Annual Report 2017 - assaabloy.com

1 Annual Report2017 The global leader in door opening solutions More and more homes are being equipped with smart door locks for improved safety, security and convenience Report on operationsASSA ABLOY in brieftabStatement by the President and CEO 2 Value creation strategy 6 Goals and outcomes7 Value-creating model8 Market presence 10 Product leadership 16 Cost-efficiency 22 Profitable growth 26 DivisionsASSA ABLOY divisions 28 EMEA division 29 Americas division 30 Asia Pacific division 31 Global Technologies division 32 Entrance Systems division 33 Sustainability reportSustainable development36 Report of the Board of DirectorsReport of the Board of Directors 39 Significant risks and risk management 41 Corporate governance 46 Board of Directors 50 Executive Team 52 Internal control financial reporting54 Remuneration guidelines for senior management 55 Financial statementsSales and income 56 Consolidated income statement and Statement of comprehensive income 57 Comments by division 58 Results by division 59 Financial position 60 Consolidated balance sheet 61 Cash flow 62 Consolidated statement of cash flows 63 Changes in

2 Consolidated equity 64 Parent company financial statements 66 Notes68 Comments on five years in summary 94 Five years in summary95 Quarterly information 96 Definitions of key ratios 97 Proposed distribution of earnings 98 Auditor s Report 99 Shareholder informationThe ASSA ABLOY share 104 Information for shareholders 107 ContentsInnovation and product development drive growth2017 was once again a good year for ASSA ABLOY. Sales increased and totaled SEK 76,137 million. Organic growth increased to 4 percent, with continued strong growth for our electromechanical solutions. Value creation strategyThe Group s overall strategic direction is to spearhead the trend toward increased security with a product-driven offering centered on the customer. The strategic action plans are focused on three areas: market presence, product leadership and in the divisions 2017 Most divisions showed continued good organic growth with a strong development for electromechanical of the Board of Directors, corporate governance and financial statements P39P2P6P28 Sustainable developmentASSA ABLOY s sustainability initiatives continued to make good progress in 2017, with advances in line with the five-year sustainability ABLOY in briefWHO ARE WE?

3 ASSA ABLOY s BRANDSWHAT DO WE DO?ASSA ABLOY is the global leader in door opening solutions with sales of SEK 76 billion and 47,500 employees. The strategies for profitable growth are market presence, product leadership and ABLOY has considerable value in its well-known brands, several of which have been acquired through the Group s many acquisitions. ASSA ABLOY is the global master brand. It is often com-bined with individual brands well estab-lished in local knowledge, regulations and security standards. The Group thus increases the visibility of the ASSA ABLOY master brand, which unites the Group s sales departments and rep-resents innovation, leading technology and total door opening ABLOY is the global leader in door opening solutions and offers mechanical and electromechanical locks, digital door locks, security doors, entrance automation, hotel security and secure identity solutions, primarily in identity and access management, as well as a number of other related products and services.

4 47,500 employeesSEK 76 billion#1 Approximately 70 percent of Group sales are under the ASSA ABLOY master brand or a combination of ASSA ABLOY and local brands. FOR WHOM?WHERE ARE WE?OUR DIVISIONSASSA ABLOY has leading positions in most of Europe, North and South America, Asia and Oceania. ASSA ABLOY covers all needs for door opening solutions and service for institutional and commercial customers, as well as for the residen-tial market. The Group has the largest installed base of products in the world, with a large share of sales in the stable and commercial customersResidential marketAftermarketThe master brand is complemented by global brands, which are all leaders in their respective market segments, some examples are: Yale in the residential market, HID in access control, secure card issuance and identification technology, and ABLOY in high security locks. The Group also has product brands that are not associated with ASSA ABLOY, such as Entrematic in entrance of Group sales by region 2017 NORTH AMERICA 40% (40)SOUTH AMERICA 3% (3)EUROPE 38% (38)ASIA 14% (15)OCEANIA 4% (3) AFRICA 1% (1)ASSA ABLOY is divided into three regional and two global regional divisions manufacture and sell mechanical and electromechanical locks, digital door locks, cylinders and security doors adapted to the local market s standards and security global divisions manufacture and sell electronic access control, identification products and entrance automation on the global BY DIVISIONOPERATING INCOME BY DIVISIONL egendLegendLegendLegendLegendLegendLegen dLegendLegendLegendEMEA, 23% (23)Americas, 23% (24)Asia Pacific, 11% (12)Global Technologies, 14% (13)Entrance Systems, 29% (28)EMEA, 24% (23)Americas, 30% (31)Asia Pacific, 7% (7)Global Technologies, 15% (15)Entrance Systems, 24% (24)

5 Read more about ASSA ABLOY s security solutions on the last pagesSTRATEGYFINANCIALS IN BRIEF 2017 Cost-efficiencyProduct leadershipMarket presenceGrowth and profitability Sales increased 7 percent during the year to SEK 76,137 million (71,293) driven by continued strong growth for electro mechanical products. 16 acquisitions were completed during the year, con-tributing to net acquired growth of 2 percent for the year. Continued good earnings and strong cash flow achieved during the year. Operating margin excluding items affecting comparability was percent ( ). Investments in product development continued at a high pace and a number of new products were figures20162017 ChangeSales, SEK M71,29376,1377%of which: Organic growth, %24of which: Acquired growth, net total, %32of which: Exchange rate effects, %01 Operating income (EBIT), SEK M11,254112,34110%Operating margin, % before tax (EBT), SEK M10,549111,67311%Operating cash flow, SEK M210,46710,9294%Return on capital employed, % per share20162017 ChangeEarnings per share after tax and dilution (EPS), SEK/share7, per share diluted, , ,30310%Weighted average number of shares, diluted, thousands1,110,7761,110,7761 Excluding items affecting comparability.

