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Edited Transcript of SECU B.ST earnings conference call or presentation 6-Nov-19 8:30am GMT

Q3 2019 Securitas AB Earnings Call

Stockholm Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Securitas AB earnings conference call or presentation Wednesday, November 6, 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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* Anvesh Agrawal

Morgan Stanley, Research Division - Equity Analyst

* Carina Elmgren

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* David Roux

BofA Merrill Lynch, Research Division - Associate

* Henrik Mawby

Nordea Markets, Research Division - Senior Analyst

* James Peter Winckler

Jefferies LLC, Research Division - Equity Analyst

* Mikael Löfdahl

Carnegie Investment Bank AB, Research Division - Research Analyst

* Steven James Goulden

Deutsche Bank AG, Research Division - Research Analyst

* Sylvia Pavlova Barker

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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

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Good morning, everyone, and welcome to our Q3 call. I'm glad to be here today, as always, with our CFO, Bart Adam, to go through the performance in the quarter and then also a Q&A.

So let us start by looking at the performance on a group level. We had decent growth in the third quarter, and we continue to grow faster than the market. At the operating income level, we have 5% real change during the first 9 months of the year. And the operating margin of 5.6% in the quarter is stable compared with last year, with continued strong performance in North America while the margin in Europe is slightly below last year.

As communicated with the Q2 results, we have a negative price/wage balance in 2 countries in Europe that are affecting the price/wage balance for the group. We are much more satisfied with the cash flow in the quarter and the first 9 months of the year, and the operating cash flow year-to-date of SEK 3 billion represents a significant improvement versus the same period last year.

Looking at the progress with solutions and electronic security, we had 11% growth during the first 9 months, and solutions and electronic security now represent 21% of our sales. And converting services to integrated solutions is important since we engage more closely with our clients and we deliver higher value. And so this remains an important area of focus for us as we go forward. And actually, this is also important from a revenue mix and a margin perspective.

We always like to show a customer reference case, and we will show a brief one right now. This time, it's from the annual Oktoberfest in Germany, where we deliver some integrated guarding and protective services. So let us play the video, please.

(presentation)

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

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Okay. So my apologies. Magnus here. We had a technical glitch in the transition from the video back to the call. But we'll now continue, and I hope you can hear us well.

Just to make a few comments about the video and the reference case from Oktoberfest that we just saw. I've had the chance to visit this client. And it is an impressive event by itself, but it's also a complex operating environment. While this is more of a guarding assignment, we are very proud of the services and the quality that we do deliver at Oktoberfest in close collaboration with event organizers and the local authorities.

And with that, let us now look at the performance in the divisions, and we start with North America.

We had strong performance in North America with 4% organic sales growth. Our 5 guarding regions, the business unit critical infrastructure services and very good performance from our Pinkerton team were the main drivers of the growth. And security solutions and electronic security account for 18% of the sales year-to-date.

We've had continued good profitability development in North America and an operating margin of 6.7% in the quarter. And once again, good performance across most areas of the business. Five guarding regions contributed, together with and Pinkerton and Securitas Electronic Security, to the margin development. So it's a solid quarter by our North America team.

Let us now then turn to Europe. Europe, we had good contribution to growth from Germany, Belgium, Nordics and Turkey, but the previously announced contract losses in France and U.K. had a continued negative impact on the growth in the division, and we recorded organic sales growth of 1% in the quarter. Security solutions and electronic security accounted for 22% of sales in the business segment in the first 9 months.

Looking at the profitability development in Europe. The operating margin was 5.9% in the quarter, and the margin was supported by the cost savings program in Europe, which is developing in line with plan. But we had a negative impact primarily from France and Sweden, and the negative price/wage balances in the Netherlands and France are affecting the margins.

Turning then to Ibero-America division. We had growth of 12% in Q3, and the slightly lower growth rate is primarily due to the reduction of some short-term security solutions contracts in Spain. But we have continued good development with security solutions and electronic security that are now representing 27% of sales.

The operating margin in Ibero-America was stable at 4.7% in the quarter, and the margin was supported by continued good development in Spain despite the negative impact from the reduction of some of the higher-margin solutions contracts that I mentioned a minute ago. So similar to the previous quarter, the margin was negatively impacted by continued challenging operating conditions in Argentina.

And with that, I am handing over to you, Bart, for some more details regarding the financials.

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Bart Adam, Securitas AB - CFO [3]

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Good. Many thanks, Magnus. So let's then look at the financial information to the quarter and the 9 months, and we start with the income statement here, as usual, and some further details to that.

As of Q1 this year, we have adopted IFRS 16. And as mentioned before, we have implemented this standard without any restatement of the comparatives.

There is a quite substantial negative net effect from IFRS 16 on our income statement. As mentioned here in the table to the upper right, on the operating result level, there is a positive effect in the 9 months of plus SEK 60 million, but then offset by a larger negative effect on financial items of minus SEK 111 million. So leaving then a net negative of minus SEK 51 million on income before tax.

