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Edited Transcript of SECU B.ST earnings conference call or presentation 7-Feb-19 8:30am GMT

Q4 2018 Securitas AB Earnings Call

Stockholm Apr 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Securitas AB earnings conference call or presentation Thursday, February 7, 2019 at 8:30:00am 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

* Andrew Charles Grobler

Crédit Suisse AG, Research Division - Analyst

* 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

* Fredrik Skoglund

* 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

* Matija Gergolet

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Mikael Löfdahl

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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

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Good morning, everyone, and welcome to our Q4 call. I'm happy to be here today with our CFO, Bart Adam. We will go through the Q4 results and the full year results. And then we will also talk about how we're accelerating the digitization of our company, provide you with a brief update related to the development of our intelligent products. And as always, we would obviously finish with a Q&A.

So let us look at some of the highlights of the fourth quarter and full year 2018. Q4 has been a very good quarter, with strong growth and profitability improvement. We have had good commercial activity during all of 2018. And the strong sales, together with solid customer retention, are the 2 main growth drivers behind 5% organic growth in the quarter and 6% in the full year.

And we should also note, we're very happy about the fact that we have good growth across all the segments, from North America, Europe and Ibero-America. And like in previous quarters, we have been successful in terms of balancing wage costs with price increases, and this is an important focus also during 2019.

We achieved 5.5% operating margin in the quarter, which a is 0.2 improvement versus last year. And on a full year basis, we improved the margin to 5.2%. And in terms of earnings per share, we had 12% improvement in real terms before items affecting comparability. So when you look at the overall momentum that we have as a company and the performance, we are doing really well and also carrying strong momentum going into 2019.

During the quarter, we also initiated 2 major transformation programs that are more forward looking and really then for shaping a stronger Securitas in the future. Related to these programs, we recorded items affecting comparability of SEK 187 million. And we will talk more about these programs later during the call.

And looking at cash flow, Q4 was decent, but we were not satisfied with the full year performance. So we have initiated actions to analyze the development and also then to take actions to improve as we go forward.

I should also note that the Board of Directors have proposed an increase of the dividend to SEK 4.40.

We have the best offering in the security services industry, and this is really the reason that we are also growing faster than the market. And we have a strong focus on continuously improving our protective services offering to our customers. And when you're looking at the sales of security solutions and electronic security, we grew with 21% in real terms during 2018. And I'm also really happy to say that we are progressing well with the integration of the acquisitions that we closed during the first half of 2018. I'm then referring, obviously, to Kratos in the U.S., Automatic Alarm in France, Alphatron in the Netherlands and a few other major acquisitions.

Let us now shift the focus to the performance in the different segments. First, let us look at North America. We have had solid growth in North America during 2018, and achieved 5% organic growth in Q4, and this is then despite high comparatives. We are winning in the market, growing faster than the market, and we have strong commercial activity that had continued at a high pace throughout all of 2018. And I should also note that we have solid client retention.

It is also a very good quarter from a profitability perspective. We have good leverage from the growth and solid performance in our risk management contributed to 6.3% operating profit margin in the quarter. And looking at the full year, we improved the margin from 5.9% to 6.1%. So when we are closing 2018, looking at most metrics, it is a very good performance by our North America team.

Shifting then the focus to Europe, we had growth of 3% in the quarter and 4% for the full year. And there was a slight negative impact from the continued reduction of refugee-related sales that had almost 1% negative impact on the growth in the quarter. But we've had very good commercial activity in Europe. Most countries, almost all countries actually, are contributing to the growth, but I would highlight -- would like to highlight good support from Belgium, Germany and our guarding business in Turkey that are doing all -- 3 are doing really well.

Shifting then to the operating margin. In Q4, we improved to 6.3%. And this is thanks to good growth and also improved cost control. The cost savings programs that we announced during the summer of last year is running according to plan and had a small positive impact in the quarter. But this turnaround, obviously, after a more mixed result in the first half in Europe last year, we are now strong, ending on a significantly stronger note going into 2019.

So let us then shift to Ibero-America. We had good organic growth of 14%, which was in line with the previous quarter. Spain is the main driver behind this development, with double-digit sales growth. And looking at profitability, we had a good development overall in 2018, but a weak Q4. And from an external perspective, it is a challenging operating environment in Argentina. But I should also mention that from an internal perspective, we have not been satisfied. And due to this, we have made some management changes and now putting an action plan in place to improve as we go forward. But we do expect some continued challenges in the operating conditions in Argentina in the next couple of quarters.

Spain, on the other hand, delivered strong performance through 2018. And our team in Spain have continued successfully drive conversion of contracted solutions but also, similar to the comments that we made in the third quarter results, we should note that some of these contracts are more of a short-term nature. But all in all, we have good momentum as a company, we're carrying good momentum into 2019, and are also very excited about the transformation programs that we're now initiating, but I'll come back and talk to those -- a little bit more about those after an update from our CFO, Bart Adam. Bart?

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Bart Adam, Securitas AB - CFO [2]

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Many thanks, Magnus. Good morning to everyone. Before we take a look into some further financial details to the quarter and the full year, I believe we can say that we added another good year to our track record. And these are slides that you probably also recognize from the investor update, and we believed at that time that we could reach sales on SEK 100 billion for the full year. And yes, here we are, so we did. And we can say that we have been on a steady increase of our top line since 2013 through a combination of organic and acquired growth.

When we move then to the next slide, moving to the operating income. Here we see that, that has also been steadily growing over the last 6 years, ending now for 2018 at SEK 5.3 billion with the margin then at 5.2% now, where, yes, back in 2014, we had an operating margin of 5.0%.

Then as to the EPS before items affecting comparability, that has been growing also over the same period from a bit over SEK 5 to now a bit over SEK 9, actually SEK 9.17. And I believe we can label this as a quite solid and sustainable development.

I think these 3 slides are, for me, witness to our position in the market that we have built over the long years. And while at the same time, we have been and will continue to prepare for the future.

When we turn now to the quarter and the full year and the income statement, and some details around that. As at Q3, I can mention that as of July 1, we have adopted the IAS 29 standard, and that is the standard that deals with hyperinflation accounting, and we have implemented that standard connected to Argentina. The impact on Securitas has also, as in Q3, not been really meaningful. There's almost no effect on sales and operating result and a small impact within the financial items line. And that is further commented under note 1 and 3 in the report.

Turning now to the numbers on this slide. As commented by Magnus, the quarter showed 5% organic sales growth and the full year ended on 6%. And, operating margin improved 0.2 in the quarter, and then 0.1 in the full year. And we are really happy with that development.

