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Edited Transcript of SECU B.ST earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 Securitas AB Earnings Call

Stockholm Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Securitas AB earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bart Adam

Securitas AB - CFO

* Lisa Micaela Sjökvist

Securitas AB - Head of IR & Acting Senior VP of Corporate Communications

* Magnus Ahlqvist

Securitas AB - President & CEO

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Conference Call Participants

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* Aymeric Poulain

Kepler Cheuvreux, Research Division - Head of Support Services Research

* Bilal Aziz

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Carina Elmgren

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Chirag Vadhia

HSBC, Research Division - Research Analyst

* 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

* Karl-Johan Bonnevier

DNB Markets, Research Division - Analyst

* Mehrdad Bahador

Pareto Securities, Research Division - Research Analyst

* Miguel Medina-Sivilotti

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director

* 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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All right. So good afternoon, everyone, and welcome to our Q2 call. I'm glad it's usual to be here with our CFO, Bart Adam. And so let us turn to the view on the Q2 results. We had healthy growth of 5% during the quarter, and we grew faster than the market. The operating margin in the quarter of 5% was stable compared to last year, and we had very strong support from North America, while Europe and Ibero-America had weaker performance in the quarter. In Europe, we had a slightly negative price wage balance in 2 countries, and we will come back to this in more detail later on. From a cash flow perspective, we see an operating cash flow of SEK 950 million, which is an improvement versus last year. And all in all, a stronger first half in terms of cash collection and operating cash flow. And during the quarter, we also announced some leadership changes and the creation of 3 expertise units, and I will talk more about this after the review of the financials.

So let us now turn to Security Solutions and Electronic Security. Delivering solutions and strengthening our electronic security capability is one of our most important priorities. And we had 15% growth of solutions and electronic security in the first half.

And during the quarter, we have started the integration of two acquisitions, Staysafe and Allcooper. And those 2 are in Australia and in the U.K., respectively. And -- but we're also happy to say that the integration of Kratos in the U.S. has been progressing very well under the leadership of our North America electronic security team. And that integration is now concluded.

As in previous quarters, we always want to share a customer reference case, and we wanted to do the same today as well. And this time, it's not a global case, rather focusing on a smaller contract. This case is from Belgium, where we have implemented our RVS Go concept for Inter-Beton, which is part of the Heidelberg Cement Group. So let us play the video, please?

(presentation)

(foreign language)

I should make a comment here that this is, obviously, in French audio, but on the -- if you're following us through the web conference, you will be able to also then see the subtitles which are then translated into English, of course. But when you look at this reference case, this is relatively small, but standardized solution where we have addressed the client security needs with our standardized RVS Go concept. And here, we are combining the latest technology with our mobile guarding and our ability to respond. So really a good example of a solution that we're rolling out across a number of similar sites. We are combining people and technology into a complete solution.

So let us now then look at the performance in the different divisions. And starting with North America, we had a very good performance with 5% organic sales growth on strong comparatives. And our 5 guarding regions and the business unit critical infrastructure services were the main drivers of the growth. Security Solutions and electronic security accounted for 18% of the sales in the quarter. And we continued the very positive trend from previous quarters, and the operating margin was 6.3%. And this is a solid improvement of 0.2% versus last year. Securitas Electronic Security contributed to the positive margin improvement as did our 5 guarding regions. So to conclude, we have very good momentum across all parts of the business in North America.

And looking at Europe, we had more of a mixed picture in terms of top line growth. We had good performance in a number of countries, such as Germany, Belgium, the Nordics and the guarding business in Turkey. But the overall growth was negatively impacted by contract losses in France and the U.K. And as we have previously announced, the loss of an aviation contract in France also had a negative impact, but we also then had a few other guarding contract losses in France and also in the U.K. that hurt the growth on a division level.

And looking then at the margin development, we had an operating margin which was below our expectations for Europe during the second quarter, and this was related to 3 main factors. One was the negative results development in France, where the contract terminations mentioned earlier in combination with the impact from regulatory changes resulted in a negative development in France compared to last year. Second factor is that we continue to work in tight labor markets across Europe, and we're not able to fully offset the wage increase with price increases in France and the Netherlands. And then obviously, the previously announced loss of a profitable contract in Sweden from the end of last year had a negative impact. And if we look then at the cost savings program that we announced at the similar time last year, this is running according to plan, but the impact on the cost-saving program was then offset by some of these negative factors.

So to conclude on Europe, we have a number of areas that are performing well, but we are now working to regain the momentum in few of the key markets.

And with that, we then turn to Ibero-America, and we had good growth in the Ibero-America division in the quarter. Similar to previous quarter, this was driven by very strong performance in Spain. In Spain, we are winning quite a lot of business, strong organic sales growth and also then, thanks to really driving the strategy and successful solutions for our customers, driving significant improvement. Price increases in Argentina, obviously, also then contributed to the organic sales growth in the quarter. But if you look at the client retention, slightly lower compared to the same period last year. But security solutions and electronic security accounted for 28% of our total sales in Argentina -- sorry, in the division in the quarter. If we then look at the margin perspective, operating margin in Ibero-America was driven by the strong performance that I mentioned in Spain. So very much thanks to the positive development of security solutions from top line perspective and also profitability. But we have burden from Argentina. So the overall margin came in at 4.6%. And we expect continued challenges in our business in Argentina also as we enter the third quarter. And this is due to a combination of 2 different factors. Challenging macroeconomic environment, but also the internal changes that we are implementing in the market.

So with that, I will now hand over to you, Bart, for an update on the financials.

