential or do you see stronger growth in the nonresidential part of the business?

[Nico Delvaux]

If you look at the first part, acquisitions, the only one that could affect, if you call it an acquisition, it's August. It depends a little bit if you see August still as an acquisition or not because it's now more than a year that we have it in our group. And like I mentioned, in Q4, half of the quarter, August, was considered as in the acquisition column, half of it was considered in the volume column. So definitely, August was an important contributor to the growth, also because Q4, for the kind of business August is in, is by far the biggest quarter with Black Friday sales, Christmas sales, New Year's sales and so on. When you look at the residential and commercial, we have seen accelerated growth as well on the commercial as on the residential side. So also the growth figures for commercial were higher than run rate in the quarter.

[Sébastien Gruter, Research Analyst]

And the final question on that issue is, of course, I mean, investors will be worried that the comps would be again quite difficult in next year, in Q4 '19, given the very strong growth you had in Elmech and especially the digital locks in the quarter. Do you have any visibility on the sell-in versus sell-out for Amazon, Nest, Walmart and Yale also? I mean that you see the same trends for the end user, same cause for the end versus yourselves?

[Nico Delvaux]

Yes, we -- if you take, for instance, Google Nest, what we see is that we get recurring orders from the same outlets where they sell their -- all our digital door locks. So you really see that they fill the shelves in the shops, and then the stuff on the shelf is being sold and you get replenishment. So we believe it's a good recurring business. It's true that the most public growth figures with Nest today are inflated, and the comparison is difficult in the sense that, yes, today, we can sell a digital door lock to every Nest customer that doesn't have a digital door lock yet. And at a certain moment, that population will have a digital door lock, and then it will continue to grow more at a normal organic growth levels like Nest grows their business. But I think we are far from that with Nest, and I think we are far from there also in general. If you look at the penetration of digital door locks in the U.S., I think it's still somewhere mid-single-digit. If you compare it with a country like Korea that started with digital door locks 20 years ago, penetration is above 90%. So there is still good potential to further grow that business. Speed? I don't know. The speed will depend on the consumer and how fast he adapts to that new technology. The only thing I can say is that we have seen an accelerated growth of that part of our business over the last 3, 4 quarters, so let's be confident that, that continues. But indeed comparison will become difficult and more difficult quarter, after quarter, that's for sure.

[Operator]

Okay. In that case, it is over to the line of Mattias Holmberg at DNB Markets.

[Mattias Holmberg, Analyst]

A quick one from my side. You've talked a little bit about August, which you acquired just over a year ago. And in that statement that said that you expected sales to be roughly $60 million or SEK 500 million. Given the very rapid growth in this business, I'm just wondering, given that we now have 2018 fully in the books where this figure actually ended up and if there was any diversion from how you think of it today?

[Nico Delvaux]

I don't know what figures we exactly gave. I can only say that August is, more or less, progressing in line with the model that we made internally when we acquired August, as well top line as bottom line, where we indeed had ambitious growth targets to plan. We are slightly below the plan. And then bottom line, as I explained a couple of times also before, we lose money in August, and we have said that, that will be the case in 2018 and 2019. And we had then the ambition to come into black figures by summer 2020. We can confirm that, that is also the case and that they are also the figures we realized are, more or less, in line with our model. But we have seen more -- and that's more difficult to directly calculate. It's a lot of cross synergies from August to our Yale channel. You have perhaps noticed that we have now used, started to use the August software platform also for our worldwide Yale business, so the August app we use now as a standard Yale app. And that's just one example of those costs synergies that are more important than we anticipated when we bought August.

[Björn Tibell, Head of Investor Relations]

Thank you very much. We have now reached the end of this presentation. And I would like to thank you for your interest and participation. And we look forward to seeing you next time and speaking in the next week. Thank you.