Securitas AB (publ)

Magnus Ahlqvist - President and CEO Bart Adam - Chief Financial Officer

Srini Sarikonda - HSBC Bilal Aziz - UBS Paul Checketts - Barclays Capital Mikael Holm - Danske Bank David Fernandes - Macquarie Allen Wells - Exane Andrew Grobler - Credit Suisse Henrik Nilsson - Nordea Markets Carina Elmgren - Handelsbanken

Good afternoon, everyone. I am Magnus Ahlqvist and I am here with Bart Adam, our CFO to go through the first half results and then we have a Q&A session towards the end.

Our customers are at the, sorry, our customers are at the center of what we do and we are working to deliver the best possible value to our customers. We do this through a combination of people, knowledge and technology.

And so let us look at some of the highlights from the first half. We have strong momentum across the Group and achieved 7% organic sales growth in the first half.

And of course, you should realize that this growth is good in the first half, but we are also facing a tougher comparative in the second half. And there is growth in all business segments and also strong commercial activity and this together with excellent customer retention have contributed to this growth.

The customer retention is important since that is one of the indications of how satisfied the customers are in terms of the services that we provide. The wage cost increase in the first half is on par with the price increase, which we are happy about and we are also delivering an operating margin of 4.9% in the first half, which is slightly better than the first half of 2017.

We have initiated a cost savings program in Europe and we come back to that later in the presentation. Sorry, and the earnings per share 15% real change in the first half.

So let us now look at the progress in security solutions and electronic security. In the second quarter, we have seen good activity with a number of mid-sized solutions, where we deliver a range of protective services and the growth is in the first half 21%.

We are making good progress with integration of the acquisitions in France and the Netherlands, and completed the acquisition of Kratos in the month of June. And these acquisitions will strengthen our technical capability in these important markets.

Good, so let us now then look at the performance in the different divisions and we have had a very strong quarter and first half in North America. The organic sales growth is very strong and this is driven by solid performance across all the segments of the business, strong new sales and solid customer retention.

I would also like to highlight that we have good growth in electronic security and solutions that represented roughly 17% of the total sales in the quarter. And when looking at the profitability in North America, we also see good development first half margin improving to 5.8%.

The operating margin was supported by leverage through organic sales growth. But I should also mention that the Q2 operating margin contained a positive one-off impact.

Looking at Europe, we are very happy about the fact that the recovery is continuing. So we see stronger growth now than what we have seen in the previous quarters, 4% in the first half and 5% in the second quarter.

It is also good to see that the client retention is improving now at 93% and when we are looking at the growth, almost all countries in Europe are supporting the growth. But we should highlight Belgium, Germany and also the guarding in business in Turkey as important contributors.

The refugee-related sales continued to decline and this has had approximately 1% negative impact on the organic sales growth. We have good growth in security solutions and electronic security, which now represented 21% of the sales.

But while we have significantly improved the growth in Europe, we are not satisfied with the margin and this decline in margin is primarily explained by some operational inefficiencies and also then investments in the strategic developments. And based on these developments, we have initiated a cost savings program for the second half of 2018.

Now we estimate that the restructuring cost for this program to be in the range of SEK200 million to SEK250 million recognized in the third quarter and the payback period of this program is about two years. If we then turn the attention to Ibero-America, we have solid customer retention at 93% and good growth overall.

We achieved 10% organic sales growth in the first half and the decline in organic sales growth is mainly due to Argentina, but we have continued very strong development in Spain, which is helping the growth in the quarter. And when looking at the operating margin, our Ibero-America team has delivered a very strong first half with an increase to 4.6%.

Spain is the main driver behind this improvement that we are improving, thanks to strong development in security solutions sales. But I am also happy to say that we are also seeing improving margins in the guarding part of the business.

And to me, this is also an indication that the customers are appreciating the quality and the value that we bring. And we do have a more challenging situation in Argentina, with negative leverage and also turnover in the contract portfolio.

But, all-in-all, I would say, it is a very positive development in the Ibero-America division. And with that, I would like to hand over to our CFO, Bart Adam.

Bart?

Many thanks, Magnus. Hello to all of you wherever you are in the heat in Europe.

So let’s now turn to some further financial details to the first half year and the second quarter, and we will start with the income statement here. As mentioned also at our Q1 meeting, I would like to confirm that the 2017 comparatives for the Group have been restated according to IFRS 15.

