ASSA ABLOY
Annual Report 1999

Plain-text annual report

Contents The Annual General Meeting of ASSA ABLOY AB ______2 The year 1999 in brief ____________________________3 Statement by the President ________________________4 Group development ______________________________6 The ASSA ABLOY share __________________________8 ASSA ABLOY and the lock industr y ________________10 Strategy and financial objectives __________________12 Management philosophy ________________________14 Environmental management and quality ____________16 The trend towards higher security ________________18 ASSA ABLOY in development______________________20 ASSA ABLOY’s products ________________________22 Getting closer to the customer ____________________24 Scandinavia __________________________________26 Finland ______________________________________30 Germany ____________________________________32 United Kingdom and Ireland ______________________34 France and Belgium ____________________________36 North America ________________________________38 Australia and New Zealand ______________________42 New markets __________________________________44 VingCard ____________________________________48 F I N A N C I A L S TAT E M E N T S: Report of the Board of Directors __________________50 Consolidated income statement and cash flow statement ________________________56 Consolidated balance sheet ______________________57 Parent Company income statement and cash flow statement ________________________58 Parent Company balance sheet ____________________59 Accounting and valuation principles ________________60 Financial risk management ______________________62 Notes to the income statements and balance sheets __63 Audit report __________________________________73 ASSA ABLOY’s Board of Directors __________________74 ASSA ABLOY’s Management Team ________________75 Addresses ____________________________________76 A S S A A B L O Y 1 9 9 9 1 The Annual General Meeting of ASSA ABLOY AB will be held at Ingenjörsvetenskapsakademien, ‘Wallenbergsalen’,Grev Turegatan 16,Stockholm, at 3 p.m.on Wednesday May 3 2000. Notice of attendance at the Annual General Meeting Shareholders wishing to attend the Meeting must: – be recorded in the register of shareholders kept by Värdepapperscentralen VPC AB (Swedish Central Securities Depository and Clearing Organisation), no later than April 20* 2000 and: – give notice of attendance to ASSA ABLOY AB, Box 70340,107 23 Stockholm,tel.+46 8 50648500 by 4 p.m.on April 25 2000.Notification must include the shareholder’s name,personal identity number (registration number),address and telephone number as well as information regarding the number of shares held. Any shareholders whose shares are nominee- registered must also,in order to be entitled to take part in the Meeting,request a temporary entry in the register of shareholders kept by VPC.Shareholders must notify the nominee about this well before April 20* 2000,when this entry must have been effected. * The formal date is April 23 2000.However, due to holidays, the actual printout of the register takes place on April 20 2000. ––––––––––––––––––––––––––––––––––––– Financial information from ASSA ABLOY will be published as follows: Interim reports: January 1 – March 31:May 3 2000 January 1 – June 30:August 10 2000 January 1 – September 30:November 13 2000 Year-end report for 2000: February 7 2001 Annual report for 2000: March 2001 Annual reports and other reports may be ordered from: ASSA ABLOY AB, P.O.Box 70340, SE-107 23 Stockholm,Sweden Tel:+46 8 506 485 00. Fax:+46 8 506 485 85 www.assaabloy.se 2 A S S A A B L O Y 1 9 9 9 The year 1999 in brief: Continued strong growth in sales and earnings l Sales amounted to SEK 10,277 M (8,582), an increase of 20 percent. l Organic growth in comparable units in local currency amounted to 5 percent (6). l Income before tax increased by 31 percent to SEK 981 M (748). l Earnings per share increased by 26 percent to SEK 2.25 (1.78). l Operating cash flow amounted to SEK 1,218 M (1,028), an increase of 18 percent. l Cash earnings per share (CEPS) increased by 15 percent to SEK 4.38 (3.80). l Coordination and transfer of know-how between units, facilitated through the benchmarking process, is providing the foundation for improved earnings and cash flow. l During the year 11 companies were acquired, two in Sweden, two in France and one each in Australia, Ca n a d a , Denmark, Finland, Ge r m a n y, Israel and Spain. The major acquisitions are: — Lockwood, the leading lock manufacturer in Australia. — effeff in Ge r m a n y, the world(cid:213)s leading manufacturer of electric strikes. — Mu l - T-Lock, Israel(cid:213)s leading manufacturer of locks and high-security cylinders. l ASSA ABLOY completed a share issue in July where SEK 1,985 M was raised, with a subscription rate of 99.8 percent. ASSA ABLOY: growth profile Stable organic growth l Trend towards higher security. l After-market sales more than half the volume. l Electromechanical products – cross sales – new markets. Increasing margins l Improvements in each unit – benchmarking – transfer of know-how Cash flow even stronger l Work flow and balance sheet rationalization. l Goodwill amortization. Consolidation opportunities – focus on earnings per share (EPS) l Fragmented industry – harmonization and R&D requirements lead to consolidation. l Strong cash flow funds acquisitions. A S S A A B L O Y 1 9 9 9 3 The President and CEO, Carl-Henric Svanberg: Creating Group strength step by step 1999 was yet another eventful and important year for the ASSA ABLOY Group. Sales increased by 20 percent to SEK 10,277 M, income before taxes increased by 31 percent to SEK 981 M and earnings per share increased by 26 percent to SEK 2.25. Operating cash flow, a good measure of the strength of operations, amounted to SEK 1,218 M. Organic growth was good after a weak first quarter, and for the year in total amounted to 5 percent. We have made 11 acquisitions, strengthening us in various areas. The acquisition of effeff in Germany has given us a world-leading position in electromechanical locking. Lockwood has provided us with a leading position in Australia and South East Asia. Our strategy remains intact, i.e. to develop products and concepts focusing on the lock business in order to offer our customers continuously improved solutions to their security prob- lems. This process of development is car- ried out in close cooperation with end- users and other decision makers in the market. In addition to our end customers, the police, the fire service and insurance companies are important partners in dis- cussing requirements and creating prod- ucts and systems that work properly in all s i t u a t i o n s . Our business is based on stable organic growth that during the year amounted to five percent for the Group. The year start- ed weakly but ended stronger. The fi r s t quarter appeared rather weak partly because of the comparison with the very strong start of 1998. It was also affected by a decrease in sales to Russia and Vi n g- Card(cid:213)s decreased sales in Asia due to a drop in new construction. 4 A S S A A B L O Y 1 9 9 9 In addition, we continue to strengthen our position through acquisitions in different parts of the world, sharing knowledge and improving operations l o c a l l y. We exploit synergies through com- mon R&D and production of more global products, not least in the area of electro- mechanics, and through cross sales with- in the Group. In addition to the growth created in national operations, there are good growth opportunities for Gr o u p companies to expand their product port- folios by adding other Group products in their countries. One of the year(cid:213)s most important events is the acquisition of effeff. Electromecha- nical locking is used for door control of access control systems of various kinds. With effeff manufacturing electric strikes, Abloy manufacturing motorized locks and Securitron producing magnetic locks, the Group now has a leading position in all areas of electromechanical locking. The growth rate for these products is closely tied to the growth of the access control business and is considerably higher than for more traditional lock products. In Australia, Lockwood has developed better than expected since being acquired. The management has quickly taken advantage of experience and products in the other ASSA ABLOY companies, and we expect to reach our goal — of a four to five percent margin increase within four years — earlier than expected. We continue to increase our margins through intensive benchmarking and the exploitation of synergies. Operating cash flow exceeds income before taxes for the sixth year in a row thanks to continuous focus on work flows and capital employed. Looking at our various operations, the Finnish companies ended the year strong- l y. The year started weak since Finland in particular was affected by the decreasing Russian sales, both directly and indirectly via Finnish entrepreneurs. Ho w e v e r, a stronger home market combined with success on other export markets, particu- larly in the area of electromechanics, has contributed to an increase in sales during the year. The rate of increase towards the end of the year exceeded 20 percent. The Scandinavian countries developed well. The Swedish and Danish units show stable growth and increasing margins. A new range of door closers has been suc- cessfully launched in Sweden. Two distri- butors have been acquired: Sloth & Co. in Denmark and AKI L(cid:140)sgrossisten in Swe- den. Both acquisitions give us the oppor- tunity to approach our customers even more closely and to increase our quality of service. Tr i o Ving of Norway had a weaker start in 1999, but sales picked up during the autumn as the Norwegian economy improved. The need for high-security locks is evident and the Tr i o Ving Tw i n high-security cylinder, launched in 1998, already constitutes more