ASSA ABLOY AB (publ) (ASSAB) Earnings Call Transcript & Summary

[Presentation] Welcome to our Capital Markets Day 2024. Thank you for being so many to attend and making the journey from London to Prague, I guess, or from sunny Stockholm, I understand it's very difficult. You have 2 weeks good weather in Stockholm, and then you have to come to Prague, so luckily it's also a good weather in Prague. Thank you also for -- most of you making the trip tomorrow traditional. One of our more important factories for EMEIA. It will be a very interesting visit, where we will show how we handle complexity in a very efficient way. I understand it means a lot, taking 1.5 or 2.5 days out of your busy schedule. So we will payback during the day with interesting presentations, good Q&A, good discussions, good demos outside of this meeting room. But we also have a plan B. If that doesn't work, we will try to satisfy you with some Czech foods, some Czech beer, and perhaps some other drinks. And here, Czech beer, the second best beer in the world after the Belgium beer. Let's go back to 30 years back. We were born 30 years ago. We celebrated our 30th birthday. I know privately it's not such a nice birthday to celebrate. Again, it stops when you're 18 or perhaps when you're 21. I can tell you, for the younger people in the room, it only gets worse. I mean you are 40 or 50, I don't know, about 60, let's say. But professionally, I think it's a different story. We are very proud to celebrate our 30th birthday because we can look back at all the fantastic things we have done over those 30 years. This is our birthday certificate, our prospect that we handed out 30 years back. Quite interesting to extract out of that prospect. One is, at that time, already 30 years ago, we showed about the importance of aftermarket to us and to our business, and that helped us to be less cyclical in our industry. As you know, we make better margins on aftermarket and on new build. If you have a downturn, normally, it's a new build that goes more down, you have a shift to aftermarket, you can protect your bottom line and your cash flow. Also very interesting to see that 30 years ago, we were already talking about electronics and electromechanical, so the shift from mechanical to electromechanical. Quite visionary, if you ask me 30 years back. For those that were shareholders 30 years ago, I know there is some in the room. I see Michael. Michael is a shareholder 30 years ago. Of course, the [ Latur ] family and the [ Markosian ] family were on us at that time. I don't know if there was other owners. But if you look today, over the 30 years, we increased our share price with 16,800% and increased our dividend with 6,500% from [ CZK 2 ] -- SEK 0.02 back in '95 to SEK 5.4 this year. I guess you have worst investments in your portfolio. Czech Republic is also an important market for us. We do around SEK 650 million in this country. Mainly through Entrance Systems in EMEIA. EMEIA representing 54% of that SEK 650 million, Entrance Systems 33%. Then also Global Solutions in HID, which are growing strongly in this country. We have several factories here, several sales offices and around 1,300 employees. The agenda for my presentation, or I should say, our presentation because I will do it together with our CFO, Erik Pieder. We will give you a business update. We will explain to you again why we are in a good industry with strong positive market drivers. We will zoom in on our major activities to accelerate growth. We will zoom in on how we realize cost efficiency. And we will leave you with some key takeaways. If I start with the business update and perhaps start with our strategy. Our strategy, we explained in a, I would say, simple way to our 60,000 people in the group through our strategy house. And our strategy house is built up of different strategic items, starting with our vision. It's our vision to be the global leader in providing innovative access solutions that help people feel safe and secure so that they can experience a more open world. A more open world, it's all the Amazon experience. People wanted to be smooth, easy, fast. But of course, if you talk about access, you want to do it in a safe and secure way because it's also the safety, security of your family, of your children. So for us, safe and secure are 2 words where we really want to make the difference. We want to be seen as the expert in safety and in security when it comes to access solutions. We are the expert to talk to when you want safety and security for your access solution. We deliver solutions in an innovative way. Innovation is really in our DNA. It's in everything what we do. And for us, innovation is much wider than just new product development, developing new solutions. It's also the way we run our processes. We run even admin processes. We run marketing. It's also the way we run our operations through automation and robotization. And then clearly we are the global leader. We are the undisputable leader in the Western world, in Europe, after the acquisition of HHI, definitely also in the U.S. and in South America. We are a strong leader in most of the emerging markets. And there is definitely pockets where we have room for improvement in countries like China, some countries in Southeast Asia. But overall, we are clearly the global leader. It's our mission, of course, we would like that to build sustainable shareholder value. But we also want to provide added value to our customers, our partners and end users to make that shareholder value creation sustainable. We want to be a world-leading organization where people can succeed. We consider our people as our most important asset. It's really our people that make the difference. You can have fantastic new products, IDs. If you don't have the right people, it will never work. And then obviously, we want to conduct business in an ethical, compliant and sustainable way. We have our financial targets that remain the same. We want to grow 10% as a CAGR over the business cycle, 5% growth organically, 5% growth through acquisitions. And we want to do that with an EBIT margin within the 16% to 17% corridor. With our strategic objectives, they are really our compass. They guide us in everything what we do. Grow through customer relevance, product leadership through innovation, cost efficiency in everything we do and evolution through people. And then we have some common, I would say, group-wide strategic activities. We obviously want to continue with our successful acquisition journey. We want to actively upgrade our large installed base. We want to generate more recurring revenue, Software as a Service, service contracts [ to men in the vending ] Entrance Systems. We want to increase our service penetration and we want to grow in emerging markets. Sustainability is really embedded in everything we do. We are the market leader. As a market leader, we want to be also the leader when it comes to sustainability in our industry. And we see sustainability as a way to further reduce our costs, optimize our operational footprint and to further increase our relative position in the market, coming with new innovative, sustainable products and solutions. And then last but not least, our core values and beliefs. Empowerment, we have trust in people. We give also people the freedom to act. Innovation, we have the courage to change, and we have also the courage to change when things are still going good. And integrity, we stand up for what is right. If I go back a little bit on the financial targets and go back to previous Capital Markets Day and perhaps go a little bit back to, I would say, end of 2019, beginning 2020, when we finalized our first internal 5-year strategic plan that we then also shared with you during the Capital Markets Day back in -- when was it, in October? When what was it -- in May 2021. We expressed our ambition for 2026 to become SEK 150 billion top line company and a SEK 25 billion bottom line company. If we then look where we stand today, in the middle of that journey, you can say that -- you can see that despite very turbulent times, we are really well on track to reach those targets. I would say if things stay like the same, we should be able to reach those targets a year to 18 months before the 2027 deadline. And that despite a COVID-19 crisis in between, a period of hyperinflation, a period with important component shortages, and today, definitely a market that is, especially on the residential side, a little bit depressed. So we are quite proud of that achievement. If we zoom in a little bit in the different divisions. EMEIA is definitely the -- is clearly the division that is most hit by the residential downturn and also other exposed to residential. Then they have done a great job in implementing cost measures. If you consider that they took out SEK 450 million cost in 6 months' time, I think it's a fantastic achievement, really protecting and further improving their bottom line and protecting that and improving their cash flow. Some very nice acquisitions they did in recent years. Acquisition of Arran Isle, a U.K.