These results in a relatively minor change for the year, the change is about SEK20 million positive increase of the operating income for the full year and it relates to that now we need to activate and then further depreciate sales commissions. When we turn now to the numbers.

Yes, as Magnus commented, both the quarter and the first half year showed good organic sales growth and the margin -- operating margin improved 0.1% both in the quarter and in the first half year. When we move to the acquisition-related costs, we move little bit further down in the income statement.

The acquisition-related costs you see that in the first half year, these were SEK25 million, compared to SEK30 million in the first half of last year. And then about half of that SEK25 million relates to the Kratos acquisition in the U.S.

and you shall expect that a total estimated acquisition-related costs for Kratos are about SEK75 million for the full year and we expect that all of these costs will be recognized as I said in 2018. When we go further down in the income statement and we look at the financial income and expenses.

These are flat in the first half year compared to the first half last year at minus SEK196 million. Note, however, that financial income and expenses amounted to a bit over minus SEK100 million in the quarter, compared to minus SEK94 million Q2 last year.

I mean, this step-up in the quarter is due to a combination of the development of the U.S. dollar interest rates, also of course, this weaker Swedish kroner and increased net debt during the quarter as a result of the acquisition.

This step-up also happened a bit gradually during the quarter. Then, we move -- the step-up, I mean, compared to last year same quarter.

Then we move to the tax line, the applied tax rate for the first half year is 25.0% and that is compared to 25.5% at Q1 and compared to 29.0% for the first half of last year. This reduction from 29% to 25% is due to lower -- largely due to lower U.S.

tax rates as of 2018, as a result, of course, of the U.S. Tax Reform.

As you can see, the 2000 [ph] full year tax rate was 31.5%. That is, however, including a one-off tax expense of 3.1% that was booked in Q4 last year.

So excluding this one-off tax expense, it was 28.4% last year. And then, we will, of course, continue to -- we will continue to set the tax rate going forward as more details and interpretations to the U.S.

Tax Reform become available especially related to the so-called BEAT, the Base Erosion Abuse Tax. When we move to the next page, and then, we take a look primarily at effects from the different currencies, and the numbers mentioned here to the right of the slide are the foreign exchange and rates in Swedish krona at the quarter end, and we see that both the U.S.

dollar and the euro has strengthened now quite a bit versus the Swedish krona at the end of Q2, compared to Q2 last year, respectively, plus 5.5% and plus 7.2% up. The euro has continued from Q1 at 10.3 to 10.4 level.

But the main swing then compared to Q1 is the movement of the U.S. dollar rate.

The U.S. dollar has continued its increase since the start of 2018 and our Q1 consolidated -- so our first quarter consolidated results were negatively affected from the U.S.

dollar, when comparing to last year, whereas now in Q2, we got some tailwind from the U.S. dollar development.

The Argentina peso, however, further reduced somewhat its valuation against the Swedish krona and that is now on close to minus 37% at quarter end. All in all, the net effects on the different slides in income statement can then be seen from the difference between total change and real change.

And then, if you turn to the box to the left, you notice that regarding sales for the first half year, the net effect, that is the difference between total change at 7% and the real change at 8%, you notice that the net difference is 1%. So the real change is 1% higher than total change.

This difference was more like 3% after Q1. So where Q1 was hampered from the currency rates, as said, we had exchange tailwind in Q2, so the negative currency effect from Q1 has been almost fully compensated by tailwind from currency during Q2, mainly as a result from the swing in U.S.

dollar. As regards to earnings per share, there you can see that there is actually no more difference between total change and real change for the first half year, where the difference was also 3% for Q1.

Let’s turn then to the next slide, cash flow and balance sheet. Also, here it shall be noted that related to IFRS 15, we have restated the balance sheet, but there is no change to the cash flow.

That remains unchanged after IFRS 15. We had, I would say, for Q2 an okay cash flow during the quarter for Q2.

In the second quarter, our cash flow from operating activities recovered from the negative cash flow effect at the end of the first quarter. You will remember that we had some negative effects from the timing of Easter and we saw that money coming into the balance -- from the balance sheet into the cash flow during April.

However, we also suffered in the second quarter from a few other negative effects then. There is a negative effect related to regulatory change in social security payment timing in France.

