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Edited Transcript of SECU B.ST earnings conference call or presentation 6-Feb-20 1:30pm GMT

Q4 2019 Securitas AB Earnings Call

Stockholm Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Securitas AB earnings conference call or presentation Thursday, February 6, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bart Adam

Securitas AB - CFO

* Magnus Ahlqvist

Securitas AB - President & CEO

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Conference Call Participants

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* Allen David Wells

Exane BNP Paribas, Research Division - Research Analyst

* Carina Elmgren

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Chirag Vadhia

HSBC, Research Division - Research Analyst

* David Roux

BofA Merrill Lynch, Research Division - Associate

* Edward Stanley

Morgan Stanley, Research Division - Equity Analyst

* Henrik Mawby

Nordea Markets, Research Division - Senior Analyst

* James Peter Winckler

Jefferies LLC, Research Division - Equity Analyst

* Matija Gergolet

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Paul Daniel Alasdair Checketts

Barclays Bank PLC, Research Division - Director

* Steven James Goulden

Deutsche Bank AG, Research Division - Research Analyst

* Sylvia Pavlova Barker

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Magnus Ahlqvist, Securitas AB - President & CEO [1]

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Good afternoon, everyone, and welcome to our Q3 -- Q4 and 2019 conference call. I am here today, as usual, with our CFO, Bart Adam, to go through the performance in the quarter, followed by a Q&A session.

So let us start with the performance on a group level. We had 2% organic growth in the quarter, and this was below our expectations. But looking at the full year, with 4% growth, we grew faster than the market. Q4 was not a strong quarter from a margin perspective. The operating margin of 5.3% was lower than the same period last year. And this was primarily related to some temporary factors in North America and a weaker Q4 in Europe. The price/wage balance was slightly behind in 2019, and this remains a key focus area as we enter 2020.

But we had a strong cash flow in the quarter. On a full year basis, we achieved almost SEK 4.9 billion in operating cash flow. And in terms of dividend, the Board will propose increasing the dividend from SEK 4.40 to SEK 4.80. 2019 was also an important year because this was the year when we initiated significant modernization and transformation programs in the company. And I will talk a little bit more about this in the strategy session towards the end.

But let us now turn to the progress of solutions and electronic security. We had 10% real sales growth during 2019, and we continue to strengthen our technology and electronic security capability. And we recently announced 2 important acquisitions, Fredon Security in Australia and Techco Security in Spain. And with these 2 acquisitions, we welcome teams with a lot of competence in electronic security, and we further strengthened our leading offering in 2 important markets to Securitas.

But after the strategic review that we conducted in 2018 and '19, we also communicated the ambition to double our electronic security and solutions business by 2023. And these types of acquisitions play an important role in realizing our ambition. As in the previous quarters, we'd like to show customer reference cases. And this, we do to enhance the understanding of our offering and of our solutions. And this time, we're going to show a customer reference case from the National Gallery in London. So if we can please play the video.

(presentation)

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Magnus Ahlqvist, Securitas AB - President & CEO [2]

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Yes. I hope you liked this case. This is a demanding operating environment, but it's also a good illustration of how we can add significant value to the National Gallery with our great people and know-how and integrated security solutions from guarding to advanced technology.

With that, let us now turn to the performance in the divisions, and we're starting with North America. We had a temporary decline in North America and 2% organic sales growth in the quarter. We had a transition in our critical infrastructure services part of the business, and this had a 1% negative impact on the organic sales growth. Our 5 guarding regions and the Pinkerton business were the main drivers of growth in the quarter. And the work to offer integrated solutions to our clients continue with high focus, and security solutions, electronic security account for 18% of the North America sales in 2019.

The operating margin in the quarter was 6.1%, and this was due to the impact from the temporary decline in our critical infrastructure services business. And the operating margin was supported by good development in our 5 guarding regions, our Securitas Electronic Security business, where the team did a really good job and also in Pinkerton. When looking at the full year, we've had a good year in North America, despite the relatively weaker fourth quarter.

So with that, let us then turn to Europe. The organic sales growth in Europe was 1% in the quarter, and this is then in line with the run rate from Q3. But the lower growth is related to the previously announced contract losses in France and the U.K. And from a growth perspective, we had decent performance from Belgium, Germany, Turkey and the Nordic countries. And security solutions and electronic security accounted for 22% of sales in the business segment in 2019 and a few percent higher than that in the fourth quarter.

The operating margin was 6.1% in the quarter, and this margin was supported by the cost savings program in Europe and gains related to settlement, existing defined benefit plans in Norway, but hampered by Sweden, Belgium and the Netherlands. So all in all, continued weaker performance in Europe compared to the previous year. And with that, let us then turn to Ibero-America. The organic sales growth in Q4 was 10%, and the lower growth is primarily related to continued reduction of some of the short-term security solutions contracts that we have in Spain. But good continued developments, security solutions and electronic security, now representing 27% of the sales.

And looking at the margin, the operating margin improved to 4.8% in the quarter, primarily thanks to Spain, and this is a positive development. But I should also mention that we have weak comparatives from Q4 last year related to Argentina. And we have now concluded the investigation in Argentina that we have talked about in 2019. And I'd like to make just a few comments related to this. The success of Securitas company has been built on good values. We are very disappointed by the breach of trust displayed by certain individuals in Argentina. But we have taken proactive action and decisive actions to deal with this matter, and also made significant management changes. I should also mention that from a financial perspective, we have adequate provisions at year-end. But looking ahead, we are reinforcing our compliance program to prevent a similar situation from arising again in the future in Argentina or elsewhere.

And with that, happy to hand over to you, Bart, for more details on the financials.

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Bart Adam, Securitas AB - CFO [3]

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Very good, and many thanks, Magnus. So let's look at the financial information to the quarter and the full year and starting as usual with the income statement. As of January 1, 2019, we have adopted to IFRS 16. And as you know, we have implemented this standard without any restatement of comparatives. So 2019 is now the first full year accounted for under IFRS 16. And by that, we have recognized leases and rental agreements as assets in the balance sheet. This created a quite substantial negative net effect on our income statement.