When we then look at the items affecting comparability, we accounted for minus SEK 60 million as items affecting comparability in the third quarter. And that is then adding up to minus SEK 126 million in the 9 months. These items affecting comparability relate entirely to the 2 transformation programs we have in place, as we disclosed and talked about before. And as for our planning and in line with earlier comments, we expect to recognize around SEK 200 million of items affecting comparability for 2019 related to these 2 programs. The speed of this depends on how fast we can implement certain matters and when exactly we will incur those costs, but we are largely in line with our planning there.

The earlier referred total of SEK 650 million that we have been mentioning and talking about that shall be accounted for during 2019 and 2020 and potentially part in 2021 is still the relevant amount to consider. In Q3 last year then for our memories, we accounted for minus SEK 268 million as items affecting comparability, and that related entirely to the European restructuring program.

Then as to the financial income and expenses, we accounted for minus SEK 149 million in the quarter and minus SEK 438 million for the 9 months. As mentioned before, this number is negatively impacted through the adoption of IFRS 16, and such impact amounts to minus SEK 111 million in the 9 months compared to 9 months 2018. The additional difference then compared to the same period in 2018 comes from the increase in net debt, the increased U.S. dollar interest rates and then also U.S. dollar foreign exchange rates development.

Then we take a look at the tax line and no big news there. Our current estimate for the full year group tax rate in 2019 is still around 27.6%, and that is exactly the same as what we have mentioned before.

Still an increase compared to 2018 then, mainly due to reverse effects from the U.S. tax reform. And then there is a small -- in the bottom here, there's a small difference between EPS and EPS before items affecting comparability relating, of course, entirely to the earlier-mentioned item -- items affecting comparability.

Moving then to the next page, we take a look here at effects from the currencies. The numbers to the right are the foreign exchange and rates in Swedish krona measured at quarter-end. The U.S. dollar further appreciated during the quarter, ending then on SEK 9.78 from around SEK 9.30 to SEK 9.40 in the previous quarter, and that is more than 10% stronger then compared to Q3 last year. So a strong appreciation on the U.S. dollar rate.

The euro continued to hover around SEK 10.60 during the quarter and ended the quarter then at SEK 10.69. And that is a bit more than then 3% over last year. Then the Argentina peso stood out a bit negatively and took, after a more stable period, a new jump downwards during early August there, ending somewhat like 26% lower compared to the Swedish krona compared to 12 months ago. So some tailwinds from the U.S. dollar and the euro and some headwinds from the Argentina peso.

Due then to the combined effects from these different currencies, our quarterly consolidated income statement was positively affected when comparing to last year. So our nominal numbers got some tailwind then from the currency. These effects, as to -- we have seen similar effects in Q1 and Q2, actually.

In the 9-month period then on sales here, the total change was 11% and a real change of 7%. So there was a 4% tailwind from currency development, as seen from the difference. And we see a similar effect then, of course, on operating result level, total change on 11% for a real change of 5%, the difference being 6%.

As mentioned also at the earlier quarters when we compare the real change between operating income and EPS, we see there is some deleverage here happening in between the 2, and that difference is then entirely related to the higher financial items, mostly as a result of IFRS 16 and due to the higher tax rate.

Turning to the next page where we look at cash flow and the balance sheet. As mentioned before, the net cash flow is not impacted from IFRS 16, but some of the individual lines are impacted. We see in the year-to-date net investments of SEK 286 million, and that results then from investments of close to SEK 2.3 billion and reversal of depreciation of SEK 2.0 billion. And it shall be understood that IFRS 16 leases increased the investments with about -- more than SEK 700 million and then impacted the reversal of depreciation with close to same amount but a little bit smaller. So we could say that with IFRS 16, our CapEx gets inflated, and that is from around SEK 2 billion, which we mentioned before, to an amount of now around SEK 3 billion per year.

Then very happy to say that we saw a good, substantial cash flow improvement in Q3, adding also to the improvement we saw in the first half year compared to the first half year last year. And this year, we made so far SEK 3 billion in operating cash flow compared to SEK 1.3 billion from 9 months ago. And that is -- that SEK 3.0 billion is now, after 9 months, almost the same amount as the amount we made in the full year 2018. So a good improvement where we are satisfied with, we have worked with the issue, and we will continue to do so.

Then next slide, and we look at the net debt here, the net debt then ended after 9 months at SEK 19.4 billion, up from SEK 14.5 billion at the end of last year. And of course, there is a considerable impact from the implementation of IFRS 16, which made then a debt increase, reached almost SEK 3.5 billion by itself.

Then we paid, of course, a dividend. That was paid in May, and that is SEK 1.6 billion. And as you can see here on the slide also, the currency development also added more than SEK 1.1 billion in translation. And then we had acquisitions for close to SEK 400 million on the year-to-date. But as mentioned before, we had good cash flows coming in, so -- meaning that we also achieved a free cash flow then of more than SEK 1.8 billion after 9 months, reducing the net debt, and we are very pleased with that.