So we need to pay faster now in France, the social security, compared to how it was before. Then we have an invoicing system change transition in the Netherlands and that is not a major issue, but at least it is causing some invoicing and payment delays from our customers.

And then finally, we were also affected from the interest rate hike in Argentina. That is causing some payment delays also from our customers in Argentina.

That would probably be a bit more difficult to recover from, I mean, not so much concerned about bad debt, but it is just that people -- companies or our customers are paying slower compared to how it was before. So in France, the situation will not change.

The situation in Netherlands will gradually improve, whereas the situation in Argentina could take a bit longer to resolve. I should also add, of course, that the strong organic sales growth especially in North America resulted in increases in operating capital employed, impacting the cash flow negatively.

When we see this type of strong growth rates, we, of course, need to fund that growth also from the balance sheet. I should also remind you that the quarter two ended in the weekend and that did not help either to the cash flow from operating activities.

And I just want to flag that also the timing of Q3 closing is unfavorable for the cash flow, because of the weekend timing in relation to the quarter end. Well, we then move to the next slides.

We look at the net debt. It stands now at 16.7 and the development from year end, of course, reflects the development from the operating cash flow, as just explained and then also we paid out a bit more than SEK1.2 billion related to acquisitions.

All of which, of course, were disclosed to the market and we paid over SEK1.4 billion in dividend, which hopefully our shareholders are happy with. Magnus will come with some further details on the acquisitions.

The net debt was also impacted from the foreign exchange development. You can see there a translation difference of SEK837 million and that is purely the development also of both the euro then and U.S.

dollar since -- so that compared to January 1st. Still you then see also that for Q2 to the far right of the slide, the net debt in relation to EBITDA is still on a healthy 2.6.

We see here the development over the years and we compare this quarter and then to the end to the -- year end from previous years. We are now at the leverage of 2.6%, knowing that our Q2 tends to be our highest leverage point during the year due to seasonality.

So you can expect that based on the same seasonality, and of course, everything else equals this shall go down by year end. And by this, I would like to hand back to Magnus and then we will be happy to answer any questions later on in the call.

Okay. Thank you, Bart.

Similar to last quarter, I would like to share also a few updates related to the work that we do with our customers, but also the work related to the strategy. And when we look at security solutions, we talk quite a lot about them and -- but I think that it is also important that we took at -- take a look at these examples also from the customer perspective.

So we would like to show a brief video and this is the reference case down from a business product customer in Finland. So if we can then roll the tape please.

[Video] Well, as you can see, we recorded this video, I think, in the spring or the older spring. It is also the different temperature with snow than what we are having and seeing right now.

When you look at this case, I think, it is a good example of a solution and that we are -- that we have developed for Tecnopolis, because it is a range of protective services, close integration with the customer to add value and to really address their critical needs. And as you can see in this case, it is also a good combination of people, technology and knowledge.

If we turn to the next page, looking a bit at the acquisitions, we are making good progress with the acquisitions in the company and have now completed acquisition of Kratos Public Safety and Security Division in the U.S. And this is an important acquisition, because it really help and enhance our proximity to the customers with a good branch network across the United States.

This week we also closed the acquisition of Pronet in Turkey. Pronet will further strengthen our leading position in the security services market in Turkey and I would like to say that we are very happy to welcome the teams from not only Kratos and Pronet, but also from the other companies that have become part of Securitas in the last six months.

And if we turn then to the next picture, this is a picture that that we like to show and it is also important for our strategy. And it does show the development of our services and the impact on the value that we are creating, value to the customer, but also then value that we are creating for Securitas as we are developing from our quality guarding to the more integrated security solutions and electronic security.

And we have a good recent example, I think, from the Spanish market, where we have strong momentum with security and solutions in generating higher customer value and also higher value to Securitas. But I would also like to emphasize that we have a big part of the business, which is guarding.

We are proud of this business and it is also a part of the business that we are constantly looking at how can we develop this, how can we protect the value and then develop that part of the business also as we go forward. And when you look at the first half in terms of the progress on security solutions and electronic security, we have good growth and security solutions, electronic security are now accounting for approximately 20% of our Group sales.

And before we conclude, just wanted to repeat the slide that we shared three months ago when we presented a Q1 results, and this is a little bit outlining the journey that we are on, where we are coming from in terms of the strong foundation that we have built in security services and then, obviously, the drive and the transformation towards a richer protective services offering, and also then the next phase that we are calling intelligence security and our ambition to be a leader in intelligence security. And so, I think, to wrap this up, we have strong growth across the business 7% organic sales growth in the first half and EPS improvement of 15%.