than 25 percent of all new cylinder sales. Co n t i n u e d rationalizations during the year have proved successful and contribute to an increased profi t a b i l i t y. Our German company IKON shows stable development, and an increase in demand toward the end of the year was noticeable. A number of new products are about to be launched and growth is expec- ted to increase this year. The acquisition of effeff has clearly improved our position. Both sales and earnings are improving better than expected. The integration work is going well including the coordination of various marketing and sales activities. The French operation continues to develop well. The phase-out of non-profi t- able products has contributed to improved result of the crisis. Apart from the important work of devel- oping each individual market, a number of projects are in progress with the aim of developing our Group strength. Our Prod- uct Council is responsible for coordina- ting development within the electro- mechanical area that is quickly gaining in importance. Demands on security are continuously rising, but at the same time the lock products must be user-friendly enough to ensure proper use and to make emergency exiting easy. These three requirements of security, user-friendli- ness and safe emergency exiting are to some degree conflicting. Electronics and electromechanics create opportunities for more efficient solutions. Although the technology is the same throughout the world, it must be adjusted to local demands by cooperating closely with the customers. A good — and gratifying — example is that we have been entrusted by the US Department of Defense with the task of upgrading the lock security in the Pe n t a g o n . Purchasing in the European and US companies is coordinated by the Pu r c h a s- ing Council and savings are substantial. Another important area is the develop- ment of IT solutions for interfaces with customers and suppliers. Here we can learn from each other(cid:213)s successes and mistakes and also create common solu- tions. Within the production itself, how- e v e r, we believe in simpler IT systems and o ften manual solutions. All in all, the locks business offers good opportunities for continued growth. The need for security is constantly increasing, and the business is currently experiencing a consolidation that creates further acqui- sition opportunities. All companies in the Group still have much to learn from each other and there is room for further improvement of margins. We therefore look forward to a continued exciting devel- opment for the Gr o u p . Stockholm, February 2000 Carl-Henric Svanberg A S S A A B L O Y 1 9 9 9 5 margins but has consequently had a nega- tive effect on sales. Our position has strengthened substantially through the acquisitions of Stremler, France(cid:213)s leading manufacturer of locks for aluminum and glass doors, and Fichet, the leading manu- facturer of high-security cylinders. The American units continue to show good growth and we estimate that we are gradually gaining market share. Ra t i o n a l i- zation is continuing and margins are increasing as a result. Securitron, manu- facturer of magnetic locks, shows particu- larly good growth. In Canada, we have strengthened our position through organ- ic growth as well as a few smaller acquisi- tions, and we achieved total sales of SEK 267 M. In Mexico, Scovill shows good development after a downturn in 1998 due to the turbulence in Latin America. Growth in the new markets has been good and amounts to 26 percent. Po l a n d , for example, has nearly doubled its sales. In Asia, Lockwood and ASSA ABLOY have merged to create the leading sales force in South East Asia. Sales in the region amount to SEK 200 M and China shows particularly good growth, with sales increased from SEK 8 M to SEK 25 M. We expect this growth to continue. Fi n a l l y, Vi n g Card has had a mixed year. Sales in Europe are growing strongly as are Latin America and the marine seg- ment, albeit from a low level. USA is experiencing a temporary slowdown aft e r the last few years(cid:213) extensive upgrading of hotel security, and Asia shows a clear downturn. The business in Asia is driven by new construction and there is present- ly an over-capacity in the hotel market as a Group development: Statements of income Sales by organizational unit 3) Sales Cost of goods sold Gross income 1999 EUR M1) 1999 SEK M 1,171 10,277 -716 -6,282 455 3,995 Selling and administrative expenses -298 -2,612 Operating income before goodwill amortization Goodwill amortization Operating income Net financial items Share in earnings of associated companies Income before tax Tax Minority interests Net income 157 -21 136 -26 2 112 -32 -2 78 1,383 - 189 1,194 - 230 17 981 - 280 - 14 687 Capital employed and financing 1999 EUR M2) 1,006 380 351 31 624 1999 SEK M 8,602 3,246 2,998 267 5,337 Capital employed – of which goodwill Net debt Minority interests Shareholders’ equity 1) 1 EUR = 8.78 SEK. 2) 1 EUR = 8.55 SEK. 1998 SEK M 8,582 -5,463 3,119 -2,018 1,101 -138 963 -228 13 748 -212 -10 526 1998 SEK M 6,984 2,524 4,237 32 2,715 1997 SEK M 6,968 -4,496 2,472 -1,662 810 -103 707 -179 9 537 -183 -2 352 1997 SEK M 5,783 1,835 3,442 24 2,317 The ASSA ABLOY product portfolio total SEK 10,277 M Security doors and fittings: 27% Mechanical locks, lock systems and accessories: 50% VingCard hotel locks: 9% Industrial locks: 4% Electromechanical and electronic locks: 10% Sales by geographical area total SEK 10,277 M Other: 4% Australia and Asia: 7% Nordic region: 20% North America: 40% Europe excl. Nordic region: 29% 6 A S S A A B L O Y 1 9 9 9 Scandinavia Finland Germany France United Kingdom United States Australia New Markets Hotel locks,VingCard/Timelox Elimination for internal sales 1999 EUR M1) 1999 SEK M 202 1,777 102 71 898 621 179 1,576 31 270 424 3,721 68 45 110 -61 590 398 965 -539 Total 1,171 10,277 3) Including exports from each market. 1998 SEK M 1,701 811 583 1,504 266 2,916 – 186 952 -337 8,582 Sales by country4) 1999 EUR M1) 1999 SEK M 437 3,835 162 1,419 1998 SEK M 3,198 1,309 84 64 62 60 54 39 37 30 18 17 13 11 10 8 7 5 5 5 4 4 3 2 741 563 540 528 476 340 329 267 159 147 113 100 89 68 62 43 40 40 36 34 25 15 658 30 505 528 489 316 308 171 155 134 63 48 80 52 78 26 58 38 35 36 13 31 United States France Sweden Australia Finland Germany Norway United Kingdom Denmark Canada Czech Rep. Belgium Poland Africa Middle East Switzerland Baltic countries Japan Russia Other countries Total Asia (excl. China,Hong Kong and Japan) Spain The Netherlands Italy China and Hong Kong 1997 SEK M 1,660 744 533 844 236 2,402 – 68 794 -313 6,968 1997 SEK M 2,652 735 627 35 471 475 514 273 287 122 57 95 93 39 68 40 62 17 39 34 28 29 24 27 30 268 1,171 10,277 223 8,582 125 6,968 4) Sales to customers in each country. Key data Sales,SEK M Organic growth, % Gross margin (EBITDA), % Operating margin before goodwill amortization (EBITA), % Operating margin (EBIT), % Income before tax,SEK M Profit margin (EBT), % Operating cash flow, SEK M Net capital expenditure,SEK M Depreciation and amortization,SEK M Total assets,SEK M Shareholders’ equity, SEK M Net debt,SEK M Capital employed,SEK M Equity ratio, % Interest coverage ratio,times Net debt / equity ratio,times Return on shareholders’ equity, % Return on capital employed before goodwill amortization, % Return on capital employed, % Earnings per share after tax and full conversion,SEK1) Cash earnings per share after tax and full conversion,SEK1) Shareholders’equity per share after full 1999 10,277 5 18.1 13.5 11.6 981 9.5 1998 8,582 6 18.5 12.8 11.2 748 8.7 1,218 1,028 391 667 11,289 5,337 2,998 8,602 49.6 5.3 0.56 16.1 28.5 15.5 2.25 316 623 9,219 2,715 4,237 6,984 29.8 4.4 1.56 19.0 26.4 15.2 1.78 1997 6,968 8 16.8 11.6 10.1 537 7.7 796 260 461 7,692 2,317 3,442 5,783 30.4 4.1 1.49 17.2 25.2 15.3 1.24 1996 4,958 8 14.6 10.4 9.3 345 7.0 481 163 265 4,684 1,408 2,085 3,503 30.3 3.8 1.48 20.2 25.9 18.3 0.94 1995 3,457 8 12.6 7.5 7.2 213 6.2 411 187 184 2,470 928 659 1,596 37.9 5.9 0.71 15.8 16.1 14.9 0.57 4.38 3.80 2.76 1.83 1.23 conversion,SEK1) 17.38 10.07 8.75 5.47 4.43 Number of shares,thousands 314,409 284,304 282,928 257,244 214,368 Number of shares after full conversion,thousands 324,200 295,448 295,448 265,396 221,684 Average number of employees 12,654 10,545 8,088 6,317 4,274 1) Comparative figures are adjusted for dilution related to new rights issue, with the adjustment factor 0.9784, and for the split Sales: n Income before tax: n SEK M SEK M Capital employed: n Return on capital employed: n SEK M % Operating cash flow SEK M Earnings per share: n Cash earnings per share: n SEK Definitions Organic growth: Change in sales for comparable units in local currency and adjusted for acquisitions. Gross margin: Operating income before deprecia - tion and amortization as a percentage of sales. Operating margin before goodwill amortization: Operating income before goodwill amortization as a percentage of sales. Operating margin: Operating income as a percentage of sales. Profit margin: Income before tax as a percentage of sales. Operating cash flow: Based on the consolidated cash flow statement. Net capital expenditure: Purchase of tangible fixed assets reduced by sale of tangible fixed assets. Depreciation and amortization: Depreciation / amortization of tangible and intangible fixed assets. Net debt: Interest-bearing liabilities less interest-bearing assets. Capital employed: Total assets reduced by interest-bearing assets and non-interest-bearing liabilities including deferred tax liability. Equity ratio: Shareholders’ equity including minority interests as a percentage of total assets. Interest coverage ratio: Income before tax plus interest net in relation to interest net. Return on shareholders’ equity: Net income plus interest expense after tax regard- ing convertible debenture loan in relation to average shareholders’ equity after