6 2 Excluding restructuring As proposed by the Board of Directors. 20,00035,00050,00065,00080,0001716151413 12111009085,0007,50010,00012,50015,000 Sales, SEK MEBIT, SEK M1 Excluding items affecting Reclassification has been income (EBIT)1, 21, 2111 SALES AND OPERATING INCOME (EBIT)EARNINGS PER SHARE 1 SALES ON EMERGING MARKETSSEK01234567817161514131211100908 SEK M05,00010,00015,00020,000171615141312111 009081 Earnings per share has been restated due to the 3:1 share split in Excluding items affecting ABLOY Annual Report 2017 THE YEAR IN BRIEF1 Statement by the President and CEOI nnovation and product development drive growth2017 was once again a good year for ASSA ABLOY. Sales increased and totaled SEK 76,137 million. Organic growth increased to 4 percent, with continued strong growth for our electromechanical solutions. We strengthened our market leadership, partly because of rapid innovation in electro-mechanical, digital and sustainable door opening solutions, and partly through the acquisition of 16 companies.

7 Operating income increased 10 percent to SEK 12,341 million, supported by higher sales and good cost control. Operating margin improved to percent, in line with our target. SEK MSalesSEK MOperating income20,00035,00050,00065,00080,0001716 151413 SalesOperating income15,0007,50010,00012,50015,000 SALES AND OPERATING INCOME1 Excluding items affecting comparability 2013 and BEFORE TAX AND OPERATING CASH FLOWSEK M02,0004,0006,0008,00010,00012,000171615 1413 Income before tax1 Operating cash flow2 Excluding items affecting comparability 2013 and 2016. Excluding restructuring OF KEY FIGURESG lobal demand for door opening solutions strengthened in 2017 and once again the mature markets grew at a higher pace than the emerging markets. We saw con-tinued good organic sales growth in all of our divisions, except in APAC, where China once again had negative growth. ASSA ABLOY s sales growth in 2017 was 7 percent, including 4 percent organic, 2 percent net through acquisitions and divestments and 1 percent from cur-rency fluctuations.

8 Underlying the increase in organic growth is the growing demand for electromechanical and digital door opening solutions. This technology shift affects not only the advanced mature markets, but increasingly also many emerging markets. ASSA ABLOY is the leader in this technology shift, thanks to the many years we have focused on innovation, product develop-ment and complementary acquisitions. Our operating income for 2017 increased by 10 per-cent to SEK 12,341 million. The operating margin of percent is in line with the target of 16 17 per cent on average over a business cycle. Good profitability requires a good cost-efficiency. Our restructuring program con-tinued to deliver according to plan, as did the Group-wide programs for more efficient processes at every stage from purchasing, across production and adminis-tration to sales. A review of the divisions in 2017 presents the following picture:Division EMEA, with 23 percent of the Group s total sales, increased organic growth to 4 percent.

9 Growth was strong in Finland and the UK, as well as in Eastern and Southern Europe, and good in Scandinavia, France, Israel and Africa. Germany and the Benelux countries had growth, while the Middle East remained negative. Demand has grown following the major investments in innovation and product development within digital door opening solutions in recent years, especially for the Group s Yale brand and its smart door locks for the residential market. Acquisitions contributed with 3 percent growth. Three acquisitions were carried out during the year. The Americas division, with a 23-percent share of the Group s total sales, experienced organic growth of 4 per-cent, a slight weakening after several years of high growth. The positive trend continued in Canada and in most Latin American countries. Brazil had slightly negative growth. In the US, demand grew in both the commercial and the residential segments at a somewhat slower pace after several years of high activity. Demand from the public sec-tor continued its recovery from last year.

10 ASSA ABLOY s Yale brand successfully strengthened its position as sup-plier of smart door locks on the division's markets. Two acquisitions were made during the year, including August Home, a leading provider of smart door locks in the US. Acquisitions contributed 1 percent to BY THE PRESIDENT AND CEO ASSA ABLOY Annual Report 20172 DEVELOPMENT OF EARNINGS PER SHARE 1 Earnings per share has increased by almost 158 percent since Earnings per share has been restated due to the 3:1 share split in Excluding items affecting We are world leaders in the development of technologies for identification and authentication. The Asia Pacific division, which accounts for 11 percent of the Group s total sales, had organic sales growth of 0 percent, still affected by weak sales in parts of China. However, sales were strong in Japan, Southeast Asia and South Korea. Australia and New Zealand had good growth. In India, marketing efforts were expanded and sales increased sharply. Major streamlining measures, which reduced the number of employees in China by 29 percent over five years, have adapted Chinese operations to lower demand and the errors we discovered in China last year have led to improved and increased control.