-based company. And then DoorBird and Kinetron, that also have product displays here outside of the meeting room. I will come back on DoorBird and Kinetron later in the presentation. Americas, if you go back to 2019, I think a fantastic story. Great value creation, a division where we clearly outperformed the market, as well in North as in South America, leading also to a record strong underlying margin record cash flow. I would say, a division fired on all cylinders. And I am also very excited by the acquisition of HHI and all the nice things we can do now also on the residential side in U.S. and Canada, in particular. APAC, perhaps we should make a difference between China, Greater China, and the rest of APAC where we still see a strong commercial market but also a challenging residential market. Despite all the challenges internally and externally, in China, positive margin trend over recent years. And also some very nice acquisitions, acquisition of D&D Technologies in Australia and Caldwell in addition to our penetration, window hardware business in Australia and also in the U.S. Global technology is made up of Global Solutions, where Stephanie will later give us a deep dive. And HID, I would say if we correct or take the disturbance of the PACS recovery business out, remember, PACS, we had a semiconductor shortage just 2 years ago, built up a big backlog. We invoiced that backlog a year ago and now we look against a very difficult comparison. I would say the underlying demand is very strong as well on Global Solutions as on HID. But of course, again, that's a PACS story impacting the mix in a negative way on the shorter term. But despite that, still good EBIT results. And then also in that or in those 2 divisions, very nice, smaller and midsized add-on acquisitions in recent quarters. And then last but not least, Entrance Systems, I would say, another star division. You can see our story in Entrance Systems over, I would even say, the last 15 years, if we go back to when we bought, some 17, 18 years ago, small sliding door company in Sweden in the last 10 years, doing the one acquisition after the other. Entrance Systems being our biggest division today, creating fantastic shareholder value. The record high margin, very proud also on the service side, where we have this plan to grow our service business, high single digit year-after-year. An ambition we have achieved over the last 2 years and we will continue to achieve in the years to come. Successful integration, very successful integration of agta record contributing as well top line as bottom line wise. And also here, Massimo, our Head of Entrance Systems will give a deep dive later today. As we have limited time, and I'm almost probably already over time, I will not have the possibility to comment on all the different points of our strategy house. But let's zoom in on product leadership through innovation. Something that is really important for us, something where we make the difference in the market. Like I already explained, innovation for us is much wider than just product and solutions, it is also the way we run processes, we run our operations. But if we zoom in specifically on product and solutions, we really have increased our R&D efforts. When I started back in 2018, our R&D spend was 3.2% of top line. Today, it's above 4%. I think 4% is also a good number going forward. If you consider that we have grown significantly over those 6 years, of course, in absolute value, the increase has been very important. We increased, since 2018, R&D spend with SEK 3.3 billion. We also increased the number of employees working in R&D. Where did we spend that money? A little bit overall, I would say. Definitely in our mechanical core, definitely also on the shift to electromechanical, further extending our product and solution offering for electromechanical solutions with mobile credentials in particular. A lot of effort has gone also -- investments have gone also into Global Technologies as well as on Global Solutions to build the different verticals. Definitely, we'll come back on that as in HID. And then we, I would say, from a very low level, also increased R&D spend in Entrance Systems, helping us also on the organic growth side. 22% of our top line comes from products that we launched in 2023. We registered more than 230 patents last year, more than 900 since I started in the company. We launched more than 450 new products last year. We launched more than 2,500 products since I started back in 2018. Let me give you one example of R&D and show you that also acquisitions are important in R&D. Sometimes we don't develop technology ourselves. Sometimes we come across interesting technology. Kinetron is a very good example of this. It's a partner we have -- well, we work together since many, many years. They are specialists in energy and harvesting. And we bought that company back last year. They have some product demonstration outside. Frans, who was heading Kinetron, can explain to you. But basically what they do is they use kinetic energy that you use. If you touch a door -- for instance, if you touch the door handle and move the door handle, you create kinetic energy, that kinetic energy to a small generator is transferred into electric energy, and that makes that you don't have to change your batteries or don't need a battery anymore. So fantastic operational efficiency gains in a hotel or in a commercial building. No problems at home that your battery is flat or if you have Yale Doorman or Yale Linus and also good for the environment, obviously. So very excited about this technology acquisition we did last year in EMEIA. They will serve as a technology hub for the group. If we then go and zoom out a little bit on the industry, we are in a good industry with very strong positive long-term market drivers. There is a drive coming from an increased demand for safety and security. If we like it or not, but people have the impression that they don't live in a more secure world today than, let's say, 10 years ago, they believe it's less safe, less secure than 10 years ago, that creates good business for us. Movement of people and democratic change. Urbanization goes on. People move to cities. People become greater, the middle class population is increasing. That's our target audience. So a bigger buy to be divided by the same number of players gives us good opportunities. Digitalization, new technologies, the wholesale from mechanical to electromechanical and digital. What does -- that does? It drives R&D up in our industry. It takes also the pure cost players out of the equation. A bigger pie to be divided with less players, also something we like. Sustainability is a strong growth driver like-for-like. You get more money out of the customer if they does a sustainable solution versus a traditional solution. And sustainability definitely also drives technology up in our industry. Again, fewer players that can offer a true sustainable