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Bart Adam, Securitas AB - CFO [2]

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Very good. Thank you so much, Magnus. So let's turn to some for the financial information to the quarter. And as usual, we start with the income statement.

As of Q1, as you know, we have adopted IFRS 16. And that is the standard that deals with leasing contracts, in essence, meaning that as of 2019, all equipment and all premises that we lease or rent is considered them as an asset for accounting reasons. As mentioned also at the Q1, we have implemented this standard without any restatement of comparatives. What we then see is that there is a quite substantial negative effect from IFRS 16 on our net income with a very similar magnitude, you could say, in the first quarter and in the second quarter. When you look here at the H1 numbers in the table here to the upper right of the slide, you notice there is a positive effect of plus SEK 34 million on the operating result. But then there is an even larger negative effect on financial items of minus SEK 73 million. And all in all, that leaves then a net negative of minus SEK 39 million on income before tax. So that is IFRS 16.

Moving then to the line items affecting comparability. We accounted in this quarter for SEK 46 million as items affecting comparability in the quarter, and that is then adding up to minus SEK 66 million in the first half year. These items affecting comparability relate entirely to the 2 transformation programs we have in place, as we announced also at the reporting of Q4 2018. As per our planning and in line with what we said at the first quarter, we expect to recognize around SEK 200 million of items affecting comparability for 2019. Here, everything depends a bit on how fast we can implement certain matters and when exactly we will incur what cost. What I can also add is that the earlier referred total of SEK 650 million that shall be accounted for during 2019, 2020 and potentially as a part -- partly in 2021 is still the relevant amount to consider and calculate with. Then as to the financial income and expenses, that is SEK 150 million negative in the quarter and minus SEK 289 million in the year-to-date, for the first half year.

As said, this number is negatively impacted through the adoption of IFRS 16 for SEK 37 million in the quarter, the additional difference then compared to Q2 comes -- from Q2 2018 comes from increased net debt, increased U.S. dollar interest rates and also apart from U.S. dollar foreign exchange rate development.

Turning then to the tax line. Our current tax estimate is that the full year group tax rate in 2019 will be around 27.6%. We estimate a 27.8% in the previous quarter. That is still an increase, of course, compared to 2018, mainly due to reversed effects from U.S. tax reform related to the introduction of tax on foreign payments to so-called BEAT. I should also add that the BEAT makes the effective tax rate, the group effective tax rate, a bit more difficult to forecast as it is more sensitive to certain elements in the income statement and in the calculation. In the bottom then, you noticed there was a small difference between EPS and EPS before items affecting comparability, of course, entirely relating to the earlier mentioned items affecting comparability for the 2 transformation programs.

Turning to the next slide. We then look at the effects from the different currencies. And the numbers here to the right, as always, are the foreign exchange and trades in Swedish kroner measured at quarter end. And we can say that the U.S. dollar has been hovering around 9.30, 9.40 in the quarter. It was at some point, even up at 9.60 to the kroner, but then ended the quarter at 9.27, and that is some 3% stronger than the same quarter 2018. The euro during the quarter was around 10.60, even with the peak also up to 10.80, and ended then the quarter at 10.55, and that is a bit more than 1% over last year. So it starts to be more stable also on the Euro. The Argentina peso then starts to come closer to the weak rates from the second half of last year, but still a negative 33% compared to the krona of 12 months ago. The drop in the Argentina peso especially happened during May, September 2018. And since then, the peso -- the Argentine peso has been a bit more stable, one can say.

So as a summary, then due to, especially the effect from the U.S. dollar, our quarterly consolidated income statement was positively affected when comparing to last year. So our nominal numbers got some tailwind from the currency in the quarter.

On sales, the total change was 11% and a real change of 8%. So there was a 3% tailwind as seen from the difference. And then on operating result level, the total change was 12% for a real change of 7%. So a little bit larger difference here being 5%. So in real terms, apples-to-apples, our operating result improved with 7% in the first half year over 2018.

Then one sees at for EPS before items affecting comparability it was a total change of 5% and a real change of minus 2. And when we then compare the real change between operating income, on the one hand, and EPS before items affecting comparability. On the other hand, we see there is a deleverage happening in between the two. And the difference is, of course, entirely due to the higher financial items, mostly as a result of IFRS 16 and then also due to the higher tax rate.

Let me turn to the next page, and we take a look at the cash flow and the balance sheet. And as commented before, by Magnus, we have a healthy cash flow this year than last year. It shall be noted that the net cash flow is not impacted from IFRS 16 leases. However, it shall also be noted, while the net amount is not impacted some of the individual lines are impacted, especially the investments, and so to say, the reverse of depreciation.

We see here in the year-to-date net investments of minus SEK 187 million. And that results from investments of close to SEK 1.5 billion and the reversal of depreciation of SEK 1.3 billion. And it shall be understood that these numbers that I just mentioned that then include the amounts related to IFRS 16. And that is the investments are increased with SEK 456 million. And then it also impacted the reversal of depreciation with SEK 422 million. So with IFRS 16, our CapEx gets inflated, and that is around -- from around the usual SEK 2 billion which we commented before, 2% of sales then to an amount of SEK 2.9 billion, just by the fact that we have implemented IFRS 16.

There is always a seasonality in our operating cash flows. We see substantial cash flow improvement compared to the first half of last year. This year, it was -- yes, almost SEK 900 million during the first half year, while last year, it was minus SEK 124 million. So a good improvement. We have worked more with the issue, and we'll continue to do so and then normally, also, the second half year is much more operating cash flow, and rich half year compared to the first half year.

