Securitas AB (publ)

Good morning everyone and welcome to our Q4 call. I'm happy to be here today with our CFO Bart Adam.

We will go through the Q4 results and the full year results and then we would also talk about how we're accelerating the digitization of our company. Provide you with the brief updates related to the development of our intelligent products.

And as always we would obviously finish with a Q&A. So let us look at some of the highlights of the fourth quarter and full year 2018.

Q4 has been a very good quarter with strong growth and profitability improvements. We've had good commercial activity during all 2018.

And the strong sales together with solid customer attention are the two main growth drivers behind 5% organic growth in the quarter and 6% in the full year. And we should also note I'm very happy about the fact that we have good growth across all the segments from North America, Europe and Ibero-America.

And like in previous quarters we have been successful in terms of balancing wage costs with price increases and this is an important focus also during 2019. We achieved 5.5% operating margin in the quarter which is a 0.2 improvement versus last year and on a full year basis we improved the margin to 5.2%.

And in terms of earnings per share, we had 12% improvement in real terms before items affecting comparability. So when you look at the overall momentum that we have as a company and the performance, we are doing really well and also carrying strong momentum going into 2019.

But during the quarter we also initiated two major transformation programs that are more forward-looking and really then for shaping a stronger Securitas in the future. Related to these programs, we recorded items affecting comparability of SEK187 million and we will talk more about these programs later during the call.

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

I should also note that the Board of Directors have proposed an increase of the dividend to 4.40 Swedish kronor. We have the best offering in the security services industry and this is really the reason that we are also growing faster than the market and we have a strong focus on continuously improving our protective services offering to our customers.

And when looking at the sales of security solutions and electronic security, we grew with 21% in real terms during 2018. And I'm also really happy to say that we are progressing well with integration of the acquisitions that we closed during the first half of 2018 and then referring obviously to Kratos in the U.S., automatic alarm in France, Alphatron in the Netherlands and a few other major acquisitions.

But let us now shift the focus to the performance in the different segments and first let us look at North America. We have had solid growth in the North America during 2018 and achieved 5% organic growth in Q4 and this is done despite high comparatives.

We are winning in the market, growing faster than the markets and we have strong commercial activity that had continued at a high pace throughout all of 2018. And I should also note that we have solid client retention.

It is also very good quarter from a profitability perspective. We have good leverage from the growth and solid performance and our risk management contributed to 6.3% operating profit margin in the quarter.

And looking at the full year, we improved the margin from 5.9% to 6.1%. So when we are closing 2018, looking at most metrics it is a very good performance by our North America team.

Shifting then the focus to Europe, we had growth of 3% in the quarter and 4% for the full year and there was a slight negative impact from the continued reduction refugee-related sales and had almost a 1% negative impact on the growth in the quarter. But we've had very good commercial activity in Europe.

Most countries almost all countries actually are contributing to the growth. But I would like to highlight good support from Belgium, Germany, and our guarding business in Turkey that are doing really well.

Shifting then to the operating margin, in Q4 we improved to 6.3% and this is thanks to good growth and also improved cost control. The cost savings programs that we announced during the summer of last year is running according to plan and had a small positive impact in the quarter.

But this turnaround obviously after a more mixed result in the forest health in Europe last year, we are now strong ending on a significantly stronger note going into 2019. So let us turn shift to Ibero-America.

We had good organic growth of 14% which was in line with the previous quarter. Spain is the main driver behind this development with double-digit sales growth.

And looking at profitability we had a good development overall in 2018, but a weak Q4. An from an external perspective it is the challenging operating environment in Argentina, but I should also mention that from an internal perspective we have not been satisfied and due to this we have made some management changes and outputting an action plan in place to improve as we go forward.

But we do expect some continued challenges in the operating conditions in Argentina in the next couple of quarters. Spain on the other hand delivered strong performance through 2018 and our team has continued successfully to drive conversion of contracts to solutions, but also similar to the comments that we made in the third quarter results, we should note that some of these contracts are more of a short-term nature.