As shown here in the table to the upper right, on the operating result level, there is a positive effect in the full year of plus SEK 80 million. But then this is offset by a larger negative effect on financial items of minus SEK 148 million. So leaving a net negative of minus SEK 68 million on income before tax. And that is an effect of about 1.5% of our income before tax for the full year.

Looking then at items affecting comparability. We accounted for SEK 83 million in the quarter. And that is then adding up to a bit more than SEK 200 million for the full year, and that is in line with the earlier communicated amount of around SEK 200 million. These items affecting comparability relate entirely to the 2 transformation programs we disclosed and talked about before.

In Q4 last year, we accounted for minus SEK 187 million as items affecting comparability, and that related also to the 2 transformation programs back then. In the entire 2018, we accounted for, in total, SEK 455 million as items affecting comparability. And of such amount, SEK 287 million related to the European cost-saving plan and that was accounted for in Q3 of 2018.

We referred earlier to a total of SEK 650 million of items affecting comparability that shall be accounted for related to the 2 programs and that during the period of 2019, 2020 and some part into 2021. And that SEK 650 million is on top of the SEK 187 million from 2018. The SEK 650 million is still the relevant amount to consider. For 2020, we could see an amount of around SEK 250 million, everything depends a bit on the speed of the different implementations, and we can confirm that the 2 programs are on track.

Then as to the financial income and expenses, we accounted for minus SEK 140 million in the quarter and minus SEK 578 million for the 12 months. As said, this number is negatively impacted from the adoption of IFRS 16 and such impact with the earlier mentioned SEK 148 million in the 12 months compared to 2018. The additional difference then in the full year compared to the same period in 2018 as well comes from increased net debt and then further from increased U.S. dollar interest rates and the U.S. dollar foreign exchange rates as well.

Last year, in 2018, then the financial income and expenses were impacted by a one-off effect of minus SEK 46 million in Q4, and that's related also to Argentina. In Q4 last year, we have settled and refinanced the high interest-bearing debt items in Argentina, and we took the one-off costs related to that in Q4 of 2018.

So as we are talking now about Argentina anyhow, and as Magnus mentioned, we have now been able to close the investigation in Argentina. And the largest financial impact following the outcome of the investigations relate to a tax correction -- tax corrections for a total amount of SEK 130 million. And I can confirm, we are fully provided for such amount of corrections at year-end. There are a few other related costs, contingencies, risks for which we have accounted for at year-end and for which we believe also to have adequate provisions. I should mention that based on the conclusions from the investigation and the actions taken, there might exist some further exposure, but it is our judgment that there is no further significant financial impact for the group.

I shall also add that the tax correction did not have any impact on our 2019 full year tax rate and also for any other costs there that we have accounted for. This has been largely offset by a few other positive matters. So both these items have not impacted any of our margins or tax rate.

Then when we take a look at the tax line, our previous estimate for the full year group tax rate in 2019 was around 27.6%, and we ended now on 27.2%, confirming the expected increase from 25.0% from 2018. And as said, there is no real impact in this percentage from the Argentina tax matter.

We turn then to the next page. And we consider here then the effects from the different currencies. As always, the number to the right are the foreign exchange end rates in Swedish krona measured at quarter end. Both the U.S. dollar and the euro, they weakened somewhat during the quarter. But then they recovered again towards the end during actually the month of December, still ending stronger than the year-end rates at the end of 2018.

As you can see here, the U.S. dollar ended on SEK 9.32, 4% stronger than end of 2018 and the euro ended on SEK 10.43, almost 2% more than end of 2018. The Argentina peso then stayed around SEK 0.16 to the Swedish krona. And that is then 30% lower than compared to 12 months ago. Due then to the combined effects from these different currencies, our quarterly consolidated income statement was positively affected when comparing to last year.

Our total numbers -- nominal numbers got some tailwind from the currency in the quarter. And these effects adds then to similar effects that we have seen during the first 9 months for the full year.

In the 12 months, on sales, the total change was 9% and real change of 6%, so a 3% tailwind from currency. On operating income level, total change of 8%, for a real change of 3%. So here, a 5% tailwind. And then on EPS before items affecting comparability, that's a total change of 5% and a real change of minus 1%. The real change in EPS was negatively impacted by the adoption of IFRS 16, as mentioned before as well as by the higher tax rate, of course, compared to 2018. Together, these 2 factors impacted with minus 4.5%. So adjusting the real change in EPS before items affecting comparability would have been then around 4% in 2019.

And I think that is the 4% that we should compare to our target of 10%. And I would say that during a period of initiation of important transformations, combined with important also management changes, our 10% target was not reached, but there was still a positive development from our entire business of 4% on EPS real change before then the external changes that impact it.

So Slide 14, we go to the cash flow, and there's definitely some good news here. We are happy to see a strong cash flow coming in during the quarter, adding then to earlier good 9 months as well. And so in total, we had SEK 4.9 billion in cash flow from operating activities for the full year and a free cash flow then of more than SEK 3.2 billion. I think both numbers are pretty much record high.

As mentioned before, the net cash flow is not impacted from IFRS 16 leases; however, while the net amount is not impacted, some of the individual lines are. And we see in the full year net investments here, we see net investments of SEK 320 million. And that results from investments of SEK 3.0 billion and reversal of depreciation of SEK 2.7 billion. And it shall then be we understood that IFRS 16 by itself increased the investments with close to SEK 1 billion actually.

So IFRS -- with IFRS 16 then, our CapEx, you could say, gets inflated, and that is from around SEK 2 billion per year to now an amount of SEK 3 billion. Should also say that we had good cash flow, and we are happy about that. But it has also been helped to some extent by the lower organic sale growth. Still, we are satisfied with the outcome, and we have hard -- we have worked hard with the issue, and we will work more with it going forward.

