I am pleased to report that ASSA ABLOY recorded its highest-ever sales and income in 2008, at the same time as investments in product development and market presence continued at a high level. The global economy gradually weakened during the year but the ongoing restructuring programs and other measures achieved valuable savings, which counteracted the steadily weakening market. Acquisition activity continued at a high rate, with 18 acquisitions completed.
Johan Molin, President and CEO
Sales in 2008 increased by 4 percent and amounted to SEK 34,918 M (33,550). At the same time operating income increased by 1 percent excluding restructuring and non-recurring costs and amounted to SEK 5,526 M (5,458) – once again the highest-ever income for the Group – representing an operating margin of 15.8 percent (16.3).
Viewed over a five-year period, total growth excluding currency effects amounted to a satisfactory 52 percent, of which 30 percent was organic growth and 22 percent acquired growth. Cash flow over the whole period has been very good, with a significantly strengthened balance sheet.
Investments in product development
For ASSA ABLOY, organic growth is the single most important driver of profitability and success. Organic growth is driven chiefly by product development, improved marketing and increased market coverage. The year was marked by continued strong investments in product development, which will deliver a number of exciting new products and good contributions to growth in 2009 and beyond. In parallel, the successful expansion of the marketing organization also continued, with increased concentration on specification salesmen and architects and greater focus on the fast-growing area of electromechanical lock solutions. The effectiveness of marketing efforts is growing in step with the consolidation of the separate brands under the ASSA ABLOY master brand.
An industry under consolidation
On the acquisition front, activity was high during the year, with 18 acquisitions that steadily strengthened ASSA ABLOY’s positions, especially on the growth markets in Asia which are important for the future. ASSA ABLOY operates in an industry under consolidation, where acquisitions are an important element in the Group’s development. Through acquisitions ASSA ABLOY complements its product portfolio, brings in new technology and increases the Group’s geographical market penetration. The companies acquired during the year will provide annual sales of about SEK 1,800 M. All five divisions acquired new units. The major acquisitions include Rockwood in North America, Gardesa and Valli&Valli in Italy, Copiax in Sweden, Cheil in South Korea and the Chinese companies Beijing Tianming and Shenfei.
Improved production efficiency
ASSA ABLOY’s restructuring program begun in 2006, which will be completed early in 2009, has been a great success, with major savings and substantially improved efficiency in the Group’s production units. The program, which included 50 individual structural measures, has led to 24 manufacturing units closing while a substantial number of other units have refocused their operations to concentrate on final assembly. A consequence of the program is that more and more standard production has moved to low-cost countries and is being carried out in both our own and external plants. Production processes have improved, while a local presence on the end-user markets ensures rapid delivery and efficient assembly of customized products. Net savings from the program are SEK 600 M a year and more than 2,000 employees have now left the Group.
During the second half of 2008 a new review of the production structure in the high-cost countries was undertaken. Its aims are to accelerate the restructuring process and address those units that have not yet converted from full production to final assembly. The review resulted in about 40 restructuring projects and the full cost was expensed in the third and fourth quarters of 2008. Some projects started before the end of the year. The new program affects a total of 1,800 employees and the estimated payback time for the projects is 2–3 years.
It is highly satisfactory to report that at the same time as production has been undergoing restructuring in the high-cost countries, ASSA ABLOY has maintained a high tempo in the expansion of its production base in low-cost countries. Over the past two years the number of employees in the low-cost countries has increased by 50 percent to over 12,000 people, more than 40 percent of the Group’s total workforce.
Development of the divisions
EMEA division
The EMEA division was affected by the gradually deteriorating economy in Europe during the year and reported negative organic growth of 2 percent (+7). Operating income was unchanged, excluding items affecting comparability.
The project to develop the marketing and sales organizations, which includes bringing them together under the ASSA ABLOY brand, continued to produce good results. Work with joint product platforms led to the launch of several extremely promising electromechanical and electronic products such as Aperio and various Hi-O solutions.
Most of the projects from the restructuring program launched in 2006 were concluded in 2008. During the second half of 2008 a new program was initiated to convert the division’s remaining production units in high-cost countries from full production to assembly.
Several acquisitions were carried out, the most important being Gardesa, Copiax and Valli&Valli. Gardesa is a leading Italian manufacturer of high-security doors. Copiax is a Swedish security wholesaler. Valli&Valli is a leading Italian supplier of designer door-handles. The acquisitions strengthen ASSA ABLOY’S position as a provider of total door opening solutions on the market.
Americas division
The Americas division reported organic growth of 4 percent (5) during the year, though trends varied among the different segments. While demand in the non-residential segment continued to be robust during the year, demand in the residential segment fell back strongly. However, this trend had only a minor effect on the division because of low exposure to the residential segment. Profitability further improved during the year and operating income rose by 5 percent.
The initiatives to establish a common segmented sales organization and to increase specification work so as to stimulate demand have proved highly successful and led to increased market shares and advancement of positions.