When you move to the right here, the net debt in relation to EBITDA is on 2.5, and that is measured after IFRS 16. As also mentioned before, IFRS 16 has a relevant impact on this ratio because the net debt fully includes the entire effect from IFRS 16, while as -- or -- 12-month rolling EBITDA still only includes now 3 quarters with the effect from IFRS 16. And we can add to that, that actually, we have a bit of a similar effect actually from the currency development. The net debt fully reflects the current currencies as well as the income statement is then taken on a -- yes, as the currency develops, so to say.

As to net debt-to-EBITDA before IFRS 16, that stands now on 2.3. And everything else equal, we shall see a further reduction then towards year-end. And then we move to the final slide here, where we have summarized the effects from IFRS 16, as we did in previous quarter. And I will refrain from any further comments. I think this slide is clear by itself.

So with this, I'm handing back to Magnus then.

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

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Very good and thank you, Bart. I will just make a few comments related to the strategy, and then we're going to open up for the Q&A in a few minutes.

But from a strategic perspective, and then always taking the longer-term view in terms of our strategy and direction, and how we develop our offering to our clients, this is a slide that I think many of you have seen a few times before. And when you're looking at the strategy, I think in essence, we continue with the work to strengthen our foundation, and that is the guarding, which is still the majority of the business that we have, and then represented in this chart by the arrow at the bottom.

But we're also continuing to invest, to be able to offer the best protective services and integrated solutions to our clients. And this is obviously very much related to the work that we initiated 5, 6 years ago in terms of combining more actively people and technology and integrating solutions for better value generated to our clients but also for us to start moving up in the value chain. And then looking beyond 2020, we have an ambition to lead the transformation of the entire industry with knowledge and data-driven intelligent services.

And we will talk a lot more about this during our Investor Day that we have in December. And I would just like to take the opportunity to welcome you to join us on the fifth of December either at our offices or online because there, we will have the opportunity to talk more about the strategy but also for you to meet some of the great leaders that we have in the Securitas team.

So to sum this up, looking at the first 9 months of the year, we've had good organic growth of 5%; real change, 5%; and stable operating margin of 5.1%. And the strategically important solutions and electronic security are now accounting for 21% of our group sales. And like I said, you see a place over here at the bottom on this page. I'm really looking forward to seeing you and hope that you can join us for the Investor Day that we have in December.

So with that, we are now happy to open up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is over to the line of Morgan Stanley and Anvesh Agrawal.

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Anvesh Agrawal, Morgan Stanley, Research Division - Equity Analyst [2]

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This is Anvesh filling in for Ed today. Just like 3 questions. First, you flagged some macro weakness in this statement, and if you can just clarify which geographies you're seeing that or is it across the board. And connected to that is, are the labor problems mainly confined to Europe or U.S. is also getting worse. And then second, if you can just probably comment on the management issues you had in Argentina. What's the progress there and if it's kind of -- if it's impacting the growth as well? And finally in Europe, the margins were helped by the transformation program. And maybe if you can just able to quantify the impact so we can assess the underlying trend in the margins.

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

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Thank you. So a few comments related to the macroeconomic situation. Broad lines in perspective, we see a continued good economic activity in North America. The reason that we make this comment here is it's more a reflection of the economic development in some of the key countries in Europe, such as Germany, where we're seeing that there is a significant slowdown. This slowdown is obviously happening at a time when unemployment is still very low, which means that we continuously need to work hard to attract and to retain people. But there is also underlying wage increase pressure as well. So it is also more a matter of saying that this is the situation that we are seeing now. Primarily then in Continental Europe, this is something that we need to watch and to manage. And historically, as you know, one -- and also now, one of the most important priorities is how we then balance wage increases with price increases, but we're also then actively as well promoting more solutions and electronic security to offer an alternative as well to customers that might be putting a lot of emphasis in terms of cost management.

You also asked a question about labor situation. Like I said, now we -- it is still a fairly tight market in terms of availability, and that is fairly similar picture still across most markets in Europe. We haven't seen that softening much in the last couple of months. North America is more of a dynamic labor market where there is also then less of an annual cycle in terms of wage increases, et cetera, and more dynamic short term.

The comments related to Argentina, it is still an externally challenging situation from macroeconomic perspective, and that is what we are referring to. We have also, as we have announced in previous quarters, also done a number of changes internally as well. So we're driving through these changes with new leadership, et cetera, and that is going in the right direction. But that is really the Argentinian situation. Argentina, another one I should also Highlight, It is about 2% of our sales and significantly less of the overall profitability. So the impact on a group level is not that big.

Bart, do you want to comment on the European margins and the program then?

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Bart Adam, Securitas AB - CFO [4]

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Yes. As mentioned earlier, the cost of the program is SEK 268 million on a -- for the full program. And we mentioned before that there was going to be a payback period of about 2 years. So if you divide the SEK 268 million by 2, that should be then the run rate of the savings once it is fully implemented. And we can confirm now that in Q3, the program was, yes, 90% up and running, so to say. So most of the effects are hitting then the quarter -- the third quarter as a run rate.

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Anvesh Agrawal, Morgan Stanley, Research Division - Equity Analyst [5]

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Okay. That's clear. And maybe just to kind of clarify on North American wage comment that you made. So as I understand, you were able to pass on the increases in North America not real time but with less of a lag than you can do in Europe because of the way the contracts work, right?