When we look at, then, the acquisition-related costs, these were quite high in the quarter. We also see that, in the full year, these were SEK 120 million compared to SEK 48 million last year. And from that SEK 120 million, there is SEK 80 million that relates to the Kratos acquisition in the U.S., as we also commented on in our Q3 report. I can say that, that for Kratos, the acquisition integration has progressed well and that in line with our comments made at the Q3, the integration costs related to Kratos now have been fully recognized. Not mentioned on this slide here, but I can also say that the integration of the Pronet acquisition that we have made in the summer now in 2018 in Turkey is progressing very well and in line with the plans we had made.

In the financial year then, in the full year, we had minus SEK 455 million of items affecting comparability, and that is now the SEK 187 million we booked in relation to the 2 announced transformation programs. And we had another SEK 268 million, of course, related to the cost-saving programs in Europe. I need to emphasize -- but Magnus will come back to that -- that the nature of these items affecting comparability is quite different. As I said in relation to Europe, this was a cost savings program, whereas in relation to the 2 announced programs now, this is forward-looking investments.

When we go further down in the income statement, you'll notice that our financial expenses are also quite high in the quarter. Included in this SEK 154 million here that you see is a one-off of SEK 40 million (sic) [SEK 46 million] related to Argentina. And that SEK 46 million is due to, well, as a result of the very high interest rates, we were confronted with very high interest costs on some interest-bearing debt items in Argentina. The interest in Argentina, as you know, has peaked to as high as 60%, 70% as of summer. And now we have settled and refinanced all of these interest-bearing debt items from Argentina, and we took the one-off costs related to this in the quarter. So this is a one-off effect of minus SEK 46 million that hits the quarter and that's why this is also totally [solved].

When we look at the full year financial income and expenses and we take away this Argentina one-off from the full year number, then we get to a run rate of about SEK 400 million for the full year. That is about SEK 100 million for the -- per quarter then. As mentioned before, there is a small positive impact from IAS 29. So the run rate, excluding IAS 29, is around minus SEK 105 million per quarter.

Then we take a look at the tax line. The applied tax rate for the quarter and the full year is 25%, and that compares to almost 40%, actually 39.8%, in the fourth quarter from last year and 31.5% for the entire 2017.

The 2018 tax rate has benefited from the lower U.S. tax rates based on the U.S. tax reform. As said also, the 2017 full year tax rate was 31.5%, and that included a one-off tax expense booked in Q4 of 2017 related to the same U.S. tax reform. Excluding this one-off tax expense, the tax rate was actually 28.4% in 2017.

Now, important to mention is that we have further assessed our tax base and the rates going forward, and our best judgment is that we will have a tax rate of 28.5% in 2019. And this increase is largely impacted from, basically, reversed effects from U.S. tax reform related to the so-called BEAT tax. So while the first year in the U.S. tax reform we benefited, in the second year, that has been largely reversed.

You then notice in the bottom, of course, a difference between EPS and EPS before items affecting comparability, and that entirely connects, then, to the items affecting comparability, as commented upon, and also to this one-off tax expense from Q4 2017 basically related to the U.S. tax reform.

Okay, turn to the next page, and then take a look at the effects from the different currencies. And here to the right on the slide, the foreign exchange rates in Swedish kronor are the quarter-end rates. And we see that both U.S. dollar and euro have strengthened quite a bit versus the Swedish krona at the end of Q4 compared to the same quarter last year, respectively, 8.3% and 4% up. The euro during the quarter was around SEK 10.2 to SEK 10.3 level after it had peaked to around SEK 10.7 in the third quarter. The U.S. dollar has been hovering around SEK 9 during the quarter, ending then at SEK 8.94 at the end. Our 12-month consolidated nominal results were, so to say, positively impacted -- affected from both the euro and U.S. dollar when comparing to last year.

The Argentina peso continued to be around minus 50% compared to 12 months ago. All in all, the net effects on the difference lines in the income statement can then be seen from the difference between total change and real change, and the effect becomes a bit bigger when we move further down in the income statement.

You note that, in the end, for earnings per share before items affecting comparability, the real change stands at 12% for the full year, and that has to be compared to our long-term target of 10% EPS growth.

So we then turn to the next page and take a look at the effects from the different currencies -- sorry, I'll move onto the balance sheet now instead. And we have a good cash flow in the quarter, as Magnus said, a decent cash flow from operating activities during the quarter. But we were not satisfied with full year. We suffered from a few negative effects, we commented on those also a bit at the Q3. Basically, you could say the DSO, the days sales outstanding, increased, and this was primarily in Security Services North America where the cash collection at year-end was below the plan. As commented before, we have an invoicing system change transition in The Netherlands, causing some payment delays and that continued in the fourth quarter. And then finally, the interest hike in Argentina is also causing some payment delays from our customers.

I should also add, of course, that the strong organic sales growth, especially in Security Services North America, resulted in increased use of operating capital employed, impacting then the cash flow negatively.

As said, we were not satisfied with the full year cash flow, and we will further analyze and work with the issue and see how we can improve this.

I shall also mention here that we now have prepared for the IFRS 16 implementation. IFRS 16 is a standard that deals with leasing contracts. In essence, as of 2019, all equipment that is leased today will basically be considered as capital expenditures in the balance sheet, so will be shown as fixed assets. And then there will be shown a similar debt item on the liability side. So, due to IFRS 16, the net debt will increase, but so, of course, will the EBITDA, and the EBITDA increases because some items that were previously recognized as expenses in the EBIT will now become depreciation and interest. And for Securitas, we estimate the increase of assets and net debt with each, SEK 3.4 billion. And I will come back to that also on the leverage effect.

Moving to the next slide. Then, we look here exactly at the net debt, and this stands now at SEK 14.5 billion, coming down from SEK 15.7 billion at Q3 and it was SEK 16.7 billion at the end of Q2. So quite some improvement here compared to Q2.

We started the year with SEK 12.3 billion. And the development since then reflects the development from the operating cash flow, as just explained. And then also we paid out a bit more than SEK 1.7 billion related to the different closed acquisitions. And all of these, of course, were disclosed to the market. And we paid also over SEK 1.4 billion in dividend.

The net debt was also impacted from the earlier commented foreign exchange development, as you can see here at the bottom, and that added SEK 758 million in translation to the net debt since January 1. Still, you see then here that for the period end to the far right of the slide, the net debt in relation to the EBITDA is still on a healthy 2.3, in line with our mentioned expected development. And we see here the development over the years, and that has been hovering between 1.9 and 2.4. And now, as I mentioned, at the healthy level also of 2.3.