We turn then to the next slide. And then we take a look at the net debt. And the net debt now stands at SEK 20.4 billion up from SEK 14.5 billion at the start or at the end of last year, I should say. The main difference then relates to, of course, the implementation of IFRS 16, which has hit -- impacted with almost SEK 3.5 billion. Then, of course, we have the acquisitions we paid for during the first half year, and that is SEK 382 million. The dividend of SEK 1.6 billion that was paid out. And then the net debt was also impacted by some foreign exchange translation. As you can see here, with SEK 456 million in the first half year. Most of that actually happened in the first quarter of the year, the translation difference. When you move to the graph and to the right of the slide, the net debt in relation to EBITDA is on 2.9%, and that is, again, measured after IFRS 16.

As mentioned, IFRS 16 had quite substantial impact because the net debt now fully includes the entire effect from leased assets and rented premises. To our -- though on the other hand, our 12-month rolling EBITDA only includes now 2 quarters with the effects from IFRS 16. So that makes that our net debt after IFRS 16 is a bit inflated from that, and it will go down by itself, as we add more quarters with EBITDA, including IFRS 16. And that then should also normally go down with a further healthy cash flow during the second half of the year. And then without, so to say, any further main acquisitions or anything like that, we should then end normally around 2.3 as well, as we have ended last year before IFRS 16, of course. Yes. I think that is largely it from my side, we can go to the next slide, where we have tried to summarize all these effects from IFRS 16. I will refrain from a lot of comments. I think you understand that now, and all of that is available in our report as well in our Q2 report where we provide all these different KPIs and where you can compare.

As mentioned before, the rating agencies, to a large extent, followed already this same reasoning from IFRS 16 in their evaluations and in their ratings. And during then, April, Securitas has been moved up from Standard & Poor's from BBB, with stable outlook to BBB with a positive outlook. And with this, I'm handing back to Magnus.

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

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All right. Thank you very much, Bart. So before we open up for the Q&A, I would like to provide a brief update regarding near-term priorities as well as the progress with some of the strategic transformation programs.

First of all, this is a simple outline of our presence today around the world. We do have a strong position. And for those of you who follow us closely, you also know that with a future, which is more knowledge and databased, and we were continuing the work to leverage our position to invest in our protective services capability, to leverage the data that we're generating, combining that with other data to then enhance knowledge and how we handle risk and provide better security and solutions to our local and global clients. But while we're investing in shaping the strategy beyond 2020, our priorities that we are working on a lot at this point in time is, first of all, the client engagement, and that is how we are not only winning, but also engaging and developing our relationships and the value with clients over time, driving down specialization of our protective services so to ensure that we strengthen and further our protective services leadership, and also then driving the modernization of our business, including quite a lot of focus on cost efficiency.

And then when you look at the first 2 points on this slide, we made a few important leadership announcements, as I commented on at the beginning of the call, and created 3 new units that are really focused on addressing a few of these key objectives. First 2 units, the ambition is to strengthen the specialization of our guarding, first of all. And second, electronic security capability. And the third one is to strengthen our engagement with an offering to our global clients. And we have appointed a very experienced and capable leaders for those 3 units, and this work is starting just a few weeks ago, but with high expectations in terms of the impact that we will generate in the mid and the long-term in these 3 areas.

And as announced earlier this year, our 2 major transformation programs. First one, to address and strengthen our global IS/IT foundation and capability. And the second one, the Transformation -- Business Transformation program in North America. Both of these programs are running according to plan. But I would like to emphasize that they are extensive and long term programs, but they will greatly enhance our capability to deliver and also efficiency across the company over time. And when you're looking at the journey that we are on in our focus areas, I always show this picture because it is important to put things a little bit in perspective in terms of where we're coming from, but also where we are heading. We do have quite a lot of emphasis in the lower part of this slide. And that is obviously roughly 80% of our business today, focused on guarding. So looking at how can we continue to strengthen our foundation, which is really guarding part of the business. Second one, then, of course, is that we are in a journey since the formulation of our Vision 2020 strategy to establish clear leadership in Protective services. And this work continues in terms of strengthening, guarding electronic security, mobile monitoring, et cetera, but also then integrating solutions to our clients. And then as we're looking then more beyond 2020 to ensure that we are establishing ourselves as the leader in intelligent security.

So to sum this up, when you're looking at the first half, we've had a little bit of a mix of a strong Q1 and a slower Q2 in terms of growth. Organic sales growth of 6%, operating income real change in the first half of 7%, and continue to grow in terms of solutions electronic security that are now accounting for 21% of our group sales. By the fourth -- from the focus of managing the results in the near term, we are driving quite a lot of work and relate then to the modernization activities that we are undertaking with the products I just mentioned to make sure that we can deliver a very strong offering to our clients in the years to come and that we continue to lead the development of the industry.

So with that, Bart and I are now happy to open up for Q&A and then handing over to the moderator.

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Questions and Answers

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Operator [1]

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Our first question comes from the line of Bilal Aziz of UBS.

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Bilal Aziz, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [2]

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Just a few from my side please. Firstly, can you give a bit more detail on the way you see your slide in Netherlands and how these rate into more mature contracts with the wage prices of maximum or relatively more recent ones, and I come back to your slide, some issues of the year. And then what sort of action plans do you have? Secondly, you stated the 2 transformation programs are going on track, and you suggested other options in Europe. Can you update us where you're on European plans, either way we can expect an update on that.

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

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So Magnus here. The line is not entirely good or clear. So but I -- if I understood correctly, the first question was related to the contract in France and the U.K., please feel free to fault...