solution. So again, more business potential for us. And then the fact that local regulations stay local, but become more stringent. It's also a good thing for us. We like complexity because we are convinced that if you are the best in mastering complexity in an efficient way, you are the winner. We are very good in managing complexity. We will show you that tomorrow also when you visit our factory in Rychnov. Then again, in the interest of time, let me just zoom in on one of them, increased demand for safety and security. Rising security threats and public safety concerns, I always take the same example. The shooting in schools and universities in the U.S., the case a guy coming in with the gun and killing students and teachers. That has created a whole new business for us. I would say, unfortunate, but it is like that. All those schools, K12 schools, all those universities are being upgraded from a mechanical solution into a sophisticated electromechanical solution. If a crazy guy comes in with a gun, with one push on the button, you can lock down all the classrooms. The bulletproof glass, the doors are closed, and the students and the teachers are safe in the class. And in the meantime police can come and hopefully kill the guy with the gun. We see that going on constantly. There is still a lot of schools that have to be upgraded, universities that have to be upgraded. And I would say, it's almost a license to operate if you're a university or a school in U.S. today. Regulatory requirements, I'll just take one example. Here in Europe, the NIS2 regulation, an EU Directive on cybersecurity, and that will come in effect later this year. It emphasized, of course, cybersecurity. It also emphasizes physical security. And therefore, a lot of critical infrastructure and higher security buildings will have to be upgraded physically to a higher security level, again, very good business for us. And then changing work environment, the shift to remote work also means that there is an increased need for, I would call it, adaptable security solutions. One day, you want to work in that office, and another day, another office and the third day at home. So you have to manage this different security needs. And you can do that, of course, in a much better way if you have an electromechanical solution. And that brings me to this point. We see a further shift from mechanical to electromechanical. Further acceleration of the trend after COVID-19 because there's clearly so many more things you can do in electromechanical way than in a pure mechanical way. And electromechanical solutions offer a high level of security. We have advanced authentication methods. You can remote monitor and give remote control to people that need access to a building or a meeting room or an office. You have state-of-the-art encryption technology. And you also have audit trails and access locks on who came to the office, when, when, how you can see suspicious behavior and so on. Our Elmech product category is our fastest-growing category. If you look over the 8-year period, 2015 to today, our Elmech category has grown close to double digits, 9%. Whereas we, as a group, only grow around 4%. And then our mechanical category only grew around 2%. Our mechanical categories today, around 25% of group sales. Our Elmech category is around 32% of group sales. And you will further see that shift from mechanical to electromechanical. If I then zoom in a little bit on main items that will give us an acceleration of our growth. I will not talk about pricing, but pricing obviously is also an important factor to accelerate organic growth. We will live in a higher inflationary world. We live in an industry where we can pass through inflation through price increases to the market. If prior to COVID-19, price increases on average have been 1% per year. In a higher inflationary world, if inflation is 1% higher, we will get 2% price. So we only need 3% volume rather than 4% volume to realize the 5% organic growth. But these are the strategic activities that will help us in accelerating our organic growth and our acquisition growth. We continue with successful acquisitions, actively upgrade the installed base and generate more recurring revenue, increase service penetration and grow in emerging markets. If I take them one by one, continue -- start with the successful acquisitions. We acquired more than 350 companies since we were born 30 years back. Last year was a record year in number of acquisitions and in value, obviously, because we acquired HHI 24 acquisitions, and that was on top of a record year, the year before 21 acquisitions. What is our acquisition strategy? We want to buy this 20 -- 15, 20 small companies, EUR 20 million, EUR 30 million per year. We want to continue what we have been doing for the last 10 years. We buy a smaller mechanical competitor in the local market. And I would say now, more and more also an electromechanical competitor, because the electromechanical competitors are now big enough that they are interesting for us to buy. We close their operations, integrate their operations into our operations, get operational synergies and then give them access to the full ASSA ABLOY product portfolio, and therefore get also SG&A synergies. We want to continue to extend the core. Obviously, the same example. A couple of years ago, we bought the company, Planet. They make very innovative door seals. We were not in door seals, but also obviously, with sustainability become a very important component on a door. When we bought the first door seal company in our operational synergies because we were not making those sales. And we bought a second and the third one, yes, because then you can combine your operations. But clearly, SG&A synergies because you can sell those door seals with your existing sales teams. The third one is service and distribution, that's mainly in Entrance Systems where we want to continue to buy dealers and service companies to get direct access to do a lucrative service business, doing service on industrial doors, pedestrian doors, loading docks, mainly in the Western world. And then the fourth one, access to new technologies. We still have some technology we are interested in and we don't have in-house yet. Kinetron energy harvesting was a good example of acquiring technology. We want to acquire more technology when it comes to biometrics. There is some technologies in Entrance Systems that we would like to have so many things still to do on the acquisition side. We often get the question, but are you not running out of steam? Have you not bought everything that is available in the market? The answer is no. If you look in most markets, it should take us together with our 2 main competitors in the market, we would have to get a less than 50% market share. So in every market, there is still many smaller players that we can acquire. We have identified more than 900 potential acquisition targets. Obviously, we are not talking to all of them, but we are talking to many of them. Sometimes we talk and they want to get married immediately. Sometimes it takes years. We are talking to [indiscernible], I guess, for more than 10 years, but it's important to be there when the other party is ready to sell and to have, of course, the balance sheet that you can buy those companies. We have the balance sheet, we can continue to do those 20 acquisitions per year. Give it to the end of the year, and we will also be able again to do bigger acquisitions because by the end of the year, our net debt to EBITDA ratio should be back on historical numbers. I would like to ask Sascha -- Sascha Keller on stage, because I want to zoom in on one acquisition we did some time back. Sascha is the Founder, together with Bernd Müller. They were the founders of DoorBird. DoorBird is a German company out of Berlin that makes IP and telecom solutions for residential applications, build residential applications and commercial applications. We bought DoorBird back in October 2022. You founded DoorBird in 2006 -- 2008?