Turning back to the issue then of the IFRS 16 implementation. We can see that the leverage then, that is net debt to EBITDA, will increase with about 0.2, so the 2.3 from year-end 2018 in a way, will, under IFRS 16, then become 2.5. So that is the effect of adding the SEK 3.4 billion we estimate right now to the debt, but also at the same time, of course, to the asset side.

Then going to the next slide. As we have been writing about, our Board of Directors has approved 2 major transformation programs. The first program will radically modernize our global IS/IT foundation and will create a global IS/IT organization as well. And this is about preparing for future development at the same time, and once finalized, the IT costs in the group is expected also to be reduced by some SEK 300 million upon completion in 2022.

The second program is business transformation in Security Services North America. And here, this is expected to positively impact the operating margin in North America. The operating margin is expected to be supported up to 0.5 percentage points by 2022, of course, everything else being equal. Related to these 2 programs, we will make some serious investments, that is, we will recognize as items affecting comparability approximately SEK 650 million. And then also another CapEx amount of SEK 550 million, and this will be recognized in the period 2019-2020.

The costs that will be recognized as items affecting comparability are mostly in impairment of assets that become obsolete with the implementation of the programs, some organizational restructuring charges but also then some other nonrecurring items. And with this, I'm happy to hand back over to you, Magnus.

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

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Thank you very much, Bart. We would now like to provide you with an update regarding these transformation programs and also to share a little bit about the early development of our intelligent products.

This is a slide that you have seen in our investor update outlining the strategic phases, so essentially where we're coming from, the strong foundation that we have, but also where we are heading. And I mentioned this many times before, we are in a good position. We have a strong foundation as a company, and we have good momentum. All of this has been built on what you see in the lower part of this picture, which is really our strong guarding capability. So we call that our guarding core. But then, in the more recent years, we have also developed the best offer in terms of protective services to our customers, and the ability to then integrate these services into solutions. And during the next phase, our ambition is to build on this foundation and become the leader in intelligent security.

So yesterday, we announced 2 major transformation programs. And the first is a group-level program, where we're working to consolidate, rationalize and modernize our IS/IT delivery. With this program, we are creating a global IS/IT organization where we are shifting from managing IS/IT in more than 50 countries around the world to creating 10 strong clusters and 1 global IS/IT organization. Other things we are doing, creating 1 collaboration platform, and we are also then leveraging shared data centers and cloud platforms to essentially build and modernize a higher IS/IT capability.

As Bart commented, we are expecting IT costs to be reduced by SEK 300 million upon completion in 2022. But it is also important that there are efficiency aspects of this and productivity aspects. But for us, when we're looking at our intelligent products and intelligent security, with data-driven intelligent security, to be able to drive that scale does require a solid and secure and also then scalable IS/IT foundation. And that is the reason that we are so excited about now really embarking and starting to drive this change.

The second program is a business transformation program focused on North America. And the objective here is to create a modern and integrated platform for people management, workforce management and finance. And this is very much about streamlining core operational processes, modernizing our way of working internally and with our clients. And from all the work and the pre-studies that we have done related to this, I think that one of the most important benefits with this program is that with modern tools and modern applications, our teams in the front line will spend less time on internal, more administrative issues, and we will free up more time to engage and drive development with our customers.

So this is a little bit why we call it the business transformation program, because it's really touching all the ways in terms of how we are conducting the business, but then with integrated platform, significantly more modernized and efficient tools, et cetera, we see an opportunity to support the operating profit margin improvement up to 0.5% by 2022 onwards.

And I just want to highlight, again, that there are clear efficiency and productivity gains to realize with these programs. But they are also critical to build the capability to develop and to launch new intelligent services at scale.

So if we then shift to the next slide, coming back and talking a little bit about intelligent security. For those of you who were with us at the investor update in September, we talked quite a lot about our intelligent security vision. And as we have communicated, we are working now across a number of different areas and with the development then of new intelligent products and services. And one of those is related to crime prediction. And I should say that we are now adding our first intelligent products to our portfolio during 2019. And it's early days, and these are the first steps, but we are very excited to now show you first product that we call Insights. And Insights is a good example where we are leveraging our size and access to relevant data to create higher value to our customers. So let us look at a brief movie to see what this is all about.

(presentation)

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

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Great. So as you can see in this example, we are now starting to leverage our vast amounts of data to create new products and better security for our customers.

And we should emphasize that it is early days, but from the friendly user trials during the last 6 months, I have seen the impact to the relationship and the dialogue with our customers when we bring this high level of knowledge and insights to them. And in the future, where scale and data availability are critical, we are uniquely positioned to lead the transformation of the security services industry. And it's also in this slide that you should look at the transformation programs that we are now launching.

And so to start to wrap this up. At the investor update, we also talked about what are the key focus areas right now. And we have a high focus on our customer value proposition. We know that we have the best offer in the market, but now also very excited to launch one of our first intelligent products. And we continue to strengthen our protective services leadership, and with these 2 transformation programs, we're really accelerating the transformation through modernization of our IS/IT capabilities and platforms to really build a different level of capability for the future.

So with that, we would like to wrap it up. I think it is quite clear from the graphs that Bart showed that 2018 has been a really good year. With strong organic growth and positive profitability development, we are delivering on our strategy in terms of solutions and electronic security, and we are now taking very important steps in terms of accelerating the transformation to lead the development of this industry in the future. So with that, Bart and I are now happy to open up for a Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Bilal Aziz from UBS.

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

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Just 3 questions from my side, please. Firstly, just a bit of more detail on the restructuring programs announced last night. Of the SEK 650 million, can you please help break out the level between cash and noncash charges. I know you've already suggested that a decent proportion will be impairment rather than restructuring. Secondly, and you've seen pretty strong margin momentum already through 2018 in North America. Can you describe how the increase in CapEx will translate into high margins in North America, which already is best-in-class? And lastly, on working capital, shall we read this increase in DSOs as a structural step up in the working capital requirement for large contracts? And what sort of mitigating actions are you willing to take for? I know some of your peers have started securitizing more and more of their receivables. And so what sort of actions are currently on the agenda?

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

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I can make a comment, and then hand over to Bart. First of all, I really want to highlight that these are not really restructuring programs. These are programs that we are undertaking to create stronger capability or basically have a stronger platform in the future. So they are more future and forward-looking programs that we are investing in now, to be able to accelerate the pace of change in terms of bringing intelligent products to our customers. But for some of the financials, Bart, I think maybe you want to comment?