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Bart Adam, Securitas AB - CFO [4]

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Wages.

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Lisa Micaela Sjökvist, Securitas AB - Head of IR & Acting Senior VP of Corporate Communications [5]

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Wages.

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

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Okay, was it wage? Sorry, so I didn't hear that properly and transformation program in Europe. That one I picked up? Yes. Okay. So to the first question, when you're looking at France, there have been a number of regulatory changes. And the most significant one is the -- this is related subsidy scheme that was changed towards the end of 2018. And that has had quite an impact in the short-term on our price wage balance. And that is the main reason that we are behind in France when you are looking at the first 6 months and the current situation in France.

When we're looking at the Netherlands, there we had and basically been driving our price increase related activities together with the clients. And that is something that we planned in the second half of 2018, but then there was a collective labor agreement that came in at a higher level than anticipated. And also timing not fully anticipated. So that means that we're essentially behind the curve in the Netherlands. And what then happens is that there are customers and contracts where we have price indexation clauses, et cetera, which means that it does take some time until we're then able to recover. Yes. I think one follow-up question that you asked was then also, what are the kind of the actions? Well, obviously, this is very high focus for us within these countries. It is high focus in terms of what we're doing in the near term. While in some of the cases, there is also a certain lag impact, which means that orders now then obviously we need to look at how we're also recovering and also reestablishing balance as we go into 2020. And that is the same in France as it is in the Netherlands.

If I can comment on the second question that you had as well and that was related to the transformation programs. Yes, we mentioned when we announced the transformation programs on a global level related to IT and also then North America Business Transformation program that we are looking at Europe, and we have promised to come back in the second half. What we have concluded so far, is that a very similar program to what we do in North America did not make any sense from a return on investment perspective. Everything that we do has to generate a solid return, mid and long term. And the reason behind that is that the starting position is quite different. When you're looking at Europe, we have a presence in 28 different countries. And we have also less of a shared service set up in Europe between the countries and within the division compared to what we have in North America. So the starting point is quite different. But we continue with this. So under the leadership of our new leader for the European division since the beginning of this year, this is high priority, and we will come back with updates once we have come further with that work and also then to be able to communicate what is longer-term structured improvements are going to look like.

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Operator [7]

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

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [8]

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Following up on one of Bilal's questions, on the wage inflation point, if we think beyond France and Netherlands, are there any other countries globally where price negotiations are upcoming or ongoing, where you're now incrementally a bit more cautious? Secondly, on the IT spend, SEK 60 million or so outflow. When we think about the phasing of those, it doesn't sound like there's any change to the overall amounts of the projects. So I'm just wondering on the phasing or timing of the exceptional items. And thirdly, on the Ibero-America outlook or in the statement you talk about improper behavior by management, you're able to elaborate on what exactly that means?

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

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Yes, I can start with the third question. Maybe Bart, you can then handle, number 1 and number 2. And so when I look at the situation, I mean, from a Securitas perspective, our values, our code of conduct is always of the highest priority. From the comments that we have made we have also shared that we are conducting an investigation. And for that reason, we are not able to enter in more detail at this point in time. So I think -but that's something which is important. I should also highlight that even though Argentina is not a very big country representing around 2% of our global sales, significantly less than that of the profitability, our values are important, and we always then investigate anything which is escalated as well to our intention. So this is something that we will have to come back and inform when appropriate time. And also then, if we take actions, obviously, then we will assess what are the relevant actions to initiate. Bart, if you want to handle the first one.

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Bart Adam, Securitas AB - CFO [10]

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Yes, as to the wage inflation, so as Magnus pointed out, this is an issue that was affecting Netherlands and France for specific reasons. And Netherlands, I mean, they were a bit surprised, you could say, by the magnitude of the wage increase after so to say they had already initiated the price increases that was from a timing prospective, not very good. And in France, then it's more related to the CICE matter. In other countries, as you know -- I mean, most of our price wage increase has happened in Q1 and Q2 each year. So the majority of that work is now after ourselves. And we can say that on the other countries, we have a balance there. So that is clear as well now. So that is, I think, the answer to your question.

On the IT spend, when we announced these two programs we mentioned that we would make these capital expenditures and that we would so to say, along the line also take these items affecting comparability. But as to the savings and the benefits from that, that will mostly kick in as from 2022, actually, where we then expect the benefits coming in. We are spending the money now, and it's quite substantial programs, of course, and project and a substantial project that we're running there, both on the global IT side and on the North American Business transformation. And -- but the benefits will only kick in as of mostly then as of 2022.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [11]

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Just on the first point you made on the investigation. I appreciate you can't necessarily say what's happened, but would there be any financial liability further down the line that we should or need to be aware of?

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Magnus Ahlqvist, Securitas AB - President & CEO [12]

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Yes. So I think from my perspective, it's like I highlighted. We investigate anything that is being escalated through whistleblowers, et cetera. And so it's difficult to comment on the investigation, per se. When you're looking at the financial impact, this is obviously a critical question that we have been looking at as well. And you just have to think or put things in perspective there to look like I said, the size of the business in Argentina, it represents around 2% of our sales and significantly less than that of the operating profit. And so I think that is as much as we can comment on at this point in time.

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Operator [13]

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

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Chirag Vadhia, HSBC, Research Division - Research Analyst [14]

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Just on the margin contribution from the cost savings program initiated in 2018, could you give us how many bps that was in Europe? And secondly, on M&A activity in the U.S. We're possibly entering the market? Do you have any kind of view or take on how this would affect the U.S. market?