We go to the next slide, and we'll take a look here at the net debt, and it ended at SEK 17.5 billion as you can see here in the bottom of the slide, up from SEK 14.5 billion at the start of the year. There is a quite considerable impact, of course, from the implementation of IFRS 16, which made the net debt increase with almost SEK 3.3 billion as you can see here on the line lease liabilities. And then, of course, we have had the dividend that was paid in May of SEK 1.6 billion. And as you can see here also the currency translation, the revaluation also added more than SEK 0.5 billion in translation to the net debt. And then we have the acquisitions we paid for during the year and that is close to SEK 0.6 billion.

Adding all these effects that I mentioned before now from the start of the year that adds around SEK 6 billion in total to the opening net debt. So we would have been around SEK 20.5 billion, but then from there, of course, we reduced with the free cash flow of SEK 3.268 billion, and then we end on SEK 17.5 billion net debt at year-end, and that we are pleased with. And you can see here to the right of the slide that the net debt in relation to EBITDA is on 2.2, and that is after IFRS 16, and before that, it would have been on 2.0 to be compared to the 2.3 from 12 months ago. So we have been able to bring down our leverage during the year.

And then to the next slide, which is a slide you have seen before as well, that is basically explaining the impact from IFRS 16 on our different KPIs. Nothing more to explain here.

And with that, I'm handing back over to Magnus.

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Magnus Ahlqvist, Securitas AB - President & CEO [4]

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Thank you very much, Bart. So before we open up to Q&A, let me just share a few words regarding the strategy and transformation. And for those of you who participated in the Capital Markets Day that we had in December, this is just a brief recap as well.

But if you look at the journey that we are on, we have built our success very much based on being focused on security, clear focus on security, but then continuously also enhancing the offering to protective services and now intelligent services as we go forward.

So the strategic direction for the next phase is not really a change of direction, it's more an acceleration, and that we are accelerating the transformation to reinforce our leadership position in the industry and by having the best offering to our clients.

And in 2019, we have launched important programs that Bart referenced as well to modernize and to digitize the entire business. And one of those, obviously, with -- or one important objective, I should say, is to enhance efficiency and productivity, and that is then represented in the lower part of this picture. But at the same time, we continue to invest in our offering with focus on electronic security, integrating and selling solutions and intelligent data-driven services. And we also have a business transformation ongoing in North America, and that is progressing according to plan. And we are also analyzing the best and optimal approach to undertake this type of a program as well in Europe, but we will come back at a later point in time when we have that ready. But as part of the strategy work, we have also defined our wanted position, and that is to be the intelligent protective services partner, and we identified 3 focus areas to be able to reach this wanted position with our clients.

So all the strategy work and the focus that we have within the company is really focused on 3 areas: client engagement; protective services leadership and innovation, so that is essentially how we enhance and improve our offering; and then the third aspect is then how do we also drive higher efficiency so we can free up resources, but also then create better value over time.

So to conclude this, we are really accelerating the transformation, but we are acting from a position of strength. And we do see new opportunities in a large and growing and dynamic market. And like I mentioned, we have 3 key focus areas that we need to work on and that we are working on to reach our wanted position. And with clear targets and a very solid team, we are now ready to execute on this.

So with that, to sum up and coming back to the performance in the quarter in 2019, we had organic growth of 4% in the year, stable operating margin of 5.2%, a relatively weak fourth quarter. But if you look then also at the strategically important solutions, electronic security now accounting for 21% of our total group sales. But we also then, as I highlighted earlier, in conjunction with the strategy (inaudible) communicated our ambition to double electronic security and solutions by 2023. And we are taking concrete actions to achieve this ambition.

And with that, now happy to open up for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Paul Checketts from Barclays.

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [2]

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I think I've got 3 questions, please. The first is on the recurring theme of the price/wage balance. Could you give us an update on how -- the timing for your negotiations through this year? And if they're successful, at what point we might see a positive move on margin? That's the first one.

The second is on contract losses. Today, there's been a 1 win and 1 loss and they've roughly evened each other out. But if we look back over the last year, there have been quite a few contract losses. When you reflect on that, is there something -- why do you think it's been -- that it's been quite a few? Or is it just part and parcel of business?

And then the last one is the results of the investigation in Argentina. You mentioned a few times. Can you tell us what actually happened there? And Bart, I'm just struggling to understand how it hasn't had any impact on the numbers? Would you -- maybe you it's to do with the accounting, but can you run us through that?

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Magnus Ahlqvist, Securitas AB - President & CEO [3]

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So in terms of price/wage balance, to give you a little bit of perspective, in 2019, in the fourth quarter, we had a slight improvement, but we were behind for the full year. This is obviously an area where we have a high focus and emphasis. We also have a good track record. So it goes without saying that this is a very important focus area for us as we are now entering 2020. When I look at the timing, to your question of the negotiations, a lot of this is typically happening in the first part of the year. So significant efforts starting in the summer of last year, and then a lot of the negotiations throughout Q1 and Q2. So that is really the main point. But that could also differ depending on countries and circumstances. But to give a rough idea, that is really where we have the emphasis on that work.

To the second question on the contract losses, we lost some significant contracts in Q1 and Q2. And those have obviously had an impact throughout 2019. And part of that is part of the normal business. But I think one other aspect, and I should also mention that some of those contracts were lower margin contracts, some of them were contracts that we definitely did not want to lose because they were contracts where we delivered good quality, but also generated good margins or healthy margins. But we haven't sold enough. So some of the commercial activity that would have been needed to offset some of the contract losses, that hasn't really been high enough. But we did highlight that we had some improvement in the fourth quarter when you look at the overall portfolio development. So that is obviously more of a positive thing as we're going into 2020.