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Bart Adam, Securitas AB - CFO [4]

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Yes. As to the cash, noncash, you can say largely SEK 200 million will be noncash items from the SEK 650 million you mentioned. As to the margin improvement in North America, yes, we have healthy margins in North America, absolutely, based on the scale of our business, based on the strong customer relations that we have been building over the years. What we are doing now is really modernizing and bringing the entire company, the 100,000 people, into a new scalable platform where we will benefit from modern technology, where we will improve and free up time for our branch managers to be much more effective in what they'll be able to do and how they can communicate with our customers. And we are quite sure that, that will deliver us additional margin improvement. We are well-positioned in North America, as said before. We have talked about that. We have there a very scalable organization. And this is then a further really good opportunity to further scale and take benefits from the scale that we have in North America and our customer focus as well. So that is the main items there. When it comes to the working capital, yes, that is also to some extent, of course, related to the fact that we have good growth in the U.S., as commented before. The U.S. is a business which uses a little bit more capital compared to, for instance, the European business. And especially, also the electronic security technology uses a bit more capital compared to the guarding business. So we have been investing further into electronic security and technology during the year in North America. We have benefited from high growth as well in North America. So that shifts the balance a bit further into -- further capital increase from then -- driven from North America. Anything you would like to add, Magnus? No? Good. So I hope we did answer your questions.

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Operator [5]

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Our next question comes from the line of Allen Wells from Exane.

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Allen David Wells, Exane BNP Paribas, Research Division - Research Analyst [6]

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Just a few for me, please. And just following up on a couple of Bilal's questions there as well. Of the, I guess, what is the total SEK 1.2 billion of P&L and CapEx charges, is there any way you can sort of help us in terms of phasing those charges between 2019 and 2020, just so we can understand sort of the structure of the cash flow profile over the next 2 years? Second question, if you can maybe just touch on the SEK 300 million of IT investment savings that you highlight. The language seems to allude to the fact that some of this might be reinvested in the future. Maybe you could talk about how much of that will be captured versus reinvested? And then maybe just on the question that Bilal asked on the receivables side, I think he was alluding to the potential use of factoring. Could you maybe disclose what level of factoring you have within the business and how you expect that to transition over the next few years, please?

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Bart Adam, Securitas AB - CFO [7]

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Yes. As to your first question, of the SEK 1.2 billion. So we have taken now SEK 200 million in this quarter. And then, of course, we have the SEK 650 million and the SEK 550 million, as we have mentioned. It's about 50-50, you could say 50-50 2019 and 2020, both for the items affecting comparability and for the capital expenditures. As to your last question, receivables and factoring, we use no factoring in the company, so that is -- I can be very clear around that. And we have no intention to use factoring either. Factoring is just another way of financing the company. Then, as to the IT/IS savings, yes, we -- so based on this program, we see SEK 300 million of IT/IS savings. And that will materialize. Along the journey, we see huge opportunity as well to further develop and invest into what Magnus showed, the intelligent products. And that basically -- some of that will be used for investing further into that, and that then will be operating expenditures. We haven't really decided how much. That will become clear during the journey and also on how big we further estimate the opportunity and how much we can accelerate around that. So I think I cannot give you a precise answer there, but I can provide you with our thinking around that.

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Operator [8]

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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 [9]

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Firstly, I just wanted to know what precipitates the North American business transformation? Why North America first and now? And what sort of thresholds do you use to assess the progress of these transformations? And secondly, just to confirm, is the SEK 300 million savings in group IT perpetual from 2022? And finally, what is the U.S. labor churn rate currently running at the moment?

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Magnus Ahlqvist, Securitas AB - President & CEO [10]

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I can start with the first question. When you look at this, this program is something that we have been studying the opportunity and the feasibility of this for quite some time. And we do have good momentum in the business, but we also have an ambition to also really transform the company and create a stronger company in the future. So when have been looking within the organization, how we are spending our time, where are we potentially wasting some time, how can we free up time to be more time with customers, et cetera, we have then basically looked extensively at all the aspects of the business in North America, and came to the conclusion that with an integrated platform we are now in a very good position to modernize and to create applications and tools that are really helping the business and helping our front line to a better job all the time. And a big part of that, I think I mentioned earlier as well, is that we are also then freeing up time -- less administrative, more time with customers -- but also with this platform, able to bring better services also to our customers. So this is also really building a foundation that is going to last us for quite a long time to also be able to enhance the overall proposition that we have to our customers. So North America, we felt now is a good time. We have good momentum. We are investing for the future to become stronger. And -- but this is obviously always done on -- based on quite extensive feasibility study, but also then we need to have good confidence, which we do, that there's going to be return on this investment. And that's really the context for embarking on that journey now. Do you want to take the other one, Bart?

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Bart Adam, Securitas AB - CFO [11]

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Yes. I think as to your -- the mentioned savings, the SEK 300 million, yes, that is perpetual than annual savings that then should continue after 2020 (sic) [2022]. And, as said before, some of that we will invest into further development of the intelligence services as well. U.S. labor churn rates, for the entire North America, they were around 63% last year and then for the full year around 68%.

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Operator [12]

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Our next question comes from the line of Matija Gergolet from Goldman Sachs.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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My first question is regarding the IFRS 16 impact. Could you be a bit more specific, please, on the impact that we should see at the EBITDA level, EBIT level and at the income level from IFRS 16? Second question is, if you can provide any guidance on CapEx for 2019 and if anything beyond? And thirdly, just a clarification on the tax guidance for the year. So I think -- so you're guiding for 28.5%. No, I'm not a tax expert, but basically, is the 28.5% more or less the new run rate that we should be assuming also for the outer years? Or is 2019 a bit exceptional from a tax perspective?

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Bart Adam, Securitas AB - CFO [14]

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Shall I start with the last question here? Yes, the 28.5% is -- we used be around -- if you remember, 2016, '17, we were hovering around 28%, 29%. And then we dropped down this year, because of largely the U.S. tax reform, to 25%. Now what happens in the U.S. is that there is the BEAT tax, the so-called BEAT tax, which is levied on foreign payments, is increased -- the rate on that is increased from 2018 to 2019. And that is then basically causing a reverse effect from the benefit from that we enjoyed, so to say, in 2018 that we largely reverse that effect going into 2019. So that is the big movements that we see. There are, of course, other countries as well, here and there, which lower and increase their rates. And then also, of course, our tax base moves as such, and some countries have more profit development than in other ones. So assuming all of that and taking all of that into consideration, then our best judgment is right now 28.5% based on what we see in 2019, and you could assume that, that is also the rate going forward, unless, of course, all the tax changes would start to apply then in the future from other countries or from the U.S., I don't know. Coming to IFRS 16. Yes, that is a tricky one. And there is some disclosure around that in Note number 2 in the reports. I think you will find a lot of details there. So asset -- on the asset side -- the main impact come basically from that we are renting out buildings today, we are renting buildings in our operations and we are also using leased vehicles. Those are the 2 main elements. And then when you, so to say, create the actual value of our future payments -- that is how IFRS 16 works -- then you come to that, those are worth SEK 3.3 billion, SEK 3.4 billion in assets. And of course, you have to recognize the same thing on the liability side, so that also becomes net debt. So that is how it works, the mechanics of that. What it means to our operating result, as some of these items will become -- so we now have an expense in our income statement, which will become basically depreciation on the one hand and financial items on the other hand. The effect on our operating result will be an improvement of a little bit more than SEK 0.1 billion. And then, of course, the interest will increase with the same amount, a bit more actually than SEK 0.1 billion, around SEK 135 million, we actually estimate, but still we need to go through the entire cycle, which we will do now in Q3 -- in Q1 when we for the first time will close under IFRS 16, but we want to give you that guidance already now. Yes, I think that is the best thing that I can say around that. And then, of course, as...

