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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone, and welcome to the presentation of ASSA ABLOY's third interim report 2021. My name is Björn Tibell. I'm heading Investor Relations. And joining me here in the studio are ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. We have set aside about 1 hour for this call, and we will, as usual, now start with a short summary of the report before we open up for your questions. So with that, I would like to hand over to you, Nico.
Thanks, Björn. And also good morning from my side. Q3 report for ASSA ABLOY, we can show you good figures. We have a strong profitable sales growth, an organic sales development of plus 7%, where all divisions contributed in a positive way with the exception of the APAC division that continues to be affected by COVID-19 measures and where we also have challenges more in general with the construction world in China. Also good EBIT improvement, an EBIT margin of 14.2%. But if we correct for one-off items this quarter and same quarter a year ago, EBIT margin of 15% at the same level as a year ago and that despite, I would say, all the inflation pressure on material costs and logistic costs and even on labor costs. Five acquisitions signed in the quarter, and of course, the big acquisition announced of Home and Hardware Improvement division of Spectrum Brands. Very excited about that acquisition. Good work down on the balance sheet side with a strong operating cash flow and a cash conversion of 112%. So in figures, a sales almost SEK 24 billion, 8% up. Like I mentioned, 7% organic growth, good complementary growth through acquisitions of plus 2% net and then a minus 1% negative currency effect on the top line. And EBITDA margin of 15.6%, so heading again towards the 16% to 17% bandwidth. And then an adjusted underlying EBIT margin of 15% on the same level as the quarter a year ago. And adjusted EBIT up 7%, almost SEK 3.6 billion. If we then comment a little bit on the different regions, starting with North America, very good performance in North America with an organic growth of 13%, where we see and continue to see good, high activity on the residential side, of course, with more challenging comparisons now going ahead, but where we also see the commercial business bouncing forward and coming and reaccelerating again. And then a very strong South America, plus 36% organic growth, where we have seen high double-digit growth in all the different countries in South America. So very good region where, despite very difficult comparisons with a year ago, we see -- we continue to see strong momentum. Also very good organic growth in Europe, plus 8% where, again, good activity on the residential side and also commercial side coming back. Unfortunately, now in recent weeks, we also see again infections, COVID-19-related, going up again, though, so let's see how will play out. Some markets are again implementing restrictions. So let's see how that will affect trust and mobility in the society. Africa plus 2% and also strong performance, I think, in Australia and New Zealand, plus 1%, and that despite the fact that New Zealand was under lockdown for most of the quarter and also big part of Australia were under important lockdown during the quarter. And then the only region with negative growth, Asia, with minus 11% organic growth where we continue to see COVID-related challenges in Southeast Asia, where we were perhaps more positive in Q2 where we thought that borders would open up. That has not happened yet on the contrary. And of course, that part of the world really live off tourism -- off international tourism. So that remains a challenging part of the world. And the same is true for China, where we have, again, in, I think, seven provinces now COVID-related incidents and restrictions in place and where we have, of course, also the more, I would say, general challenges in the construction market related to also all the news we hear around Africa. But so overall, I think a very positive picture in the world. So market highlights also this quarter: several big project wins, several critical infrastructure projects to secure water and transport infrastructure sites in the U.K. and in Australia, a big eCLIQ frame contract with E.ON. in Germany, including more than 30,000 locking points. And then nice energy saving door solutions for a big U.S. distribution customer. We launched also in this quarter, again, different new products and solutions: a new sliding door operator range for emerging markets, and then a strategic partnership for Yale together with Bosch and then several new solutions in our HID division. And also this quarter, again, it's good to see that we are awarded for our innovation efforts through different awards around the world. So after a difficult 4 quarters with negative organic growth last year due to COVID-19, now again, the third quarter in a row with a strong positive organic growth. So happy about that. And then an operating margin 14.2% but corrected for the one-offs at 15%. So going again in the right direction. And then obviously, operating profit being the result of what you have seen on the top line as I just explained. Acquisitions. We continue to be very active on the acquisition side with three acquisitions completed in the quarter, nine acquisitions completed year-to-date. They represent an annualized sales of around SEK 800 million. And then we have three more acquisitions that should be closed now in Q4. MR Group and Arran Isle, two acquisitions that represent a sales of around SEK 1.4 billion. And then, of course, the bigger acquisition that we announced earlier of HHI. We also finalized