Yes. Almost 10 years ago. Right, 2014.

So perhaps, Sascha, to start, give us a little bit -- I mean, you are now 1.5 years part of the ASSA ABLOY family. Give us a little bit of your experience, how did that journey go? What is your experience after 1.5 years?

Yes. It was a very inspiring journey so far. I've met many, many great leaders within the organization, within ASSA ABLOY. And what I was really overwhelmed with is the great support I received from all the local organizations and the global organizations by ASSA ABLOY. The support, the interest, et cetera, although we are still a small daisy compared to other ASSA ABLOY companies. And of course, it's great to have such a big organization in the background with big financial resources, human resources. So we are super keen and confident to see DoorBird flying on a much higher level than before. So it's a great journey so far.

And why did you sell to ASSA ABLOY? Because you were a successful company before we bought you.

That's a very good question, of course. When we looked at ASSA ABLOY, we have seen that ASSA ABLOY can not only help us to grow DoorBird worldwide. So we are a German company, of course, with traction also in the United States. But ASSA ABLOY can really help us to grow worldwide and also much, much faster than we could have achieved on our own. Whereas what's very important, we also have a technology transformation going on right now. So the majority of door intercoms in the whole industry are still analog. So it's a perfect time to assess the DoorBird as a professional IP door intercom, means ASSA ABLOY can really help us a lot to accelerate. And if you look at the traditional door intercom manufacturers, they all struggle with developing firmware, cloud apps, et cetera. And this is where ASSA ABLOY can really kick in and help us to -- that we become the global brand for professional IP door intercoms in the global market.

And after 1.5 years, what would you say about all the synergies? What is the success we have realized together?