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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What is the incremental depreciation?

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Bart Adam, Securitas AB - CFO [16]

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Sorry?

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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What is the incremental depreciation? I'm having a hard time as you go through the Note 2, sorry.

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Bart Adam, Securitas AB - CFO [18]

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SEK 700 million, SEK 800 million, if I remember well. SEK 800 million. You also had a question on CapEx. But with the explanation I gave, what was your question there?

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Just what do you expect for CapEx for this year as a normalized CapEx? We get this is extra CapEx, I think, so basically your 2 transformational programs, but what is, let's say, the -- what would be your best estimate for the recurrent CapEx for the year?

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Bart Adam, Securitas AB - CFO [20]

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We commented that our normal run rate would be around 2% CapEx to sales. And that, now, you could expect will increase a little bit with the 2 mentioned programs for '19 and '20.

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Operator [21]

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

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Aymeric Poulain, Kepler Cheuvreux, Research Division - Head of Support Services Research [22]

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Two questions, if I may. The first is on the U.S. restructuring. If I understand correctly your explanation, it's mostly saving administrative time to reallocate the resource to commercial efforts. But in terms of the net margin gain that you estimate, 0.5%, how much is actually hard cost savings, and how much is actually dependent on that commercial success that you expect to get from this effort? Because I understand it takes about 3 years to achieve, so it seems that it's more conditional on the top line. In that regard, I was curious about your views on the organic slowdown that you see in Q4, especially as we continue to see some high inflationary rate for wages. I'm just wondering if you could give some color on the competitive landscape and what you see panning out for this year in the U.S. market? That's the first question. And the second question is on the European side. You already started a restructuring effort. Here we are talking hard cost benefit. Could you give us the exact number for the benefit in Q4 at the EBIT level and what you expect to be in 2019, please?

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

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Shall I start?

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Bart Adam, Securitas AB - CFO [24]

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Yes, good.

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

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We can -- I think when you're looking at the North America business transformation program, we are not breaking down the 0.5% in different components. But we do see that we have significant benefits from modernizing, significant benefits from harmonizing, also then to also get scale benefits from one integrated platform of systems, while at the same time then, with better tools, like we said, we also expect real savings in terms of administrative effort. While at the same time, when we do that, we would also be able to build better systems that will enhance the way that we're engaging with our customers and also the customer offering. So there's quite a comprehensive program, and that's the reason we call it a business transformation program. But we are doing well today in North America, so I also want to highlight this, that this is not really to address a fundamental problem. These are forward-leaning investments that we are doing to become stronger tomorrow. And that is also why we are very confident about the improvements that we're going to be able to derive while this program or after this program is fully implemented. And if you look at the organic sales growth, overall in 2018, we are growing, we believe, significantly faster than the market. We also had higher comparatives in Q4. And when you look then at the overall commercial activity, we have healthy activity in North America and coming into 2019 with good momentum, and so there is not so much to say about that part. One question that quite often comes up, of course, is also then wage inflation, how we are able to handle. Well, when you look at 2018, we have been able to handle in a very good way in North America. It's also more of a dynamic situation there with our customers, and this is something that our North American team have been very successful in doing and, obviously, also focused on continuing to be able to do as we go forward. And then in Europe, I think you asked some question also then about the specific impact from the -- basically the cost reduction program that we launched in -- that we announced in conjunction with the Q2 results. There is a small impact in the fourth quarter. The majority of the profitability improvement is coming from good commercial activity, top line growth and overall better cost control and with contribution from a number of the different units as well in Europe. So I hope that answers your questions. Anything else to add, Bart?

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Bart Adam, Securitas AB - CFO [26]

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No. Maybe to once more emphasize, these are not restructuring programs here. Different from the European program that you have seen at Q3, which was more a cost-saving program. These are transformation programs. But at the same time, I should also emphasize that the savings, the benefits, are quantified benefit. It's not like betting on hope or anything, it's quantified benefits line by line. And basically what it does, I mean, if 85% of your cost base is staff, this is really about improving and working more efficient with our staff base. And you can imagine that there's quite some improvement potential there, if you use new tools and modern technology in -- with this platform then that is scalable with 100,000 people at once. Yes, that was that.

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

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And maybe to add on some more flavor to that, I mean, we are digitizing the entire business. We have vast presence, we have a scale advantage. And with some of the first, even if they're early products, in terms of our intelligent products, we're really seeing that we are able to create and add significant value, leveraging our data and then obviously being smart about how we're processing that data to enhance customer value. And that is the reason that we are so excited as well about now being able to launch these programs, because with these programs, to be able to launch more advanced products at scale will also require a strong IS/IT foundation. And that has to be scalable. It's got to be solid. It's got to be secure. So we are really excited about now starting to make these steps to be able to then realize and also then really push the agenda forward in the next 3 to 5 years.

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Operator [28]

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Our next question comes the line of Andy Grobler from Crédit Suisse.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [29]

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Firstly just a question on depreciation. With the additional CapEx, but also a number of write-offs, what are your expectations for depreciation or incremental depreciation charges for the -- through the next couple of years? And can I just check, when you talk about the SEK 300 million EBITDA savings from the IT program, that is post any adjustments for depreciation? Secondly, and unrelated, what is the expected regional split of those savings from IT? And then thirdly, you've talked about SEK 450 million cash cost from the other items. What is this? Is it mainly redundancies? Or what type of costs are those going to be?

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Bart Adam, Securitas AB - CFO [30]

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Could you repeat, please, your first question there? I didn't really capture that.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [31]

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Okay, sorry. With additional CapEx, so the SEK 500-odd million over the next couple of years, there will clearly be higher depreciation charges. But you're also writing down some assets, which will lower depreciation charges. Can you just quantify on an annual basis the net impact of those 2 factors, please?