I would like to emphasize again that we are meeting much stronger comparatives in the second half for this year. But we have a feeling that most things have gone well this quarter in terms of the general development.

So we have good momentum. And before we start the Q&A, I would also like to highlight that we have an investor update in September -- on the 20th of September that we are going to do in Stockholm.

But there will also be possibility to follow that on the web as well and we would be very happy to see you there when we talk little bit about the business, where we are right now and also some thoughts about the future. So, I think, with that, I turn over to the moderator and we open up the Q&A.

Thank you.

Hi. This is Srini from HSBC.

A couple of questions for me please. First, in Ibero-Americas, you have said like Spain has driven your strong growth in margins and you have also mentioned that short-term contracts has contributed to growth and -- growth basically so.

May I know how much growth has come from these short-term contracts and what is the duration of these contracts? And I also believe usually the short-term contracts will have higher margins than it will provide short-term services to the clients, is it correct?

And have they contributed to the margin expansion in this quarter?

Yes. Bart here.

I will take the question. Yes.

These are more short-term nature contracts. We cannot exactly tell how long they could last or could not last.

That is an unknown to us as well. So I cannot guide you on that one.

As to the impact on the volume that is a bit more than 1%, between 1% and 2%. And then on the impact on the margin, you could say, that has quite also a significant impact on the margin in Ibero-America around 0.3% actually.

Okay. Basically, I think, 30 basis points improvement has come from these contracts…

Yeah.

… for Ibero-Americas.

Yes.

Okay. On second, if you look at the gross margins, gross margins have fell by 20 basis points in this quarter, but operating margins have improved by around 10 basis points.

Just could you give us some color on the equations why like gross margins declined but operating margins improved? Is it like operational improvements or is there any IFRS 15 adjustments that helped?

No. It is to a large extent you should not bother too much about it.

It is, basically, if you look at the comparatives from last year, that is where you look from and you compare to last year and that is how you make your conclusion. There has been some adjustment between Q2 and Q3 last year when it comes to either gross margin or indirect cost.

So don’t try to make too big conclusions out of your right observation.

Okay. Thank you.

Good afternoon, everyone. And just two questions for me, please.

And firstly, regarding the one-off in North America, can you perhaps quantify that and also review what the exact reason for that one-off positive impact was? And separately, in Argentina, and you haven’t quite used the phrase and they expect it to get worse from here, as it perhaps did in the last quarter.

So do you perhaps think you have kind of bottomed out today in terms of the sales decline and the margin headwinds as well in that business? Thank you.

Yeah. So I think in terms of the one-off in North America that is related to the reevaluation of work in progress.

When you look at Argentina, it is a less stable and more uncertain situation. So I think it is difficult to predict at this point in time, if it is going to get worse and exactly what the developments are going to be.

But we are looking carefully, obviously, and working with the team as well to make sure that we manage through the situation.

So as to the one-off that you mentioned for North America, it is when we mention the one-off it is normally 0.1 or more. So in this case it is also 0.1.

And it is basically -- it relates to a revaluation of the work in progress in a larger contract in the U.S. But you should also remember that last year as well we had a positive one-off of the same magnitude in the quarter.

Brilliant. Thank you.

Hi, everyone. I have got a couple of questions, please.

The first is on wage inflation. Could you give us a sense for the level of wage inflation you are seeing in the U.S.

market please and a sense of how pricing negotiations have gone? It sounds like you have managed to pass it on?

And on the same topic in Europe, perhaps, you could give us an update on the negotiations that you have already passed through and those which are upcoming in the rest of the year? And then, on a slightly separate topic, on the restructuring costs, could you elaborate please on which cost it is that you are intending to take out of your European business and when you talk about the payback, do you think the entire amount will flow back to the operating profit?

Thanks.

Yeah. So, Magnus here, so I can start and then I invite the Bart to make a few additional comments.

If you look at the price wage balance in general in North America and also in Europe, we have managed to balance that quite well. And if you look then at the specific numbers European perspective, now we are talking 2%, 3% type of range, but it differs country to country.