the divestment, as mentioned earlier, of CERTEGO in the quarter. A couple of words on the acquisition of the Hardware and Home Improvement division of Spectrum Brands: 7,500 employees that we will add to the family, headquarters in Lake Forest in California, with very attractive manufacturing footprint in factories in Mexico and in different places in Southeast Asia and in Greater China; a strong platform in North America for the residential segment with a large mechanical base; a nice portfolio of innovative products, including the very interesting patented SmartKey technology; and then well-established customer relations, mainly in large home improvement centers and homebuilders. I had the opportunity to meet management of HHI last week. I also visited one of the factories in Mexico. Very excited on both sides to finalize this deal. Very motivated, very experienced people that are also very happy to join the ASSA ABLOY family. A strong strategic rationale for this acquisition. It's really a strategic step for us in the residential business in North America. It's an opportunity for us to transit that large existing mechanical customers base to digital solutions. They have, like I mentioned, a strong position in residential DIY and in the homebuilders channel. We also see international growth opportunities. And it's a company that is performing strongly from a financial perspective. And like I said, skilled and passionate employees and management team. So they will definitely help us to further accelerate our profitable growth. If we then go into the different divisions, starting with EMEIA, an organic sales of 7% strong organic sales with very strong sales growth in Finland, France, Middle East, Africa and India, a strong sales growth in Benelux, the DACH region, East Europe and the U.K. and a stable growth in Scandinavia and South Europe. Also a good operating margin. We only posted 11.3%, but that is, of course, due to the capital loss of around SEK 200 million due to the CERTEGO divestment and also a hit in a negative way by FX, 70 basis points. That's a stronger SEK versus the euro. But I think a good operating leverage of 20 basis points despite all -- despite the negative mix and despite definitely also the higher material and logistic costs and all the challenges that we experienced around material shortages. And not only material charges, electronic component related, we see material shortages in general for many different product families. And this is true for EMEIA. This is true for all the other divisions as well. I think our operations have done with a very good job, in general, to maneuver through these shortages in the quarter and keeping output on a high level. Same is true for Opening Solutions Americas. Very strong performance in the quarter with an organic sales of 14%, with very strong sales growth in all different business areas in all countries. And a strong operating margin of 20.6% versus 20.2% last year. Very good operating leverage of 40 basis points also here despite all the operational challenges. FX accretive 10 basis points and M&A dilutive 10 basis points. The strong performance of this division. Then Opening Solutions Asia Pacific, the more challenging division, with a negative organic sales of minus 7%. With stable sales in South Korea but then sales declining in Pacific. Of course, Australia and New Zealand, like I mentioned, under lockdown for most part of the quarter and then also a significant sales decline in Southeast Asia, still very much affected by COVID-19 and also China, same thing, COVID-19 and then a challenging situation in construction market in general in China with liquidity challenges for the bigger contractors. Despite an organic sales decline of 7% and operating margin of 5.8%, we have a negative operating leverage of 150 basis points, of course, due to lower volumes also due to the fact that we had to close our factories in New Zealand and the lockdowns in Australia and also here the strong raw material headwinds. Also a negative FX of 60 basis points. That's a lower renminbi versus the SEK. And then accretive M&A, 50 basis points. That's mainly the transfer of India to the EMEIA division. If we then go to the global division, starting with Global Technologies, bouncing forward with an organic sales of plus 7%, with a good strong sales in most business areas. I would say all nontourist-related business areas because we saw significant sales decline in Citizen ID. And we also saw only a modest recovery on the hospitality side, but all other business areas in Global Solutions also strong sales growth. And operating margin strong of 15.8%, with very good operating leverage of 90 basis points. Also here, again, with all the operational challenges I mentioned earlier. FX 60 basis points negative and M&A also dilutive 50 basis points, partly because of the performance of the acquisitions, but it's also mainly related to acquisition costs for some acquisitions we did in recent months. And then we end with Entrance Systems. Strong performance of Entrance Systems with an organic sales of plus 10%, with very strong sales growth, I would say, in all different segments and as well for equipment as for service. A good operating margin and improved underlaying -- underlying operating margin of 14.8%. We have very strong operating leverage of 120 basis points, dilutive FX of 50 basis points and a dilutive M&A of 370 basis points, and that's, again, linked to the onetime gain of around SEK 250 million last year linked to the divestments of some of the Pedestrian segment entities when we bought agta record. And with that, I give the word to Erik for some more details on the financial numbers. Erik?