If you look to the last question, that is related to Argentina. This is something that we brought up during 2019. And to your question, what has happened? Well, we had whistleblower complaints in 2018. And then we started to look into some of those allegations that then triggered essentially that we started an investigation. And we did that because we take all values and ethics extremely seriously. So when we are getting complaints through whistleblowers or from other sources, we always investigate. And that investigation, we have been doing with external parties. We have concluded that very recently. But I would just like to make a few other comments as well before also handing over to Bart on the financial impact on this, first of all, is just to say that we are really disappointed about what has happened. Our values are very important to us, and we don't compromise related to our values. We have built the entire success of Securitas based on good values. And we have zero tolerance for misconduct.

But if you look at Argentina, specifically, this is a country with less than 2% of our global sales, less than that of our margin. But nevertheless, it is important that we are addressing those issues. And to the point then, we don't really see that there is a material impact on the financial position. Part of that is something, I think, Bart, you can comment on in more detail, we have accrued funds to be able to cover, but we have taken throughout the investigations, very active and decisive measures. And some of that have been management changes, other disciplinary actions as well. And obviously, now taking a very strong approach to make sure that we are strengthening our control system to be able to prevent something like this from happening again in Argentina or elsewhere. But I would also just like to say the last point is that, when something like this happen, we investigate it, and we have then proactively also approached the appropriate authorities with this information. But that is essentially some -- I mean, that is where we are right now in this process. So I think, with that, Bart, do you want to highlight also the financial question?

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Bart Adam, Securitas AB - CFO [4]

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Yes. Sure. So as mentioned, the largest financial impact sits in our tax line and that was SEK 130 million, that is a cost there. And then how it works, is that on a net basis, this has not impacted our tax rate. And how it works, in practice is that we follow and monitor all the time any different tax exposures and matters that we have at hand. And for these, we have set different provisions aside. And at year-end in 2019, within that provision, we had at year-end a surplus. And that basically -- surplus now have we -- we set that aside for the Argentina matter. And that means that then on a net basis, so to say, if you take some of these one-off surpluses and you take this Argentina cost, it is -- it was basically netting out. So that is how it was not impacting the tax percentage or the tax line as such. And a bit the same thing you could say on the costs that we have incurred or that we have provided for in relation to, for instance, investigations, terminations, some costs for advisers. Also there is -- it has not really impacted our margins. What I mean is that at year-end, we have accounted for all these costs, as I said, incurred during 2019 or some further to be expected, but most have also been offset then by a few other positive matters that create a positive one-off. So if you net these ones out, I mean, the Argentina matter has definitely not helped our margins, but it's also not that I can say that there has been a very large negative effect. So all in all, it's more like netting out on 0.

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [5]

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Can I just -- one quick follow-up on price/wage balance. So if -- for argument sake, if in Q1, you manage to successfully renegotiate some of the pricing on a contract, would that instantaneously kick in? Or would there be a lag?

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Magnus Ahlqvist, Securitas AB - President & CEO [6]

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Yes, that would depend a little bit on the pricing agreements that we have with some of the clients as well, that could differ. Price/wage is very important, but we have also -- as I think, we have shared in 2019, also looking at more of a broader total production costs as well. Because 1 thing that we have seen in 2019 is that with fairly tight labor markets, there has been a number of pressures in terms of general costs, and that is something that is important that we then cover with the price increases. But in terms of the timing, yes, it does vary a little bit contract to contract. But obviously, over time, there should definitely be a positive impact.

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Operator [7]

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Our next question comes from Carina Elmgren from Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [8]

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A couple of questions from my part. Still on the wage increase, price balance. You mentioned that Belgium and Sweden impacted margins negatively in Europe. So you -- would you then say that this is something else and not wage increases that you haven't passed through?

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Magnus Ahlqvist, Securitas AB - President & CEO [9]

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So on Sweden, I mean, there, it's essentially the contract that we terminated -- or that was terminated in November 2018, that essentially then strong comparatives. If you're looking at Belgium, there, it was not a general price/wage issue. It was more related to unfavorable year-end reconciliations. So those were the 2 main issues. When you look at price/wage in Europe in 2019, it's essentially the Netherlands and France, where we've had some challenges. And then we had a slight improvement in France in the fourth quarter.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [10]

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Okay. And then on -- you said that you had quite a lot of new contract wins in Q4. Could you say a little bit in which regions or countries?

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Magnus Ahlqvist, Securitas AB - President & CEO [11]

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No. So I think I said that we had improvement. And that was fairly broad improvement when you look at the portfolio and what we call the net change. But also then a positive -- especially positive new sales activity, but that was really spread over North America as well as in Europe.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [12]

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Okay. And was this something that already had an impact in Q4 or something that should impact more going forward?

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Magnus Ahlqvist, Securitas AB - President & CEO [13]

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On a portfolio net change, that is obviously good to have right now. Some of the new sales that we are winning that could also be then for contracts that are not starting until some time typically then in Q1 or latest in Q2.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [14]

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Okay. And then maybe on the margin in Ibero-America. You said there was an improvement from Spain, but Peru is weighing and probably Argentina as well. So regarding the margin in Latin America, have you seen any changes there? Or should we expect it to be on a lower level going forward?

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Magnus Ahlqvist, Securitas AB - President & CEO [15]

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Well, we have challenging operating conditions in Argentina, as we have commented, throughout the last 4 or 5 quarters. If you look at Peru, also a fairly challenging situation for us. Where we have also taken -- under our new divisional leadership, also made some management changes. So we are taking actions to improve, but fairly challenging operating conditions that we are facing.

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Operator [16]

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Our next question comes from the line of Chirag Vadhia from HSBC.

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Chirag Vadhia, HSBC, Research Division - Research Analyst [17]

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Just back on the Argentina investigation. You mentioned that -- as you said, there wouldn't be a financial impact on the group. Then is there any possible other qualitative ramifications at a group level that could come from this?

And secondly, just on the temporary decline in Northern -- in the U.S. business due to critical infrastructure. Could you give any more color on where that decline came from?

And just finally, on a broader view, how do you view the trade-off of organic growth or contract wins versus margin stability in this tightening labor market?

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Magnus Ahlqvist, Securitas AB - President & CEO [18]

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Yes. Thank you. Bart, if you can take the third question, I didn't capture that one.