But all in all we have good momentum as a company. We're carrying good momentum into 2019 and are also very excited about the transformation programs that we're now initiating.

But I will come back and talk to those, a little bit more about those after an update from our CFO, Bart Adam. Bart?

Many thanks, Magnus. Good morning to everyone.

Before we take a look into some further financial details to the quarter and the full year, I believe we can say that we added another good year to our track record. And these are slides that you probably also recognize from the investor update and we believe at that time that we could reach sales on SEK100 billion for the full year and yes here we are, so we did and we can say that we have been on a steady increase of our top line since 2013 through a combination of organic and acquired growth.

When we move down to the next slide, moving to the operating income here we see that that has also been steadily growing over the last six years ending now for 2018 at 5.3 billion Swedish with the margin then at 5.2 now where back in 2014 we had an operating margin of 5.0. Then as to the EPS, before items affecting comparability that has been growing also over the same period from a bit over five Swedish kronor to now a bit over nine, actually 9.17 and I believe we can label this as a quite solid and sustainable development.

I think these three slides are for me a witness to our position in the market that we have built over the long years and while at the same time we have been and will continue to prepare for the future. When we turn now to the quarter and the full year, and the income statement and some details around that.

As at the Q3, I can mention that as of July 1, we have adopted the IAS 29 standard and that is a standard that deals with hyperinflation accounting and we have implemented that standard connected to Argentina. The impact on Securitas in Q3 not been really meaningful, there is almost no effect on sales and operating result and a small impact within the financial items line and that is further commented under note 1 and 3 in the report.

Turning now to the numbers on this slide as commented by Magnus, the quarter showed 5% organic sales growth and the full year ended on 6% and the operating margin improved 0.2 in the quarter and then 0.1 in the full year and we are really happy with that development. When we look at then the acquisition related cost these were quite high in the quarter.

You also see that in the full year these were SEK120 million compared to SEK48 million last year and from that SEK120 million there is SEK80 million that relates to the Kratos acquisition in the U.S. as we also commented on in our Q3 report.

I can say that for Kratos the acquisition integration has progressed well and that in line with our comments made at the Q3, the integration costs related to Kratos now has been fully recognized. Not mentioned on this slide here, but I can also say that the integration of the Pronet acquisition that we have made in the summer now in 2018 in Turkey is progressing very well and in line with the plans we had made.

In the financial year then, in the full year we had minus SEK455 million of items affecting comparability and that is now the 187 we booked in relation to the two announced transformation programs and we had another SEK268 million of course related to the cost-saving programs in Europe. I need to emphasize, but Magnus will come back to that that the nature of these items affecting comparability is quite different.

As I said in relation to Europe this was a cost savings program whereas in relation to the two announced programs now this is forward-looking investments. When we go further down in the income statement, you notice that our financial expenses are also quite high in the quarter included in this SEK154 million here that you see is one-off SEK40 million related to Argentina and that SEK46 million is due to, well as a result of the very high interest rates we were confronted with very high interest cost on some interest-bearing debt items in Argentina.

The interest in Argentina as you know has peaked to as high as 60% - 70 % as of summer. And now we have settled and refinanced all of these interest-bearing debt items from Argentina and we took the one-off costs related to this in the quarter.

So this is a one-off effect of minus SEK46 million that hits the quarter and that why this is also totally solved. When we look at the full-year financial income and expenses and we takeaway this Argentina one-off from the full year number then we get to run rate of about SEK400 million for the full year that is about SEK100 million for the quarter then.

As mentioned before there is a small positive impact from IAS 29 so the run rate excluding IAS 29 is around minus SEK105 million per quarter. Then we take a look at the tax line.

The applied tax rate for the quarter and the full year is 25% and that compares to almost 40%, actually 39.8% in the fourth quarter from last year and 31.5% for the entire 2017. The 2018 tax rate has benefited from the lower U.S.

tax rates based on the U.S. tax reform.

As said also the full year tax rate was 31.5% and that included one-off tax expense booked in Q4 of 2017 related to the same U.S. tax reform excluding this one-off tax expense, the tax rate was actually 28.4% in 2017.