full conversion. Return on capital employed before goodwill amortization: Income before tax plus interest net and goodwill amortization in relation to average capital employed excluding goodwill. Return on capital employed: Income before tax plus interest net in relation to average capital employed. Earnings per share after tax and full conversion: Net income plus interest expenses after tax regard- ing convertible debenture loan in relation to weight- ed average number of shares after full conversion. Cash earnings per share after tax and full conversion: Net income plus interest expenses after tax regarding convertible debenture loan,plus depreciation,amortization and minority interests, minus share in earnings of associated companies and adjusted for change in deferred tax in relation to weighted average number of shares after full conversion. Shareholders’ equity per share after full conversion: Shareholders’ equity plus convertible debenture loan in relation to number of shares after full conversion. A S S A A B L O Y 1 9 9 9 7 The ASSA ABLOY share: ASSA ABLOY AB has been listed on the Stockholm Stock .Exchange since November 8 1994. In October 1995, the share was moved to the A list. The price of the ASSA ABLOY share rose by 58 percent in 1999. During the same period, the Stockholm Stock Exchange(cid:213)s general index rose by 66 percent. The closing price at year-end was SEK 119.5, corresponding to a market capitalization of SEK 37,572 M. Including all shares due for conversion, it is estima- ted that the market capitalization was SEK 38,742 M. The number of shareholders at year-end was approximately 12,400. Insti- tutional investors, excluding the main shareholders, represent about 50 percent of the capital. Non-Swedish investors, including Metra Oyj Abp, account for 57 percent of the capital. During the year, a total of 79 million shares were traded, corresponding to an average of approximately 314,461 shares for each trading day and corresponding to 25 percent of the shares outstanding. Share capital ASSA ABLOY(cid:213)s share capital at year-end amounted to SEK 314,408,642, distribu- ted among 18,437,812 Series A shares and 295,970,830 Series B shares. All shares have a par value of SEK 1.00 and provide the holders with equal rights to the Co m- pany(cid:213)s assets and earnings. Each Series A share entitles a holder to 10 votes, while Series B shares provide one vote. Convertible debentures for personnel In 1995, convertible debentures were offered to employees in the ASSA ABLOY Group. About 400 employees participated in the first issue in 1995. The debenture loan amounted to SEK 75,004,375 and extends from June 29 1995, to June 30 ASSA ABLOY AB’s share trend B share General index Shares traded 1,000s/month (incl.off-floor trading) Volume 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Share price, SEK 135 120 105 90 75 60 45 30 15 5 1994 -95 -96 -97 -98 -99 8 A S S A A B L O Y 1 9 9 9 2000. Conversion into Series B shares is in progress and rights may be exercised in the period from July 1 1998 to June 15 2000. During 1999, a request for the con- version of debt instruments with a par value of SEK 14,030,663 was submitted. The Swedish Patent and Registration Off- ice has registered 700,334 of these shares. The exercise price is SEK 8.70. On full conversion there will be a total of 319,998,167 shares. A second convertible debenture loan was issued during 1997. A total of 1,400 employees participated in this issue. This debenture to SEK loan amounts 250,000,000 and extends from Decem- ber 8 1997 to December 2 2002. Co n v e r s- ion may be exercised for Series B shares from December 1 2000 to November 15 2002. The exercise price is SEK 59.50. On full conversion an additional 4,201,681 shares will be created. Dividend and dividend policy The Board of Directors and President pro- pose that SEK 0.75 per share be paid as a dividend to shareholders for the 1999 financial year, corresponding to a direct return on the Series B share price at December 31 1999 of 0.6 percent. The aim is that, in the long term, the dividend should correspond to approximately one- third of ASSA ABLOY(cid:213)s average earnings a fter standard tax, but always taking into account ASSA ABLOY(cid:213)s long-term financial requirements. Data per share 1) SEK/share 1999 1998 Earnings after 28% standard tax Earnings after full tax method Dividend Dividend, %3) Direct yield, %4) Share price at end of period Highest share price Lowest share price Shareholders’ equity 2.27 2.25 0.752) 33.0 0.6 119.50 140.00 73.21 17.38 1.79 1.78 0.61 34.1 0.8 75.65 92.73 48.07 10.07 1997 1.36 1.24 0.44 32.2 0.8 51.24 52.95 28.69 8.75 1996 0.95 0.94 0.30 31.6 1.0 29.28 28.97 12.38 5.47 1995 0.60 0.57 0.22 36.7 1.6 13.24 15.16 5.23 4.43 1994 0.21 – – – – 5.34 5.76 4.48 3.11 Number of shares (1000s) 5) 324,200 295,448 295,448 265,396 221,684 214,368 1) Adjusted for new issues. 2) Proposed dividend. 3) Dividend as percentage of earnings per share after 28% standard tax. 4) Dividend as percentage of the share price at the end of the period. 5) After full conversion. Share capital Transaction Year 1989 1994 100:1 split 1994 Bonus issue 1994 Non-cash issue 1996 New share issue A shares C shares Share capital B shares *SEK 20,000 2,000,000 2,000,000 2,000,000 1,746,005 1,428,550 50,417,555 53,592,110 2,095,206 1,714,260 60,501,066 64,310,532 1996 Conversion of C shares into A shares 1997 New share issue 1998 Converted debentures 1999 Converted debentures before split 1999 Bonus issue 1999 Split 4:1 1999 New share issue 3,809,466 4,190,412 16,761,648 18,437,812 1999 Converted debentures after split and new rights issue 2000 Unconverted debentures 2002 Unconverted debentures * SEK 1 per share – balanced number of shares. Ownership structure Data is based on the share register as of Dec.30 1999 60,501,066 64,310,532 66,541,706 70,732,118 343,865 71,075,983 293,991 71,369,974 268,718,248 285,479,896 295,564,487 314,002,299 406,343 314,408,642 5,589,525 319,998,167 4,201,681 324,199,848 Owner Metra Oyj Abp SäkI A shares B shares Capital % Voting rights % 10,140,794 57,183,029 21.4 6,845,018 880,000 Melker Schörling + family and companies 1,452,000 11,281,818 Janus Capital Corp. Investment AB Latour SPP Roburs unit trusts Nordbankens unit trusts SEB unit trusts SEB group of companies * 26,782,738 23,512,000 11,115,555 10,496,360 9,985,040 8,276,150 5,839,690 Other shareholders with more than 50,000 shares 114,333,889 Shareholders with 501-50,000 shares Shareholders with up to 500 shares 14,852,572 1,431,989 Total number 18,437,812 295,970,830 2.5 4.1 8.5 7.5 3.5 3.3 3.2 2.6 1.9 36.3 4.7 0.5 100.0 33.0 14.4 5.4 5.6 4.9 2.3 2.2 2.1 1.7 1.2 23.8 3.1 0.3 100.0 * Within the SEB group of companies, SEB-Trygg Insurance holds 5,209,890 shares and SEB-stiftelsen 589,500 shares. A S S A A B L O Y 1 9 9 9 9 ASSA ABLOY and the lock industry: A traditional and growing market ASSA ABLOY is the largest lock company in the world, with .projected sales exceeding SEK 13 billion in 2000. ASSA ABLOY(cid:213)s share of the still fragmented world market is 7-9 percent. The Group has its origins in the Nordic countries and holds market- leading positions there. The Group also has strong positions in continental Eur- ope and North America. A market-leading position was also achieved in Au s t r a l i a and South East Asia through the aquisi- tion of Lockwood in 1999. The Group has considerably strengthened its position in the area of electromechanical locking through the acquisition of effeff in Ge r m a n y. Within the electromechanical area ASSA ABLOY holds a world-leading position in hotel security through its subsidiaries Vi n g Card and Timelox. Product segments where the Group is active are: l Mechanical locks,lock systems and accessories (including construction locking) l Electromechanical and electronic locks l Security doors and fittings (including door and window hardware) l Industrial locks (including automobile locks) l Hotel locks 1 0 A S S A A B L O Y 1 9 9 9 ASSA ABLOY was created as a result of the spin-off of Assa to Securitas AB(cid:213)s shareholders in November 1994. Ab l o y was subsequently acquired from the Finnish company Metra Oy Ab through a new issue of shares. As a result Metra Oy Ab became the largest shareholder in ASSA ABLOY AB. Market The global lock market is fragmented and comprises many small and medium-size companies. Many of these have extremely strong positions in their local markets, with long histories and strong brands. This primarily applies to markets in Europe and North America. On the whole, established standards and strong local brands do not exist in other parts of the world. There are only a few multi- national players, and their joint share of the world market is relatively small. It is estimated that total lock market sales are approximately SEK 150 to 200 billion, depending on how the market is defi n e d . Strong local brand names and stan- dards, long product lives and the large number of installed locks make the lock market highly stable. Other factors are customized solutions, brand loyalty and manufacturers(cid:213) proximity to national dis- tributors and customers. In consequence, the retrofit market accounts for more than 50 percent of sales, which reduces depen- dence on cyclical new construction activi- t i e s . In general the present market condi- tions and distribution patterns are stable. Ho w e v e r, Do-It-Yourself (DIY) retailers are gaining ground, especially in the resi- dential segment. The growth of these modern means of distribution is fastest in new markets where traditional distribu- tion has not been developed to the same e x t e n t . E-commerce opens up new and exciting opportunities for more efficient business- to-business relationships based on inter- active specification tools and order hand- ling. It is also possible that direct distribu- tion to residential customers