Good sales and earnings trend for ASSA ABLOY

30 Jul 2008

  • The sales trend was positive for all divisions in the second quarter and sales increased in local currencies by 8%.
  • Sales growth in Western Europe continued on a weak level, sales in North America were stable at a good level, and growth remained strong on the Asian, African and South American markets.
  • The gross margin improved as a result of the restructuring and efficiency programs carried out.
  • Sales amounted to SEK 8,526 M (8,329), with 5% organic growth, 3% acquired growth and exchange-rate effects of -5%.
  • Operating income (EBIT) amounted to SEK 1,378 M (1,325), an increase of 4% after negative currency effects of SEK 72 M, representing a margin of 16.2% (15.9).
  • Net income amounted to SEK 865 M (822).
  • Earnings per share amounted to SEK 2.30 (2.20), an increase of 5%.
  • In order to further accelerate the pace of restructuring, a new revision of the production structure in high-cost countries has been initiated. The preliminary cost is estimated to be SEK 700-800 M with a payback time of 2-3 years.
  • For 2008 the organic growth is expected to be positive, but can be lower than 3% depending on the development of the business cycle (previous guidance 3-5%).
SALES AND INCOME


 
COMMENTS BY THE PRESIDENT AND CEO
 
"ASSA ABLOY's sales trend during the quarter was good in spite of continuing weakness on the West European markets. The restructuring program and other efficiency-improving measures continued to raise the gross margin. Growth on the new markets remained strong, with contributions from both organic and acquired growth at the same time as it was very pleasing to see a number of acquisitions completed on the mature markets of Western Europe and North America" said Johan Molin, President and CEO.
 
SECOND QUARTER
 
The Group's sales totaled SEK 8,526 M (8,329), representing growth of 2% compared with 2007. In local currencies the increase amounted to 8% (12), of which organic growth for comparable units was 5% (7) while acquired units accounted for 3% (5) of the increase. Exchange-rate effects had a negative impact of SEK 386 M on sales, i.e. 5%.
 
Operating income before depreciation, EBITDA, amounted to SEK 1,599 M (1,554), a rise of 3% compared with 2007. The EBITDA margin was 18.8% (18.7). The Group's operating income, EBIT, amounted to SEK 1,378 M (1,325), a rise of 4%, after negative currency effects of SEK 72 M. The operating margin was 16.2% (15.9).
 
Net financial items amounted to SEK 190 M (197), which corresponds to an average interest rate of just over 5%. The Group's income before tax amounted to SEK 1,188 M (1,128), which represents a rise of 5% on the previous year. After translation of subsidiaries' income statements, exchange-rate effects had a negative impact of SEK 62 M on the Group's income before tax. The profit margin was 13.9% (13.5). The Group's tax charge totaled SEK 323 M (306), corresponding to an effective tax rate of 27% for the quarter. Earnings per share amounted to SEK 2.30 (2.20), which represents a rise of 5%.
 
FIRST HALF-YEAR
 
Sales for the first half of 2008 totaled SEK 16,728 M (16,556), which represents an increase of 1% compared with 2007. Organic growth was 3% (8). Newly acquired units contributed 3% (5). Exchange-rate effects affected sales negatively by SEK 661 M, i.e. 4%, compared with the first half of 2007.
 
Operating income before depreciation, EBITDA, amounted to SEK 3,075 M (3,072) for the half-year. The corresponding margin was 18.4% (18.6). The Group's operating income, EBIT, amounted to SEK 2,621 M (2,614), representing a small increase after negative exchange-rate effects of SEK 124 M. The corresponding operating margin (EBIT) was 15.7% (15.8).
 
Earnings per share for the first half-year increased to SEK 4.38 (4.36). Operating cash flow for the half-year amounted to SEK 1,663 M (1,762).
 
RESTRUCTURING MEASURES
 
Payments related to the restructuring program amounted to SEK 97 M during the quarter, bringing the total for the half-year to SEK 207 M. Savings during the quarter resulting from measures carried out are SEK 50 M compared with the same period last year. The quarterly rate of savings from the start of the program now amounts to SEK 110 M.
 
So far 1,702 out of the total of 2,000 employees affected by the restructuring program have left the Group. The full program is expected to have reached completion by the end of the year.
 
In order to further accelerate the pace of restructuring, a new revision of the production structure in high-cost countries has been initiated. The revision covers those units that have not yet been converted from full production to assembly. Preliminary results indicate that some thirty projects can be carried out. The total cost is estimated to be SEK 700-800 M, with a payback time in line with the current restructuring plan of around two to three years. The cost of the program is expected to be fully expensed in 2008.
 