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

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You can take number one.

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Bart Adam, Securitas AB - CFO [16]

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Yes, as to the cost-saving programs in Europe, we announced that there would be a bit of a 2-year return on the investment there or on the costs that we incur in that program. So that would be a little bit more than SEK 130 million, SEK 140 million on an annual basis, once everything is implemented. The majority of those measures have been implemented. We have also said that there would be a little bit of investment as well into new people. So the net of that, we estimate it to be a bit more than SEK 100 million on an annual basis. And that has also been what we have mostly then been hit on a half year basis, of course, in 2019, now a bit less than SEK 50 million.

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Magnus Ahlqvist, Securitas AB - President & CEO [17]

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And to your second question about North American acquisitions. When you look at our business and our capabilities, we have a very strong team. We have strong guarding capability with significant scale. We have a strong electronic security capability. And this was obviously very much boosted by the Diebold integration back in 2016. We have further strengthened our capability and ability to deliver on a national, but also local level with the successful integration of Kratos. And then we have strong also corporate risk management and a number of other capabilities. So when I look at North America and Securitas, I dare say that there is no one that has anything similar in terms of strength of offering to the clients. And that is the most important for us. Having said that, we are continuously looking at other opportunities to further strengthen, then we are happy to invest in further strength. But this is really our basic view, when I look at the North American situation.

Built up a sizable platform over almost 20 years. And of course, we welcome any other professional people as well into the market. And it's a big market. There's still a lot of space as well.

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Operator [18]

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

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [19]

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Two questions, please. First of all, can you just tell us what the volume growth was overall for the group in Q2? And then in Ibero-America, would you be able to split out the Spanish growth, and the Argentinian growth if possible. Then on -- finally, on the margins in Europe. So I guess, the cost savings were probably about 10 basis points based on your comments, IFRS 16 was probably another 5 to 10. So clearly, the margins run backwards kind of organically. So you've given comments around it. But could you just check one point. So when you say in the statement that in other, you've got investments for Vision 2020, is that the data scientist teams who obviously work in Europe, and have presumed that the cost base would actually be within the European cost base, but that's shown in the other segment. Could you just clarify where those costs hit or, indeed, what division 2020 related costs are if that's not then?

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Bart Adam, Securitas AB - CFO [20]

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What was your first part of the question, Sylvia?

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [21]

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So first question was just volume growth for the group, if you can give that for Q2?

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Bart Adam, Securitas AB - CFO [22]

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Yes. I mean, in general, overall, we have commented before that we see normally price increases around 2%, across the cycle. And then if times are better now we see it more between 2% and 3%, and we have commented before that now we are even a little bit ahead of the 3% for the total -- totality of the group. So that is where we are in price. And then anything remaining is, of course, the volume change compared to last year, which is then consisting of both portfolio changes and potentially extra sales changes.

When it comes to Spain, Ibero-America, we do see very good growth in Spain. And that has been double-digit growth that we have seen and in -- so that is what we have. I think that answers your question. Then about the other costs. Europe is Europe, and what is going on in Europe there with a saving program that affects Europe. The costs we are incurring at the group level has basically not so much to do with Europe. Those are really investments that we are making, mostly in people then that are working with further strategy implementation for the entire group. I don't know, Magnus, if you want to comment anything to that?

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Magnus Ahlqvist, Securitas AB - President & CEO [23]

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Yes. So like Bart said, essentially strengthening in 2 areas. And one of those is in global IT. And the second one is in Intelligent Services or Intelligent Products.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [24]

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So the team payload that's actually sit in other as a cost item rather than in Europe. Just to be clear?

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Magnus Ahlqvist, Securitas AB - President & CEO [25]

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Yes.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [26]

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Yes. Okay. And for the IFRS 16 for Europe, that is about 5 to 10 basis points, in line with the group, is that fair?

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Magnus Ahlqvist, Securitas AB - President & CEO [27]

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Correct.

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Operator [28]

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Our next question comes from the line of Henrik Mawby of Nordea.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [29]

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Is it reasonable to expect that this -- sorry, the weak net portfolio development in Europe, explaining the step down in organic growth. In your view, are there any structural changes to the competitive environment? Or what do you think explains that you're certainly running into tougher portfolio development in Europe?

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

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Yes. So when we look at the contracts that we have lost, essentially guarding contracts, as a standalone guarding, it's difficult to conclude or I won't really conclude and say that it's more competitive, now, we always have to deliver good quality and value for money. Some periods, you win more and some you lose more. Now we kind of had a few significant contract losses coinciding at the same point in time. What's obviously important then from my perspective and for the team is that we are looking into as well and analyzing why have we lost them. It's always easy to say, we just lose them because of price. But there, I think it's customer-by-customer to really understand that situation and the specifics.

And then I think I would also comment that these contract losses, then obviously, we had announced 2 significant ones. One was the Swedish one, end of last year, and then a French aviation contract. All of those obviously now have full impact in the quarter as well. So there is -- but it's primarily related as well to France and the U.K. So it's not something that we're seeing as an issue all over Europe. It's really focused on those 2 key markets and guarding contracts.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [31]

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And is it reasonable to expect that this -- you mentioned a few contracts had sort of been stopped in the beginning of the quarter, and the impact was through the quarter. Then is it reasonable to expect that the negative impact on EBIT is larger in Q2 than what we should expect in the coming quarters, as sort of the initial ramp down cost is higher?