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Bart Adam, Securitas AB - CFO [32]

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Okay. Yes, on a net basis, as you -- as commented upon, the SEK 200 million noncash is then assets that we take out of the balance sheet and we will put SEK 500 million instead, then, that will start to be depreciated as of, yes, largely 2021 as we start to use then these platforms as well. It's a bit of an impact there, it's not a large impact at the same time. These things are amortized depreciation normally over 5 to 6 years over the lifetime and potentially even longer of some of the lifetime of these assets. Then you had -- we're talking about the SEK 450 million cash cost? Some of that is restructuring, but a large part is also when you do this type of transition transformations, you need people that help you with implementing those type of platforms and so on. And these costs can, under IFRS, not fully be CapEx-ed. That is why we take some of these costs then as well as part of the items affecting comparability, because otherwise, we would have to take them into the operating margin and then we would have to explain you all the time. So with this setup basically, we'll keep a very clean operating income statement where you can be able to follow the normal development of the business and then we take the other items as items affecting comparability.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [33]

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Just a quick follow-up. So, of the extra depreciation, so the SEK 50 million, SEK 60 million per year, when you talk about the SEK 300 million savings by 2022, that is post the additional depreciation charges, is that correct?

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Bart Adam, Securitas AB - CFO [34]

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That is post the additional depreciation, correct.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [35]

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Okay. And you didn't mention the regional split of those savings. And again, another follow-up, in terms of those implementation costs, are you bringing in external bodies to help you with this transformation program? Or are you doing this all internally?

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Bart Adam, Securitas AB - CFO [36]

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No. As I said, we are bringing in external people as well that help out with this transition. During this 2, 3-year implementation time, we are bringing external people, yes. What was your question there on the split of the savings?

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [37]

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Yes, so you talked about SEK 300 million savings from the IT program. Regionally, how do you expect that to fall?

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Bart Adam, Securitas AB - CFO [38]

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That is basically -- in large, we have today, 55 different -- we have 55 countries, 55 different IT organizations. Each of them having their own data centers. Each of them having their own setups. And that is what we will make global, and cluster that also in 10 clusters around the world and in 2 delivery hubs. And that will basically, if you move from 55 data centers to few ones, that is basically where the savings will come in. You will create scale that you don't receive -- that you don't benefit from if you do it just country by country. That is based on modern technology, cloud-based technology, based on also the communication opportunities that you have today that you didn't -- and the network opportunities that you have today that you did not have 3, 4, 5 years ago. And that is really where we will take the savings from. So data centers, network connectivity, but then, of course, we have 55 different IS/IT organizations today, which we'll globalize and bring into one organization, and that will create some benefits, of course.

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Operator [39]

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Our next question comes from the line of Carina Elmgren from Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [40]

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I have a question on the Ibero-America segment. Do you expect any impact from minimum wage increases in Spain in Q1 going forward? And also the internal challenges that you have seen in Argentina, for how long do you think you will have this?

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

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Yes. So when I look at Spain, there are increases in Spain and also in Portugal. We have a good track record in terms of being able to cover wage increases with price increases campaigns. And that is obviously something that we are at full speed with that work as well in Spain right now. I should also mention that a lot of the strength that we have in the business in Spain is related to being able to offer solutions. So we are also in a good position. One is obviously to manage the price-wage balance with price increases. But we are also offering alternative solutions to our customers, and that is also an attractive proposition when there is cost pressure potentially. Argentina, it is -- to your question, it is an externally -- it's a challenging environment. But we've also then not been satisfied with some of the things that we have done internally in terms of how we have managed the situation, so we have made some changes. And we expect that we're going to have challenging conditions in the next couple of months and quarters. But obviously, with strong retention, we, generally speaking, have a strong business in Argentina, and then trying now to navigate this as well as we can in the next couple of months and quarters.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [42]

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Okay. And then the new product that you're launching, the Insights, is this going to be, like, integrated to your security solutions going forward? Or is it separate product that you will sell? And how would, like, the business model and margins be affected? Could you maybe give us some more color on this? And also, how big a scale have you started this? And how do you expect it to ramp up moving forward?

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Magnus Ahlqvist, Securitas AB - President & CEO [43]

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So when we look at this, like I mentioned before, it is early days. The Insights product is very much a product which is then one of the products that we are building now, which is based on the ability to make predictions and to assess risk. And I always look at what are the pain points that we are addressing from a customer perspective, and is the customer willing to pay for the value. And that's -- obviously, those are going to be kind of the basic tests for a number of these products that we are developing. We have done friendly user trials of this particular product over the last 6 months. And I have seen significant improvement in terms of the engagement with our customers, the dialogue with our customers, when we're essentially bringing much better knowledge, leveraging our presence and our scale and our data in terms of assessing risk. But then we are now also working on the commercialization of this. So we will start to roll some of these products out during 2019. But then, like we mentioned as well, to be able to scale these products, we also need to upgrade our IS/IT platforms. And that is also one of the reasons that we are now really driving these transformation programs as well, is to be able to launch more digital products, intelligent products, at scale as we go forward.

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Operator [44]

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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 [45]

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I just wanted to clarify something really quick. First, with regards to the U.S. labor churn rate, you'd mentioned that it was 63% last year and increasing to 68% this year. But the North American one quoted in your annual report last year was 78%. So I'm just wondering what the discrepancy is here or maybe if I misheard. And then additionally, to the investment programs, as mentioned briefly in the press release, there's the potential to roll out a similar plan in Europe, and I'm wondering if you can give any color on kind of the potential magnitude of that. I know you'll update the next half, but any additional information you might be able to give? And if that's correct, then why is a similar program not being considered for Ibero-America as well and if there's any potential there additionally? And yes, I think that's it for me.

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Magnus Ahlqvist, Securitas AB - President & CEO [46]

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If you don't mind, I will start with the second question, related to Europe. We have seen and we are convinced, based on the study and the analysis that we have done in North America, that this will really help and modernize and really put us in a better position in terms of how we are operating the entire business. But that is the case for North America. In Europe, we are looking at that, but it's still early. So we're doing a pre-study and looking at the opportunity, essentially, to create the synergies and also then the improvements across the European footprint. But that's something that we will have to come back to at a later time, because it is early days for us in terms of assessing that. But one thing I can say is that we will only do and will only deploy that type of program if there is return on the investment. But we will come back in the second half this year with an update in terms of what we're concluding, if there is a feasible business case or if there is not. Bart, do you want to comment on the first question?