And I think in terms of the restructuring program, we estimate the restructuring cost to around SEK200 million, SEK250 million and then we say two years payback and there will obviously be some differences in the timing of that program. So some things we will be able to start to do in the fourth quarter this year, and then, obviously, expect them to drive full impact the closer we get to the two-year timeframe as well.

But it is correct that -- when we say, two years that is essential to then recover the restructuring charge that we are taking into the third quarter. Bart, do you want to quantify anything more on there to comment on the price wage?

Yeah. On the price wage, I would just like to comment that it is not like that, that is a huge part of the growth is driven from price increases.

It is on a bit higher level compared to last year. But it is not on the fundamentally different level or a totally different level, as Magnus mentioned for Europe 2% to 3% and basically the same thing overall in the group, it is around 2% to 3%.

The restructuring SEK200 million to SEK250 million with a two-year payback, so meaning, that we expect about half of that amount as savings and they will flow in, as Magnus said, during Q4, but then mostly as of 2019.

And would wage inflation in North America be materially higher than that 2% to 3%?

No, no. It’s not.

Over the cycles we see that wage inflation in North America is around 2% and in downturns it goes to 1% and in upturns it goes to 3%. And we have not seen, I know there are statistics around, which show 5% and 6%, but that we do not see, we do not recognize that those statistics, I can confirm to you that we think they are right on a long-term.

So the long-term perspective, correct, but we cannot confirm the short-term like month-on-month development that sometimes is shown in the statistics.

Okay. And maybe one -- I could ask one more which is around the interest charge.

It was SEK102 million in the quarter. Is that a fair reflection of the quarterly level now or were there any one-offs in there that meant it was slightly higher?

No. There were one-offs -- not -- no one-offs in there.

As I mentioned, it is a reflection of higher U.S. dollar interest rates.

So that will stay. We expect that to stay.

Also reflection of the foreign exchange rate for the Swedish krona as our debt is in euro and dollar and then also a reflection of the fact that the debt was higher. And it is ramped a bit up.

The cost ramped a bit up during the quarter that you should also know. So this is the quarterly average, but it ramped a bit up during the quarter.

Thanks.

Yes. First just a question on the organic growth in Ibero.

Historically, you have given us the organic growth rate for Latin America in the report. Would it be possible to say something about where it was and also the level of organic growth in Spain for the quarter?

Okay. Yeah.

We stopped putting that. I think we did not really put that in the report, but sometimes we put it as a comment in the report.

It was not all the time there. But I think we can confirm maybe America is still growing absolutely and it is still double-digit growth that we see.

And then, as a consequence, Spain together with Portugal should also be around that range in view of the divisional average then.

Okay. And just a clarification on the cost savings is roughly 50 basis points on the margin.

How much of that will you invest into more of the new strategy and how much do you -- think you could keep as a gain more long-term?

Not sure how you get to the 50 basis points. I mean, if you take the average of SEK200 million and SEK250 million, say, SEK225 million, and then a two-year payback, that should be then a saving of around half of that.

So, say, SEK110 million. That is how it should reason.

So, SEK110 million, yeah, we have more than SEK40 billion sales in Europe. So, it is more, I think, on the level of 0.25%, 0.3%.

Okay. Then I understand.

And then, yes, my final question is regarding, I mean, looking at the margin development for the Group, 10 basis points up. But could you say something about the margin development in man guarding, is it still 20 basis points, 30 basis points annual pressure or is it stabilizing?

Yeah. There is always pressure on the margins.

So, I think, that is something that has not fundamentally changed. I mentioned briefly in some of the comments that in some markets where the margin has been under severe pressure, we do see like in Spain, for example, that some customers are also coming back, because they value the quality and they realize that there is value in the service that we bring.

And so that is, obviously, positive and it is also healthy. There is also companies that have gone bankrupt in the last couple of years.

So that is probably also helped that situation overall. So I think that is the general situation.

What we obviously focus on is to deliver good quality. We are proud of the guarding activities that we have and we are also looking at how can we become good at also protecting the value and the services that we bring and that is obviously an important given that guarding is still a very significant part of the overall business, but the price pressure is always, always there.

Okay. Thank you.

Hi. Good afternoon.

Thank you for taking my question. I only have one question if I may please.

In my view the key attraction of Securitas investment case is a transition from man guarding to technology and the impact that that is going to have an organic growth and margins. And I think we are seeing the organic growth coming through, but we are not seeing that margin expansion coming through despite technology growing much faster than man guarding.

