Securitas AB (publ)

Alf Goransson - President & CEO

Srinivasa Sarikonda - HSBC Mikael Holm - Danske Bank Henrik Nilsson - Nordea Markets Andrew Grobler - Credit Suisse Carina Elmgren - Handelsbanken

Hello, everyone. Welcome to Securitas in our January to September '17 Interim Report.

As you shall, we'll go through relatively quickly the results and then allow for questions. We had a quarter, in summary, I would say which is pretty much in line with our expectations, our own expectations.

And the good news is on the growth side, we had a good growth in the quarter, 5% of organic sales growth which we are pleased with and [indiscernible] 4%. Good market dynamics in North America, gradual recovery of the portfolio in Europe as we have expected and said in Q1, Q2 but it's what we have planned for; so what is happening is more or less basically along the lines that we were expecting and that's why we were bridging some of the resources as well, as we have also commented in Q1 and Q2.

We see in Ibero-America, very good growth in Spain and Portugal where we're really taking market share and also taking advantage of a situation that one of the main competitors in Spain went bankrupt in Q2 and picking up some -- quite some contracts from that bankruptcy. In Latin America, Argentina is weakening, we have had -- it's a poor economy to start with.

Secondly, we've had number of reductions in some of our larger contracts, and then inflation is coming down as well which has an effect on organic growth. We'll come back to that in a minute.

Operating margin along with what we were expecting, in the quarter we were one-tenth below last year, come back to that for the divisions as well. 7% will change, cash flow kind of okay but still little bit weak, I'll be commenting about also little bit later and the strategy works and we continue to deliver on that.

So here we have the numbers and I think I'll just flip straight into North America. Very strong market dynamics in North America, very strong interest among our customers and potential customers of our strategy, how we are really ahead of every other guarding [ph] company when it comes to be able to offer security solutions and electronic security in North America and that simply, that strategy allow us to win contracts.

And then on top of that we had some extent of support by the hurricanes in September that gave us a little bit of extra sales, almost 1% on the top line but still we're growing well. In North America, I mean we are growing 6% in the quarter, when we looked on the number of guards employed in the Q3 compared to the equivalent quarter last year, it's basically the same.

So when you look on the number of people for the last three to four months I will say, it has not really very slow growth; and then, but still the market is growing including price adjustments in the range of -- I will 3%, 4% still. But even -- and the reason for why we have is slowdown when it comes to number of guards is because it's the shortage of labor in a number of places.

We think this is of a temporary nature because the market -- the companies will adjust, they will either improve our recruitment processes or increase the wages better than we have done in the past and then try to manage the situation. So we have a bit of a temporary, let's call it a slowdown on the market because of the shortage of labor.

I think this is a temporary situation, my expectation is that the market will continue to grow in the 4% range next year, as well as is basically is doing this year, little bit less because of a slowdown in the last three/four months because of the shortage of labor. That also means that we will see more wage inflation going forward the next year in North America but I will be certain that that will happen.

We feel very confident that we are able to mitigate that and compensate that by increasing our prices to the same extent that wage will go up, so -- but in any case, we will see more of wage inflation in the year to come. Margin, good development, 6-2 [ph] in the quarter versus 6 last year, so two times improvement, impressive and well done, very strong team, very good performance by our North American team and very consistent in delivering improving margins overtime.

So we're very pleased with the development and the good momentum even North American market, both from a top line point of view but also from a margin point of view. In Europe, we had a sales growth of 2% in the quarter which we were pleased with given still difficult comparatives of roughly related business and some large contracts which I guess you have heard about many times by now.

So -- but given that with a good 2% in the quarter, we are sort to say putting in -- so we can see a recovery of our portfolio of business. When it comes to the margins, we have now made the adjustments over the -- the part of our over capacity, one part we kept and one part we adjusted there; adjustments are now made by the end of the quarter so we now have the right structure when we enter Q4 in relation to -- and imbalanced with the expected market development.

So I think we made the right choices two quarters ago, beginning of the year to breach this situation because we still see a recovery of the portfolio and we now have made the adjustment necessary but not -- we've didn't [indiscernible] made mistakes, I mean we had to rehire people, so we bridge that in a sensible way, we suffered a little bit a few quarters on the margin but I think we are now well positioned to have the right -- so we have the right balance between cost structure and the expected market that we see going forward. The European market is growing this year in the range of 2% to 3%, probably closer to 3%, even 2% and are basically in the same level the next year.