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

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Generally speaking, that is correct, yes.

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Operator [7]

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We are now over to the line of Steve Goulden at Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [8]

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Just a couple of points on the accounting and on cash flow. So firstly, the -- we touched on it earlier on, but the improvement in working capital, if you'd give a bit of an indication of what's going on there. My understanding is that was an improvement in collection. But that was obviously quite significant on a year-on-year swing basis. And secondly, sorry, could you just clarify the point around leases, CapEx and depreciation around IFRS 16? I wasn't quite sure that I picked up on that.

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Bart Adam, Securitas AB - CFO [9]

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Yes. Absolutely. So when it comes to the improvement in working capital, as you rightfully said, that is mostly derived from the accounts receivables. Last year, we commented that the situation was a bit negative. So this year, this situation is much better. We have been able to focus more on it again. And of course, we should also say that we are helped by the lower organic growth. Organic growth consumes some cash flow as well and working capital. So those are the 2 main factors, internal focus combined with then the lower organic growth.

I should say, though, that we see that there is pressure from customers on increasing their payment terms, and that pressure is still there. But we have worked more with that then, as I said, during the previous quarters, and we start to see some result from that. Just for avoidance of any doubt, we are not into any supply chain financing or into anything like that.

Then CapEx and depreciation? Yes, because of IFRS 16, the net cash flow there is not affected from IFRS 16, but some of the individual lines are. So basically, what you could say is that because now we recognize what was previously, for instance, a leasing of a car, now we recognize that as an asset, so as a CapEx. So we still continue to lease cars, for instance. But now instead of just being leased cars, they show up as an asset in our balance sheet. And that then is -- year-to-date, we had around SEK 700 million investments, so to say, this type of leased assets which are now recognized as a CapEx in our balance sheet. And hence, of course, the depreciation also increases from that. So that is the main reason behind the difference before and after IFRS 16. The -- everything, so to say, that was leased before is now a CapEx and sits on our balance sheet.

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Operator [10]

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Okay. So we're now over to the line of David Roux from Bank of America.

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David Roux, BofA Merrill Lynch, Research Division - Associate [11]

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Just 3 from my side. The first one, just coming back to the labor conditions in Europe. Can you remind us what time of the year you typically negotiate wage increases with your workforce? And then secondly, on solutions and electronic security. I think it was around 2014 when you mentioned that the company needs to spend about SEK 400 million per year to reach its technology goals. Is this amount sort of how we should think about the investment in technology? And then just lastly, on Argentina. I appreciate 72% of group. But given recent capital controls, are you able to repatriate cash out of the country?

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

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Yes. I can take the first question and maybe, Bart, you follow up on the last two.

In terms of the labor conditions in Europe, it is very much an annual wage and price cycle that we're working with. There are more collective labor agreements, significantly more compared to the North American environment. A lot of the preparation for this work is typically happening now. So as you -- a few months before you enter the year, and then the majority of that activity is in the first and the second quarter. So -- and that is something that we're working with and we have been successful and continuously with very high focus, of course, to manage successfully in any type of environment. But that is really the cycle when I look at Europe. So the majority in the first half of the year.

What that means, of course, is something we commented on in the second quarter, like in the Netherlands, for example, where we essentially then increased prices lower than the anticipated wage increase. And that then means that we are behind in balance in the Netherlands. But that also means that you then have to put full focus on recovering in the next major cycle, which is mostly done on an annual basis. Do you want to take the solutions cost commitment?

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Bart Adam, Securitas AB - CFO [13]

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Yes. So on the investments there in solutions, as you rightfully said, we said back in 2014 that we had about SEK 400 million needed for our technology strategy, but that was SEK 400 million on top of already an existing amount of some technology investments that we had already back then as well with our customers. So the run rate amount then was around, yes, SEK 550 million. Now we are trending a bit higher on that amount -- on the total amount needed, of course, as we are further investing into technology and the company has grown, so to say, since 2014 as well. So -- but yes, I think that answers your question.

On Argentina, we have no problems, so to say, on taking out cash from that country. There is nothing, so to say, that is standing out here as an issue.

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Operator [14]

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(Operator Instructions) And James, over to you.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [15]

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The first one, I was just curious about, from the European cost savings development moving to Q4 this year. Q4 last year was the first quarter where you started seeing benefits. So I'm wondering if year-over-year we should be expecting fewer, comparatively, benefits to the year-over-year margin next quarter. And if so, if you're able to quantify that. And then just lastly on the cash. I'm just wondering if you can give us any color on your expectations for the full year in terms of improvement of, for example, accounts receivable days or anything, just because obviously, the large inflow from accounts receivables stands out as quite unusually strong compared to overall what you guys have delivered on a quarterly basis.

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Magnus Ahlqvist, Securitas AB - President & CEO [16]

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Yes. So on -- thank you. So on the cost savings program in Europe, we had benefit of around SEK 75 million in the first 9 months. Expect similar run rate to that in the fourth quarter as well. So around SEK 25 million in terms of the positive impact, and that is going according to plan. Bart, do you want to take the question in terms of cash? Obviously, we don't make any predictions, but can we [answer]?

