February 6, 2020 / 8:22 AM / 14 days ago

UPDATE 3-Lock-maker Assa Abloy says acquisitions will squeeze margins in 2020

* Shares fall 4%

* Says two acquired firms to dilute margin in 2020

* Company has high acquisition rate in fragmented market

* Contingency plan if virus disrupts supply for longer (Adds CEO comment, updates shares)

By Anna Ringstrom

STOCKHOLM, Feb 6 (Reuters) - Sweden’s Assa Abloy, the world’s biggest lock and security doors maker, said on Thursday acquisitions agreed last year would squeeze its profit margins in 2020, as it reported a slowdown in fourth-quarter organic sales growth.

Assa Abloy, which has acquired new business at a rapid rate in a fragmented market, in 2019 agreed to buy an additional stake in Swiss firm agta record and AM Group in Australia.

“Looking into 2020, acquisitions will be a main growth driver once we have consolidated agta record and the AM Group. Because of these businesses’, current margin levels and their size, our group operating margin will be diluted,” it said on Thursday in a statement.

Chief Executive Nico Delvaux told a news conference the wording reflected plans for higher growth from acquisitions than in 2019, of 5-6% against 3% in 2019, and not a cautious outlook on organic sales.

He said the negative effect on group margins would probably be between 40 and 80 basis points.

Shares in the group, whose products include mechanical and digital locks and access control systems, were down 4% at 1100 GMT after gaining 25% over the last year.

CHINA VIRUS CONTINGENCY

Operating profit before items affecting comparability grew roughly line with expectations in the fourth quarter, to 4.1 billion crowns ($423 million) from 3.8 billion a year earlier.

Organic sales growth slowed to 1% from 6% partly because of reduced construction activity in South Korea and the implementation in China of a more selective sales strategy.

Unfavourable conditions in many European markets, Britain in particular, as well as a workers’ strike in Finland that hampered output, also had a negative impact, Delvaux told Reuters.

Organic sales in the Asia Pacific division fell 10%, while in EMEA (Europe, Middle East and Africa), growth slowed to 1% from 3%.

The rival to Allegion and Stanley Black & Decker sources some of its components and products for its main markets in China.

If the coronavirus outbreak disrupts supply from China for a few more weeks, Assa Abloy would recoup lost time by flying products from China to Europe and the Americas, rather than shipping by boat, once production recovered, Delvaux said.

“In the extreme case factories were to stay closed another two months, it would be much more complicated as we would need to see what can be produced in other factories,” he said in an interview.

The group has started looking into possible ways to buy in other countries, but merely as a contingency plan for an unlikely worst scenario, he said.

$1 = 9.5831 Swedish crowns Reporting by Anna Ringstrom; Editing by Simon Johnson and Barbara Lewis

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