So very strong macroeconomic booming economy Europe, I will say in general. So we have -- it's a good market situation, good macroeconomic status in Europe.

In Ibero-America, good growth again, Portugal and Spain, Spain growing in the 6% to 7% range which is very healthy in the market which is growing 1% to 2% but that's very much because we are picking up those projects but came from the bankruptcy. But also growing well in electronic security or solutions as well and Spain are using that as a very strong weapon in the markets outside.

Even also Portugal with good growth in the third quarter and the first nine months. Argentina will see a declining inflationary trend, that is basically good news for Argentina but it means less organic growth because inflation becomes organic growth.

And then we have had a number of contract reductions in -- and to some extent terminations also in Argentina in a slow macroeconomic situation in Argentina. So that means that we will see -- I mean the numbers that we have been used to over the 13%, 14% organic sales growth in Ibero-America for a while now will be less for sure in Q4 and onwards; at least as long as the situation in Argentina is as expected right now.

On the margin side, flat compared to last year in the quarter, 4.2, still then burdened by the restructuring actions as we are taking in Argentina in the quarter which is 20 basis points, 0.2 times; and we will probably have in the same range in Q4 as well burdening Ibero-America in the coming quarter. And Peru has been fixed now, so now we make money in Peru, so that should not be an excuse going forward.

Good development in Spain, should also be mentioned. Cash flow was on the weak side, July was good, August was good, September was good, at least to start with but in the -- as the month was ending and the quarter was ending on a weekend, there was a number of payments that flipped over to the first week of October so cash flow was very good in the first week of October, that of a normal but the last week of September was worse than normal.

So we are not happy with that, it's bit disappointing cash flow in the quarter but the money was not lost, it just came the week later basically, that's what happened. So -- and we don't put too much focus on the quarterly end when it comes to the cash flow point of view, we put a lot of focus on the year end and as a year end, it's also ending on a weekend, then we are now taking all possible actions in order for us to pick up what we should have had in Q3 to pick up that in Q4.

So I expect still Q4 to be good and the year to be good, and we should have a very strong cash flow now in the last quarter and we are really on top of that. Net debt, pure mathematics, little bit helped also by the translation differences, the effects, so no drama there, and the strategy you know, very well, so I'll skip that for now and allow for questions.

Any questions will be welcome to, we will try to answer those as well as we can. Please go ahead.

Hi, this is Srini from HSBC. A couple of questions from A plus on North America.

With percentage of the growth was from pricing and from volumes, please? And do you see the 5% growth in North America which is excluding that 1% extra sales to be sustainable?

And second, on margin improvement in North America; what -- how many basis points improvement was due to extra sales and how much due to improved sales? Thank you.

On the pricing and let's say volume base, I mean, we have -- I would estimate that we have price increases in the range of 2% out of the 5%, 6% that we are growing, so to say. If we take the year-to-date number, in North America we have organic sales growth of 5% and that's how I will say about two of those would be price related and the rest is positive re-exchange.

So -- yes, I'm just checking if it's the right thing, but I obviously did, I have my colleagues here in the room and they're nodding now, so I did not make mistake; so it's confirmed. So -- yes, so about two out of the five I will say are price related, so we have a positive net change in the portfolio.

What is sustainable growth, I mean I don't want to make a forecast, the market is good, I'm saying short of 4% this year, probably 4% security market growth next year. Of course, a larger part than historically is right now coming from price and less from number of guards I would say, especially last three/four months has been basically 0.5%, 0.8%; if you look on the BLS statistics.

So a larger and larger part will be driven by price, this year it's relevant to SIVAT [ph] and also for next year. But what will be a sustainable growth for us, I don't want to give a forecast, our ambition is as always to grow fit faster than the market average which we have proven that we are able to do in the last three to four years I will say, basically consistently.

So we continue with that ambition but I don't want to make a forecast for the coming quarters in that respect, that will be wrong or me doing that. And then on the margin, the extra sales from the hurricanes effect has a minor effect.