Now important to mention is that we have further assessed our tax base and the rates going forward and our best judgment is that we will have a tax rate of 28.5% in 2019 and this increase is largely impacted from basically reversed effects from the U.S. tax reform related to the so called B tax.

So while the first year in the U.S. tax reform we benefited to the second year that has been largely reversed.

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

Turn to the next page and then take a look at the effects from the different currencies and here to the right on the slide, the foreign exchange rates in Swedish kronor are the quarter end rates and we see that both the U.S. dollar and the Euro have strengthened quite a bit versus the Swedish kronor at the end of Q4 compared to the same quarter last year respectively 8.3% and 4% up.

The Euro during the quarter was around 10.2 to 10.3 level after it had peaked to around 10.7 in the third quarter. The U.S.

dollar has been hovering around 9 Swedish kronor during the quarter ending then at 8.94 at the end. Our 12-month consolidated nominal results were so to say positively impacted affected from both the Euro and U.S.

dollar when comparing to last year. The Argentine peso continued to be around minus 50% compared to twelve months ago.

All in all, the net effects on the difference lines in the income statement can then be seen from the difference between total change and real change and the effect becomes a bit bigger when we move further down in the income statement. You note that then in the end for earnings per share before items affecting comparability, the real change stands at 12% for the full year and that has to be compared to our long-term target of 10% EPS growth.

So we then turn to the next page and take a look at the effects from the different currencies. Sorry, I will move onto the balance sheet now instead and we had a good cash flow in the quarter as Magnus said, a decent cash flow from operating activities during the quarter, but we were not satisfied with a full year.

We suffer from a few negative effects. We comment upon those also a bit at the Q3.

Basically you could say the DSO, the Day Sales Outstanding increased and this was primarily in security services in North America where the cash collection at year end was below the plan. As commented before, we have an invoicing system change transition in the Netherlands causing some payment delays and that continued in the fourth quarter and then finally the interest hike in Argentina is also causing some payment delays from our customers.

I shall also add of course that the strong organic sales growth especially in security services North America resulted in increased use of operating capital employed impacting then the cash flow negatively. As said, we were not satisfied with the full-year cash flow and we will further analyze and work with the issue and see how we can improve this.

I shall also mention here that we now have prepared for the IFRS 16 implementation. IFRS 16 is a standard that deals with leasing contracts in essence as of 2019, all equipment that is leased today will basically be considered as capital expenditures in the balance sheet.

So will be shown as fixed assets and then there will be shown a similar debt item on the liability side. So due to IFRS 16 the net debt will increase, but so of course will the EBITDA and the EBITDA increases because some items that were previously recognized as expenses in the EBIT will now become depreciation interest and for Securitas we estimate the increase of assets and a debt which each SEK3.4 billion and I will come back to that also on the leverage effect.

Moving to the next slide then, we look here exactly at the net debt and this stands now at SEK14.5 billion coming down from 15.7 at Q3 and it was 16.7 at the end of Q2 so some improvement here compared to Q2. We started the year with 12.3 and the developments then reflect the development from the operating cash flow as just explained.

And then also we paid out a bit more than SEK1.7 billion related to the different closed acquisitions and all of this of course were disclosed to the market and we paid also over SEK1.4 billion in dividend. The net debt was also impacted from the earlier commented foreign exchange development as you can see here at the bottom and that added SEK758 million in translations to the net debt since January 1.

Still you see then here that for the period end to the far right of the slide, the net debt in relation to the EBITDA is still on a healthy 2.3 in line with our mentioned expected development. And we see here the development over the years and that has been hovering between 1.9 and 2.4 and now as I mentioned at the healthy level of 2.3.

Turning back to the issue then of IFRS 16 implementation, we can see that a leverage then that is net debt to EBITDA will increase with about 0.2 so the 2.3 from year end and 2018 in a way will under IFRS 16 then become 2. 5.

So that is the effect of adding the SEK3.4 billion we estimate right now to the debt, but also at the same time of course to the asset side. Then going to the next slide, as we have been writing about our Board of Directors has approved two major transformation programs.