Thank you, Nico, and good morning also from my side. The sales grew in the quarter with 8%. 7% of that comes from the organic part. Acquisitions, there, we should mention that agta record, we bought the company end of August last year. So that is into the acquisition column then for 2 months out of the 3 months in the quarter. FX, minus 1%. That's related to the strengthening of the SEK. If you look on the operating income or the EBIT, it's down, but we have mentioned a couple of times already that we had capital gains last year and we had capital losses this year. If we take that out, it's actually on par on 15.0% both years. The net income and the earnings per share went down with 5%. Operation -- Operating cash flow was strong. We had a cash conversion of 112%. If you compare to last year, last year, of course, we had the impact of COVID where we reduced our working capital, whereas this year, we are ramping up. We also get the higher material costs into our inventory, and as well, we try -- we build inventory in order to cope with the demand with the present material shortages. But if you look here, year-to-date, we are up with 9% versus the same period last year. And finally, on this slide, return on capital employed increased with 2% and is now at 15%. If we dissect it a bit more, if you look on the organic part, 4% is coming from price increases. 3% is related to volume. The organic flow-through, I think, is strong, almost at 22%. This is despite the material -- the cost for the material that we're having. We're able to offset that with the help of pricing as well as operational efficiencies. The currencies there, it's having a dilutive impact of 40 basis points. This is related to the strengthening of the SEK. And when we start -- when we recalculate last year's profit, then we had a higher portion of renminbi as well as dollars, and that's sort of the reason why it has a negative effect. On acquisitions, yes, we have talked about this before, the capital gain, the capital loss. But if we look on the column then for the 2 months, agta record had a negative impact of 20 basis points. If you look for the full quarter, it's roughly a minus of 40 basis points. If we then take the cost breakdown, on the direct material, it's lower with 60 basis points. 40% of that comes from direct material. 40 basis points come from direct material. 20 basis points come from the mix, where in the mix, we have a higher portion of Entrance Systems and Americas, and they have a higher portion of direct material. If we then go back to the direct material, the 40 basis points, prices has, in the quarter, continued to increase for the raw material. It's up with another 18%, but we start to see that it's flattening out a bit. And we keep the guidance that we have given before is that we expect that the impact will be less than what it was 2018, when it was around 60 basis points. Conversion cost is flat, and that is despite that we have a higher logistic cost, but we have been able to offset that with the help of operational efficiencies. On SG&A, it's better with 70 basis points. We still continue to invest in R&D, and you've seen that we have launched a number of new products, but we have efficiency gains when it comes to the sales and the admin part. Operating cash flow on a 12-month basis versus EBT, it's 118%. As I was mentioning before, I think we have a strong cash conversion. And we have, of course, that there is a different, let's say, dynamics in the working capital last year [ with the one there is ] this year. But as Nico mentioned before, I think we do an excellent job in making sure that we can deliver and that we can keep all our factories open. And last from my side is the -- next to last is it even, the net debt versus EBITDA is now down to SEK 1.5 million versus SEK 2.2 million a year ago. We have been able to reduce our net debt even more. So now it's down to a little bit more than SEK 25 billion. It's -- in this one, however, we have -- which is going against, we have roughly SEK 500 million increase due to the currencies that you need to deduct from this -- from the gearing -- from the net debt as well. Debt versus equity at 38%, we still have a very strong financial position. This is the last one for me is then the earnings per share, which is down, as I mentioned before, with 5% and ended at SEK 2.15. And with that, I hand it back to Nico for some final comments.
Thanks, Eric. So a good quarter 3 for ASSA ABLOY with strong profitable sales growth and organic sales of 7% complemented with good growth through acquisitions of net plus 2%, an adjusted underlying operating margin of 15% on the same level as a year ago despite all the operational challenges. Strong operating cash flow. And now going forward, of course, our focus is -- remains on profitable growth. How can we reaccelerate again? And then short term, definitely also, how can we offset the challenging operating environment away from, [indiscernible], higher material costs, higher logistic costs and even higher labor inflation and definitely also logistic challenges with longer lead times for logistics and definitely a component shortages where it's much wider than only the electronic shortage? We have been able to maneuver ourselves through those challenges in a good way in Q3. Let's be confident that we will be able to manage that also now going forward. And with that, I give the word back to Björn for, I guess, Q&A.