COMMENTS BY DIVISION
 
EMEA
 
Sales in EMEA division totaled SEK 3,578 M (3,370), with organic growth of 4%. Overall, the weakening of the West European markets continued even though the 'Easter Effect' was recovered in April. On the emerging markets in Eastern Europe, the Middle East and Africa growth was good to strong. Acquired growth amounted to 2%. Operating income amounted to SEK 608 M (556), which represents an operating margin (EBIT) of 17.0% (16.5). Return on capital employed amounted to 22.4% (20.7). Operating cash flow before interest paid totaled SEK 672 M (502).
 
AMERICAS
 
Growth in the commercial segment in the Americas division was good and stable while the sales trend in the residential segment was negative, as for the past three quarters. Total sales amounted to SEK 2,419 M (2,607), with 5% organic growth. The net figure for acquired growth and disposals/closures was -1% because of the disposal of Quadrastat in 2007. The operating margin improved further from an already good level and amounted to 20.5% (19.4). Return on capital employed amounted to 24.1% (22.4). Operating cash flow before interest paid totaled SEK 564 M (450).
 
ASIA PACIFIC
 
Sales in Asia Pacific division grew strongly on the Asian markets, especially in China, while the sales trend in Australia and New Zealand weakened. Sales totaled SEK 856 M (650), with 8% organic growth. Acquired growth amounted to 27%. Operating income amounted to SEK 104 M (73), which represents an operating margin (EBIT) of 12.2% (11.3). The quarter's return on capital employed amounted to 16.1% (13.9). Operating cash flow before interest paid totaled SEK 55 M (60).
 
GLOBAL TECHNOLOGIES
 
Global Technologies division reported continued growth overall, but with considerable variations between the business units. HID and Hospitality had good-to-strong growth, whereas ITG had a negative sales trend as the program to phase out unprofitable customers continued and delays arose on some customer projects. Total sales in the second quarter was SEK 1,157 M (1,174), of which organic growth accounted for 4%. Acquired growth amounted to 2%. The operation to merge HID and ITG proceeded according to plan and will in time yield good effects on both sales and production. Operating income for the division amounted to SEK 159 M (169), giving an operating margin (EBIT) of 13.7% (14.4). The operating margin improved further for HID, decreased for Hospitality and remained weak for ITG. Return on capital employed amounted to 12.6% (13.1). Operating cash flow before interest paid totaled SEK 183 M (160).
 
ENTRANCE SYSTEMS
 
Entrance Systems division reported sales of SEK 758 M (749) in the second quarter, representing organic growth of 6%. Growth in Europe and North America was weak but it remained very strong in the division's newly established operations in Asia. Operating income amounted to SEK 105 M (108), giving an operating margin (EBIT) of 13.8% (14.4). Operating income was boosted by price increases made, but diminished by a growing price pressure, especially in the retail sector, caused by the weak market situation. Return on capital employed amounted to 13.5% (13.7). Operating cash flow before interest paid totaled SEK 65 M (102).
 
ACQUISITIONS
 
The major acquisitions completed and consolidated during the second quarter were those of Rockwood in the USA and Beijing Tianming in China. Information about Beijing Tianming was published on 18 March and information about Rockwood was published on 25 June. Adding smaller acquisitions, a total of seven companies were consolidated during the first half-year. The combined acquisition price amounts to SEK 530 M and preliminary acquisition analyses indicate that goodwill and other intangible assets with indefinite useful life amount to about SEK 400 M. The acquisition price is adjusted for acquired interest-bearing liabilities including estimated earn-outs.
 
On 9 June it was announced that EMEA division has signed a contract to acquire Gardesa, one of Italy's leading manufacturers of high-security steel doors. Gardesa is based near Piacenza and has some 200 employees and sales of EUR 45 M. The acquisition was completed after the end of the reporting period and is expected to be consolidated from 1 July.
 
On 7 July it was announced that EMEA division's acquisition of Valli&Valli, reported in January, has been completed and that the company will be consolidated from 1 July. Valli&Valli is a leading Italian manufacturer of designer handles, based near Milan, with 170 employees and expected sales of more than EUR 30 M in 2008.
 
On July 30 it was announced that Entrance Systems division acquired Cheil. The company is a leading company in the Korean door automation market and will be consolidated during the third quarter. The company has 50 employees and is expected to reach a turnover of SEK 150 M in 2008.
 
The competition authorities in Sweden and Germany are still reviewing the acquisitions of Copiax and SimonsVoss respectively.
 
During the quarter the operations of Visioncard in Austria, which belonged to ITG in Global Technologies division, were sold off.
 
SUSTAINABLE DEVELOPMENT
 
During the quarter ASSA ABLOY launched its first products to carry a full Environmental Product Declaration (EPD). The Declaration covers the whole life of the product, from the materials it is made of to how the residual products shall be handled, in accordance with ISO 14025. More information about this and other information about sustainable development and the Group's program for sustainable development can be found at www.assaabloy.com.
 