The first program will radically modernize our global ISIT foundation and will create the global ISIT organization as well and this is about preparing for future development at the same time and once finalized the IT costs in the group is expected also to be reduced by some SEK300 million upon completion in 2022. The second program is a business transformation in security services North America and here this is expected to positively impact the operating margin in North America and the operating margin is expected to be supported up to 0.5% points by 2022, of course everything else being equally.

Related to these two programs we will make some serious investments that is, we will recognize as items affecting comparability approximately 650 million kronor and then also another CapEx amount of SEK550 million and this will be recognized in the period 2019/2020. The costs that will be recognized as items affecting comparability are mostly in impairment of assets that become obsolete with the implementation of the programs.

Some organizational restructuring charges but also then some other non-recurring items. And with this I'm happy to hand back over to you, Magnus.

Thank you. Thank you very much Bart.

We would now like to provide you with an update regarding this transformation programs and also to share a little bit about the early development of our intelligent products. This is the slide that you have seen in our investor update out under the strategic phases so essentially where we're coming from the strong foundation that we have, but also where we are heading.

And I mentioned this many times before we are in a good position. We have a strong federation as a company and we have good momentum.

All of this has been built on what you see in the lower part to this picture which is really our strong guarding capability. So we call that our guarding core.

But then in more recent years we have also developed the best offer in terms of protective services to our customers and the ability to then integrate the services into solutions. During the next phase our ambition is to build on this foundation and become the leader in intelligence security.

So yesterday we announced two major transformation programs and the first is a group level program where we're working to consolidate, rationalize and modernize our ISIT delivery. And with this program we are creating a global ISIT organization where we are shifting from managing ISIT in more than 50 countries around the world to creating 10 strong clusters and one global ISIT organization.

Other things we are doing, creating one collaboration platform and we're also then leveraging shared data centers and cloud platforms to essentially build and modernize a higher ISIT capability. As Bart commented we are expecting IT costs to be reduced by SEK300 million upon completion in 2022.

But it is also important that there are efficiency aspects of this and productivity aspects but for us when we're looking at our intelligent products and intelligence security with data-driven intelligence security to be able to drive that at scale does require a solid and secure and also then scalable ISIT foundation and that is the reason that we are so excited about now really embarking and are starting to drive this change. The second program is the business transformation program focused on North America and the objective here is to create the modern and integrated platform for people management, workforce management and finance.

And this is very much about streamlining core operational processes, modernizing our way of working internally and with our clients. And from all the work and the pre-studies that we have done related to this I think that one of the most important benefits with this program is that with modern tools and modern applications our teams in the front line will spend less time on internal, more administrative issues and we will free up more time to engage and drive development with our customers.

So this is a little bit why we call it a business transformation program because it's really touching all the ways in terms of how we are conducting the business but then with integrated platform significantly more than modernized and efficient tools, etc., we see an opportunity to support the operating profit margin improvement up to 0.5% by 2022 onwards. I just want to highlight again that there are clear efficiency and productivity gains to realize with these programs, but they are also critical to build the capability to develop and to launch new intelligence services at scale.

So if we then shift to the next slide coming back and talking a little bit about intelligence security. For those of you who were with us at the investor update in September we talked quite a lot about our intelligence security vision and as we have communicated we are working now across a number of different areas with the development and of new intelligent products and services and one of those is related to crime prediction.

I should say that we are now adding our first intelligent products to our portfolio during 2019 and it's order days and these are the first steps, but we are very excited to now show you a first product that we call Insights. And an Insights is a good example where we are leveraging our size and access to relevant data to create higher value to our customers.

So let us look at the brief movie to see what this is all about. [Movie Starts] Securitas had loan experience from risk assessment.

We gather security data and make observations on a global scale. We combine this with intelligence to create products that bring value to our clients.

Today, we’re in the beginning of our journey and we’ve our first intelligent product in use, Insight. Insights is our application for data driven risk prediction.

Let me show you by searching specific locations, we can view the risk for different events for our clients. We can pan and assume to see how this risk varies across geography.