Yes. Thank you, Nico and Erik. [Operator Instructions] Operator, this means that we are ready to kick off the Q&A session. Please go ahead.
[Operator Instructions] And the first one comes from [ Max Elias ] from DNB.
Mattias Holmberg from DNB. I'm trying to understand the undertone in the outlook comments you've made. I mean you've talked about a slower recovery in travel-related segments for some time and also cost inflation has been discussed throughout the year. And I'm really interested in if there's anything in the statements that you've made now where you believe that the outlook is either improved or worsened compared to what you said 3 months ago.
Well, if you take the different items, what you have said that previous quarters is that everything what is international travel-related remains a challenge and that it will take longer to recover back to prior of COVID-19 levels, and I talk about Citizen ID. I talk about hospitality. I talk, to a certain extent, also about marine cruise ships. That statement remains valid because, of course, we have seen a small uptick in the summer months because people finally wanted to go on vacation after being locked up at home for more than a year. But I mean, you've also seen flight companies reporting on how they see the market evolving. So that will remain a challenge going forward. When it then comes to COVID-19-related issues, like I mentioned earlier, I think in the Western world, Europe, North America has accepted probably that we will have to live with COVID-19 for quite a while going forward, and we have accepted that life has to go on. That's definitely the case in North America. In Europe, you see still politicians intervening. And now with infections going up again in many places in Europe remains to be seen what effect that might have on trust in society and mobility. But let's be confident that yes, thanks to vaccination. Also, the consequences -- or the negative consequences will remain limited. It's a little bit different in Asia where after Q2, we were more positive on Southeast Asia, where we believe that Southeast Asia would open up again with vaccination and COVID-19 being more under control. That did not happen yet. And that part of the world depends very much on the international travel to get market conditions up again. We are now a bit more positive again on Australia and New Zealand as vaccination rates are going up in a very important quick way there. We are confident that we will not see the same challenges now going forward as we have seen in Q3 with severe lockdowns in New Zealand and in Australia. And then definitely, the situation in China went further down. I mean we all read the news around Evergrande, but I think it's a wider challenge in just Evergrande in China. So I think in general, it's a little bit difficult to predict going forward because there is several moving factors, market-related and operation-related. Also with the shortages, the biggest challenge on the operational side is that our visibility is very short because, for some components, we only have a visibility of 6 weeks. In normal times, you would have a visibility of 6 months or longer. So we know that we are okay with those components for the next 6 weeks, but we don't know what will happen afterwards. And this situation is going on since several months, and so far, we manage to always -- to manage this division in a good way. And we are confident that, that will continue to be so also going forward. But it's a bit an uncomfortable feeling because we don't have that visibility on the supply chain that we used to have, let's say, 6 months ago.
That's clear. And just a follow-up on the supply chain issues and cost inflation as such, would you say that you've increased prices enough to offset these headwinds? Or would you need to raise prices further and, in that case, by how much?
We definitely have to raise prices further. If you look in Q1, our dilution because of material inflation versus price was close to 0. I think in Q2, it was around 20 basis points. As Erik mentioned, now in Q3, it's around 40 basis points. Q4 will still be a challenging comparison, so we are, as we speak, further increasing prices to compensate for the higher material inflation because like we said earlier, it's around 6 months time lag between material indexes going up or down, and I'm seeing that in our income statement. And in that way, it's perhaps encouraging to see that at least some of the material prices are now leveling out on a, I would say, very high level. But we remain to with our statement that we are confident that this time around, the dilution will be lower than it was back in 2018 when we had the other spike in material increases at that time. On a yearly basis, the dilution was around 60 basis points. We are confident we are sure that, this year, that will be lower. And like we said earlier, we are also confident that towards middle next year, somewhere that's under the condition that material indexes stay where they are today, that around mid-next year, somewhere we should be able to fully compensate for material inflation to price increases.
We have another question from Daniela Costa from Goldman Sachs.