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Bart Adam, Securitas AB - CFO [19]

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Yes. (inaudible)

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Magnus Ahlqvist, Securitas AB - President & CEO [20]

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Related to Argentina, we take this seriously because we take our values very seriously. And that's also the reason that we have investigated based on Securitas' values and ethics and our principles. If you say, could there be a qualitative impact? Well, it's not a good feeling when you have a problematic situation like this. But I feel that we have investigated, we have taken decisive actions, terminated those people who were involved, and we have a strong values-driven leadership in place, that is the most important. We are continuously working with our compliance programs, and that is locally as well as globally, I would say, a positive trigger from having something like this happen is that, that also then raises the awareness of the importance, and it's also then a reason for us to step our efforts even further. So I think that is probably the main one that I would highlight that we are -- that we can see based on where we are today.

And to your second question about the U.S. Well, we made a clear reference to a temporary decline. And that is essentially because this is related to our critical infrastructure services business. And when we -- it's essentially a transition in terms of who is buying this specific service where we are phasing out one, then being replaced by another. And we expect that we will recover that in the near term. And if you then say, well, what does near term mean? Well, difficult to quantify weeks or months, but it's definitely not several quarters away. And -- so that is really the background. That then also had a significant impact on the margin in the quarter.

And if you then ask, okay, what is the critical infrastructure services business? This is essentially a business in the aerospace, defense, energy sectors, where we have private customers, but we also have public customers as well. So that is more of a specialized segment that we have within North America.

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Bart Adam, Securitas AB - CFO [21]

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On your third question, the prioritization between organic sales growth and margin stability, as I have understood your question, there, our preference would definitely be for margin stability. And the reason for that is simply -- I mean, we are a market leader or second in the market in many of our markets, and we need to set an example of pricing discipline as well. And that is why, we will always prefer margin stability over organic growth.

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Operator [22]

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Our next question comes from the line of Sylvia Barker from JPMorgan.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [23]

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I missed the parts of the previous answers. So I might repeat a little bit, but just on the critical infrastructure unit and the overall growth in North America, could you just comment on how temporary that impact is? And also on what led to the other 100 basis points of slowdown sequentially?

Then secondly, on the contracts you've announced in Europe. Should we assume that they're both a bit of a margin drag in 2020, given you are setting up the German contract and that will be ramping up? And also in Norway, if kind of the press is correct, you've actually lost 39 airports. So maybe just in the near term have some stranded costs there?

And then finally, on the other line from an EBIT point of view, that missed a little bit again. You said that, that's where your intelligence solutions investments are going. As we think about kind of 2020, should we assume that, that run rate just kind of increase continues in the first half. So your 6 basis points of drag year-on-year are mainly focused in the first half?

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Magnus Ahlqvist, Securitas AB - President & CEO [24]

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Well, thank you, Sylvia. To the critical infrastructure services business, your question was how temporary? And it's essentially a transition, so we -- where we are phasing out the counterparty or the procurer, if you will, and then phasing in another one. And that is the reason that we see that this is truly a temporary matter. The near term, I would say, we will recover this. And that's our expectation in the near term, but it's difficult to say if that is weeks or months away, but it's definitely not 3, 4 quarters away, just to give a better kind of view on the expected impact there.

In terms of -- the other aspect in terms of the growth related to North America. We had some larger contract losses, and those have hurt the growth throughout 2019. But that comes back to the question that I commented on earlier is that we have not been able to compensate those with new sales to that type of extent. So that is the other reason behind lower growth, but we also had very strong comparatives from 2018 as well in North America in the organic sales growth.

In terms of Europe, I think the question there was related to the margin development. Yes, a significant contract win in Germany, and that's essentially then a win. It's an extension and it's also an increase, and that is a fairly large assignment, one of the biggest undertakings that we have. And there could always be startup-related issues as with any large new contract.

In terms of Norway, obviously a regret that we have lost some of the aviation contracts there. And that is something that we tried to manage through as well as we can. So I think that is really the key points on the commercial side.

We also had final settlements of some defined benefit plans in Norway that have given us some benefit in 2019, and that's going to be the reverse impact, obviously, positive from a long-term perspective that we have this settled, but there will be a slight negative impact when you're looking at 2020 versus 2019. Bart, do you want to take the other line question?

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Bart Adam, Securitas AB - CFO [25]

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Yes. Yes. As to the other line as you have pointed out, Sylvia, we have there an impact this year compared to last year of close to 0.1%. And also for next year, we expect a further increase because of the investments we are making there in the transformation. And that is -- yes, as mentioned before, around 0.6%, we mentioned that at the Capital Markets Day, and that will a bit be more heavy in the first half of the year compared to the second half of the year, but 0.6% is the full year rate increase, so to say.

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Operator [26]

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Our next question comes from the line of James Winckler from Jefferies.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [27]

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My first one was -- I mean, it's just still on the North American margin, just to be clear, you described it as sort of a transition. Is that essentially just you had a short period of time through the quarter where you had no revenue associated with a bunch of employees that you're still paying until that transition period is over? And within this specific headwind, was that fully or -- because obviously, before that, the trend in North America for the prior few quarters in a row was up sort of 20 basis points year-over-year. Was the full swing in terms of what you saw in Q4 100% attributable just the -- just the decline in critical infrastructure services? Or was that also a mix from the contract losses as well?

And then just back to European margins, the underlying sort of benefit of about sort of 10 basis points should have been about stable in Q4, because you also had (inaudible) getting easier as well as -- even though some of the cost savings were lapped. Wondering if there's some specific areas that got worse, what you should expect going into next year?

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Magnus Ahlqvist, Securitas AB - President & CEO [28]

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Yes. So to the North America question, James, we didn't hear you perfectly. So you have to -- please don't hesitate. You can restate the question if we don't answer it. But if you look at North America, it was a transition. And from that perspective, when you have a decline until you have then replaced that with the corresponding increase, that's essentially where we were in the quarter. It might take some time, but like I stated earlier, we expect that we're going to recover that in the near term.