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Bart Adam, Securitas AB - CFO [17]

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No, but that -- I mean, yes, as you mentioned, so our accounts receivables and days have been reducing. It's the first time in a quite long period that we have seen a reduction actually year-on-year on the DSOs, day sales outstanding. So helped, of course, by the focus we had on it; helped by also reduced organic growth. That is just how it is. If organic growth is on a bit lower level, then that helps our accounts receivables. And of course, our entire plan is to keep this gain for year-end as well. And I do not make any promises there, but that is what we're really working at.

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Operator [18]

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We are now over the line of Sylvia Barker and JPMorgan.

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

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So a series of questions. One, North America, just understanding the slowdown sequentially. Could you maybe give any color around how that progressed during the quarter? So any indication of run rate or any indication of how price versus volume has done maybe in North America just to understand that move? And secondly, on Ibero-America. Was all the sequential slowdown due to the Spanish contracts? And is there more to come there? And then on Argentina, within that, is -- was there any sequential impact from Argentina? And could you just remind us how you actually treat the hyperinflation within the organic, just to be clear on that? And then finally, thirdly on European margins into Q4. So you spoke about the savings. How much of a drag is the French CICE reduction year-on-year currently? And how much better could that be sequentially into Q4?

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

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So if you look at, Sylvia, the first question related to the growth in North America, it is, like you highlighted, a little bit lower than what we see last year. We have a few contracts that we lost in North America at the beginning of the year and also are having a negative impact. I would argue that, that is more kind of seasonality. Sometimes, we win more than what we normally do. Sometimes it's the opposite. This was the situation now. Generally speaking, in terms of price/wage, North America team handling very well. And I think that is also reflected in the good performance that we have. Like I highlighted, the 5 guarding regions are strong drivers and contributors to the results.

When I look at the Ibero-America-related questions, Spain and the solutions contract, first of all, yes, there was primarily impact from a reduction in those temporary solutions contracts that we've had. And we expect a gradual decrease of those contracts over the coming quarters. But we're obviously working to mitigate some of that impact as well with new sales of solutions contracts.

I think the other question, Bart, do you want to cover?

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Bart Adam, Securitas AB - CFO [21]

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Yes. So as of first of July last year, we have adopted IAS 29, the hyperinflation accounting, for Argentina. And when we calculate there the key ratios, such as organic growth and will change, the impacts from the remeasurement is treated in the same way as currency change. So from that perspective, the organic sales growth is a similar measurement as we did before IFRS -- sorry, before IAS 29. So there is no, so to say, any impact from the remeasurement on how we measure organic growth.

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [22]

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Bart, sorry, just a follow-up on that. And so essentially, you would take off all the "excess inflation." And to offset that, I guess, and so obviously, you still have inflation. How much inflation, I guess, did you have in Argentina in Q3 on the organic?

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Bart Adam, Securitas AB - CFO [23]

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Yes. Just to be clear here. So the inflation adds to the organic growth. But then the remeasurement would mean that you reduce sales. The remeasurement, according to IAS 29, would mean that you reduce sales then for a certain amount because of this hyperinflation, and that the latter one does not affect then the organic sales growth.

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

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Overall, so the FX line in terms of a percentage or it involves organic (inaudible), sorry?

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

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It -- so again, the inflation, which is around -- in Argentina then, around 25%, 30%, that, of course -- because there, we translate that into price increases for our customers. So that is measured as growth. Either -- We have growth coming from 2 buckets, you could say. We have growth coming from contract growth, volume, and we have growth coming from price increase. As always, that is then adding up to organic growth. The growth coming additionally or negative growth coming from foreign exchange, that we take out from the organic sales growth calculation.

So in this case, we have not done anything else. The growth coming from portfolio change is included, the growth coming from price increase is included. But then IAS 29 makes you reduce the sales for a certain amount. That we do not consider in the calculation of organic growth.

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Operator [26]

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We are now over to the line of Carina Elmgren at Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [27]

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I have a question regarding Germany. You mentioned it's a country where you see the macroeconomic environment a bit softening. Would you then expect it to be more challenging to get the price hikes too, when you still see probably wages going up? And also, is it, as for many other European countries, then something that would happen in Q1 or Q2? And then, are there any other countries in Europe where you have a similar situation?

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

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Yes, thank you. When you're looking at this, we highlighted because it's obviously something that we're facing in the dialogue with our clients. They are now looking at a low or zero-growth environment and kind of near-term outlook. But at the same time, unemployment rates are very low. And there is, like I said, as well, increasing pressure in terms -- or a continuous pressure in terms of wage increases. This is something that we just continuously need to be focused on and need to manage. Historically, we have a good track record overall in terms of how we manage this, and that is obviously the ambition as we go forward. What is important, though, in terms of what we're driving internally with the team, but also then with our clients, is to also continuously offer solutions. And when we do that, we always have a good alternative to avoid too much focus on just price per hour and guarding-only type of services. And that is obviously something which is important when we enter these types of slowdown situation that we now have.