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

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I mean, the fact is that we have highlighted that the terminations took place at the beginning of the quarter to give an understanding of what is the impact. And then, I think you know the nature of our business as well, we're working fairly long contracts and extensive contracts and longer cycles as well. So I think that's all we can comment on in terms of these losses.

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Bart Adam, Securitas AB - CFO [33]

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And in these specific cases, they were not very much important termination costs, so to say. The ramp down costs were not very high, not very relevant.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [34]

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Okay. A couple of more questions from me, if I may. How should we think about your ability now to raise prices in France and Netherlands going forward? I mean, should we expect that you've done what you can and that this will be a headwind to expect in the second half as well? Or are there more contracts where you have still have windows to raise prices?

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Magnus Ahlqvist, Securitas AB - President & CEO [35]

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Yes. When you look -- if I generalize that we have a lot of emphasis on the price increase related activities in the beginning of each year. Now we're obviously end of July. And that means that in some of these cases, like I indicated earlier, the next major opportunity when I look at achieving a balance is done really with the next kind of annual cycle, because that is typically a way that it is working with a number of the clients and in the majority of the countries as well.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [36]

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And last one for me, coming back to the costs on a group level that you mentioned. It sounds like it's reasonable to expect that these costs are -- that they are structural cost increase to expect going forward as well?

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

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Yes, they are.

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Bart Adam, Securitas AB - CFO [38]

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Yes.

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Operator [39]

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Our next question comes from the line of Paul Checketts at Barclays Capital.

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [40]

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I've got 3, I believe. I just want to follow-up on the contract losses comments you just made. You said you'd like to go through and understand why you lost them? What was the outcome from that, if you've gotten it? And then the second is, are you able to quantify the collective revenue of the lost contracts? And the last one, can you give us the level of wage inflation that you're seeing in the Netherlands and France, please?

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Magnus Ahlqvist, Securitas AB - President & CEO [41]

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Yes. So on the contract losses, I think I got the question related to the French aviation contracts in the previous court announcement and that's essentially a contract where we have been delivering good service. But -- and also all indications that I have received and also experienced myself have been positive in terms of delivery. So that was then very much price driven. When you look at some of the others, we haven't gone through all of those, because this is an activity we take quite seriously to also feedback when we are not winning from the customers. One -- I mean, another one was a retail-related contract that where price was a very significant factor. And from us, obviously, we have -- I mean, we are investing in quality. We are investing in delivering for the long term. So sometimes it does happen that we are losing out to price. But this is something that we continue that work. I mean, I'm working quite actively with the team as well to get better understanding internally, but also directly from the customers.

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Bart Adam, Securitas AB - CFO [42]

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As to quantifying the collective revenue of the lost contracts, I mean, our organic sales growth has dropped from, yes, Q1 around, what was it? 4% to now 1% in the quarter. So yes, a little bit less than 3% of our total revenue in Europe, you could say, is then if you add up all these lost contracts that is, what it relates to. What was your specific question on wage inflation?

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [43]

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I just wanted to know what actual level of wage inflation you are experiencing in France and the Netherlands at this minute.

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Bart Adam, Securitas AB - CFO [44]

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In Netherlands, it's quite well ahead of the 3% we mentioned before, that is more on the 4.5%, 5% level. In France, I don't know exactly, but it's more related -- that the issue is more -- France is more average, but the issue is more related to the CICE subsidies, which have disappeared. So that is more the issue there, part of the CICE subsidies, which have disappeared, which are difficult to compensate for in the price increases.

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Operator [45]

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And our next question comes from the line of James Winckler in Jefferies.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [46]

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I apologize if Magnus you already touched on it, but just curious if you could give a little more color on the timing of the cash impact of the transformation programs, are a bit higher in this year because I believe there's like about $150 million from European restructuring programs to come in terms of cash cost in 2019? Plus any cash impact from, obviously, the transformation programs. Wondering if you could give a bit more color on how much cash impact do you expect in the second half from those out of expecting comparability. And then secondly, just based on growth. I think people were expecting a bit of deceleration based on some of the things you flagged, some lost contracts, some tougher comparables into the second half of the year. Current expectations are about sort of flat relative to first half of the year. Is that consistent with the way you guys are seeing current trading and the way you expect second half as of right now to unfold?

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Bart Adam, Securitas AB - CFO [47]

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As to the items affecting comparability. Yes, the cash flow impact is a bit higher, mainly then coming from the European transformation program, which is hitting cash right now in 2019. And all of that is, of course, also explained in Note 8 of our statement. We expect around the same amount give and take for Europe. And then all the cost that we should have in relation to the transformation programs that is mostly -- most of that will be actually cash flow.

And the second question?

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Magnus Ahlqvist, Securitas AB - President & CEO [48]

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Was that the deceleration of growth and view on the second half. Was that right, did I capture that rightly?

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [49]

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Yes. Just what's the current sort of median expectations are for sort of H2 to look similar in terms of growth to H1. I'm wondering if you can comment and if that's reasonable to expect? And how you are currently seeing current trading?

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Magnus Ahlqvist, Securitas AB - President & CEO [50]

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I mean, we typically -- we don't guide on the forward-looking periods. But if you look at some of these contract losses, when I look at Europe, its, I think, like I mentioned earlier as well. We're working with fairly long cycles. So obviously, this is the situation as we have it at this point in time, we look at the growth numbers.

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Bart Adam, Securitas AB - CFO [51]

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I think it's important to understand, of course, that we achieved now 5% in the second quarter on quite high comparatives from last year. So that is to remember. And then, of course, also important to understand is that in Europe, most of this effect hit the full quarter. So I think those are 2 important elements at least to take into consideration in judging the future growth.