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Bart Adam, Securitas AB - CFO [47]

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Yes. As to the U.S. labor churn rate, yes, I should say that we have started to report on that because we felt there was a too big emphasis on that. It's not by just understanding the percentage that you can understand the whole development in the business. What I would like to say, though, we follow it also, of course, on different levels, and people are working with this on different levels, and there are different reasons why there is churn. But I can say that the churn has increased in U.S. from 2017 to 2018. And the number we referred to was a different type of metrics than the one we used to report to you, but it's basically along the same lines. The one we used to report outside was really the toughest one you could imagine, the most toughest definition that you can put on yourself when measuring churn rates. So that is the difference now with the other amount that we mentioned. But there was an increase in the churn rate, yes.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [48]

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Okay. And just on the first question, I was wondering if I just could get a comment on why or if a similar investment program is also being considered or at least discussed for Ibero-America, since it is being implemented for North America and considered for Europe. And then lastly, sorry, I'm just -- you put some incremental cash -- some cash outflows into the business over the next few years. Wondering if this has any sort of impact on your guys' M&A strategy, maybe being a little bit more cautious on where you spend money on acquisitions for the next few years because of this.

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

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Yes. So on the first question, when we say Europe, in that case, it's actually the continent of Europe and not our definition of Europe. So we're including Spain and Portugal in that assessment as well. We obviously have a global ambition. We're building for a global scale and capability, which means that we will look at all of these aspects. But Europe is obviously, from a size perspective and impact, the other really big important after North America. So that's the reason that we're focused on Europe at this point in time.

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Bart Adam, Securitas AB - CFO [50]

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As to the M&A question. I mean, we start from a very healthy balance sheet, has been healthy over the last years, and we manage that carefully, of course. If anything, we are -- our rating as well is really in a very good position, and if anything, it's more trending up actually, our rating, so we are in a very good position with our balance sheet. Yes, this will, of course, affect where -- it's around SEK 500 million this year, 2019, next year. But in the larger things, this is not a huge impact as well. So we will continue with M&A and carefully look after different targets. But we felt here that in -- we had a good 2018. We are starting off very well going into 2019. This is then about preparing for the future in '21 and '22, and we also believe we need to take those actions and support that from our balance sheet. So yes, this will affect a little bit the balance sheet. The starting point is very good in the balance sheet, and we will continue with acquisitions as well. And we have quite some leverage capability if we would come across a very good target.

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Operator [51]

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Our next question comes from the line of Karl-Johan Bonnevier from DNB Markets.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [52]

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We're keeping you busy for a long time this morning with questions. I just have a couple of clarifications if possible. Looking at the transformation program. So starting off with the SEK 300 million you're looking to save out of the IT platform. Could you give us some indication of what your group-wide IT cost is for the moment so we can get an idea for what kind of savings you are looking at from a total perspective, would be great. Then just clarification also on the -- your opportunity that you see for doing a similar program in Europe as in North America. Would you consider that, looking at the feasibility study, that you already have a more advanced platform in Europe to start with than you have in America, so you -- in the Americas, so you don't really need to do the same kind of action to generate the kind of opportunities you were looking at. And then finally, just on this French airport contract that's now going out as of Q2, could you just indicate if this is below average or higher margin than the average for the European operation?

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Bart Adam, Securitas AB - CFO [53]

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As to you first question there, to give you a bit of perspective of the cost base when we talk about the SEK 300 million savings. Actually, we are talking about a current spend which is a bit higher than SEK 2 billion.

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

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And to the questions related to Europe. Yes, you're right in the sense that in North America, it is obviously dominated by one major country, being the U.S. So we already today have a different starting point. And if you look at Europe, we have operated and we are operating, then, focused on -- very much on a country level up until this point in time. And it does vary as well, the maturity and the capability that we have with our different platforms in Europe, and that is one of the reasons that we're also studying this in detail. But I just want to highlight as well, we will only embark on that type of program if there is a strong business case. So that is an important point to make. Looking at the French airport contract, we highlighted that because of the size of the contract, it is a well-run contract that we've had. We don't really comment on specific margins, but it was not a low-margin contract. It's a contract that we would like to keep.

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Operator [55]

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

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [56]

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On Europe, it's a clear improvement in your margin trend sequentially. I think actually compared to the past 7 years, we've never seen that sequential improvement in the margin. Can you elaborate a little bit? I know you sometimes comment on large year-end adjustments and so forth. Can you elaborate on really what's this -- maybe also comment on how much of the savings program that is already kicking in, in this quarter and then elaborate around what you're seeing in Europe. Why is it improving so dramatically?

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Magnus Ahlqvist, Securitas AB - President & CEO [57]

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Yes. I'm glad that you also see the substantial improvement. We have had, and this is really going back a few years with the increase of the refugee-related business, when -- and there, we obviously fulfilled an important role. It generated quite a lot of extra contract sales. But then it was also quite a painful transition, transitioning out of a number of those contracts and that business when that was gradually being wound down. So I think that one issue that we've had, and that we also talked about in 2018, is that we had to take a tighter grip on our cost development. And when you're looking at a very simple level in terms of how we're growing costs in relation to how we're growing sales, we are now in a healthier position overall. But we also have good contribution from a number of countries. France obviously has been burdening significantly in 2018, but we have many other units that have been performing really well. So I hope that, that gives you a -- somewhat of a flavor. We've also had better commercial activity in 2018. The offer that we have, it does resonate. We have a stronger offer than anyone else in the market. So we have pretty good momentum as well, I believe going into 2019. Was there -- specifically to Europe?

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Bart Adam, Securitas AB - CFO [58]

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Yes, I think we also have a successful price-wage development during 2018, which was stronger in a way than the one during 2017. And that also helps the development, of course.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [59]

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But what I'm looking at here is the results of the -- this sequential trend from Q3 '18 to Q4 '18, which is a different world, really, when looking at the margin trend and development. Is there any -- or is it just the general view, you're driving in this more cost-focused culture and you see that your country managers are really pushing in another way to get cost out? Or is there any more tangible factors that are in play?

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Magnus Ahlqvist, Securitas AB - President & CEO [60]

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No, I would say it's more of a holistic view. I mean costs, obviously, like I mentioned before, we did have a period of transition that was fairly challenging. When you're looking at the margin development, that obviously starts with the gross margin and the pricing, and there, like Bart correctly highlighted as well, we've also had a stronger and more successful price-wage outcome in 2018 than what we had in the previous year. But then also -- I should also highlight that, between some of the quarters, we have a significantly higher share now as well of solutions than electronic security. So there will also be -- depending on different projects, there will be some variations as well and some more volatility than what we have been used to in the past. But the general picture is we are going in the right direction.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [61]

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Okay. And one last question. On the other segment, actually. The top line and the beat, that was specifically stronger than the market had expected. I know that Johnson & Thompson have been coming into the number, but that far -- came far from explaining all the deviation there. What is driving that? Is it FX? Or is it the generally very strong organic growth underlying as well?