Yes, honestly, of course, we are going through different phases when it comes to synergies, sales-wise and technology-wise. Sales-wise, we've spent the past months with lifting sales synergies in North America. North America was thrilled acquisition, already our strongest market with around 50% of our revenue. And yes, ASSA ABLOY U.S. DSS and ASSA ABLOY Canada, they have done a very professional job, a very professional process to roll out DoorBird in North America, which is happening right now. And next step is, of course, to also establish DoorBird with the help of ASSA ABLOY in EMEIA, considering, of course, the EMEIA region is way more fragmented than America or North America in particular. And also technology-wise, we benefit a lot from ASSA ABLOY. ASSA ABLOY is the global leader for access control and they can help us a lot with combining that also of our door intercoms. Also HID will play a role there with their credential technology. And yes, we are super keen on lifting these synergies anytime soon. But of course, the mission for us is not only to grow DoorBird, but to provide a full solution by ASSA ABLOY for all these entry doors. And that's possible by combining access control together with an IP door intercom as a seamless solution by ASSA ABLOY.

I think what Sascha didn't meant is, of course, is that we have a little bit more money than when Sascha was in his company. So we can also spend a little bit more and invest a little bit more money to accelerate some of the growth initiatives that Sascha had in mind but was more limited as a smaller company. Here, when we see that the business case makes sense to invest, we obviously invest because we want that faster accelerated growth. Thank you. Sascha will be there also during the coffee break. He will show some of the intercom products that we have with DoorBird and we can also answer more questions that you might have. I think that's good step into the next strategic activity, actively upgrading our installed base. We want to do that on the residential side. We also want to do that on the nonresidential side. As you know, on the nonresidential side, we are active in, I would say, all verticals. What's good is that we are not extremely exposed to one vertical. There's no vertical where we have a double-digit exposure. All verticals have only single-digit exposure. Our 2 biggest verticals are education and health care. And I propose that we zoom in a little bit in on those 2 when we talk about the shift from mechanical to electromechanical. I'm getting that installed base. It's all about safety and security. It's all about operational efficiency. I will take those 2 verticals, and I will also take enterprise because we often get questions about, there's less office space, what does that mean for ASSA ABLOY business. So I will also comment on enterprise. If I start with health care. What is important is for you to realize is that we have dedicated solutions for the different verticals because there is some things that are special vertical by vertical. What is special for education? For hospitals? I would say, mainly 2 things. Is this around tracing, tracking. We can -- with our electromechanical solution, we can trace and track doctors, a very important asset in a hospital. We can track patients. We know where we are, and we can also track critical equipment. I would say, through our solution, being able to know where the doctor is, where the patient is and where the equipment is, we can save lives. It's also a good purpose for the world. We do that through our positioning system. You should imagine in a big hospital, things get lost. They don't know where the doctor is, they don't know where critical equipment is. So finding and locating and tracing is very important. Obviously, the other thing is, what is very important is hygiene. Hygiene is so important in hospital in general, definitely after COVID-19, became more important with low touch or nontouch door openings. People don't want to touch. They don't want to get infected. And then they also want to seal off, in a much better way, compartments, one compartment from the other. They also want to seal off in a better surgery rooms. We have solutions with our hematic doors there. So huge potential, a very important vertical as well in the U.S. as in Europe. The other one, education. I already gave the example of the shooting in the schools is, I would say, the main reason why there is a lot of upgrade of installed base in education. But we should make a distinction between K12 and universities. If we talk about U.S., I think similar is true in Europe, where in K12, it is definitely also about security, while in universities, it's also about a requirement, a poll from the students. These students want to use their mobile phone for everything. New generation wants to use their mobile phone to pay in the canteen, they want to pay in the gym, they want to get access to the dormitories, to the different classrooms and so on. We're being the leader also when it comes to mobile credential, offering are very well placed to take advantage of that trend of upgrading a pure mechanical solution in the university, an electromechanical solution. And then the last example I want to give on the nonresidential side is the drastic shift that we make in enterprise. We often get the question, yes, but people work from home, there's less office space, offices in a crisis. What does that mean for you? So like I said, first of all, we are not very exposed to offices. Offices are not in our top 3 verticals. But we also don't leave off square meters of square feet. We couldn't get less, as a matter of fact. What we are interested is in number of door openings. And we are convinced that, yes, there is going to be less square meters, but most probably, there's going to be more door openings. And for sure, the door openings are going to be of a higher value. What will disappear is those big landscapes where 200, 300 people sit in a meeting -- in an office altogether. You will go to smaller offices, but with more breakout rooms, with more meeting rooms. And all those breakout out rooms, meeting rooms have a door opening. And the door opening will be of an electromechanical nature, they will have an HID radar there, it will open automatically. We have seen several examples, is [ SAB ] here. I was in your office in New York a couple of weeks ago, you were before in a big office in New York. I don't know why I met a smaller one, because you make good money in SAB, but you decided to go to a much smaller office but much more modern office. So very nice, I must say, very nice breakout rooms, meeting rooms. Every breakout, meeting room had an HID reader, fully electromechanical. So first, this is very good. It's much less square meter but much more revenue for us to take. So I would say this trend, if it's already something, it might even be a positive trend rather than a negative trend. Of course, they upgrade to Elmech for safety and security, for increased efficiency. I mean, if people change banking, we got some SAB to another bank. Otherwise, you have to get a mechanical key back and keys get lost. We're now an electromechanical solution, moves to another bank. We just got them off and he has no access anymore to the SAB facilities. And then, of course, sustainability through automatic regulation. You can also regulate who has access to a floor, who has access to a building. You also can increase energy. Efficiency linking it also to a building software solution. I was, myself -- I think Bjorn was there also and Erik was there for sure in London. Bishop Gate is a futuristic new building. The people that live in London, you should GO and visit it. So they have plenty of sensors in every room. They measure oxygen, they measure lights, they measure if there is people in the room. And based on all those parameters, they then decide on the temperature in the room and the lighting of the room, optimizing energy efficiency. And our full access control solution is integrated in that complete ecosystem. So a good example of sustainability and how an office will look like or a building will look like in the future. Why is that upgrade of installed base interesting for us? One, because we sell a second time. Selling a second time is always good -- but we also sell more for the second time. If you compare a pure mechanical solution in a commercial building 15 years ago, we would sell mechanical door hardware in the building. We would sell some electronic access control on the perimeter. We have a couple of readers on the outside, but inside it would be pure mechanical. Now today, that same building, in an electromechanical solution, we, of course, still have the mechanical door hardware, but we also have electronic access control on the perimeter, but also inside the building. And the fact that we have that also inside the building gives us also the possibility to sell software, Software as a Service, we can offer mobile access, we can offer touch-free applications and then definitely, the drive for gain specification also makes increase the value per project. So more sale and a second time sale. Here, the same thing, I want to zoom in on one specific project. Being in Czech, being in Prague, we have chosen project here in Prague. For the sports fans around you, the O2 Arena. And then around O2 Arena, they built a whole ecosystem of other buildings. We can explain much better with a video that I can do, so I propose to play the video. [Presentation]