So you should get a mix benefit. So we have oftentimes discussed what is going on in the man guarding margin side of things, but I still struggle to understand why our Group margins not expanding.

And my question is what are the all-in margins that you’re currently having in the technology, because when we discuss this 10%, but this excludes ramp-up cost and investment on countries, which are subscale, so I was really trying to understand if I may, please what are the current margins that you are having on technology?

I think this is obviously an important question and we are building this for the long-term. We are happy about the growth that we have in electronic security and solutions.

We are also constantly looking at and making sure that we are also improving or having significantly higher margin. So I think the 10% there is definitely the benchmark, which is fully valid.

But it is also important, because it is rightly pointing out. We are also investing in these contracts and in these relationships and thereby adding more value and it is also competitive edge for us.

And other factors, the guarding part of the business is still growing fast and that is obviously reflected also in some of the organic sales growth figures that we are delivering. So, I think that, yeah, this is long-term work, but we are convinced as well that when we are converting customers, we bring more value and then we will also be able to improve those margins over time.

Now we have many good examples when we are looking at that across different divisions also in different regions and in different countries.

Okay. But could you at least give us a feeling on when do you think you’re going to reach 10% on technology?

Yeah. I mean, we don’t give the…

Today is clearly low around 10%.

We don’t give any guidance. But I think we are convinced about the value of the strategy and the work that we do.

So this is just that we keep on driving this. I think one other point as well is that we are also investing and we have been investing quite a lot in the future strategy and that has also then meant also greatly expanding and improving our technical capabilities, hiring quite a number of people to also be able to deliver this.

So I think the big difference now compared to a few, say, four years or five years ago is that now we have more of a strong platform as well on which we can build and that we can also then really bring that more actively to the customers.

Could you at least confirm whether technology margins are higher than Group average today?

Yeah. Yeah.

Absolutely. Yeah.

Okay. Thank you.

Hi. Good afternoon, Magnus, and two quick ones.

One clarification question for me. You are talking about the one-offs in the U.S., am I right in thinking you said that was 0.1% or 10-basis-point impact on the margin, just to clarify that?

And then second question, is it possible to get a little bit more granularity about exactly what is going on in restructuring in Europe. I mean, is this head count reduction are you looking at or reducing HQ or office costs?

And maybe could you talk a little bit about and regionally what countries you’re mainly focused on here? Thank you.

I was commenting before on the question related to North America, Bart here. I can confirm that is 0.1%, the one-off that we talked about before, the reevaluation of the WIP, the work-in-progress in a larger contract in North America and I turn then the question for Europe to Magnus.

Yeah. So I can gladly give a little bit more flavor.

So when you look at Europe, like, I mentioned at the beginning, we have good growth. We are also driving the transformation in terms of improving as well an increase in the share of electronic security and solutions in Europe for a number of years now.

But we have not been happy with the margin that we are generating because we do feel that we are adding more value to the customers in the business and that should obviously also reflect over time. And then in some of countries, because this program is roughly in 10 countries where we are implemented this.

It’s not everywhere. It is around 10 countries.

And what has been kind of a common trend is that we have had the cost increases that have been little bit too high and that then when I say too high obviously, cost then growing at the higher pace than sales or margin, and that is obviously not sustainable over time. So that has been a trigger to make this program.

And when you look at where, well, like I said it is about 10 countries, but we are then primarily as well focused on management functions and some of the support functions when you look at those cost savings and then it is primarily people related. So that is the basics of all the program and we are now rolling this out in the -- we are starting the rollout of this in the third quarter.

And maybe just sort of a follow-up, I mean, my concern would be that you hired an awful lot of people leading into the migrant contract opportunity that you had there. I mean, is this restructuring basically an effort to reduce headcount off the back of that, because you carried additional headcount for at least a year as part of that strategy as you expected the market to pickup or am I slightly misinterpreting what you’re saying here?

So, I mean, the -- when you look at the whole refugee situation that really started in the second half of 2015 and there we peaked during 2016 in terms of that demand. And there I should highlight as well, I mean, we fulfilled a very important role from a society perspective and I see that we have also done a really good and important job with that.

But most of those activities are also then temporary in nature, so short-term contracts and then we have seen this kind of gradual decline of that business in 2017. And we also highlighted, I think, in the comments around 1% of the organic sales growth also negative impact in the first half of this year as well.