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

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When looking at -- I mean, we're not talking so much about our Middle East and Asia region because they are, on a percentage basis, smaller. But part of the answer is coming from healthy growth organically and also some decent profitability improvement as well by our team in what we call the AMEA region. So that is really the main driver behind those numbers. I should also mention that a lot of the business there -- we are also benefiting from our global presence, and we're also becoming better in terms of now bringing our customer value proposition to customers that want the relationship which is then cross-border on a global level.

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Operator [63]

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Our next question comes from the line of Fredrik Skoglund from Länsförsäkringar.

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Fredrik Skoglund, [64]

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I just want to ask a little bit on return metrics. As I calculate, this return is 38% on the first program and 46% return on the investment in the second program. How much more can you invest in this, and also how fast? And if you could elaborate a little bit more on the longer-term return metrics for you going forward. And also if you, as the business is evolving more into IT, is changing incentives internally, more return on capital employed metrics?

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Bart Adam, Securitas AB - CFO [65]

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As to the return metrics, you have very well calculated them based on the amounts we provided. Yes, this is, of course, as we say, if you go from 55 IT/IS organizations to 1 global one, there is quite some good benefits that you could really achieve out of that, especially also by moving to the newer technology which is available today in terms of both networking and storage processor capability, and that is what we are really after here. So this is one clear pocket of benefits that we see. And then, of course, we have the North American one, where we have been preparing for this for quite some time now. I mean, we have worked with this for more than a year, looking into how should we do this, how can we do this. And of course, North America is the first place where you look at this type of things because you can scale them up quite fast. So that is how you get to these quite good returns for these 2 programs. As also Magnus talked about, we will have a similar exercise for Europe, but as you can imagine, that is a bit more sophisticated from the starting point, as you're talking different languages, different jurisdictions and everything else as well. So that -- and that is why we need to even look more carefully into that business case. And we will see at the end of the day, if we can come out with a very good business case, we will do it. If not, then we will do something else. We are here to make money at the end of the day and to make good returns, as you rightfully mentioned. And this will be the consideration, how fast can we get to these benefits, and also, of course, how much is needed to this to really build to -- further into bringing value to our customers by adding these additional new products that we have talked about. So that is also a consideration. How much do we need this type of transformation in relation to that ambition that we have there. So yes, I think that is what I tried to say here.

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

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Then I think the second question, if I understood you correctly, that was more, then, are we adjusting our incentive systems more than in terms of return metrics as we go forward. Well, that's not something that we are changing right now. We have quite a robust and good incentive system today, but obviously, continuously assessing if we need to make changes for the future.

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Operator [67]

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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 [68]

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Just a quick one here. I just wanted to know what sort of wage inflation you're seeing across the North America region, and in Europe as well.

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Bart Adam, Securitas AB - CFO [69]

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Yes. As commented before, our business has a wage inflation of around 2% on a long-term basis. And then in worse economical times, that will drop to 1%, and in better economical times, that will increase to around 3%. And that is where we are right now. We are around this 3%, both in North America and in Europe, basically, yes.

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Operator [70]

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Our next question comes from the line of Mikael Löfdahl from Carnegie.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [71]

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And I hope I am the last one out here. So first, one question on this program, again, or maybe a clarification. I think you got the question before. The IT savings, how will that be divided among the regions? That's one. And also regarding all these savings, I mean, full effect in 2022, but when can we expect to see the first benefits? Will it come already in 2020? Or will it be more like from one day to the other? And then the last question, in Europe, you spoke a bit about the CICE tax changes or the change to tax credits before in 2018, that was going to impact also Q4. Could you quantify that, and also what we should expect from that change as we move into 2019 now?

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Bart Adam, Securitas AB - CFO [72]

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As to the tax, basically, yes -- well, as commented before, this is largely impacted from the U.S. tax reform, where at Q4 2017, we had a revaluation of the deferred tax assets increasing then the tax line. And so that was a one-off. Then we benefited from the tax regime in the U.S. during 2018, and now there is a step-up again in the tax rate for the U.S. related to this BEAT introduction. And that is just how it will continue like this.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [73]

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I'm speaking about France.

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Bart Adam, Securitas AB - CFO [74]

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About France? Okay. Yes. The CICE is another component adding -- yes, sorry, the CICE is another component adding to basically the increased tax increase in France -- in the group, yes. It is also -- there is a part of -- as I mentioned, there are a few other countries as well -- and you rightfully point out that France, which also has an impact from the CICE, a different type of mechanism that they have introduced now in France compared to how it was before, affecting then the tax line, yes.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [75]

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And how did that affect the margin? Because it was a cost thing, so how did it affect the margin in Q4 in Europe, and how will it affect the margin going into 2019, when this tax credit is eliminated entirely or replaced by other...?

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Bart Adam, Securitas AB - CFO [76]

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So it affected negatively the margin in the fourth quarter because that was due, again, to the way the system was introduced. We had, during one month, no benefit in France from the system -- during the month of December, actually. And then this will be, as of 1st of Jan, 2019, there's a new system in place that will largely but not entirely compensate how it was before. And there will come another system in place more towards October, November in France that then will fill out a large part of the gap. But at the same time, we have embarked on a price increase in France connected to this change in CICE because this is not only affecting us, of course, it's affecting the whole industry. So we also are compensating that, then, the drop from the CICE, with price increase in France. Yes, I think that was that one. Around IT savings then, the split per regions. Well, I mean, North America is obviously North America. But you talked about IT savings. So related to that program, that will largely affect all of the countries around the world. But a bit larger effect in Europe, actually, from that. But it is spread all over the world, you could say, as well. So it's more or less equal with a little bit more effect in Europe. Yes, and then, of course, to the timing of those savings, as commented upon, we expect that the run rate will really be there by 2022 when that will kick in. And there will be some gradual impact in 2020, 2021. But really, the bulk of that will come more in 2022.

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

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Great -- so I think with that -- yes, did you have another comment?

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [78]

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No, I just said thank you.

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

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Great. So with that, I would like to say thank you to all of you. I think it was a bit longer than normal. Thanks a lot for dialing in. And just to wrap that up as well, we have strong momentum, and we're really excited about the next steps that we are now taking as a company as well. So thanks a lot to all of you.