through Internet sales may develop, although the wide range of products available, the secu- rity aspect and insurance requirements as well as the frequent need for skilled instal- lation may limit the opportunities for growth. The Pentagon in Washington, head- quarters of the US Department of Defense, is undergoing a major over- haul and upgrade that will take some seven years to complete. ASSA Inc. has won the contract to supply the security needs of this prestigious building, which will re q u i re over 200,000 maximum high-security c y l i n d e r s . Competitive situation The lock industry is fragmented globally but is in many countries well consolidated l o c a l l y, with a limited number of com- petitors — often family-owned — in each market. In recent years, a structural transformation has been initiated in which larger corporate groups are form- ed. This transformation is partly driven by the growing proportion of global products and technologies, particularly in the electromechanical area. Ho w e v e r, the large installed base and the long product lifetime create a need for continued sup- ply and support of these local products and therefore put limits on the globaliza- tion process. The major international players include Ingersoll Rand, a diversified US corpora- tion that owns well-known brands like Schlage in the United States and Ne w m a n Tonks in the UK. Ingersoll Rand(cid:213)s lock division has annual sales of approximate- ly SEK 9 billion. Williams Holdings, a d i v e r s i fied British corporation, owns the Yale and Chubb brands and has large operations in the UK and the US. Its lock division has sales of approximately SEK 6 billion. Other major players are Black & Decker (USA), whose lock division — including the Kwickset brand in the USA and Dom in Germany — has sales of SEK 6 billion, and the Swiss security hardware company KABA, which has annual sales of SEK 3 billion. In addition there are a number of local players with strong positions. There are also strong players within individual prod- uct segments: for example, Ilco Unican of Canada is a world leader in key blanks. The hotel lock segment is unique in that standards and products are global. Wi l l i- ams Holdings, through its subsidiary Tesa, plays an important role in this seg- m e n t . A S S A A B L O Y 1 9 9 9 1 1 Growth factors l Trend towards higher security The need to protect information and prop- erty is increasing throughout modern s o c i e t y. Many people feel insecure in an increasingly anonymous society and per- ceive criminality as a substantial threat. Today(cid:213)s high-tech society is also more vul- nerable to breakdowns, and the need to safeguard vital information is becoming ever more important. As a result, the demand for better lock products is grow- ing steadily in applications ranging from simple balcony doors to the protection of computer rooms. By continuously developing and marketing products that meet these needs, ASSA ABLOY is estab- lishing a basis for stable, long-term organ- ic growth 2-3 percent higher than the compounded GDP growth for applicable c o u n t r i e s . l Electromechanical locking products Rising demands on security increase both the number of security products used and their security level. These security consid- erations may run counter to needs for safe, fast evacuation of buildings and for convenience. The resulting demands for more sophisticated functions are increas- ingly being met by electromechanical and electronic means, and sales of electrome- chanical products are growing signifi c a n t- ly faster than the lock market as a whole. Since development costs are typically higher than for traditional lock products, a critical mass of sales is essential, and the size of a company becomes an important competitive advantage. While electro- mechanical solutions are of a universal nature, successful selling also requires adaptation to local lock dimensions and standards and integration with other mechanical locking systems. l New markets In many new markets, such as Asia, east- ern Europe, the Middle East and Latin America, an increasing proportion of the population enjoys a high standard of living, and hence the need for security has increased. These groups are now deman- ding lock products that are more advan- ced than those manufactured locally. Strategy and financial objectives: A multi-domestic organization with cross-learning between countries Our products and markets Focus on the lock segment ASSA ABLOY(cid:213)s strategy is focused on locks and lock-related products in order to achieve maximum efficiency in the devel- opment of markets, products and produc- tion. Because all companies within the Group work in the same industry, there is an environment for successful transfer of knowledge and for benchmarking bet- ween the various units within the Gr o u p . The best performance can always be transferred directly to another unit to pro- duce a genuine increase in know-how at all levels in the organization. Focus on the trend towards higher security ASSA ABLOY(cid:213)s product development takes place in close cooperation with insurance companies, police and fi r e departments, end-users and other impor- tant decision-makers. We also make com- prehensive efforts to inform and train important target groups such as retailers, architects and security officers about the Gr o u p(cid:213)s products and security solutions. As the DIY distribution channel gains importance in the residential segment, opportunities are developing for the Group to present its security solutions more directly to the end-user. Our management model Mu l t i - d o m e s t i c ASSA ABLOY is a world leader in the lock business, but closeness to local customers in each country and experience of local requirements, business arrangements and distribution patterns are still the basic prerequisites for success in the lock 1 2 A S S A A B L O Y 1 9 9 9 i n d u s t r y. Ac c o r d i n g l y, responsibility is clearly decentralized to a single manager in each country. Each country constitutes a natural building block in the Gr o u p(cid:213) s o p e r a t i o n s . The hotel lock market is by its nature much more global, forming in effect a single market. Vi n g Card is therefore organized separately from the Gr o u p(cid:213) s national lock companies so as to respond effectively to the opportunities and threats of the international hotel market. Executive management structure All Country Managers are members of the Group management team. The manage- ment team(cid:213)s most experienced manag- ers — the Group Vice Presidents — are each responsible for a number of countries and help to ensure that ASSA ABLOY(cid:213)s management model and methods are applied consistently throughout the Gr o u p . Internal efficiency through bench- marking and cross-learning A continuous improvement process The Group endeavors to achieve a flexible (cid:212) h o r i z o n t a l(cid:213) organization, with clear responsibilities and active internal bench- marking and cross-learning between the different companies. In ASSA ABLOY it is a basic assump- tion that (cid:210)profit drives growth(cid:211). Profi t a b l e organizations tend to grow, whereas non- p r o fitable organizations seldom reach p r o fitability by adding volume. In the benchmarking process all opera- ting units are compared each month on cost levels, margins, critical balance sheet figures and growth. The benchmarking report is distributed to the units so that managers can see their relative perfor- mance. Since every manager has a natural ambition to improve performance and strive for excellence, the benchmarking tool is the driver behind ASSA ABLOY(cid:213)s continuous improvement. All Country Managers meet on a regu- lar basis and compare their operations. Despite differences in profitability bet- ween individual units, the basic attitude is that even the best operations have a great deal to learn from the others. Managers at other levels also meet to share experience and transfer know-how. Building on Group strengths Si g n i ficant rationalization and improved e f ficiency have resulted from the continu- ous benchmarking, cross-learning and transfers of know-how described above, and these are responsible for a high pro- portion of the improvement in earnings achieved in both established and recently acquired units. In market sectors exposed to serious international competition — representing approximately one third of the Gr o u p(cid:213) s products — there is an active coordination of development and production to achieve economies of scale. The Group Product Council plays an instrumental role in coordinating technical development at the various units, including the management of joint projects. Group procurement of raw materials, components and finished products is coordinated by the Group Pu r c h a s i n g Council. Substantial savings are steadily being achieved and a joint supplier database is being developed to further enhance this process. A Group Treasury Department is located in Geneva to promote effi c i e n t financing and management of fi n a n c i a l transactions and to minimize fi n a n c i a l risk exposure. Wider participation in ownership ASSA ABLOY wants employees and exec- utives to participate in the company to the greatest possible extent. Ap p r o x i m a t e l y 1,700 of the Gr o u p(cid:213)s 13,000 employees hold shares and convertible debentures amounting to approximately eight per- cent of the shares when fully diluted. Group executives have substantial share- h o l d i n g s . Group information In a rapidly growing Group, there is a great need for a regular flow of informa- tion. The Group newspaper ASSA ABLOY NEWS is published in nine lan- guages and plays an important role in communicating the Gr o u p(cid:213)s strategy and development. ASSA ABLOY NEWS also presents success stories from various