So we still have quite some refugee business and it is difficult to, say, is it only that? I would say, no.

We have had a situation where some countries are really performing well, strong performance, strong financial management. Others, we felt that it was time to take a stronger grip and that is what we are doing now to realize those cost savings, but then also to be able to free up resources to also continue to invest in the strategy and the future.

Okay. Thank you.

Hi. Good afternoon.

Just one for me if I may. Just on the cash flow which was weaker again in Q2.

Bart, you mentioned the three reasons for that change. So, I guess, two questions flowing from that.

One, have you seen a reversal from the quarter ending on a weekend into early July? And secondly, of those three issues, you highlighted, how much of that is structural and so we just have to accept the working capital going forward is going to be more of a drain than it has been historically and how much is temporary?

Yeah. The -- as for the quarter end, yes, we have seen that in the beginning of July was recovering from that.

So that is that. Then as to the three reasons mentioned, France will stay.

I mean, that is just a piece of legislation where we now need to pay faster. So that will not go away.

Netherlands, I mean, that is a matter now of going through the process and so to say, the delay we had in regenerating the invoices we recover from that and that should be recovered by year end. Argentina, it is a bit more difficult.

I mean, the interest rate hike has really been important in Argentina, which meant that. And -- I would say, together there is two effects, so it was that one, but it was also the fact that the interest starts to move in U.S.

actually, which means that some people are moving their investments or their moneys from Argentina to U.S. dollar and so there is less cash around in the Argentina interest base.

So that is more difficult to predict. We will work with those customers.

But we are not willing to accept any bad debt on those customers as well. So it could also mean that we maybe have to clean out some of our customers and say, well, sorry, if you cannot pay in time or not at least within a certain reasonable timeframe, we cannot longer serve you.

So we have to flush that effect now and a bit more difficult to say how long that will take. But at the end of the day, we should come back to pretty normal rates as well.

But I cannot say that takes six months or nine months or three months, I cannot say that.

But if we look to about two years, say, do you think that working capital as a percentage of sales as an easy proxy will revert back to where you have been historically or is it going to be structurally worse?

Well, that is a good question. There are, of course, reasons why it has increased.

The first reason relates to our solutions. I mean, we are consuming cash capital employed, the balance sheet for investing into the solutions, of course, you don’t see that, but that also means that our EBITDA margins are going up, but we never talk about EBITDA margins.

So that is that. And that piece will just continue.

We should accept that. Second thing is, of course, also that the electronic security business by itself is consuming a bit more cash by the fact that we have inventories and by the fact that we have work in progress, which we don’t have so much in the guarding business at month end.

So that is also consuming some cash. The more electronic security business we add, the more working capital we will add and the average should move a bit from that.

And then, of course, there is also the aspect of growth, and as you know, a large part of our growth has been coming from North America last two years, three years actually. I mean, they have been really growing very well in North America organically.

And the capital -- the operating capital employed even in the guarding business is quite higher in North America compared to for instance Europe. There are two reasons for that.

One is the fact that in U.S. you have no VAT.

In Europe, you get payments from your customers including VAT and then you have to pass on the VAT later on to the government. So that is a liability that is sitting in your balance sheet.

You don’t have that in U.S. Second thing is that you have employee-related accruals in Europe, which are far much higher than in U.S.

In U.S. it is more cash-based and also in U.S.

we actually pay out a lot of our guards to weekly rather than monthly in Europe. So those two effects, VAT and employee-related accruals makes that you need more operating capital employed in U.S.

to grow the business compared to the average country in Europe and that has also been sitting behind this driver of operating capital employed that you referred to over the last two years, three years. If what I hope U.S.

could continue to grow on these levels, we are very happy to support them further from the balance sheet to make that growth happen. On top of that, what we also see is payment terms from customers, I mean, some of our larger customers are pushing the payment terms.

We are pushing back of course. But there is also, yeah, you need to find some equivalent -- some balance in that how much you push back and how much you could accept of course.

So I hope that gives an answer to your question.

So, in summary, it is got progressively bit tougher over the past two years, three years and it is likely going to stay that way as we go forward that would going to be the reality of the market situation and your strategy. So return on capital would be a bit -- cash return on capital would be a bit lower than it would have been historically, is that fair to say?