PARENT COMPANY
 
'Other operating income' for the Parent company ASSA ABLOY AB totaled SEK 1,036 M (836) for the half-year. Income before tax amounted to SEK 1,310 M (1,393). Investments in tangible and intangible assets totaled SEK 0 M (2). Liquidity is good and the equity ratio was 47.3% (47.5).
 
ACCOUNTING PRINCIPLES
 
ASSA ABLOY applies International Financial Reporting Standards (IFRS) as endorsed by the European Union. Significant accounting and valuation principles are detailed on pages 67-71 of the 2007 Annual Report. New or revised IFRS effective after 31 December 2007 have had no material effect on the consolidated income statements or balance sheets. The Group's Interim Reports are prepared in accordance with IAS 34. The Parent company applies RFR 2.1.
 
TRANSACTIONS WITH RELATED PARTIES
 
No transactions that significantly affected the company's position and income have taken place between ASSA ABLOY and related parties.
 
RISKS AND UNCERTAINTY FACTORS
 
As an international Group with a wide geographic spread, ASSA ABLOY is exposed to a number of business and financial risks. The business risks can be divided into strategic, operational and legal risks. The financial risks are related to such factors as exchange rates, interest rates, liquidity, the giving of credit, raw materials and financial instruments. Risk management in ASSA ABLOY aims to identify, control and reduce risks. This work begins with an assessment of the probability of risks occurring and their potential effect on the Group. For a more detailed description of risks and risk management refer to the 2007 Annual Report. No significant risks other than the risks described there are judged to have occurred.
 
OUTLOOK *)
 
Long term, ASSA ABLOY expects an increase in security-driven demand. Focus on end-user value and innovation as well as leverage on ASSA ABLOY's strong position will accelerate growth and increase profitability.
 
Organic sales growth is expected to continue at a good rate. The operating margin (EBIT) and operating cash flow are expected to develop well.
 
For 2008 the organic growth is expected to be positive, but can be lower than 3% depending on the development of the business cycle (previous guidance 3-5%).
 
*) The Outlook published in the Interim Report dated 23 April 2008:
 
Organic sales growth is expected to continue at a good rate. The operating margin (EBIT) and operating cash flow are expected to develop well.
 
Long term, ASSA ABLOY expects an increase in security-driven demand. Focus on end-user value and innovation as well as leverage on ASSA ABLOY's strong position will accelerate growth and increase profitability.
 
The Board of Directors and the President and CEO declare that this half-year report gives an accurate picture of the Parent company's and the Group's operations, position and income and describes significant risks and uncertainty factors faced by the Parent company and the companies making up the Group.
 
Stockholm, 30 July 2008


 
REVIEW REPORT
 
We have reviewed this report for the period 1 January 2008 to 30 June 2008 for ASSA ABLOY AB (publ). The board of directors and the CEO are responsible for the preparation and presentation of this interim report in accordance with IAS 34 and the Swedish Annual Accounts Act. Our responsibility is to express a conclusion on this interim report based on our review.
 
We conducted our review in accordance with the Swedish Standard on Review Engagements SÖG 2410, Review of Interim Report Performed by the Independent Auditor of the Entity. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Standards on Auditing in Sweden, RS, and other generally accepted auditing standards in Sweden. The procedures performed in a review do not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.
 
Based on our review, nothing has come to our attention that causes us to believe that the interim report is not prepared, in all material respects, in accordance with IAS 34 and the Swedish Annual Accounts Act, regarding the Group, and with the Swedish Annual Accounts Act, regarding the Parent Company.
 
Stockholm, 30 July 2008
 
PricewaterhouseCoopers AB
 
Peter Nyllinge                                       Bo Karlsson
Authorised Public Accountant               Authorised Public Accountant
Auditor in charge
 
 
FINANCIAL INFORMATION
 
The Interim Report for the third quarter will be published on 22 October 2008.
 
Further information can be obtained from:
 
Johan Molin, President and CEO, Tel: +46 8 506 485 42
Tomas Eliasson, Chief Financial Officer, Tel: +46 8 506 485 72
 
 
ASSA ABLOY is holding an analysts' meeting at 12.00 today
at Klarabergsviadukten 90 in Stockholm.

The analysts' meeting can also be followed on the Internet at www.assaabloy.com.
It is possible to submit questions by telephone on +46 8 5052 0270, +44 208 817 9301 or +1 718 354 1226.
 
This information is that which ASSA ABLOY is required to disclose under the Swedish Securities Exchange and Clearing Operations Act and/or the Swedish Financial Instruments Trading Act. The information is released for publication at 08.00 on 30 July.
 
The full report with tables can be downloaded via the PDF link.