So if possible, one is a follow-up on this pricing point, but just understanding a bit better, I guess, you still have to raise prices further, but I assume you don't want to cut them one afterwards. Historically, you haven't done that. So when we look to late 2022, do you think we will enter into a positive pricing carryover? When does that happen basically that we get to net positive pricing if raw materials stay where they are now? So that's question number one. And then a question -- the second question I wanted to ask is going back to the HHI deal. If you could give us sort of a bit of an update? And I guess just to recap, like why don't you think there is like a risk of this deal not going through? It sounds like digging into the residential market shares, specifically that there is very high concentration. And I guess there's been other deals like I think there was an appliances deal not a few years back that was blocked with a very similar market share price chart, but I'm interested on why you think that's not a risk.
Let me first on price versus material. Like you rightly said, everything depends on where and how material prices will evolve. I would say for us, most probably the best scenario is if material prices stay now on this high level and stabilize on that level because then, indeed, what you could predict is that towards the second half of next year, we would then have a positive pricing versus material inflation. Of course, if the more material prices will drop significantly, like they went up significantly a year ago, that would have -- would create a completely different dynamic in the market where you would get a negative price pressure. So everything depends on where material prices go. If they, like you, suggest a stay on where they are today, indeed, towards the second half of next year, we should have a positive effect from pricing versus material inflation. When it comes to HHI, nothing new to say as compared to what we announced earlier. We are still confident, very confident that we will be able to close this deal in Q4. We see it differently. We believe there is no antitrust issues and definitely not on the residential side because, yes, HHI is a strong player on the residential side. But as you know, we are very weak on residential side. Most of our business we do today in U.S. is on the commercial side. We only are a player on, you could say, digital door locks. But if you look the market landscape for digital door locks, it's a very crowded place with a lot of players and also a lot of new entrants. We are confident, and we are going through the process we have filed. And like I said, we are confident we should be able to close in Q4 now.
We have another question from Vivek Midha from Citi.
I just wanted to ask on the Americas organic growth, very strong in Q3. Would you mind giving us a bit of color on -- a bit more further color on residential versus nonresidential and maybe break down how much of that organic growth came from pricing versus volumes?
Yes, I think we have seen good growth on both. I would say on the residential side, of course, the comparison was a bit more difficult with a year ago, but we still saw solid growth, more or less in line with the figure for the division. And on the commercial side, we saw an acceleration of the growth that we already had in Q2 and in Q1. In other words, the organic growth for commercial was even higher in Q3 than in Q2. When it comes to pricing, as the Americas has an important steel door business and still is the highest inflation component that we have in the material portfolio, pricing in Americas has been higher than for the group, so it has been higher than the 4%.
Our next question comes from Guillermo Peigneux UBS.
I want to focus on APAC. And one of your statements seems to be portraying a very weak image on Australia. And I was wondering about the divergence between your comments and what we actually heard from one of our industry peers, not basically selling into the same market, but into residential and nonresidential business as well. We've seen high single-digit growth against lower base comparison and returning to prepandemic levels supported by residential demand in response of government incentives, and that is on energy management, so I guess low-voltage to a great extent. And I'm surprised to see that huge divergence between that comment and your comments in Australia. Could you help me bridge that difference, maybe?
Yes. I haven't seen the comment. I don't know which company you talk about. I can only talk about facts. And the facts are that Australia or big part of Australia were under lockdown conditions in Q3. And together with that, New Zealand was completely under lockdown for a big part of Q3 with very low, close-to-zero business in New Zealand under lockdown conditions. So that's the fact in Q3, and that explains the plus 1% that we have shown on the geographical map. Going forward, I have said during the presentation that we are more positive on Australia and New Zealand because we believe these lockdowns will not happen anymore going forward because vaccination rates are up high level as well in Australia as in New Zealand, and that should help them also to keep those markets going -- open going forward. Again, I don't know the company who made the comments. I can only say that we are, in Australia and New Zealand, more exposed -- much more exposed to commercial. We are much stronger on the commercial side than on the residential side. So residential part is smaller for us. So that might be one of the deviations between their statement and what you read out of my comments and out of our figures.
Our next question comes from Andre Kukhnin from Credit Suisse.