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Operator [52]

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And our next question comes from the line of Aymeric Poulain of Kepler Cheuvreux.

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Aymeric Poulain, Kepler Cheuvreux, Research Division - Head of Support Services Research [53]

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My questions have been answered, so I'll be very brief. One question I had left towards on the retention rate coming down across the board. I was wondering if you could explain what was behind it. And also, remind us what was the retention rate on the Electronic Security Solutions segment? And here, why you see one security solution going up and retention rate going down? That would be helpful.

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Magnus Ahlqvist, Securitas AB - President & CEO [54]

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Yes. So when you look at the -- it's a correct reflection. And when I look at North America, we had 2 fairly sizable contracts that we lost at the beginning of this year. So that is the main reason related to 2 specific contracts. Europe, I think we have covered in quite some detail then some of the contract losses that we've had in France and the U.K., specifically. When I look at the other regions, I mean, sometimes, it's also a timing matter. We were obviously always working with retaining and developing existing relationships just as much as we are on new sales activity. And that could also vary a little bit between the quarters. When -- I think the second question that you had was then related to solutions. We see very clearly with all customers, where we have implemented solutions, we typically have higher customer satisfaction net promoter scores. We also then have higher retention figures as well. And that is typical. I mean, it's coming down to a few basic points. One is that we had designed the solution based on their risk and then it is really built for them, so addressing their needs in the best possible way, but also then that we have typically gone into a closer relationship overall and also then addressing the value for money equation as well. We were able to leverage technology to a greater extent, in combination with our people. So long answer to the second question, but the fact is that retention is higher on the solutions customers overall.

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Bart Adam, Securitas AB - CFO [55]

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I should add that, overall, we still see retention rates on the level of 90%, 91% in all of the business segments. So we still think that is on a healthy level. It has been very high, actually, 92%, 93% in some of the cases, which is very high. And now it has come down, to still, we think a good level.

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Operator [56]

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Our next question comes from the line of Mehrdad Bahador of Pareto Securities.

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Mehrdad Bahador, Pareto Securities, Research Division - Research Analyst [57]

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My question is regarding the lost contracts in the European markets. Was this mostly because of pricing or the quality of the service? And should we expect more of this going forward in the French and the U.K. market?

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Magnus Ahlqvist, Securitas AB - President & CEO [58]

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So when you look at this. I think I've commented or given quite some background. Some of those contracts, first of all, I mean, we look into this seriously with every individual customer, if we're losing not only when we're winning and keeping customers. So this is something important and that work is still ongoing. One contract, significant aviation contract, I mean, there I know for a fact, it was very much down to price because quality of services that was very good. Unfortunately, that happens sometimes. We had another one that I referenced earlier as well, which was more of a retail-related customer where pressure on price was very significant.

And then we also need to decide how do we also protect margins to be able to deliver the value and the quality to the customers in a sustainable way for the mid- and the long-term. Sometimes, we have to make that decision, sometimes, the customer would make that for us. But like I said, I mean, this is now few of those contracts then in the France and the U.K., coinciding at a similar point in time, but we are continuously working with our customer engagement, not only winning, but like I said, also, how do we keep and how do we develop by continuously then offering as well broad range of services and solutions to our clients, and that work continues.

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Operator [59]

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Our next question comes from the line of Miguel Medina of JB Capital.

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Miguel Medina-Sivilotti, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director [60]

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Just one question from my side. Each on the either America division. I understand that one of your -- one of the largest security companies in Spain has filed for creditors protection. My understanding is that the vast majority of the contracts are with public administrations. So I guess, they are of no interest to you. But my question is whether you think that the fact that you have had another security company, which mainly had contribution from administration going under might trigger eventually a change in how public administrations tender for security contracts in Spain?

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Magnus Ahlqvist, Securitas AB - President & CEO [61]

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Yes, my simple comment, I hope you are right because that is one important part. I don't want to comment on specific competitors, but there is no secret that there has been a brutal price competition when I look at guarding and on-site guarding in Spain. And that's something that we've had to tackle as well. What are we doing? Well, we are focusing and investing more for the last 6, 7, 8 years in terms of strengthening our offering and climbing up the value chain. And we do that because with a combination of technology and people were able to enhance the value, but also then be able to manage the cost because, of course, it is one very important aspect from a client perspective. We have to respect that. And then we try to optimize. It's easier for us, and we can do that with much better impact when we're leveraging our electronic security. And that's our way of working. And that is proving very successful in the Spanish market.

But to your comment, I agree with you, we are always promoting, paying our people well, investing in training and in quality, because that will be better for the clients, but for the industry overall, and very importantly, also for the people, because there is a terrible impact, of course, on the number of people as well, when you have these types of situations that you referenced.

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Operator [62]

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(Operator Instructions) Our next question comes from the line of Karl-Johan Bonnevier of DNB Markets.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [63]

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Just a quick question on technology solution. When I look at the geographic mix there, it seems that you have quite a different kind of growth momentum going on in your U.S. business compared to the European business for the moment. Could you elaborate on what's holding back development in Europe and what's driving the one in the U.S.?

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Magnus Ahlqvist, Securitas AB - President & CEO [64]

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I mean, I can start, Bart, maybe you want to fill in as well. If you're looking at electronic security, because we obviously have electronic security and solutions reported in one category. There is some degree of seasonality, when I look at electronic security. And we typically comment when there has been a significant impact then from one of the countries, maybe few specific projects as well. And that can vary over time. So I think that is, from an overall sales perspective, a key factor. The other one, which is not effective, but a focus area for us is, we are continuously working to drive deeper and higher penetration of solutions in the total portfolio with our clients.