In terms of price increase, yes, similar situation to your question. Majority, typically in Q1 and Q2. But I would also like -- because I think we missed one question from Sylvia. You asked about CICE as well in the previous questions so I can just comment on that quickly. And we do see some improvement and recovery related to the phasing of CICE and some of the replacement measures in the fourth quarter. But I should also highlight that the contract losses that we have suffered in Q2 and in Q1 this year, we're obviously working hard to also get back to positive growth after those contract losses, and that takes some time. And that will also be an issue that we need to work with going well into 2020. So I hope that, that also gives...

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Sylvia Pavlova Barker, JP Morgan Chase & Co, Research Division - Analyst [29]

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It was more around the margin rather than the growth, I suppose. Because technically, if you currently have around 40% of what you used to get from CECI, maybe now you'd get -- maybe you will get more into Q4. But like sequentially, how much of an impact is that on the European margin, if it's material at all?

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

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Yes. So there is an improvement and some recovery in the fourth quarter in France, thanks to the phasing.

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Operator [31]

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Okay so we're now over to Henrik Mawby at Nordea.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [32]

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So coming back to the U.S. margin. It expanded 20 basis points year-on-year despite you having, if I'm correct, the 10 basis point margin one-off -- positive one-off in the comparison quarter. So to me, it looks like a quite strong sequential acceleration in the margin. Is that a correct way to look at it? And what are the main drivers behind the sequential improvement in North America?

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Bart Adam, Securitas AB - CFO [33]

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No, it is a valid observation that you make, Henrik. The -- we had last year, we had an impact of one-off impact there that we mentioned of around 0.1, in the quarter in North America. So based on that then, we have seen a further development now during the quarter of 0.2 year-on-year, which then would be underlying more like 0.3. But yes, I mean, what we are seeing is more of an underlying development still of around 0.2. I mean we are very happy with the development in North America. It's coming basically, as Magnus mentioned as well, from many different -- or different services and business lines that we have in North America, both from the guarding, the guarding regions from -- as well from electronic security, for instance, and solutions. So it's a good development. And the 0.2 we have seen is a really good trend. If you look also at the year-to-date, it looks more optically like it's 0.1. But actually underlying, it's also an 0.2 there. So that is really the number we have been seeing, and we are satisfied with.

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

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Okay. And two more questions from me, if I may. We have touched upon the accounts receivables in the quarter. That was a very strong release in working capital. Still looking at the level of accounts receivables to sales, to me, it's seems like you're still on a slightly higher level than what has been the historical average. Is there still further potential to get that down? And then the second question is on CapEx. I think we're on a new record level now in the quarter. To my understanding, that includes leasing-related CapEx that -- but also, some of it is related to the ongoing transformation program, I guess. Can you comment on how much is extraordinary in that CapEx line?

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Bart Adam, Securitas AB - CFO [35]

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Yes. So when it comes to accounts receivable and sales, yes, you're right that we do have, compared to historical numbers, still some higher accounts receivable. And that is coming from the fact that there is quite some pressure from customers on payment terms. And you could say, if you have -- historically, you could sell maybe at an average of 45 days, for instance, payment terms. Now customers are pushing that up. And then beyond the other side, are taking actions to try that to bring that down. Of course, we are also gearing up our negotiation capabilities and also the way we invoice, and things like that. So it's a tension there we try to manage with our environment. And this quarter then, we have had further focus on that, then of course, you get -- you go into a certain direction as well. And this is a good direction for us there.

On CapEx, yes, it is affected from leasing, of course. As I said, if we were, before, just leasing a car, that will now be shown as a CapEx. And that is one of the major things that we have quite some cars still used in our business. And that is then one of the items that then shows all of a sudden as a CapEx. As a general rule, as mentioned as well, we were trending before around SEK 2 billion. Now it's more around SEK 3 billion and after IFRS 16, which we are working with and accounting firm. The transformation programs, they affect a little bit, but not dramatically. So there's no dramatic impact there from the transformation programs.

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

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Okay. And just one follow-up on the working capital issue, there are longer payment terms. I suppose that you could take a general trend towards longer payment terms, you could use it as a competitive advantage versus smaller peers which might have less headroom in the balance sheet to actually support such an offer to the clients. Have you been using this as a competitive advantage historically?

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Bart Adam, Securitas AB - CFO [37]

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I would say not really. I also see that some of our peers -- and then especially if you refer to the smaller companies, also to say, happy to take on supply chain financing as well. So from that perspective, it's almost a little bit like a negative competitive matter. Because we do not want to take any supply chain financing. Our own financing is still much cheaper. And at the same time, of course, this is still financing. At the end of the day, it's financing. So it doesn't matter where it comes from. So we don't go into supply chain financing. So from that perspective, we try to be well-disciplined in this matter, knowing that there is a pressure from customers. So we also need to have some commercial flexibility. But it's a balance.