Now question follow-up. Other question I want to ask is about electromechanical growth in the quarter and year-to-date. And maybe if you could talk broadly about this kind of post-COVID trends of automated entry and touchless, are you seeing any evidence of that now coming through in terms of customer demand? And a quick follow-up I had is on whether you could at all quantify the size of the top line impact from supply chain shortages or material shortages that you've experienced so far, please?
So the first question on electromechanical, if we look first on the residential side, digital door locks continues to have high double-digit growth in all geographical areas. So very happy and satisfied with that performance. Of course, we launched also several new products this year. We have the new liners lock in Europe. We have a new Yale Doorman in Scandinavia, so that helped and contributed to the high double-digit growth for digital door locks on the residential side. And we see good momentum as well on the electromechanical side. We also mentioned the figure in our report of growth of electromechanical or electromechanical growth for the group. But they are the same. We see a similar positive momentum in the different regions. We see that also translated in our spec business. Our spec business is good up again, and we see the fastest growth in our spec business, everything what is electromechanical and green-related. So we see higher growth for green solutions, and we see higher growth for electromechanical solutions versus mechanical solutions in our spec business. As to your second question -- Okay, the shortages on the top line. If you take Q1, we estimate that it had a top line effect of around -- between EUR 2 million and EUR 4 million, let's say, EUR 3 million. So not significant on top line. Things similar was true in Q2, around EUR 3 million. In Q3, now we believe it's around to double. So let's say, EUR 6 million, EUR 7 million, EUR 8 million, a negative effect on top line. It's a little bit bigger than in Q1 or Q2 but still, in the bigger picture, not significant. I would say it has more important effect on our operational efficiency because as you have no stable supply chain, you have to reschedule in your factory all the time. You have sometimes to fly parts, higher logistic costs. You have to reschedule your production planning and maneuver yourself through the challenges of shortages. So a more important effect on operation efficiency rather than on top line so far.
We have another question from Andreas Willi from JPMorgan.
I've got a question on the North America business, where you've dramatically outperformed your main competitor, probably haven't seen such a difference historically also in terms of the supply chain situation. Do you have some more insights you could share, some more views from your side, what you managed to do there that basically may be different than some competitors have been able to do on the supply chain on executing in this environment given that you had, obviously, strong growth across the board there, whereas Allegion had revenues declining?
Again, I cannot comment on Allegion or other competitors. I can only comment on ourselves. And like -- we often say when it rains, it's much less about the car. It's more about the driver in the car, and I must say that I'm extremely happy with our operational performance in general and with operational performance in North America. In particular, I think our people in operations have done a fantastic job in maneuvering ourselves through all the shortages and all the challenges from an operational perspective, and we were able to keep output in the different factories on a high level and deliver on the high backlog we have in that part of the world. Again, the biggest challenge is the visibility. We have very short visibility going forward, but that is the case now since 3, 4 months. So the situation has not really changed. It's just a little bit uncomfortable feeling because we don't have a good visibility longer time. So you know that you're okay for the next 1, 2 months, but you don't know what will happen afterwards. But so far, we managed the situation, I think, in a good way. So we are confident that we will be able to continue to manage that also in a good way going forward. I think Americas has done a great job also throughout the COVID-19 crisis. I think we were also one of the few that were able to keep all our factories in U.S. open throughout the whole COVID-19 period while keeping our people also safe during that period, which obviously is our first and highest priority.
And my follow-up on the earlier discussion on China, could you specify how much it was down year-on-year? And there maybe you're seeing more weakness than others, maybe given your exposures given that doors and locks going towards the end of construction processes. Is it fair to assume that it probably is going to get quite a bit worse before it gets better, if you already see some weakness now?
Well, it's, of course, difficult to speculate about the future, but we definitely don't see market conditions improving as we speak. So therefore, we don't expect an improvement on the shorter term. And our business in China was down double digit. But despite, I would say, the double-digit negative growth in China, we're still able to post positive margins in the quarter. So at least it gives us a bit of comfort on the stability, profitability, growth strategy that we have for China.
Our next question comes from Lucie Carrier from Morgan Stanley.
The first question I have is a follow-up around the comments you've made on pricing and potentially positive carryover into the second half of next year. When you discussed that element around pricing, is it only an offset versus your raw materials? So is it across sort of the trend that we can [indiscernible] logistics, whether this is potential labor inflation and also higher price for some electronic components? So just to specify really kind of what we are talking about here, and you're also making the comparison with 2018.