We've mentioned it has a minor effect, so the main contributors to the margin improvement is the fact that we have a good development on the electronic security sales and contracts related to that, solution contracts and the leverage from the growth, most of it -- they are absolutely the key factors.

I understand. One follow-up on number of guards; you're certain they are stable compared to last year Q3 and that's mainly due to unavailability of talent in the market.

If you start hiring more number of security guards in coming quarters, will there be a margin prior?

No, I don't think so. I think, I don't think so.

I mean, we are well equipped to doing that, we have a high turnover of people, so that's nothing new. We have not had any difficulties with shortages, we have been able to manage and I think we've proven 6% growth when the market is probably more or less half, I think we're doing well.

And -- but we have what we will have, the big factor going forward that we're discussing a lot is the expected wage inflation; so we just need to be on top of that all the time and don't get behind so that we really make the adjustment to the prices at the same time as we increase the wages, and we will; I mean that is clearly our target to do that and we normally manage that extremely well in North America, we rarely get behind on that and the macroeconomic situation allows to do that because this situation with shortage of labor is affecting not only our sector but many sectors and I think many of our customers face the same matter simply, so we're understand it's there.

Got it, thank you.

First, a question on waging inflation and there has been a lot of focus on North America but what would you say about Europe, what kind of pricing do you have in organic growth I guess for Europe year-to-date and do you see that accelerating during the year? That's the first question.

Yes, you could take that first.

Yes, I mean we see a similar pattern. In Europe, I will say in the range of about 2% would be my estimate if we take in the European division what is the price -- sorry, the wage inflation, more or less that's the status.

I think we will see more wage inflation next year than we have seen this year. The pattern is pretty similar to North America, the macroeconomic situation is, there is good understanding, short [indiscernible], not everywhere but somewhere and customers have the same understanding of the situation.

So I feel confident that we are able to push-through the wage increases in our prices also for next year.

And a follow-up on that, if you see -- I mean higher wage inflation in 2018, both in Europe and North America, wouldn't it affect to have an outlook on the market growth being slightly higher than we have in 2017?

Well, I mean that could be -- I don't want -- yes, it could be the case. I mean the drawback is, if -- do we find labor to the same extent that the market -- is the market finding labor and while we and the market are refining labor to fill the gaps and that we have seen now in the last three/four months but it has had a hampering in North America.

So I mean, we can speculate with that but if we're optimistic it will probably be more than what I said and if we are more realistic maybe I'm still on the right level and if we're -- so, yes, it's hard to say. I mean we're making the estimate, what I'm trying to say is that in conclusion or on the big -- the big picture is that we think that it will be a very good market climate also next year in the security market in Europe and North America.

And my last question is on the -- this transformation to more security solution, electronic security, obviously a big part of the equity story but still, I mean looking at the report the only thing you mentioned is that it's growing at a good pace and becoming a larger part of total group sales. Could you elaborate a bit more on, I mean what kind of growth trends are we seeing?

Is it a slowdown from last year in organic terms as this business becomes a bigger part of the group? So some more flavor on that development.

I mean we have a very good pace, a good organic growth. The base increases of course to keep the same percentage every year, it will be more and more difficult as the base increases mathematically.

But still a good pace, we're pleased with the pace, it's a long reliance we expect, we see margins are substantially higher when we sell solutions and when we sell a traditional guarding contract, that mathematic still works, it's supporting North America in the quarter and year-to-date. In Europe, it's a more complicated picture because of the reasons we have explained many times but it's there, it's there all the time and the long-term improvements are there and without that -- we've outdoing what we're doing, the numbers will be totally different, so it's fair.

And overtime it's really -- it's going to continue to dry margins, apples-to-apples, without any doubt. And it also drives growth, it allows it to grow faster than the market because we have a better story to tell and we win contracts simply because we have a better offering in front of our clients.

Many of us have bits and pieces moving in different directions in every quarter, and especially in Europe, now that the picture is more muddy due to the comparatives but anyhow it's along the line, it's along the plan and it's working as we expect. So we will disclose the numbers in the end of next quarter and then we will see the organic growth for the full year.

Okay, thanks.

Thank you. Continuing maybe on the question from Danske Bank on the electronic security.