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Operator [38]

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Our next question, is that of the line of Mikael Löfdahl at Carnegie.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [39]

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Yes, most of my questions has been answered. But more general terms, if you look at the solutions and electronic security business, growth has clearly decelerated now compared to previous quarters. And the organic growth, I guess, in the Swedish -- sorry, in the European part is low single digits now. Meanwhile, the margins are not really improving, at least not the reported figures that we're seeing. And before, I think we got some explanations that growth -- there is growth paid in some countries in regards to this business and we will wait for the margin improvements to come and so on. But now with growth coming down, margins are still not improving in Europe. I know there's other things affecting here, but is it possible to give some more color on where are you in this process of increasing these type of offerings? And when will we see a margin impact from it?

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Magnus Ahlqvist, Securitas AB - President & CEO [40]

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Thank you for the question. This is strategically important for us, driving the solutions and technology, integrated solutions to our clients. Like you highlight, growth rate is a little bit lower. It's around 11% year-to-date. There is some seasonality in that. But I also have to say that our ambition is to do more. We have been driving this strategy now over the last 5, 6 years, we have learned a lot. It differs a lot still between divisions and also within divisions, either between countries in terms of the momentum that we have been able to build. But this is one critical area of focus for us as we are driving the transformation of the entire company. And I say that because we know, and we have a lot of proof points, that we're adding more value to the clients. We improve our margin on this part of the business. And we also have more satisfied and more loyal customers as well.

Looking though, also on the margin perspective, this, we keep on driving. I think there are some other factors that have then had a negative impact on the margin. And one of those obviously is that we have a significant part of guarding business, which is growing still at a fairly good pace in Europe, but that is also under continuous pressure. There is less differentiation, and we are more exposed from a pricing perspective. So I think that is one. And we do also continue to invest in the strategy to strengthen our offering and protective services for the mid and the long term. And that is something that also then has a kind of a mitigating impact. But the key question is, continuing to really drive solutions technology, this share of the overall mix as we are then shifting the revenue and the margin profile over time. And that is high focus for the entire team.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [41]

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But the follow-up here, is it possible to say something about -- I mean, during the last 5 years, in Europe, the margin is basically down. And during the same period, you have grown this business, which should be margin enhancing. And meanwhile, the macro environment has been fairly good up until, at least, recently, for you. So can you say something more about the mix and why the margins have not lifted?

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

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Yes. So if you look at it, the -- I mean, we are tracking the solutions and technology, electronic security progress every month and every quarter. We do it on a contract basis and then consolidated on a country division level as well. We have a lot of proof points that, that part of the business is really working. The 2 main factors that I would highlight, one is the guarding part of the business. That is, like I said, under continuous price pressure. And that is also an area where we're taking more of a granular view to also then make sure that we are protecting margins better in that part of the business, where I think we can do a better job. But we are also continuously investing in shifting the offering of the portfolio. So I would say those are the main drivers.

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Bart Adam, Securitas AB - CFO [43]

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Yes, correct, Magnus. Yes, I think that is what -- the main drivers...

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [44]

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In the last -- sorry, during the last 5 years, you have constantly said that you are managing price -- the price/wage balance, which, of course, is key for the guarding business. And the guarding business as such has enjoyed quite good times, both in the U.S. and I guess, at least in many parts of Europe during the last 5 years. So shouldn't there be any leverage from that business as well on the margins? So why is the margins down?

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Bart Adam, Securitas AB - CFO [45]

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So as you rightfully say, in U.S., we see those effects on the margins. And there, the margin is clearly driven from the different areas from the different businesses that we have. The issue is more in Europe, as you also mentioned. In Europe, as such, we have been managing price/wage, absolutely. When we have the price increases, we are able to pass them on, we will have the wage increases. We have been able to pass them on through price increases, except for this year. So in this year, this has been a little bit of a difference in Europe compared to the previous years. They're mainly coming from Netherlands and from France. So that is a difference there, which has not helped this year.

In other years, there have been a little bit of different reasons then, why the margin has developed in a certain way. We could, of course, go back into all those different years. But in essence, we do see some pressure in the guarding, as Magnus also said, when it comes to new contracts, renewing contracts, then we see that with some pressure on the pricing there. So -- and that is different from, of course, just passing on the wage increases to pricing. Then it's more about -- okay, you have a new contract and those contracts normally compete a little bit at sharper pricing compared to existing contracts. And that is what we see in the market, and that is what we have commented on before as well. That we have some negative effect there on our margins from those matters. Difficult to estimate all the time how big that affect us because, of course, it's coming from a large number of contracts.

But we also believe that there is an opportunity now that we have more, so to say. We have focused a lot on everything which relates to solutions, last year. And now we think with the strategy that we put in place, that is also, again, an opportunity to focus more again on guarding as such, and develop that business further with enhanced value for our customers as well. But more about that, probably, also to come in the Capital Markets Day. And then on top of that, we have had, of course, everything related to the refugee sales there, which blurs the picture quite a bit. Yes, I think that is my best answer to this one.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [46]

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Is that the -- just one more. On the -- does the 22% of sales that you report for this quarter, security solutions and electronic security in Europe, if year-to-date, on those 22%, do you have higher margins on that than the remaining 78%?