Yes, you were breaking up a little bit, Lucie, but I think I got the question. So I can confirm that it's inflation in general. So it's labor inflation. It's material inflation. It's logistic inflation. If you take, for instance, transport cost, logistics cost, I mean some of our businesses charge for transport costs separately, and then it's easy because you just charge through the higher transport cost to the customer. But often, it's more embedded in the overall price that you charge for a product or for a solution. So when I made the comment, it was more in general on the inflationary pressure.
And my second question was a little bit on the follow-up of some of the top line impact question. We seem to understand that some construction sites are getting delayed because of missing equipment or sometimes also kind of the lack of labor. Is it something that you are seeing? Is it something that you're anticipating to see considering the pressure? Or you think that it's not so much of a big deal for your business specifically?
Again, difficult, difficult to judge. I can say that in Q3, that was not a significant augment to explain anything on the top line. But again, very difficult to predict how that is going to evolve going forward. I hear the same and I read the same news as you and as the others do. So far, it has been manageable, and it has no -- it had no significant effect on top line. But again, very difficult to predict going forward.
Our next question comes from Mr. de-Bray from Deutsche Bank.
Have you seen some of your competitors withdrawing from some projects because they could not deliver the products due to supply chain challenges and thereby allowing you to come in and gain share in particular in the U.S.?
Well, I would say, in general, it's, of course, always like that, that if you are in a challenging operational environment, that there is players in the market that tend to have much longer delivery times or can't deliver on their promises. And then the other people that have availability can then jump in and take those orders, and that has been definitely the case also in this quarter. But again, I would not say that, that is a significant reason that explains our top line.
And I mean, is there anything specific to your supply chain organization in the U.S. that could explain the comparatively much stronger performance you had there compared to some of your peers?
Again, I cannot comment on our peers because I don't know their dynamics. Of course, when you talk about supply chain for U.S. or supply chain for the Americas, you should take two things into consideration. Of course, some of the commodities, we have also an organization on group level where we consolidate efforts where it makes sense, where we see benefits of doing on a high level on a group level or on a division level. And on the other hand, we have a very decentralized organization, which, I think, helps us in the U.S., helps us definitely also in Europe as conditions and as challenges are very different market by market and, timing-wise, are also not synchronized. The fact that we can take decisions very locally close to the market, close to our operations help us in this agility and this flexibility that you need throughout these times of component shortages. That being said, I mean, we are also not immune to these challenges and the situation in the market. Again, we believe we have performed and executed in a good way, and we are confident that we will be able to continue to do so. But again, we don't have the long visibility to give us high confidence on that statement.
We have a question from [ Andrea Scotti ] from Exane BNP.
I hope you can hear me. I would like to ask two questions. First, on your group margin and raw mats. So if we should expect the net positive price cost impact in the second half of next year, are we then seeing peak headwind in Q4, Q1? And how will that headwind look like compared to the Q3 level? And related to that, when should we expect you to be back in your margin target level of 16% to 17%?
Well, I guess when you should expect us to be within the 16% to 17% margin again. Unfortunately, we believe this is not going to happen in the short term in the sense that we are confident that we are going to close HHI now in Q4. And as we said from the beginning, HHI will be dilutive around 70 basis points from the start, depending on a little bit how much the PPA component is. So that means margins 70 basis points down. Then of course, we will realize this EUR 100 million synergies over a 5-year period, but it will take a time to bring HHI up to the group levels. And let's not forget that we still have the dilution from agta record, which is today around 40 basis points where we are, I would say, ahead of our integration plans, but it's still dilutive, and it's not longer in the acquisition column. It's in the operation column, but it still continues to be dilutive. But if you exclude those two special items, you could say, if you look, for instance, now in Q4, if you correct for the 40-basis-point dilution of agta record and you correct for the currency, we are at 15.8%. So we are very close to the bandwidth we aim for. When it comes to pricing versus cost inflation, Q4, for sure, will still be a tough quarter. Let's also not forget in Q4, we started to increase prices already, Q4 last year. So also the comparison on price increases versus last year becomes a little bit more challenging. But then as we move into Q1, Q2 next year, that pressure should ease up if, again, material prices stay where they are today.