companies throughout the Group and introduces newly acquired companies. Our expansion strategy Organic growth ASSA ABLOY(cid:213)s ability to generate organ- ic growth on a continuing basis is critical to the Gr o u p(cid:213)s long-term success. We achieve this by means of intensive devel- opment efforts in both mature and new m a r k e t s . In mature markets where ASSA ABLOY is already established, organic growth depends to a large extent on suc- cessful product and market development that meets the increasing need for higher- security products. In addition, all Gr o u p companies are involved in cross-selling projects, i.e. adding products from other Group companies to their product port- folios. These cross-selling projects repre- sent significant growth opportunities for the Gr o u p . In new markets where there are no strong local players or brand names, new Group companies are established. Prod- ucts for these markets must often be based on different standards from those applying in Europe and the United States. ASSA ABLOY enjoys a strategic advan- tage as a result of its comprehensive product range. In all markets, Internet and e-commerce solutions are increasingly important tools in improving distribution efficiency by speeding information transfer between manufacturer and customer. As the DIY distribution channel be- comes more important in mature as well as new markets, ASSA ABLOY is increas- ing its efforts to provide solutions that fi t this means of distribution. Acquisitions in mature markets Brand names, existing installations, and local standards and traditions are signifi- cant barriers to entering mature markets. As a result, acquisitions of leading com- panies in such markets are a crucial part of ASSA ABLOY(cid:213)s strategy. The Gr o u p(cid:213) s strong cash flow helps to finance this type of expansion. In principle, the aim when making acquisitions is that the company concerned should contribute to growth in Group earnings per share in the year aft e r the acquisition. Financial goals The strategy described above is designed to continue the achievement of a satisfac- tory earnings trend, with a focus on earn- ings per share. ASSA ABLOY(cid:213)s financial goal is to achi- eve a return of more than 20 percent on capital employed. This goal was set when the Group was formed in 1994. The goal is increasing automatically because of the goodwill added through the acquisitions made. The return in 1999 was 15.5 per- cent. Most of the improvement required is expected to be achieved through higher margins, although there are possibilities of further reductions in the capital employed in the business. An equity/assets ratio of 25 percent is considered sufficient, taking into account the relative stability of the lock market and the Gr o u p(cid:213)s strong cash flow. Profit drives growth The improvement process in each unit – step by step 2. Creating efficiency Benchmarking Work flows Delivery performance Product quality 1.Creating a base Organization Basic routines Focus on core products Profit per product line 3. Creating organic growth Market development Product development Cross selling New distribution channels Time The ASSA ABLOY model for integra- tion of newly acqui- red companies is based on a step-by- step model on thre e levels: the cre a t i o n of a structured and w e l l - o rganized foundation; impro v- ing internal effic i e n- cies through bench- marking; and org a n- ic growth thro u g h market develop- m e n t . In May 1999, CFO’s and controllers from all ASSA ABLOY companies gathered for a two-day conference in Gimo, Sweden. A S S A A B L O Y 1 9 9 9 1 3 Management philosophy: Management meetings, with re p re s e n t a t i o n f rom most parts of the world, are held each y e a r. Focus is put on learning each other’s p roducts and identify- ing and exploiting the many new opportuniti- es for cross sales. “High ethical standards, with an emphasis on setting a good example” ASSA ABLOY(cid:213)s management approach is characterized by a .spirit of trust and positive think- ing. Management is responsible for creat- ing an atmosphere that encourages employees to make the most of their indi- vidual skills for the benefit of the whole c o m p a n y. To realize this, our management philosophy is based on the four corner- stones of realism, vision, courage and e t h i c s . R e a l i s m means that decisions, actions and leadership should always stem from a thorough knowledge of every sector of the lock business. While it is essential for a manager to maintain an overview of the business, the answers to many important questions often lie in the details. 1 4 A S S A A B L O Y 1 9 9 9 Vi s i o n is a driving force in each opera- tion. It must be based on a realistic view of the market. This comes from solid experi- ence. ASSA ABLOY(cid:213)s vision is to become the world(cid:213)s true leading lock company. To achieve this, we must continue to set stan- dards of excellence for others to follow. C o u r a g e and energy are essential criteria for success in today(cid:213)s fast-changing world. Courage develops and thrives naturally when it is based on sound knowledge and clear vision. E t h i c s are the lifeblood of any company. They are reflected in the attitudes and the actions of every employee. Good ethics are a prerequisite to trust, creativity, ambition and commitment. Maintaining high ethical standards, with an emphasis on setting a good example, is essential to the Gr o u p(cid:213)s ability to recruit and retain the best employees. And high standards are of particular importance in the security busi- ness where trust is an integral part of the products we offer to our customers. VISION The true leading lock company in the world. REALISM Seek the truth. Keep perspective but don’t be afraid of details.Profit drives growth. ETHICS High ethics attract the best.Believe in the individual.Lead by example.Confidence in competence. COURAGE Lead change. Courage is a must. Valuable exchange of experiences Our continued success and growth depend on the skills and commitment of every employee and every manager. Fo r this reason, skill enhancement, job rota- tion and training programs are conducted continuously at all levels within the Group. Our sharp focus on the lock mar- ket and active benchmarking establish a good framework for a valuable exchange of ideas and experiences among ASSA ABLOY employees from all over the world. As part of this activity, the Gr o u p conducts an annual (cid:212)ASSA ABLOY Ma n- agement Program(cid:213) in which some 25 employees, chosen from throughout the Group, have an opportunity to hone their leadership skills on a selection of real-life case studies, under the supervision of senior management. To date, more than 100 managers have participated in this p r o g r a m . Many other management training pro- grams are conducted at a local level. Fo r example, Abloy in Finland has run a train- ing program for senior employees since training. In 1994. 100 employees have now taken part in Abloy(cid:213)s AVEK program, which consists of three 2-3 day seminars that lay emphasis on business strategy, leadership, and com- municative and social skills. In Fr a n c e , t h e Human Resources departments of the various ASSA ABLOY companies actively exchange ideas about training and com- munication, with an agreed objective that all employees should spend at least three days a year on the United States, Curries and Graham have formed a partnership with 13 other busi- nesses in Mason City, Iowa, and the local Community College. The variety of topics offered by the College allows each of the 50 Curries and Graham managers that take part each year to develop a personal training program to suit their individual needs. During 1999 Curries and Gr a h a m have also conducted a 3-month in-house program for their 75 shop-floor supervi- sors, directed at giving them the tools they need to manage people effectively and to retain good employees. Since the Group was first established, participation in ownership has been an important means of encouraging com- mitment and motivation among employ- ees and management and thereby pro- moting the company(cid:213)s long-term growth. To ensure a regular flow of up-to-date information to all 13,000 of our employ- ees throughout the world, a regular inter- nal newspaper ASSA ABLOY NEWS, is published four times a year in nine l a n g u a g e s . Every second year ASSA ABLOY arran- ges a (cid:212)100 Meeting(cid:213) at which its 100 most senior executives exchange experience and ideas and review and agree the Gr o u p(cid:213)s visions, objectives and strategies. The last (cid:212)100 Meeting(cid:213) was held in Ju n e 1998 and the next will be during 2000. In 1999 a number of smaller management meetings more like work sessions were held, with representation from most parts of the world. Following the Gr o u p(cid:213)s rapid growth, these were designed to promote the learning of each other(cid:213)s products and to identify and exploit the many new opportunities for cross sales. The ASSA ABLOY Management P rogram is one of several train- ing activities within the Gro u p . Each year 25 employees have an opportunity to hone their leader- ship skills on a selection of re a l - life case studies. This session is at Medeco, USA. A S S A A B L O Y 1 9 9 9 1 5 Environmental management and quality: Customers benefit from continuous improvements and higher efficiency Assa provides a complete allergy-adapted package for door security which the construction company Skanska has re c e n t l y used when building new allergy-friendly houses in Sweden. In 1996, it was decided in principle that all Group companies should seek to become certified in accordance with the ISO 14001 Environmental Ma n- agement Standard. Since environmental issues are closely linked to general effi c i- ency in the use of materials, they can con- tribute