And to your question about the financial impact. This is the reason that we are stating as well in the quarterly report, and we do that for a reason that this was the main and fairly significant impact in the quarter. But related to Q4 as an isolated quarter, not so much relationship to Q2 or Q3 in 2019.

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Bart Adam, Securitas AB - CFO [29]

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Yes. Just adding to that, it was, as you said, I mean, there was a temporary decline there where we still had the people, to a large extent, on our payroll that are servicing or serving that type of customer base. So that was really going on in Q4 there. And then we should that -- see the top line connected to that business again coming up now during the next weeks and months.

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Magnus Ahlqvist, Securitas AB - President & CEO [30]

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And to the second question about Europe, it was really a mixed picture. And like I said earlier, I mean, we are not happy with the performance. We had some areas that performed quite well, but then we had a few areas where we had some real negatives and also very much related to the issues that I mentioned about Belgium, where we had this year-end reconciliations; Sweden, which was more related to the comparatives from 2018; and the Netherlands, we have suffered throughout 2019 due to a negative price/wage balance. And those were really the main issues that we had in Europe, some improvement in France, I should highlight, which was positive.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [31]

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Yes. Sure. And just to clarify that, I mean, it just means it got worse in Q4 year-over-year, though. So I'm just wondering, you said obviously, all the referenced things -- areas that you flagged before. So I was just wondering where -- which got worse?

And then just the last thing on the North America one was, if you're able to comment on the margins of the critical infrastructure related to the rest of the division, if it's above -- if it tends to be a higher margin work?

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Magnus Ahlqvist, Securitas AB - President & CEO [32]

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Yes. So I mean, in Europe, I think the other aspect that I would highlight is the negative leverage, when you look at the totality, and that is obviously coming from the lower growth in the quarter. I would say that's the other -- would be another major factor.

In terms of the margin, on the -- some of this business -- some of that business is more something you can look at as extra sales business. Some of it is more contractually bound. I think it differs quite a lot actually between different contracts. So difficult to generalize too much about the margin level. But good, healthy margins, absolutely.

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Bart Adam, Securitas AB - CFO [33]

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But the difference from -- in Q4 compared to earlier quarters or the full year, so to say, largely comes from the effect in Belgium.

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Magnus Ahlqvist, Securitas AB - President & CEO [34]

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[Back to] Europe.

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Bart Adam, Securitas AB - CFO [35]

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Yes, [back to] Europe.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [36]

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Yes. Okay. And just -- sorry, lastly, on the momentum of the new contract losses -- contract wins, excuse me, in Europe, you said on a net basis, you only flagged 2. But on a net basis, sort of moving forward, do you expect new contract wins to be a positive impact in 2020 in terms of the -- its impact on growth as you stand today in Europe?

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Magnus Ahlqvist, Securitas AB - President & CEO [37]

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Yes. I mean we don't give too much guidance, but we highlighted the favorable development in Q4. And that is, like I mentioned earlier, that's related to portfolio and it's also related to the new sales. If you're looking for leading indicators for us, new sales are always very important, of course. Even if we don't recognize revenue during the quarter that we record the new sales, it does give an indication of what we have coming up. And that's something that we generally have to improve as a company during 2020 is that we have, by far, the best offering, and we know that when we do a good job with our clients, we win business and we keep and we develop that business as well. And that is where we also have to step up and improve in all the divisions.

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Bart Adam, Securitas AB - CFO [38]

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And I would add that the wins that we have had are more midsize contract. It's not like 1 single big contract or anything except for maybe what we have mentioned there around the aviation side in Europe. Other than that, it have been more like midsize contracts and even smaller contracts, so which in a way, we like as well because they tend to be -- yes, create less instability in a way if you wanted to put it like that.

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Operator [39]

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Our next question comes from the line of Edward Stanley from Morgan Stanley.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [40]

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I'm just trying to back out the growth contribution that you got from electronic security in Q4? Because you've given the numbers for 2019, and it seems to be half of your growth coming from electronic security. But I just wonder, if you back that out over time, it looks like manned guarding growth rate continues to decline and the secure technology solutions continues to decline as well. So I'm just trying to work out the balance you think that will strike in 2020 between guarding growth in electronic security?

And the second question, I'm struggling a little bit to reconcile the moving parts of the working capital. But can you confirm whether you have either used recently or currently use any factoring facilities?

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Bart Adam, Securitas AB - CFO [41]

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I can start with the question -- your last question, and the answer to that one, which is pretty easy, and that is no. We do not use factoring, and we do not intend to use factoring.

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Magnus Ahlqvist, Securitas AB - President & CEO [42]

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And to your first question there, Edward, we had real sales growth solutions and electronic security of 10% in 2019. Organic sales growth, which is then more related to the solutions specifically was the vast majority of those 10%, and then some was then related to electronic security.

If you then look at the growth rates, I mean, with the ambitions that we have set out to double electronic security and solutions by 2023, we need to grow this with strong double digits every year. And that is really the ambition. A big part of that has to come from successfully converting to solutions, some historically has also then come from acquisitions in electronic security. So that is really the perspective.

If you then look at the organic relationship between guarding only versus solutions, then goes without saying that we need to have a significantly higher pace of solutions growth over guarding growth.

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Operator [43]

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The next question comes from Henrik Mawby from Nordea.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [44]

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Coming back to the temporary U.S. contract transitions. I mean it seems like it's around SEK 120 million that was temporarily lost in the quarter. Did I understand you correctly that you've pretty much kept all costs related to that specific contract on board during the quarter. And just from my math, that would just in personnel costs imply around SEK 60 million to SEK 80 million shortfall. Have you been able to use this personnel in other parts of the operation? Or is that just a shortfall related to this specific event?