A fantastic example of how initial contact is to a project and then how we can upsell to other projects. I think the red line is customer support, deliver what you promise to deliver and you will get more. I think in the presentation, they were also referring to specification activities. And therefore, I want to welcome Radek Pazour. Radek is a colleague of ours, heading our Czech operations. Radek works in the specification team. And Radek has also been instrumental, I would say, in this project. So Radek, welcome. And perhaps as an introductory question, tell us a little bit, what has been your involvement in the O2 Arena project?

Hello, Nico. Good afternoon, everyone. I joined ASSA ABLOY in 2008 as a sales guy. And after 6 years in sales, I moved to the specification team, and I was directly involved in O2 development back in 2017, when the O2 Universum project was kicked off. And I specified that building together with the architect you saw in that video.

Perhaps the audience, they are not experts like you. Perhaps guide us a little bit to construction project. What are the different phases in such a project?

Yes, sure. I'm happy to do that. For that purpose, I create this simple slide, which shows you construction project phases. So we step into the project quite early in the design phase, sometimes known as a pre-project phase. That's the first phase on the screen. During this phase, architects must finalize construction documentation with all the blueprints, detailed specifications and also detailed cost estimates. Based on these cost estimates, the final budget is approved, and investor can tender general contractor. So this is really the right moment when we can step into the project, and we can help architect to find the right solution for their openings. And to be able to do that, we need to fully understand all the customer needs. We need to have a strong technical knowledge, and we also need to know the local standards and legislation. Our delivery is a detailed specification that completely fulfill all the requirements in detail, describe the whole solution. And also, we provide a detailed cost estimate. So we help the investor to have all the costs under control. Once this is done, the construction can start it, as I said, investor can tender a general contractor. And that's also the moment where we hand over project from specifications to the sales team. So the sales team can continue during the third phase, construction phase, where a general contractor open the tender for all the technologies, including doors, access control system, master key system. So as you can imagine, our sales guys are preparing quotes. They are preparing samples. That's the right moment also for negotiations. And we, as specifiers, we are supporting the sales team. We are defending our specification against our main competitors. So if it's really needed, we can also clarify a very complicated solution or even justify that solution in front of all the key stakeholders. During this phase, if we are successful, we can close the deal with the customer. We can sign the contract, and then we can hand over to the installation phase. So that's the fourth phase. We call it closing phase. During this phase, we are delivering all the doors and the door hardware to the general contractor or we are delivering it through our installation partners. And if we successfully install everything, we can close the project. And then we are moving to the last phase, which is operation phase, where, again, we hand over project to the service department and they can offer a service agreement to the customer, the same way you saw in the video in case of shopping mall, Galerie Harfa. So as you can imagine, the process is quite long, complicated and the internal collaboration is also an important factor for our success.

I get often the question on your project. I mean, why do you win in your project? We heard, I think, in the video that positive customer experience, deliver what you promised, to deliver is very important. In your experience, how important is that? How often do you win a project because of that positive experience?