Work on restructuring and Lean methods continued successfully through the year. The North American company Rockwood, which produces door components, was acquired during the year.
Asia Pacific division
The Asia Pacific division reported 0 percent (10) organic growth during the year. Market trends in Australia and New Zealand were negative during the year, but they were positive on the Chinese market in particular. However, even this market slowed toward the end of the year. Export sales to the Group’s units in North America and Western Europe also fell toward the end of the year due to weak demand and inventory reductions.
Despite the weak demand, operating income increased by 11 percent thanks to an efficiency program which continued at undiminished pace. Two of the four production units in Australia and New Zealand closed, while the remaining units are focusing on assembly and customization.
Two large acquisitions were completed: the door manufacturer Beijing Tianming, and Shenfei’s door-closer business. With these acquisitions the Group can now offer a complete range of door and locking solutions on the Chinese market.
Global Technologies division
Organic growth was 0 percent (11) for the year and operating income fell by 3 percent. Growth for the HID Global business unit was weakly negative and for the ASSA ABLOY Hospitality business unit was weakly positive.
However, within HID Global, Identity and Access Management showed growth while Identification Solutions (formerly ITG) reported negative growth due to reduced demand, the phasing-out of unprofitable customer segments and delays to many customer projects. HID Global launched a large number of innovative products during the year. Great interest surrounded products that combine logical and physical access, including those built into some Dell laptop computer models from 2008.
The ASSA ABLOY Hospitality business unit launched a number of innovative new products on the market. One important launch was Signature RFID, the first product on the market to combine RFID technology with NFC, making it possible to use cellphones to communicate with locking systems.
Entrance Systems division
The Entrance Systems division reported organic growth of 3 percent (6), and operating income was up 5 percent with unchanged operating margin.
Demand from the retailing sector in Europe and North America weakened during the year, though this was largely offset by increased demand from the healthcare sector and by increasing demand on growth markets. Robust sales in the service segment also made a positive contribution. Among the products launched was a new global platform for automatic door closers.
The move of production from the German plant to the Czech Republic has now been completed and the new production plant in China is running very smoothly. In addition to several small acquisitions of service businesses in both mature and new markets, the major acquisition of the South Korean company Cheil was completed.
Future development
The Group is well-positioned for long-term sustainable growth through our position as market leader with a global presence. Our focus on the non-residential segment, the high percentage of aftermarket sales and an increasing proportion of fast-growing electromechanical and electronic products all contribute to stability in growth and earnings. The sales organizations are now gathered under the ASSA ABLOY master brand, which is producing good results.
Electromechanical solutions growing rapidly
New products are the most important source of organic growth. The increased investment in product development has ranged from 10 to 20 percent annually in recent years. The number of development engineers is now close to 1,000. Much of the work is concentrated on rapidly growing electromechanical lock solutions, which are being developed as global common product platforms with adaptations for local markets. The product platforms are being developed in part by the Group’s common development department, Shared Technologies, and in part through projects within and between divisions in which skills are assembled to take optimum advantage of existing resources. A large number of new products will be launched in 2009.
The share of sales held by electromechanical products has risen sharply from 20 to 34 percent during the 2000s and this trend will continue in the future, since the growth rate for this segment is two to three times higher than for traditional mechanical products.
Increased sales on growth markets
The Group is dedicating resources specifically to increasing its presence in the growth markets in Asia, Eastern Europe, the Middle East, Africa and South America. The share of sales on these markets has now passed 16 percent of the Group’s total sales, compared with 9 percent four years ago.
Positive trend in Earnings per share
Weakening world economy
The global economy weakened gradually during 2008, and at an accelerating pace towards the end of the year and in early 2009. This has had a sharply negative effect on construction activity in both mature and new markets that has resulted in reduced demand for the Group’s products. For 2009 as a whole we expect negative organic growth. We therefore took measures already in 2008 to adapt the Group to the market situation, with the result that 10 percent of employees left the Group during the year. In 2009 we will continue to work on both the long-term restructuring program and other measures to keep costs, profit margins and cash flow at good levels. Opportunities for financing have also become extremely limited on the capital market, which means we must adopt a conservative approach to acquisitions and place even greater emphasis on sustaining cash flow and streamlining working capital.
Great efforts by the employees
In conclusion I would like to thank all the employees who contributed to the Group’s successes during the year, and look forward to our continued efforts together to make ASSA ABLOY even better despite the difficult market situation and the challenges we now face.
Since ASSA ABLOY was formed in 1994 the Group has gone through several distinct stages of development and has become established as a global leader. Much has been accomplished, but many important markets and product areas remain to be consolidated. We have never had a better range of products, greater market penetration or more innovative new products than we have now. The continued demand for safety and security, along with continuing population growth and urbanization, ensure that there is an underlying structural demand for the Group’s products which will only increase over time. Combined with the restructuring measures that are now being implemented, this means that, over time, our prospects for continued growth with good profitability are very good.
Stockholm, 13 February 2009
Johan Molin
President and CEO