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Magnus Ahlqvist, Securitas AB - President & CEO [45]

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Yes. So the 1%, that's a pretty good estimate in terms of the numbers on the sales impact. The Securitas critical infrastructure business is a highly specialized business. And I think in this particular case, if we had a temporary decline in terms of the revenue, we still had a significant part of the costs. So that is really the assumption. And it was like we commented earlier, a major impact in the quarter.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [46]

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So I mean -- but with total costs for you normally running around in a contract like this, it would be SEK 100 million to SEK 110 million. Is that what we should assume as a shortfall on EBIT? Is that too aggressive?

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Bart Adam, Securitas AB - CFO [47]

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Well, that would be too high. Yes, that would -- that's too aggressive. We have been able to reduce some of those costs temporarily as well to redeploy some of the people as well. But that would be too aggressive assumption. But it has had a considerable impact, of course.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [48]

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Okay. Okay. And also coming back to the growth comments. I mean you've been not able to compensate the losses with new sales during the year. And now in this quarter, you're quite upbeat around new sales in both Europe and U.S. And can you just walk us through what's really behind the slower sales and contract losses in the beginning of the year? And then what is driving the more successful end of the year. Is it just temporary? Or have you now become more active and aggressive in trying to win contract?

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Magnus Ahlqvist, Securitas AB - President & CEO [49]

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So first of all, I mean, we have the best quality, and I'm convinced also the best offering. We always protect our margins. So I think that we are not becoming desperate to win a lot of new business. But if you look at the first half for 2019, it was a time when we had a number of significant contract losses at the same time in Europe as well as in North America. And then, obviously, it's -- everything becomes a lot easier when you have good top line growth and momentum. It's equally tough when you have slow growth or no growth on the top line in our business because that also then always requires some adjustment. But I would not say there are any specific factors. I mean we have gone through and we go through each and every contract. And I cannot really say that there is a specific pattern or any commonalities between those losses. We just have to focus on what we do well and that is to win clients that really value the Securitas offering and also our strategic direction, and then we make sure that we serve those clients and we develop those well over time.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [50]

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Is it possible that the 2018 restructuring program took management focus in the branches and that, that then led to not as high pressure on new sales in the end of 2018 leading to those losses in beginning of 2019?

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Magnus Ahlqvist, Securitas AB - President & CEO [51]

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Yes. It's -- I wouldn't generalize to say that, but 1 important aspect, and I think, Bart touched upon that a little bit earlier as well is that we are driving fairly significant transformation programs. And that is obviously 1 important rule that we all have in the leadership team as well is that we really keep a focus on the ongoing business as we are aggressively really transforming the business with modernization and digitalizing and also then building a stronger Securitas for the next 5, 10 years. But that is part of our normal job. And I also believe that a lot of the work that we are doing to transform enables us also to continuously improve our offering, and that's obviously something which is also helping in all the dialogue together with the clients as well.

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Bart Adam, Securitas AB - CFO [52]

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And maybe one thing to clarify, Henrik, is that the restructuring was not so much about the branches. It was more related to -- yes, more support, back office people.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [53]

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Okay. I'm sorry for taking a lot of time here. One more question, if I may, for you, Bart. Did you have any material effects from year-end adjustments in this quarter? I know you mentioned Belgium earlier in this call, and you mentioned something positive in Norway as well. Was it a material impact in the quarter in general?

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Bart Adam, Securitas AB - CFO [54]

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Well, you referred to 2 good examples there. Belgium and Norway, which we have pointed out, Belgium on the negative side, Norway on a positive side. We have had -- we always have some effects at year-end. But as I've also said, we also had, for instance, some costs related to Argentina, and these other matters have basically balanced out the Argentina matter then on a group level. So -- and these costs related to Argentina have been largely taken on a group level as well. But that has been balanced out by other positive one-offs.

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Operator [55]

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Our next question comes from Matija Gergolet from Goldman Sachs.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [56]

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Two questions on my side, both related to CapEx. When I look to your cash flow on page, I think, 13 of the presentation, you showed now that the net investments for the year, they're quite sharply down from SEK 495 million to SEK 320 million. How should we interpret this? Is this just now you being more efficient? Or is this basically lower investments because you actually expect lower growth, say, for the coming quarters? And maybe also say, within that context, now given the increasing weight of the tech-enabled solutions within your mix, I would have just expected CapEx to be -- the net CapEx to be a little bit up year-on-year. So some comments in that respect would be very welcome.

And secondly, just a small technicality. I think you mentioned to -- that we should expect around SEK 250 million of items affecting comparability for the -- for 2020? Is that also on a cash basis in the cash flow statement? Is the figures going to be similar? Or is there any material difference?

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Bart Adam, Securitas AB - CFO [57]

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Yes. Okay. As to the CapEx, I mean, it can differ from one quarter to the other. Yes, I think 2018 was -- the quarter 4, there, was on the higher side. Maybe Q4 is -- this year was a bit on the lower side on the net investments. I mean we do not really manage it from quarter to quarter. We manage it more on an annual basis, and there could be some movements there into -- when you compare different quarters. So I would not take it as a big indication of we are going down or we are going up. It's more the annual rate that you need to consider.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [58]

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Yes. Sorry. But on that, the annual rate is also down quite significantly from SEK 495 million to SEK 320 million?

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Bart Adam, Securitas AB - CFO [59]

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Yes, correct. Of course, the depreciations also start to catch up more and more. I mean we have had investments. Last year, we had a few larger ones related to some of the acquisitions also we did into premises, which we did not have really this year. So that's a bit of impact there that you can see from that. But I mean, the guiding is really around SEK 3 billion on capital expenditures after IFRS 16.

Then on the cash basis for the items affecting comparability, this SEK 250 million, to a large extent, that will be cash flow, but not entirely. I should look up at the exact numbers, but it's more like, yes, somewhere around SEK 180 million, I think, with cash flow. But I would have to confirm that in detail, but not the same amount.

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Operator [60]

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Our next question comes from Allen Wells from Exane BNP Paribas.