Okay. Yes. So peak in Q4, maybe Q1. And the second question, very strong performance in Americas this quarter. And I just wonder how to read your comment about normalizing growth rate in the American market. What do you consider normalized growth rates? And have your view of the American market weakened or strengthened since you announced the acquisition of HHI?
So when we make normalized, I think you can look at it in two dimensions. One is a year ago, it was definitely not normal because we had COVID-19. We believe that the U.S. has digested for, to a big extent, COVID-19 has decided that it has to co-live with COVID-19 for a long time going forward and life has to go on. People go out again. Mobility still is, again, there. Trust in society is, again, there. So that's one dimension. The other dimension is, obviously, if you compare to mainly Q2 last year, of course, we had a big drop in general. We also had a big drop in the Americas because it was affected in an important way by COVID-19. If we're now going forward, the comparison with a year ago becomes more normalized in the sense that Q4 last year and then Q1 this year were again more normal quarters. So the comparison with a year ago is on a more normal level, and therefore, also growth percentages should be, again, more on a normal level in line with our financial ambitions, I would say.
And on the American market, yes.
When it comes to market conditions, residential stays on a similar high level as we saw and as we commented on in previous quarters. So still very happy with the activity we see on the residential side. With that footnote, of course, that comparison becomes more difficult with a year ago. And conditions on the commercial side, we have seen improving in -- further improving in Q3 over Q2. And like I mentioned earlier, we shared it also in our spec business where growth in volumes are further going up, and that's being for us the only internal long-term indicator, you could say.
Our next question comes from Joel Spungin from Berenberg.
Just actually wanted to follow up on the last question with regards to Americas and maybe if we could just tie it specifically to HHI. When you say you expect a normalization in growth, does that also apply to HHI? And have your expectations for the growth of HHI changed since you announced the deal at all?
Well, the question on HHI, you should, of course, ask to the people of HHI because we are not the proud owner of HHI yet. So at this moment in time, we only have public available information like you have on HHI, so I cannot comment specifically on HHI. I can only comment on the residential market, what I did in the earlier question of Andreas, and like we said, we are still very positive on the activity on the residential side. When it comes specifically on the acquisition of HHI, like I also said, when we announced the deal, we don't buy HHI for the next quarter. We buy HHI for the long-term contribution that it will bring to the group. And in that aspect, of course, nothing has changed between the announcement and today. It remains a very deal for us. We have a lot of good opportunities mid- and long term.
Just maybe one quick follow-up. Just could you -- I was just curious with regards to how HHI sources, how -- is it a similar model to yours? Or do they produce locally? Or do they have more of an export-driven model or import-driven model?
So HHI has operations in the U.S. I think they have an interesting footprint for us also in Mexico. But today, we don't have so much supply chain in Mexico, which definitely makes it attractive for us going forward to do more in Mexico, short to the U.S. market. And then they have also a very interesting low-cost supply platform in Southeast Asia with factories in the Philippines and in Taiwan and then also factories in Greater China that we can leverage going forward.
Operator, I think we have time for one question more.
Okay. Then our last question is from Rizk Maidi from Jefferies.
So just perhaps we're struggling a bit to reconcile the outlook with our models basically, can you just perhaps help us with the exit rates at the end of September or maybe perhaps the daily rates early October, please?
Yes. Of course, Q3 is always a difficult quarter because it's still holiday months, and then September is, you could say, working month, so it depends also a little bit on how people take vacation, how long they take vacation. But if you look in the quarter and on daily rates, July and August were stronger than September, so September was on a lower level.
Okay. And then the second one is just a clarification of your earlier comment on whether we see commodity prices dropping. Like at which level would you be sort of worried about giving away some of the price increases you've already sort of achieved?
Well, again, it's difficult to say because it's, of course, a mix of the different materials. But if you would see a strong double-digit price deflation or cost deflation, that's, of course, where the competitive dynamics start to play against the price levels. As long as it's in that single- or low double-digit range, it should be okay to maintain the pricing dynamics in the market.
And thank you, everyone. It's time to round up this call. I hope it has been welcomed -- helpful. And if you have any follow-up questions, feel welcome to contact Carl Wahlberg or myself at Investor Relations. We look forward now to finally seeing many of you and speaking to many of you in the coming weeks. In the meantime, stay safe and thank you for today.
Thank you.
Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may now disconnect.