And this is the focus we have across all the countries and areas and branches, regardless if we are in North America or in Europe.

So I think those would be the main comments. Anything else from your side, Bart?

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Bart Adam, Securitas AB - CFO [65]

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No, then it's a correct observation that, that growth has slowed down a little bit in Europe.

Now last year, we had a couple of larger solution contracts, really quite sizable. We have been working with the implementation also of those that has taken some time and effort. And now we are moving on again, but there should be no structural reason, so to say, why that should continue.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [66]

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And looking at Spain, you keep mentioning these, what you call more short-term kind of technology contracts. Is there any, say, change in the outlook? Or should we expect those to remain there also coming after the second half of this year?

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Bart Adam, Securitas AB - CFO [67]

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Yes, very difficult to predict. We have been saying from the beginning that they were shorter in nature in these contracts. But of course, as long as the need is there, we will service. And we will service that to the customer. So it's extremely difficult to predict from our side as well. We basically don't know. So if we would know more, we would probably tell you, but we don't know ourselves either. But they have been there for quite some time now. And it's still some day they will terminate, but that they have not, so to say, reached as yet.

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Operator [68]

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And our next question comes from the line of Carina Elmgren of Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [69]

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I have 2 questions. One is regarding the margin development in Spain, if you could say something about that? And also, if you see any changes when it comes to wage price balance in North America, changes since Q1 or since last year?

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Bart Adam, Securitas AB - CFO [70]

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As to the Spain margin development, we do not really provide detail -- details around the countries. But obviously, the margin has developed very well over the last 2, 3 years now. And it was well below group. At some point in time, it was well ahead of group average then it was well below group average, and how it has moved up again very good, and we're happy with that compensating and setting off also some of the difficult conditions we have had in Argentina. And then as to price wage in the U.S., I mean, also there, the general rule is still valid. Normally, we are around 2% price increases, wage increases. And then we have also been higher now, more closer to the 3% actually in North America, in the year-to-date. That is what we have been seeing. So we are trending there around 3% as well as we see in other places around the world.

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Operator [71]

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Our next question comes from the line of Steven Goulden at Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [72]

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Just in terms of the kind of higher level macro -- high level macro conditions that we've been seeing, just in terms of -- obviously, you've talked about France and Netherlands being quite challenging, but those seem somewhat idiosyncratic. Can you just give us a bit of a bit color on how you see the wider European market? And also, with regard to the U.S., you're just saying that you're seeing roughly 3% wage inflation. How are you seeing customers in the U.S.? Are you seeing any incremental signs of caution? Are you able to pass prices through? So high level macro things would be very interesting there. And then the second question I've got would just be on the security solutions, slightly slower growth I saw in Q1. But -- and within that, clearly, some inorganic. Can you tell us what the organic security solutions growth was for Q2? That's it for me.

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Magnus Ahlqvist, Securitas AB - President & CEO [73]

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So if you look at the macroeconomic conditions in Europe, I mean, now we've had tight labor markets, we commented on that for a number of years. And what then happens is that, well, obviously, retention becomes a challenge, but also then hiring becomes more challenging as well. So when we're looking at direct impact, if you ask the question, what does that mean in terms of our numbers for as well? Well there is a negative impact from that in terms of sickness, in terms of overtime, in terms of training. And there, I mean, we're seeing a number of significant basis point impact when you combine those across the different markets. And because it is more of an extreme situation now, so in a sense, more structural. What are we then doing about that? Well, when we are looking at price wage, we are also now kind of elaborating the price wage equation to also then include slightly broader perspective. And that is then to look at price, but then price in relation to production costs. Well, we then have a wider definition then the wage cost alone to be able to also reflect that, and to be able to also then work that through with our customers. And so I think those are the main points, and the main impacts that I would highlight in terms of the macro economic situation.

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Bart Adam, Securitas AB - CFO [74]

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When it comes to the Security solutions growth, in general, the real sales growth was around 12% and 4, 5 of that was acquired. So anything remaining then was organically.

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Operator [75]

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And the last question in the queue, so far, is from the line of Henrik Mawby of Nordea.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [76]

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We earlier discussed this in connection with Securitas, but I think -- or I know that in Europe, Northern Europe, there's been a lot of significant calendar effect in this quarter. Some companies up towards 3% on organic growth. I suppose, is less on Securitas, it always has been. Can you comment on how large the calendar effect was in Europe and the U.S. in the quarter? And also, can you comment on the dynamics of this in relation to EBIT?

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Magnus Ahlqvist, Securitas AB - President & CEO [77]

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There was -- yes, it's a short answer, Henrik. There was no significant effect neither on the top line or on the bottom line other than the same quarter last year, so to say. That answers your question.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [78]

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What do you mean by other than the last -- same quarter last year? There are more working days basically in the last year.

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Magnus Ahlqvist, Securitas AB - President & CEO [79]

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No, what I mean is that we have some seasonality in our operating margins from one quarter to the other. And then the second half of the year is normally a bit better than the first half of the year. But quarter-on-quarter comparison, there is no effect from the calendar of this year -- significant effects from the calendar of this year compared to last year.

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Operator [80]

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And as there are no further questions, I hand back to our speakers for their closing comments.

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Magnus Ahlqvist, Securitas AB - President & CEO [81]

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Okay. So I think with that, we will conclude the call. Thanks to all of you for joining us today.

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Bart Adam, Securitas AB - CFO [82]

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Thank you.