direct economic benefits. Go o d environmental management is also in line with most people(cid:213)s wishes, including those of employees. Fi n a l l y, it is an area increasingly appreciated — and monitored — by customers. Environmental management involves daily efforts and affects all areas of the c o m p a n y, including the selection of mate- rials used in products, the way materials are utilized, the disposal of residual mate- 1 6 A S S A A B L O Y 1 9 9 9 rials and waste, and the cleaning and re- use of chemicals. It also influences the choice of packaging materials and the methods used to distribute products. The long life of lock products means that they already have less impact on the environ- ment than many other products, since they are replaced at very infrequent inter- vals — 30 years or more is not unusual. Allergy-friendly materials The Environmental Management Stan- dard helps a company to focus on envi- ronmental issues in its daily operations. The solutions found often prove to be not only less expensive and better for the envi- ronment, but also better for the employees working with the products and for custo- mers and end-users. Assa(cid:213)s nickel-free k e y, the Miralloy surface treatment and powder-coated products for interior doors are good examples. These are all designed to protect people who are allergic to nick- el, an increasingly common problem. A complete nickel-free package was develo- ped for the construction company Skan- ska and has been used when building new allergy-friendly houses in Sweden. The vertical integration of production processes at ASSA ABLOY is strong. Security products are manufactured from raw materials such as steel and brass and processed into finished packaged prod- ucts ready for delivery to customers. As a result, companies in the ASSA ABLOY Group have excellent control over design, production methods and the utilization of resources at every stage in the sequence, and can use this to create security prod- ucts having a low impact on the environ- ment. There are few constraints, but important ones are the high quality and the strict functional requirements expect- ed from security products. These can affect the choice of materials, machining requirements and distribution routines in ways that may occasionally conflict with environmental requirements. Recycling pays Surface treatment is an important area of technology where the ASSA ABLOY com- panies are continually striving to improve environmental performance. To look attractive and resist many years of daily use, most security products need either a decorative metallic layer or a lacquer. In the last few years many of the companies have made major investments intended not just to meet the requirements of the environmental codes, but to follow even stricter internal rules which exceed the codes(cid:213) requirements. As well as giving environmental bene- fits, these investments very often pay off well by saving material and by introducing advanced handling processes that reduce the cost of waste treatment. In Ge r m a n y, for example, IKON has changed from a solvent dye lacquer to a low-temperature powder coating, which has eliminated the need for environmentally aggressive sol- vents. In France, a powder recycling sys- tem installed at JPM has been shown to pay for itself in just one year. The main saving lies in reduced losses of the powder itself, but the system has also cut invento- ries and significantly reduced disposal costs and maintenance costs. Color chan- ges are also quicker now, increasing flexi- bility and productivity. For some years now, Ab l o y, Assa and many other Group companies have had a highly developed structure for collecting and sorting waste. This not only produces a very clean factory environment which pleases employees; it also yields a direct payback from sales of metals recovered from the different processes in the factor- ies. Abloy in Finland is one company that draws up an (cid:212)Eco-balance(cid:213) every year. This shows that emissions of different heavy metals have been reduced by between 20 percent and 40 percent between 1996 and 1998, even though production volumes increased by 37 percent over the same p e r i o d . Abloy has also involved its authorized A- quality dealers in the recycling program, each dealer having a system of (cid:212)Eco- points(cid:213). The system ensures is that all product scrap reprocessed under Abloy(cid:213)s control. The Danish company Ru k o manufactures locks and high- security cylinders and has a fac- tory filled with metalworking machine tools that consume large volumes of cutting fluids for cooling and lubrication. A major investment in a coolant recycling plant was completed E n v i ronmental measures can also be c o s t - e ffective. A powder recycling system installed at JPM in France has paid for itself in just one year. during 1999 that will reduce waste by 100,000 liters over a three-year period. These examples are just a few of the Gr o u p(cid:213)s environmental initiatives. There are many more already up and run- ning — and many more to come. Quality assurance Se c u r i t y, trust and quality are closely relat- ed. ASSA ABLOY companies are continu- ously improving the quality of their per- formance in all areas: products, produc- tion, development, delivery reliability and, not least, the handling of security docu- mentation pertaining to lock systems that have been installed. To assist them in the area of quality management, virtually all companies in the Group — with few exceptions — have already adopted the international ISO 9001/9002 Quality Assurance Standard. Ho w e v e r, this quality stamp is not a fi n a l seal of approval, and adopting the Stan- dard does not in itself create quality in the companies(cid:213) processes. Ra t h e r, it marks the inauguration of an ongoing program of improvement. The companies(cid:213) quality management systems are what the Stan- dard certifies — systems that will help com- panies to measure and monitor their quality; to discover defects and rectify them in time; to learn from their mistakes and steadily improve performance so as to establish sustained, long-term quality. Many of the ASSA ABLOY companies hold quality and environmental certification. Here are some examples. Quality certification ISO 9001: l Assa AB l Abloy Oy l AZBE B ZUBIA S.A l Björkboda Lås Oy Ab l FIX AB l IKON AG l Laperche S.A. l Litto n.v. l Lockwood Security Products Pty Ltd l Medeco Security Locks,Inc. l Ruko A/S l Securitron Magnalock Inc. l Vachette S.A. Environmental certification ISO 14001: l Assa AB l Abloy Oy l FIX AB l Ruko A/S l IKON AG A S S A A B L O Y 1 9 9 9 1 7 The trend towards higher security: Growing needs for physical protection in the information society We live in an information age. Wide-band communications channels, ever more power- ful computers and, above all, the expo- nential growth of the Internet mean that information and communication are becoming increasingly important all over the world. Business today depends cruci- ally on fast transfer of information: in the f a c t o r y, at the office and in dealings with external suppliers and customers. Indivi- dual householders are taking to e-mail, voicemail, electronic shopping and the Internet at a rate of tens of thousands a d a y. New records are achieved day by day and we are all communicating volumes of information not dreamed of only a few years ago. And yet the information society is still in its infancy. In the foreseeable future its growth is expected to accelerate rather than level out. In this new age, what are the security needs? Is information securi- ty the key to the future? 1 8 A S S A A B L O Y 1 9 9 9 Information security is certainly one k e y, but not the only one. It is true that much of today(cid:213)s development effort in the security field is focused on this area. In recent years the word encryption has entered people(cid:213)s daily language, and tech- niques once used exclusively by the world(cid:213)s most advanced defense forces have become part of the public domain. And there is no doubt about the impor- tance of information security. It is vital for bank transactions and for electronic com- merce on the Internet. It allows commu- nication of commercially sensitive infor- mation between manufacturers, whole- salers and distributors. There is also an ever-increasing flow of information inside and between government departments, much of it dealing with citizens(cid:213) private affairs or company-confidential matters. A lot remains to be done before all the infor- mation currently stored in databases or moving between computers is securely protected from unauthorized access. Locks and physical security But even if information security were per- fect, it could never stand on its own. Advanced cryptographic systems can only block electronic routes of access to data- bases or information flows. The hardware itself still needs physical protection: the computers that hold the information and the terminals that transmit it. The huge concentration of data in large information systems makes them vulnerable to attack and calls for ever more advanced levels of physical security. Today(cid:213)s manufacturing practices based on just-in-time produc- tion, minimal stocks and e-commerce are wholly dependent on computers and information exchange. There is also the economic success of the (cid:212)crime business(cid:213), which in most countries around the world has shown stable, long-term growth at a rate higher than GNP. All these factors drive the trend towards higher security, demanding new functional requirements that are changing faster than ever before. Higher security does not just mean stronger locks, however. It also calls for solutions that are both smarter and more convenient than before. Solutions provid- ing flexibility in use. In response to these demands, a new