I'm just trying to understand and maybe you can help us quantify the market size. You had some $14 billion of sales related to technology solutions; I think you have stated at your capital markets dated last year that you saw a $9 billion in the U.S.

but can you quantify this maybe on a group level, so we can understand how big of an opportunity this is for you?

I don't remember any of these numbers, I'm sorry but some of that we'll need to come back on that. I mean the market opportunity is huge and the strategy we are is to convert the larger and larger part of our regarding traditional manned guarding portfolio to solutions which doubles the operating margin, the EBIT margin when we do that.

And that opportunity is there and then we have some business where sell standalone into the electronic security which we now do in North America in the former Diebold Electronic Security, now-a-days Securitas Electronic Security business. And that is a -- that market is huge, I cannot -- not from the top of my head quantify that right now but that's a huge market of course where we are a tiny player.

But the main reason for making acquisition, and we actually are continuing to look forward number of acquisitions in this field is to be able to combine the manned guarding with the technology on this and create solutions for our customers which gives some very -- much better security at the same or even lower cost than they have today.

Okay, thank you. And I think the number I referred to is on Slide number 12.

I don't have it in front of me now so I don't want to guess, that's why I'm not answering. But if that's a slide from us, then it's correct.

Okay. And then continuing then on the U.S.

tax plan that the Trump administration has commented on in this week and I think is -- have you been looking internally on the effect, potential effect this may have on your organization and also just understand how you -- how is your cost base in the U.S., do you basically generate your operating earnings there or do you have financial costs also allocated in the U.S., so the actual net…

No, we have -- I mean, we have our profit in the U.S. and so -- first the reduction in the corporate tax rate, in the U.S.

it has a substantial positive effect for us, not the first year because of the accruals in the balance sheet but on the -- after that let's say then you will have a very positive effect on the earnings per share for Securitas if the tax rate is reduced from the present -- I guess we pay 37% or 38% tax rate, that's what we pay in the U.S. So any change to that will be positive for our EPS.

All right. And final from me, your comment on investments in Europe hampering margins in the quarter, can you talk a bit more about what you have been doing here and if this maybe something that will continue in the coming quarters?

I think we are investing in our vision strategy and the number of -- I mean, in people and in the IT field and to digitize our business, etcetera, so that is what we're doing. We think we have now the right balance when we enter Q4 between the -- so to say the structure and the organization, and the market that we expect; so in that sense it will continue.

But we have now also adjusted the cost structure, so Q4 should be better than Q3 from the -- so to say on the capacity point of view. But investment will have to continue, we need to invest in the longer term, both for the more technology and solutions and add the right resources and make the right investment improving our IT structure in number of places so we become more efficient and also in the longer perspective in digitizing our business and how that will impact this sector which is a chapter by itself but that it will -- in the longer perspective that will also -- that will be a new parenting shift to this industry when it will use data to a much higher degree to assess risk and the company with the most data will also be the one who has the best ability to assess risk and that will be credible in front of the clients to make -- to optimize the security solution based on data.

We'll come back to that at a later stage but those investments are also being made in both, the North American and the European and on Central level in the group right now.

So it seems just to see if I understood you correctly, it seems that the investments you're taking now short/medium term is not fully absorbed by the higher margins that you generate in this technology solutions, so that's more of a longer term?

You have to invest, I mean various few business of us will get the benefit without investing first, so you need to -- so we need to invest in order to continue to improve the margins but we have -- I mean, in order to improve the margins we will increase the share of security solutions, that will drive our margin; and secondly, we have taken medium short-term actions now during the year which have been adjusted by the end of the quarter, so we have a better cost structure, when we're into Q4 we should be helping our margin as well going forward.

Okay, thanks.

Hi, good afternoon. Just a couple of questions for me, if I may.

In terms of Argentina and the impact from lost clients and the slowdown and inflation, how to expect that to work through Q4 and then into next year? What kind of quantum of slowdown should we be thinking about?

I can unfortunately not quantify that given the fact that we don't issue forecast, then I will break rules. But I mean about 25% of division is Argentina to start with, so then you have dimensions so to stay in Argentina business in the division.

And then -- and there is a slowdown inflation, it's coming down, it has been in the range of 25%, 30%, it's probably going to come down to maybe half of that. And that has been a component of organic growth of the Argentina business and then we have some reductions as well.