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Bart Adam, Securitas AB - CFO [47]

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Yes. The answer is clearly yes. Absolutely.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [48]

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I understand that you've had quite a significant margin pressure on the remaining 78%.

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Bart Adam, Securitas AB - CFO [49]

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Your conclusion is right. We have talked about before that we have, yes, around 0.1%, 0.2% margin pressure in that business.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [50]

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Okay. And now then the follow-up on that is, when you're now only growing by low single digits organically, is that deliberately that you're doing so in order to consolidate this part and to improve margins even further than? Or why has the growth come down as it has? And also the M&A strategy. I mean M&A has been an important piece to grow. That business has also come down, the M&A activities. That also deliberately so? Or...

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

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No. I would say -- I mean, the contract losses that we had at the beginning of the year, some of those, we definitely did not want to lose, to be transparent. If you -- so I think that, that -- but then at the same time, we also need to do responsible business in terms of all the pricing and the profitability, because we do invest in good quality and delivery of the services. And that's something that we continuously need to protect. So I think that will be the main comment related to the organic sales growth. I mean that is at a lower rate than what we would like to see at this point in time, and it will take some time to recover that in light of some of those contract losses then affecting us starting in the second quarter and the first quarter this year.

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Bart Adam, Securitas AB - CFO [52]

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But as to your question, is it a deliberate choice, so to say, to slow down the electronic security and solutions? No, not really. We really think this is this -- the future of the company. And we should have, and we want to grow that business further. So it's more like a temporarily, so to say, change or slow down a little bit in the pace. But the strategy is still there, absolutely.

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Magnus Ahlqvist, Securitas AB - President & CEO [53]

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One last comment before we move on, I think, is that we made a reference as well at the beginning of the year that we're also looking now actively at the European business, which has a different starting point than the North American business in terms of how we organize. We have 28 different countries, looking then at how we're able to create more synergies and scale benefit in the European operating environment for the future. And that's something that we will provide at least a brief update as well during the Capital Markets Day that we have in December, in terms of how we're looking at Europe now and also then at the next steps.

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Operator [54]

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So we just have a final question. And that follow-up question to the line of Steve Goulden at Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [55]

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Just a couple of quick ones. On the Spanish contracts, so you said here, the reductions of short-term security solutions contracts. So can you just clarify what exactly happened here? My understanding was that a lot of these contracts were signed in Q2, Q3 last year. So now we were coming up to the annualization impact. And therefore, you wouldn't have the same year-on-year. The same impact on the year-on-year growth rate, which is understandable. But have you actually lost some of these contracts? Is that having an impact? Can you just give us a bit more clarity on what exactly is going on there and what you mean? And secondly, on the tech solutions growth of 11%, are you able to tell us what the organic was in that?

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Magnus Ahlqvist, Securitas AB - President & CEO [56]

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Yes. So on the first question, we have been trying to be prudent about the contract in Spain because they have been more of a short-term nature. I think that we peaked about a year ago, with some of those short-term contracts. The majority of the business that we do is always longer-term contracts when we talk about solutions. And we see a reduction in the third quarter, which is the reason that we then highlight this as one specific point. And we're also expecting to see a gradual reduction in the coming quarters. And so that is really the situation related to the contract in Spain.

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Bart Adam, Securitas AB - CFO [57]

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On the tech solutions there, we do not really calculate the organic growth. But you could reasonably assume that the effect we have on total sales on currency is the same as we would have on tech solutions. That is very well spread. That business is very well spread over the footprint of our total business.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [58]

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Are you saying that the M&A impact of the total business should be thought to apply to the M&A impact of the security solutions business?

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Bart Adam, Securitas AB - CFO [59]

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No. No, that's not what I'm saying. What I'm saying is that the currency impact should be the same.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [60]

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What I meant was what is the M&A impact within the tech solution sales, i.e., what's the underlying organic.

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Bart Adam, Securitas AB - CFO [61]

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Okay. Okay. Okay. Now I follow your question. Yes. Well, if you add up the different parts that we have acquired, then you would notice that. Because most of the acquisitions we have been doing have been in the space of electronic security and technology. So that would basically be the impact there.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [62]

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Okay. And sorry, just to revisit on the short-term Spanish contract that you were talking about. Are you able to tell me roughly what parts are for growth? How much of the growth has been driven by those contracts? And then, obviously, that gives us a bit of an idea as those contracts roll off whether what we should be looking at and whether actually that provides for a very tough comp into next year even.

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Bart Adam, Securitas AB - CFO [63]

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No. I mean those were good contracts. We have not really specified the volume of that, and we prefer not to do that. But it had an impact. But it's -- yes, it's not the end of the world either. It's not dramatic either. So there is some impact in those contracts we could expect will reduce a bit. On the other hand, we have other contracts coming in, other business developing in Spain. So we are not too concerned about that.

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Operator [64]

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Okay. So that was the final question for today. Can I please pass it back to you for any closing comments at this stage?

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Magnus Ahlqvist, Securitas AB - President & CEO [65]

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Yes. Very good. Thanks a lot to all of you for your interest and for joining. Wish you a good day. Thank you.