Yes, it's true that the previous experience of customer with our products is important and also a good relationship with key stakeholders like investors, contractors and architects. These things are very important. And the reason why we were selected as a supplier for O2 Universum was said in the video, you heard that. Customer was very happy with solution that we have in O2 Arena. Products we delivered back in 2004 over, let's say, 20 years works without any major issues. So it was really an easy decision for them to go ahead with the same solution. So I would say the previous experience with products and very good reference is a key to success here.

Very smart people in the room, Radek. So they will say. But the first project, the O2 Arena, you had no reference because that was the first project. So why did you then win the O2 project?

Yes, it's true. It was before I joined ASSA ABLOY. At that time, I knew that we were a leading supplier of locks with [ FAB ] brand. And together with ABLOY products, we managed to solve quite complicated doors. We provide a very sophisticated solution for their doors. So I would say it was the brand recognition of FAB, then also our expertise and our very good products that help us to win that project.

And then I mean, if you look then the whole Universum project, something in particular that stick out, as you said, it was really special difficult.

Yes, yes, definitely, yes. I think architect even mentioned it a bit in the video. We had there one very big challenge. I'm talking about the door to the main hall, series of the doors. And as you can imagine, in these public buildings, significant higher attention must be paid to fire and safety. And O2 Universum was no exception to that. We had to solve, basically, all the requirements you can imagine at the door at the same time. So for architects, it was a big pain point. They were very concerned and they even said that it's, like, a nightmare for them. But we managed to find the right solution. We really helped them. It was complicated solution, quite expensive. But yes, Nico mentioned complexity is something what we can do, so customer was very happy and you can imagine, in these cases, price pays almost no role. It's the solution itself that helps them, enables them to progress with the project. So this happened, solution really works, and we are happy that customer is happy.

You mentioned price. That's another question we always get, I mean, your pricing power. I think it's quite clear on the aftermarket side, but price must be important, I guess, on new projects. Explain a little bit, how important is price.

Price is one of the parameters that is always important for a customer, for sure. As I said, during the design phase, we can help architect with our specifications and we can provide a detailed cost estimates. So we are helping customers to ensure that their budget is under control. And the tool we are using, Openings Studio, is helping us a lot because we can see all the costs. And if we need to do some changes in the specification or adjustments, we can see immediate effect in money for the customers. This is very good, especially for price-sensitive customers.

And he will explain the Openings Studio, has a demo on Openings Studio. Outside the press or the [ orders ], quickly explain a bit what is Openings Studio in a couple of words. And then how important is Openings Studio for a new project?

For us, it's very important. I cannot imagine specifiers working without Openings Studio, yes. This tool is integrated with Autodesk Revit, let's say, 2 dominant BIM tools that are used by architects over the globe. This software really speed up the whole specification process. So it's helping us a lot, but it's not helping only us. This enables also other stakeholders to work and collaborate in an interactive way. I'm talking about locksmiths, suppliers, contractors, distributors. Thanks to the Openings Studio, they can have all the information in one place.

Perhaps he is a bit modest. I think Openings Studio is, by far, the best tool that you can find in our industry. Architects love it. It's one of the reasons how we can turn architects that normally specify competitive products to us. I think it's important for us internally. Like Radek said, I think it's also important for architects. It's important for contractors. It helps them realize operational efficiency. But again, Radek will and can explain that during the coffee break and give you a demo. Radek, we always want more. So what's the next project?

Actually, we have 2 similar projects in the pipeline. They are still in the negotiation phase, so I cannot be more specific. But what I can tell you is that in next 2 years, we hope that these projects will be closed. And thanks to the O2 Arena and O2 [ Universum ] references, we believe that we are in a strong position to win these projects.

We will take over Prague, to start. Thank you, Radek.

Thank you.