So we write about it because it's significant and that's otherwise we would not mention it, but it will have an impact in Q4 and probably coming quarters as well due to the reductions and the inflation area aspect if inflation are really cashed out but that's what we expect. So that means that the organic sales growth in the division will be less than it has been so far this year.

Okay. And in terms of the restructuring charges or cost that you incurred in Q3 and will incur again in Q4; do you think that is enough to support the margin or should we expect…

No, the answer is that -- that is, we -- when we have made the budgets and looked into next year; for Argentina, we think we're taking the necessary action, so it will hit us now in Q3 as we expand two-tenths in impact negatively on the margin otherwise the margin would have been two times better than last year and we will have a same hit in Q4 probably. And after that we have taken the actions and restructured the business, so we are on the right level for next year; so you should not expect that to continue next year, no.

Okay. And then just one last one, in terms of the wage inflation you're seeing in North America and other parts of the world, to what extent is that shaping some of the conversations you're having with clients around technology solutions; do you think that is helping?

At least we have an alternative offer to present to the customers when they do not want to pay the increase to cost. We had it during the Obama care or the ACA process and we were expecting quite a number of customers to go for that option but they didn't, they ended up paying the simply, just paying the increase anyway.

So -- but it's a good argument and it helps you in the negotiations, probably it's not going to be a large amount that will be converted just because of a higher wage inflation into solutions, I don't think so but it's a good argument and it helps us to substantiate and have a discussion with the client and to get the compensation for the cost increases. So it can be used either way so to say but it's very important such as where because otherwise it will be kind of a one -- a very narrow negotiation process so to say.

So it's helpful but I don't think at large, it will not drive substantially a larger volumes going to solution spend just because of that, there is lot of other factors influencing that.

Okay, thank you very much.

I think most of mine have been answered but I was on the electronics point, I was interested to know can you remind us what proportion of the group EBIT is now in electronics solutions if you can tell us that? And the second question, apologies if I missed it; but in terms of the harder [ph] game, the benefit that came from that is that very short-term organic growth uplift or do you expect to see some of that roll into Q4?

Thank you.

On the first question, we cannot give you that number because nobody else has been given it, so that one we cannot disclose, we don't disclose that simply. The second one, thus -- that growth was impacting September, obviously we had a little bit of a spillover first week in October but that will be minor, so you will not notice that in Q4 unless there is a new hurricane or flooding or something else happening but other than it was in September and that's it.

Thank you.

Good afternoon, just one, please. The impact of reduced payroll taxes which I think you referenced in your slide pack in North America, firstly, could you quantify that impact and secondly, was that just in the third quarter or did that benefit through the first few months, since the first quarter of this year please?

We don't give an exact number. When we use and when we have an explanation we usually means one-tenth, that's had been kind of a rule of thumb, at least one-tenth of the explanation.

Now we have three explanations, so mathematically very -- there cannot be one-tenth each versus two times difference from the margin but it has impacted the full nine months, yes.

Okay, thank you.

Hi, good afternoon. Coming back to Argentina, I mean from a macroeconomic perspective it is my perception at least that the economy in Argentina rather just turning the page on the negative trends we've seen over the past few years, are you being hit right now because of the late cyclicality or are there any other dynamics to play here?

It was in recession no too long ago but you're right, it's slightly turning. It's a little bit somewhat optimistic but we are late cyclical.

So we are facing that some of our clients and some large clients are now executing budget cuts based on how the macroeconomic situation was a while ago, and that we are suffering now. So the late cyclicality is a part of it, yes.

It's not a strong economy I will say in Argentina but -- and -- but still, yes, that's along those lines, yes.

Okay. And am I understanding it correctly that then volumes are actually were in decline in Q3, income we expect to decline in the coming quarters as well and that the organic growth in that market is mainly related to price inflation?

Now the main factor for the growth in Latin America has always been the price inflation in Argentina, that's clearly the main factor. We're looking with other countries in Latin America, we have good volume growth, net change I would say without the prices, so Columbia is growing well, Chile is growing very very well, Peru is recovering in a good manner, Uruguay is doing fine.

So many of the other countries are -- we have a nice good development. In Argentina, the answer to your question is yes, it's a volume change because we have lost some contracts, that's still the minor part but we have quite some reductions in other contract, so that is volume for a fact.