generation of security systems and products has been born that can be adapted to individual (and oft e n rapidly changing) requirements while remaining very convenient to use and pro- viding high security levels over a long peri- od of time. Regular security reviews All aspects of modern society are charac- terized by increased technical sophistica- tion and demands for ever-greater effi c i- e n c y. Production is precisely tailored to market demands, offices are supported by advanced electronic equipment, homes are equipped with computers and expen- sive household appliances. From the smallest cottage to the biggest multinatio- nal business, demands on security are increasing. Every section of this modern society needs to take a fresh look at its security requirements. Solutions that were considered the height of security only a few years ago are now merely standard practice in most applications. And installations 10, 20 or even 30 years old simply do not meet all the requirements of today(cid:213)s society, even if they were state-of-the-art when installed. For new buildings and refurbishments it is natural to survey the latest technology, but it is equally important to consider upgrading existing installations at a regu- lar security review. To protect the new investments contain- ed in every modern building and also to meet the requirements of the insurance companies, you need, at the very least, a highly pick-resistant installation and mechanically strong locks and accessories that comply with modern standards. I d e a l l y, old lock systems should be up- graded to the current state of the art, from a lock system without key control to a lock system with key control and from me- chanical solutions to combined electrical/ mechanical solutions that can meet safety and convenience requirements as well as those of security. The pace of technical progress is in- creasing all the time. This calls for regular reassessment and upgrading, which are indeed happening more and more as governments, local authorities, com- panies and households become more aware of the growing need for better secu- rity — often as a result of events in their neighborhood. This goes to explain why every year, at every level and in every market, there is a gradual shift towards better and more secure products, higher- security lock solutions, and a higher proportion of electromechanical products, which offer higher security without compromising safety and convenience. From cylindrical to mortise locks A particular trend in North America, and also in parts of the Far East influenced by American standards, is the trend from cheap and simple cylindrical locks to heavier-duty types, and from cylindrical locks towards mortise locks. The trend is led by professional and institutional end- users but also discernible in other seg- Leading the trend towards higher security ments of the market. Growing levels of violence and crime are forcing end-users to move towards the idea — familiar in Europe for several decades now — that doors and locks must be a strong barrier to unauthorized entry. In many of the fast-developing coun- tries of eastern Europe and the Far East there have been few lock standards in the past, but standards based on existing examples, mostly from western Europe and the USA, are now under considera- tion almost everywhere. The trend towards higher security thus now extends across the world, influencing all products and every level of society. Security needs are on the rise At the offic e In hotels At home Customer satisfaction Partnership in distribution The market grows 2-3% over GDP Educate the market Identify true customer needs Invest in R&D Maintaining market growth and market leadership is a reiterative process founded on identifying and satisfying customers’ needs. When traveling A S S A A B L O Y 1 9 9 9 1 9 ASSA ABLOY in development: Meeting security challenges in a changing world If you could harness it, the power of thought would be the ideal security control device, opening a door when you wished and keeping it closed and lock- ed at other times. This is impossible, of course, but you might suppose that modern computer electronics could achieve much the same and require only a minute expenditure of energy. In practice, however, significant energy is normally needed to move the strong mechanical components on which securi- ty still ultimately depends. If the lock is well designed, quite small amounts of electricity can achieve this. Alternatively, you can use a strong magnetic or electric field to create a force. This could avoid using moving mechanical parts at all, but it consumes considerable amounts of e n e r g y. Security, safety and convenience The most powerful security products available today are based on a combina- tion of mechanics, electrics and intelligent electronics working well together. The use of electromechanical security products is increasing all the time, showing a good double-digit growth rate worldwide. Ma j o r factors in this growth are the increased use of access control and the need to com- bine higher levels of security with safety and convenience features. The well-established products for latch- locking doors — electric ing and 2 0 A S S A A B L O Y 1 9 9 9 strikes, motorized locks and magnetic locks — are all used for access control and for remote or timer control. They are now increasingly accompanied by convenience products like door operators for automatic door opening and closing, and by safety products like time-delayed exits which resolve the contradiction between a secure door and a safe exit route. This strong development of electro- mechanical products and the growing market for them has not eliminated the need for new mechanical products. Ne w types of cylinders can provide key control for many years to come. New multi-point locks make doors stronger, offer increased security against burglary, and can be motorized for interlocking doors in banks, monitoring centers etc. The increased use of panic exits in a wide variety of environ- ments calls for new designs for the new c e n t u r y. Local realities decide Different countries and continents have very different traditions, attitudes and driving forces when it comes to security and safety. The USA is strongly influenced by lia- b i l i t y. Personal liability lawsuits are com- mon and awards, when granted, can be substantial. This makes it very expensive to erect or own a building with poor escape facilities. Considerations of liability have made the US market a strongly pro- nounced safety market, with security also important in special areas such as hotels. The market in northern Europe, especi- ally Germany and Scandinavia, has been driven very much by considerations of high security, led by the insurance compa- nies and the police. Stringent rules and requirements for locks and security prod- ucts and their application have been laid d o w n . In southern Europe, security has always been of great importance. In the last few decades solutions balancing safety and security demands have been found. This development can partly be explained by a disaster several years ago in a Geneva dis- cotheque in which many people died. This led to the creation of stricter standards for the fast evacuation of public buildings and other places where many people gather for work or pleasure. The newer markets of the Far East and eastern Europe are picking up a variety of trends from elsewhere. As transport, com- munication and more open borders make the world a lot smaller — stimulating foreign travel, working abroad and permanent migration — there is a general tendency for standards to converge. Customers become increasingly aware of requirements and solutions in other parts of the world, and markets where either security or safety has been paramount are gradually learning the importance of the other. Lock functions are viewed with d i ff e rent emphasis in diff e re n t parts of the world. Countries can learn a lot from each other, and the g rowing pool of knowledge in turn c reates new and better pro d u c t s . On top of a growing need for secu- r i t y, there are new demands for safety and convenience in security p roducts. Manufacturers have to satisfy all of these often confli c t i n g re q u i re m e n t s . THE GROWING BUSINESS AREA Convenience Safety Security A S S A A B L O Y 1 9 9 9 2 1 An opportunity for ASSA ABLOY For ASSA ABLOY, with its strong pres- ence in many different countries, the dif- ferences between markets, and the increasing flow of know-how and expecta- tion across borders, have already proved a source of important opportunities. Each country is in a position to supply a full assortment of established products whose R&D is already paid for. And as well as ser- ving the needs of each market, there is a great opportunity to expand into less deve- loped market sectors. For example, experi- ence in northern Europe can be used to reinforce growing security awareness in the US market. Scandinavia(cid:213)s gradually increasing demand for safe exit routes from buildings can be encouraged by US and southern European experience. Fu r- ther development of security is possible in southern Europe and elsewhere. And there is scope for all the Gr o u p(cid:213)s products in the new markets of eastern Europe and the Far East. These trends have led to the identifi c a- tion of major cross-selling opportunities within the Group, and a lot of cross-selling has begun. Both electromechanical and mechanical products require adaptation to the mechanical standards of each mar- ket so that the core technology can be fully e x p l o i t e d . Joint development Cross-selling and the exchange of know- how have stimulated further cooperation between Group companies and a number of projects have been initiated on a bi- lateral or multilateral basis to develop and share core technology. The manufacture of Abloy