And like I said, Radek will be there during the coffee break if you have questions for him or want to see the demo. Good. Back to our strategic activities, still on upgrading installed base but moving from nonresidential to residential. We see a similar trend there. Also on the residential side, we are moving towards digital solutions, digital door locks. Here, we should not forget that we are still early in that trend, even early with solutions. This door lock was invented by iRevo back in 1998. We bought iRevo back in 2007. I would say that's when our digital door lock story started, so still a very young business. There is one market that is fully penetrated in South Korea. If you live in South Korea, 95% -- minimum 90% of all front doors for residential applications have a digital door lock. Many of them have iRevo digital door lock. But if you look around the world, perhaps in China, it's, I don't know, 20%, 30%. If you take the U.S., some people will say it's low single-digit penetration of -- sorry, high single-digit penetration or low double-digit penetration. If you take in Europe, yes, in Sweden or in Finland, it might be a little bit above 10%, in U.K. around 10%. But if you then go countries, Germany, Italy, Spain, it's close to 0. So a lot still has to happen. But what you see is that broader your smart offering, the more you sell, so that's why we are accelerating our new product development around digital door locks. Clearly, demographic change, millennials are much more open to adapt to new technologies. They want that smooth Amazon experience. And then also new business models like shared economy, Airbnb and so on, this door lock is a very easy way to get a lot of different people into the same house, hopefully not at the same time. And the same thing on residential. If you compare a pure mechanical and residential customer versus an Elmech residential customer, you can get much more money out of that customer in an Elmech way than in a mechanical way. Your product offering can be wider. But it's true on the mechanical -- on the nonresidential side, it's definitely on residential side, the lifetime of a digital lock and a digital solution is much shorter than a pure mechanical solution. In the mechanical world, you will only change your mechanical lock when you move houses or when they break into your house. On a digital solution, you will also change your lock because you want to have a new version, you want to have additional biometrics. You want to have a better software and so on. Generating more recurring revenue. On one side Software as a Service, or I would say, fastest growing product or solution, it grew 160% since 2018. When I started back in 2018, recurring revenue was only 2% of top line. Today, it's more than 5% of top line. Very good profitable business, as you can imagine. Very good example here is mobile access deployment in hospitality. Hospitality was the first one to come with mobile access already back in 2015. You have seen that installed base growing with 3,300% since 2015. We see similar evolutions starting a bit later in other verticals. I would say that recurring revenue today is still in the first place, something that happens in Global Technologies, as well in Global Solutions, but we have an ecosystem around a specific end customer problem or in HID where we have mobile credentials, where we have softwares to handle. Let's call it plastic credentials. What we see now recurring revenue also coming more and more in our geographical divisions. EMEA, for instance, has launched an Incedo platform. So it's a software layer where you cap all your hardware, your electromechanical hardware to the same software layer. Obviously, when they sell an electromechanical solution, we also try to sell that Incedo software and then they get recurring revenue. And we have rolled that out now also into APAC and we have a very similar solution in the Americas. Then field service subscription, I will not talk too much. Massimo will do that in the Entrance Systems section. That's, of course, service contracts. It's mainly service contracts on entrance system equipment, industrial door -- doors, pedestrian doors, you name it, linking that customer for long term with you, creating that customer loyalty, giving you the possibility also to upsell during the lifetime of the product and the solution. And then in case service penetration, again, Massimo will come back on that. It's a high priority for Entrance Systems. We want to grow our service business high single digit for the coming years. I would say the market is not the limiting factor because we can also do service on compatible equipment on a very profitable way. It's more our own ability to scale up. If you want to grow, let's say, 10% and make it easy. We have more than 3,000 technicians close to 4,000 -- let's say, 4,000 technicians. It means that we have to add 400, little bit of efficiency, 380 technicians every year on top of the technicians that go on retirement, on top of the technicians that don't want to be a technician anymore. We have to get them up to speed, train them. So that is the biggest challenge to grow faster in service. Like I mentioned, service has better margins than equipment. So if we grow services faster than equipment, it also has an accretive effect on bottom line margins. And then last but not least, growing in emerging markets. Again, here, perhaps it's good to make a separation between Greater China and the rest of the emerging markets. If you look at the rest of the emerging markets, we have been growing with a CAGR of around 10% since 2015. So I think a good achievement. We want to grow faster in emerging markets than in mature markets. Of course, China, if you include China, the picture looks very different. You know that we have had our challenges in China, that we have been very internally focused 3, 4, 5, 6 years back, where we changed also our strategy for China. Our China strategy is delivering underlying good results. It's just a matter of time for the market to bottom out and to turn that we will also be able to show that in a better way in our financial results. Like I mentioned in Greater China, we are now close to positive growth again, still small negative growth on the 12-month end and still small negative EBIT on 12-month, maybe then, but it doesn't need that much to come back into black figures as well, when it comes to organic growth as to bottom line. What's our proven strategy in emerging markets? If you take South America, that's how we became the undisputable market leader within every country in South America. We prefer to do a smaller acquisition of a local player than we have a platform, a platform we can then build from. It gives us a little bit of scale. We can invest, bring other products to the market and then grow that country and take, you could say, country by country. It's important that we are local. Local means we have a local team that understands the local market and also local products. Because again, the needs in every market are very different, something very unique for our industry. We invest in people in our organization, local people that stay there, that give us that continuity. South America, again, a fantastic example. I was in Mexico, Peru last week, visiting also one of the acquisitions -- 2 of the acquisitions we did in Peru. Most of our people have been there 15, 20 years. That's what our customers want. They want a long-term relation. They don't want somebody that changes every 3 years, a new face. Also, our market is a very complex market. If you look at other industries, perhaps the products are easier to learn if you come from outside of the industry. In our industry, you really have to have deep internal knowledge because your customers are very experienced on the products themselves and they expect from us to be even more experienced. So therefore, the seniority is very important. I think Tim can also discuss about that when he talks about HHI later. And then like I said, local footprint, local knowledge, feet on the street. All this together with pricing, of course, will then give us that 10% CAGR over a business cycle. Continued successful acquisitions will give us the 5% acquisition growth. The other items, together with pricing, are the main items that give us the 5% organic growth. And then we want to do that with an EBIT margin within the 16% to 70%. And there, Erik, will tell us one of the main actions to keep costs under control and further improve the bottom line.