I think it is fair to say that the things I refer to are a bit more structural. It is not just cyclical.

Yeah.

And as a consequence then it is correct what you say.

Okay. Brilliant.

Thank you very much.

Good afternoon. Focusing on Europe again, I mean, last year you highlighted, I think, it was four different extraordinary factors pressuring margins year-on-year then sticking to your rule of thumb basis points, I mean, I guess, that would be 40 basis points margin pressure for those and now you highlight two but you’re still down year-on-year.

I guess I really can’t add it up. So can you please elaborate a little bit on what these operational inefficiencies are more specifically, are they related to the restructuring programs that you’re taking now?

And then also on the second point you highlight on Vision 2020. It is been highlighted for a number of quarters now as a factor of pressuring margins in Europe.

I assume those investments or higher costs will then not increase on a never ending basis. When should we assume that they will level out or that you’re happy with the structure you have put in place?

Thank you.

Hi, Henrik. So, I think, when you look at the investments we make those investments, because we have belief in the strategy and it is a number of countries of course.

We are in the process of building the capability to be able to bring and to deliver the protective services. I think that one significant difference today versus four years, five years ago, like, I mentioned earlier is that, today we have more of a platform that we can leverage, and that is obvious then very much related to have more technical expertise and more technical profiles as part of the team or then helping, and also then driving the transformation.

You also asked about the operational inefficiencies. I mean, there are a few countries where we have had a more challenging operating environment.

One of those is in France and where we have also seen that there are a few areas where we need to improve efficiency and in a number of cases also the costs. So I think that this is one of the examples.

But that is a combination of few things that we need to address internally where we need to do a better job. But where there is also some changes in the external environments.

So when you look at France, for example, there is also changes in some of the regulations and the laws that is affecting as well in terms of the subsidies, which are declining this year with the percent, when I look at the subsidies and then plan is then to abolish those next year and that is also then creating quite a lot of change in the external environment also from a competitive perspective. So I think that when you look at the restructuring program, I mean, we make this now because we are not happy with the margin development like I said.

So a big part is obviously to reduce costs. But it is also then to be able to help and continue to drive the transformation also to free up some resources also to be able to invest as we go forward.

But we are doing that down in a selection of countries and also then looking at efficiencies as well on a division level to make sure that we can become stronger as we go forward.

Okay. Thank you.

And one follow-up if I may, are there any other factors you mentioned as a margin pressure in the quarter, any of those substantially larger than 10 basis points?

No.

No.

No.

Not really.

Okay. Thank you.

Yes. Two questions for me.

The first one, sorry, if I missed this, but could you say what the organic growth in security solution was in Q2 and in H2? And then also maybe EBITDA still under restructuring, what was it that triggered it?

Was it like something that you felt you need to do to stop the margin to go down further or is this an opportunity for you to increase margins in Europe or in the near-term? That was my questions.

We are looking for the exact numbers on the organic sales growth in security solutions, but the major part of that was organic sales growth. What was your second question again?

Yes. The trigger for the restructuring program in Europe, you said that to prevent the margin to deteriorate further or is it an opportunity for you to start to increase margin or how should view this?

Well, I think, I mentioned that we are not satisfied with the margin. We believe that we should deliver on a higher level.

So that has been an important reason for undertaking this program.

Okay. Great.

What has happened basically you could say that together there with a very fast increase in the topline coming from the refugee-related activities that in the wake of that or countries have started to recruit extra people and then employ extra people. And so to say, and that has been little bit of a triggering point and where the cost started to grow faster than the topline, especially then when the topline was falling back from those refugee-related sales and we were sitting still with the recruitments.

We need to recruit also people to further work with the strategy. But at the same time, of course, we -- the gap that we took there in growing the costs faster than the topline, we now need to correct that.

So it is a correction to that. We would have liked to avoid it, I think, if we could.

It is not something we like to do. It has consequences on people, of course and we really regret that.

But it is something that we need to do then, because we need to recover from the period there that the costs are growing faster than the topline.

Okay.

On the sales growth in Q2 17% was organically out of the 21% real, I mean…

Thank you for that.

… 17% compared to 21%.

Okay. Thank you.

So 4% was coming from acquisitions.

Okay. So thanks a lot to all of you for dialing in.

Like I said earlier, we have an Investor Update in September, looking forward to hopefully seeing many of you there as well. So thanks a lot.

Thank you.