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Allen David Wells, Exane BNP Paribas, Research Division - Research Analyst [61]

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Just one very quick one for me. All my others have been answered. Just on Spain and the impact from the short-term contracts? Obviously, you flagged in the release, the sales -- organic sales decline in the fourth quarter partly is related to the reductions there. And any way you can help us [put] or quantifying what's left to run off there? And any expectation you've got in terms of what the impact might -- that might be and timing as we move through 2020?

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Magnus Ahlqvist, Securitas AB - President & CEO [62]

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Yes. So that part of the business, we have tried to be prudent in highlighting that some of those are short-term solution contracts. I would characterize this and say that it's -- this is kind of a decreasing impact, but there is still decent amount of that business still there. But that is obviously one thing to then look at that decline. The other one is we've also taken actions and our Spanish team also taking active actions to also be able to offset and to mitigate some of that decline as we go forward. But there is still some left.

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Operator [63]

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Our next question comes from David Roux from Bank of America Merrill Lynch.

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David Roux, BofA Merrill Lynch, Research Division - Associate [64]

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Just 3 from my side. Firstly, on the transformation programs, my understanding was that the SEK 650 million would be recognized as an IAC over 24 months. Can you just confirm if this timing is on track?

Then my second question, just going back to the tax impact from the Argentina investigation. Is there not a cash impact from the SEK 130 million contingency payments to the authorities?

And then just lastly, going back to margins in Europe at the risk of sounding repetitive, there's a lot of moving parts here. I was just wondering whether you could, for Q4, sum up whether there was a net impact on the margin from a under recovery in wage in -- for -- under recovery in wage inflation for the region as a whole?

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Bart Adam, Securitas AB - CFO [65]

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Okay. Maybe on your first 2 questions. On the transformation, so I said that the SEK 650 million is still the number to account with. We set that out in the beginning that it would be largely 2019 and 2020, then we'll refine that a bit as we start to -- as we -- during, I think, Q1 or Q2 during this year that it would go a little bit more into 2021 as well. We were refining the entire planning there on a more detailed level. And so now for 2020, we should talk about SEK 250 million for this year and then the remainder of the SEK 650 million to come in 2021.

On the tax impact, you are -- I can confirm that the cash flow impact should come 2020. And I think that answers your 2 questions there. And the third one, I look at Magnus.

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Magnus Ahlqvist, Securitas AB - President & CEO [66]

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Argentina and the SEK 130 million tax payment?

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Bart Adam, Securitas AB - CFO [67]

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No. That one I covered.

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Magnus Ahlqvist, Securitas AB - President & CEO [68]

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Good. The last part then, and that was related to the margins in Europe. We did see an improvement in France. And to just elaborate a little bit more on that, there has been significant changes in some of the employee subsidies schemes. And specifically, the (inaudible) scheme. Some of the benefits of those disappeared about a little bit more than a year ago, but with then the intention of being replaced with some other programs. Some of that kicked in, in the fourth quarter, and that also had an impact, a clear positive impact on our performance in France in Q4. But beyond what we commented on earlier, that is really the main point of recovery in the fourth quarter.

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Operator [69]

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We have a follow-up question from Carina Elmgren from Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [70]

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Yes. Just a quick one. Would you say that you have seen any extra sales from, for example, airports linked to the increased control due to the coronavirus in the beginning of this year?

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Magnus Ahlqvist, Securitas AB - President & CEO [71]

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Carina, no, I don't really see that. I think from our perspective, when -- I mean, when you talk about coronavirus, just put maybe some things a bit in perspective.

From a business perspective, our AMEA region is around 2% of our total business. China is only a small part of that. So we have relatively limited business in China. And then if you then look at, is if there any type of indication of temporary demand or anything like that for specific sources from Securitas, no, that is not the case.

And we also -- and I should also highlight that we also take all of our employees' safety and well-being seriously, and that's obviously a reason for us also with the number of employees around the world that we're also continuously tracking the developments related to the coronavirus.

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Bart Adam, Securitas AB - CFO [72]

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Bart here on one earlier question in relation to the cash flow from items affecting comparability. I looked it up, and it's a bit higher, actually, it's more around SEK 200 million. And I think I mentioned SEK 180 million, just as a clarification.

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Operator [73]

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Our next question comes from Steven Goulden from Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [74]

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I just wanted to dig into Ibero-America a little bit. So could you just give us a little bit more color on exactly the developments around the Spanish contracts. So my understanding is, obviously, that they have been contributing significantly to the growth rate, and we're annualizing throughout Q2, Q3. And that, obviously, was coming to an end. Just within that, you are now saying that you've lost some of those contracts. Is that correct? And can you give us a bit of a look forward as to what that business looks like and how confident you are of potentially getting some of those contracts back?

And then within that business as well, I mean, clearly, I think, Argentina is roughly 20% of Ibero-America. Inflation there is about 50%. So just doing the math, I mean, that in itself should be contributing ballpark 10 pps just through inflation, and it's something that you called out in the release as well. So if you could kind of give us a bit of color there and how much that was contributing? That would be really helpful.

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Magnus Ahlqvist, Securitas AB - President & CEO [75]

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Yes. So to give some more context, I mean, on these short-term solutions contracts in Spain. There is a negative impact, but it's a smaller negative impact on the organic sales growth now than it was in the previous quarter. We expect that these contracts will decline during the coming quarters, but like I mentioned earlier, we're also taking actions to try to mitigate some of that impact.

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Bart Adam, Securitas AB - CFO [76]

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Yes. Coming to Argentina, as you rightfully point out, Argentina is about 20% of Ibero-America as a division in sales and then inflation is pretty high. But in our business, I don't think we have seen 50%. It has been a bit lower than that. So yes, it should then add, of course, considerably also to the growth in the division.

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Operator [77]

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(Operator Instructions) As there appears to be no questions, I will turn the conference to you.

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Magnus Ahlqvist, Securitas AB - President & CEO [78]

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Okay. So with that, thanks a lot to all of you for joining us today. Thank you.