door closers in Finland for the US companies is a good example of a project launched in 1998. Door operators and motorized locks are already sold in many new areas and magnetic locks from Se c u- ritron in the USA have likewise been adapted to many different markets. Si m i- lar projects have been initiated for a num- ber of mechanical products, with the object of creating a new shared core tech- nology which can then be adapted to the s p e c i fic needs of each market by the local companies around the world. ASSA ABLOY(cid:213)s steady expansion has enabled it to reach a critical mass where new development pays off. The multi- domestic structure ensures that the ASSA ABLOY companies in each market have a strong foothold created by strong local brands, a local presence and — especially valuable — detailed know-how. At the same time, the future needs of many different markets can often be synthesized into a single need for important core technology, o ften requiring major financial strength for its realization. ASSA ABLOY’s products: Adding value through product development ASSA ABLOY(cid:213)s business is foun- ded on the manufacturing of .individual security products. Bu t every day more and more of these pro- ducts are finding their way into a great variety of sophisticated systems, making it increasingly important to design and develop products from the outset to fit these systems. Many long-established tra- ditional products are evolving into some- thing new. Sometimes this just involves enhancing the mechanical performance, but increasingly often now, electrical func- tions are being integrated into the older mechanical products. Focus on innovation The ASSA ABLOY Group has a long tra- dition of innovation. One good way to measure innovation is to look at the num- ber of active patents. At the end of 1999 the Group had around 450 active original patents, each registered in many different countries. Patents provide an important way of protecting key blanks, and many of the patented innovations cover manufactu- ring methods for keys and security designs for lock cylinders. Lock cases are another product group with fairly complex designs incorporating many interesting s e c u r i t y, safety and convenience features. The ASSA ABLOY Group companies 2 2 A S S A A B L O Y 1 9 9 9 devote a lot of effort to making substantial product improvements that will produce strong, long-lasting patents, rather than developing trivial new features for the sake of getting a patent. The most recent- ly launched products have patents valid until 2014-2015. The distribution of patents among the different product groups is shown in the pie chart. In total, nearly half of the active patents cover keys, locks and lock cases. Behind this group, security doors and fittings account for 29 percent and electro- mechanical products for 15 percent of the p a t e n t s . International cross-fertilization ASSA ABLOY(cid:213)s companies throughout the world focus strongly on locks and security products, both mechanical and electromechanical. This means that a great number of widely dispersed compa- nies within the Group are busy with the same types of products, creating many opportunities for synergy and the sharing of know-how. To coordinate product development i n t e r n a t i o n a l l y, a Group Product Co u n c i l has been active for some years, and a number of areas of synergy have been i d e n t i fied over this period. Mu l t i p o i n t locks and lock cases, mechanical cylin- ders, exit devices and electromechanical products were the first areas in which a lot of know-how has already been shared. Cooperation on development and produc- tion also leads to increased cross-selling and to the identification of new opportuni- ties, both geographically and productwise. In many fields, too, there are opportunities to develop a shared core technology. Mechanical locks The many developments in lock and cylin- der technology over the last few years have generated pressure for the renewal of old lock systems, with upgrading to state-of- the-art security. The latest new products and concepts include longer patent pro- tection for key blanks, double mechanical systems, and better system design capabi- lities. The demand for upgrading is grow- ing in most markets and often leads to renewal of other products like handles and fittings at the same time. An interesting new type of product was brought into the ASSA ABLOY Gr o u p when AZBE in Spain was acquired during 1999. More than two years ago the com- pany started to market a new-generation electromechanical cylinder called Me c a- tronic. This is a patented technology for creating a small lock system or a small (cid:212)keyed alike(cid:213) residential system which allows users to cancel a lost key by means of a simple reprogramming procedure without having to change their mechani- cal cylinders. It is based on the mechani- cally coded key and cylinder of the compa- ny(cid:213)s reversible key system, and provides strong mechanical protection enhanced with an electronic code. There is a grow- ing market demand for lock products of this type which maintain the established security levels of high-security mechanical locks and cylinders but provide additional f l e x i b i l i t y. Fittings and security doors Even if locks are the most obvious securi- ty product, the other components of a door or window are just as important in creat- ing a secure and safe environment. The hinges, for example, need to be as strong and secure as the lock itself. As a result, the door and window industry in most countries forms a major customer for ASSA ABLOY. In other countries the door industry has become more integrated into the lock and security business. In the USA, for example, ASSA ABLOY has a s i g n i ficant interest in door manufacturing through Curries and Gr a h a m . In France, Fichet Serrurerie B(cid:137)timent, a new company in the Group, has a simi- lar background as a door manufacturer with strong links to the lock industry and a strong nationwide security distribution network. Its main products are security doors for homes, including integrated, attractive high-security lock installations. Electromechanical products With a double-digit rate of sales growth, electromechanical products are seen as a major opportunity by many Group com- panies. Abloy is now distributing its prod- ucts widely within the Group accompa- nied by application advice and drawings to enable them to be combined with electro- mechanical products from other Gr o u p members. This makes it easier to start sell- ing new products, even if most products require some adaptation to local mechani- cal standards before launch. Efforts are under way to coordinate the mechanical design of the products for the many differ- ent markets and to make them easy to con- nect together for reliable performance and ease of maintenance. The ASSA ABLOY product portfolio Patents by product group Security doors and fittings: 27% Mechanical locks, lock systems and accessories: 50% Security doors and fittings: 29% Mechanical locks, lock systems and accessories: 47% VingCard hotel locks: 9% Industrial locks: 4% Electromechanical and electronic locks: 10% VingCard hotel locks 4% Industrial locks 5% Electromechanical and electronic locks 15% Industrial locks Assa, Abloy and other Group companies sell industrial locks — or camlocks as they are usually called in the USA — in many different markets. Medeco in the USA has provided the market with mechanical camlocks since 1976 and has added a growing proportion of electromechanical camlocks during the last decade. Camlocks form a very different market segment from construction locks. Ca m- locks are locks integrated in other prod- ucts like vending machines, gaming machines, parking meters and payment machines, many of them highly complex pieces of machinery. The main purpose of the locks is of course to keep unauthorized persons away from the valuables, which may include both the money in the ma- chines and any contents for sale. But the lock also becomes part of the daily routine of the vending company. It should support the regular servicing of the machines to replenish stock or paper for receipts and to collect the income. The lock becomes a central part of planning the daily service t o u r, capable of meeting increasing demands for time stamping and registra- tion so that the company can monitor and improve its performance. Hotel locks The new DA VINCI series of locks from Vi n g Card is a good example of the grow- ing importance of design in all areas. It is also a good example of how new technolo- gies are introduced into lock products. The DA VINCI locks can handle both tra- ditional magnetic cards and (cid:212)smart(cid:213) cards with built-in chips to provide high securi- ty and greater flexibility. The same applies to the latest advanced hotel locks from Timelox, a new company in the ASSA ABLOY Gr o u p . Elsafe has continued with the develop- ment of security products for the hotel room. A new safe for storing personal computers has been launched and offers advanced support functions for the com- p u t e r. Products for the handicapped The elderly and handicapped form a grow- ing proportion of society in many coun- tries, and special solutions are needed to create a secure, safe and convenient envi- ronment for them.This often involves delayed exits, motor locks and automatic door operators as well as other electro- mechanical features. The very wide assortment of p roducts within the ASSA ABLOY Group provides rich opportunities to address most important market needs in every c o u n t r y. Examples are the Abloy door closer manufactured in Finland for S a rgent in the USA and the new Australian c y l i n d e r, Lockwood Twin, which uses patented design features from Assa in Sweden. A S S A A B L O Y 1 9 9 9 2 3 

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