And then in combination with lower inflation means lower organic sales growth. Now to put it in perspective, let me remind again that Argentina is 25% of the division, so nobody over exaggerates the impact I'd say but still it's important that's why we write about it and that's why we mention it.

Okay, thank you. And then moving onto the slightly bigger market in the segment Spain, you are mentioning another or mentioning again in the quarter that the margin has been positively impacted by the good development in Spain, can you give us any quantification on how large the sequential or the year-on-year improvement has been in Spain?

No, I will not give an exact number but we have a good growth, 6%, 7% organic growth in Spain. We get leverage from the growth, we have a very slim and very efficient indirect cost structure, overhead structure in Spain, so when we have -- when we get the growth, we get good leverage, that supports the margin very well.

Secondly, the new sales that we get -- I mean, new contracts we have won is to very high degree solution based which gives us a good margin as well. So those factors together allows us to have a very positive development in Spain.

But am I correct to assume that Spain is still below the Ibero-American average in margin?

They are getting close.

Okay, thank you. And one question, Europe, if I may.

If I adjust for my assumption on the immigration and the losses of the two larger contracts, I arrive at your current growth adjusted underlying so to speaking being above 6%; is that a relatively fair assumption or…

I didn't do that math in that way, so sorry, I cannot really confirm your number.

Okay. Thank you, anyway.

Thank you.

Hi, I have just one question on the margin in Europe for Q4, basically in the latest two years where it has been in pressure both by the ramp up mostly related to sales and then the ramp down. But two years or three years ago you were actually doing the 6.2% EBITDA margin in Q4, it's fair to assume that now with more clean numbers you will be closer to that figure or have you seen a bit of a structural decline due to the pressure of manned guarding during this latest years?

I think it's fair to say that at least the last -- recently I will say, we have been bit unusually low margin in the last quarter, it's been bit disappointing. And Q4 is also a quarter where you make all the reconciliation of old accounts and especially the large labor content that we have with [indiscernible] pace and social cost and all those things have to be reconciled.

I mean, we -- I cannot give you any specific number, I think you understand that what we expect Q4 to be because this is the Q3 report and not the Q4. So, I have to be careful there but I mean, I feel confident that we have taken actions in order to improve the margin, so we have made some cuts in a number of countries to be correctly structured; so everything else equaled, we are now having a better cost base when we enter Q4 than we've had in the last two/three quarters.

So that just supports our margin; to what extent, I will refrain from estimating that.

Just on an underlying basis looking at three/four years back, we'd said that there has been a better structured margin pressure in Europe due to the pressure on manned guarding margins?

I mean that's always there but we -- and that has always been there but at the same time we are increasing the solutions sales overtime and now we are also meeting different comparatives. When the refugee business came down in Q4 last year which was good margin business at that moment; so there are many components to that so hopefully we will -- we are on the right track in that respect.

While it will be we'll see a quarter from now. Well, you will not get me to be more specific from that, I'm sorry about that but because -- but I think we are well equipped for the coming quarters now on the structure-wide.

In the way we see the market coming and also comparatives will be totally different than we have been having it meet for three quarters now going forward.

And yes, when I get the charges on the net financials in the quarter, they were like 10% below over the consensus expectations; were there something one-off positive effects from FX or anything like that or is it a good run rate for the coming quarters?

[Indiscernible]. It's just an effect from financing I see here.

Yes, that's what we wrote under -- in the quarter and the group there about the refinancing of the $350 million Europe bond at the lower coupon [ph] that reduced the average for interest from the group compared to the third quarter last year. So I think that's the main explanation and there is also some FX into it as well but it's minor.

Okay, thanks.

Yes, hi, just two questions. Do you still see synergies from the Diebold acquisitions in the U.S.

and what tax rate level should we be in [indiscernible] going forward? Thank you.

On the U.S. synergies, we still see -- I mean there was never any cost synergies expected on that acquisition and the effects we see on the commercial synergies are very good, at least in line what we expected and actually slightly better.

So that is working according to plan or even slightly better and we get a good momentum in the market because of that, the tax rate 28.5%.

Okay, thank you.

Thank you very much for calling in and sorry, we were a few days earlier than we had planned for special circumstances but we'll be back in a quarter. Thank you.