With this we can have insightful client conversations about their risk and how it varies overtime and we can tailor our security based on their specific needs. This is only the beginning and by adding data driven intelligence we can provide better security solutions and bring more peace of mind to our clients.

[Movie Ends]

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

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

So to start to wrap this up, at the investor update we also talked about what are the key focus areas right now. And we have a high focus on our customer value proposition.

We know that we have the best offer in the market, but now also very excited to launch one of our first intelligent products. And we continue to strengthen our protective services leadership and with these two transformation programs we all really accelerate in the transformation through modernization of our ISIT capabilities and platforms to really build a different level of capability for the future.

So with that we would like to wrap it up. I think it is quite clear from the graphs that Bart showed that 2018 has been a really good year with strong organic growth and positive profitability developments.

We are delivering on our strategy in terms of solutions on electronic security and we are now taking very important steps in terms of accelerating the transformation to lead the development of this industry in the future. So with that Bart and I are now happy to open up for a Q&A.

Thank you.

Good morning everyone and just three questions from my side please. Firstly, just a bit in more detail on the restructuring programs announced last light, and of the 650 million Swedish Kronor, you please help breakout the level between cash and non-cash charges?

I know you've already suggested that a decent proportion will be impairment rather than restructuring. And secondly, you've seen pretty strong margin momentum already through 2018 in North America and can you describe how the increasing CapEx will translate into high margins in North America which already best-in-class?

And lastly on working capital and shall we read this increase as a structural step up in the working capital requirements for large contracts and what sort of mitigating actions are you willing to take for and then some of your peers have started securitizing more and more of the receivables and so what's actions are currently on the agenda? Thank you.

Yes, I can make a comment and then hand over to Bart. First of all, I really want highlight that these are not really restructuring programs.

These are programs that we are undertaking to create a stronger capability or basically have a stronger platform in the future. So they're more future and forward-looking programs that we're investing in now to be able to accelerate the pace of change in terms of bringing intelligent products to our customers.

But for some of the financials Bart, I think maybe you want to comment.

Yes. As to the cash, non-cash you could say largely SEK200 million will be non-cash items from the SEK650 million you mentioned.

As to the margin improvement in North America yes, we have healthy margins in North America absolutely based on the scale of our business, based on the strong customer relations that we have been building over the years. What we are doing now is really modernizing and bring the entire company the 100,000 people into new scalable platform where we will benefit from modern technology, where we will improve and free up time for our branch managers be much more effective in what they be able to do and how they can communicate with our customers and we are quite sure that will deliver us additional margin improvement.

We are well positioned in North America as said before, we have talked about that. We have there a very scalable organization and this is then a further really good opportunity to further scale and take benefits from the scale that we have in North America and our customer focus as well.

So that is the main items there. When it comes to the working capital, yes, that is also to some extent of course related to the fact that we have good growth in the U.S.

as commented before. The U.S.

is a business which uses a little bit more capital compared to for instance the European business and especially also the electronic security technology uses a bit more capital compared to the guarding business. So we have been investing further into electronic security and technology during the year in North America, we have benefited from high growth as well in North America.

So that shifts the balance a bit further into further capital increase from then driven from North America. Anything you would like to add Magnus?

No. Good.

So I hope we did answer your questions.

Thank you very much.

Hey good morning guys and two from me please and just one up on a couple of the last questions there as well. I guess what is total 1.2 billion of P&L and CapEx charges, is there any way you can sort of help us in terms of phasing of those charges between 2019 and 2020, so we can understand the structure of the cash flow profile over the next two years?

Second question if you can maybe just touch on the 300 million of IT investments savings that you highlight. The language seems to allude to the fact that some of this might be reinvested in the future maybe you could talk about how much so that will be captured versus reinvested?

And then maybe just on the question that Bilal asked on the foreseeable side, I think he was alluding to the potential use of factoring. Could you may be disclose what level of factoring you have within the business and how you expect that to transition over the next few years please?

Thank you.

Yes as to your first question of the SEK1.2 billion so we have taken now 200 million in this quarter and then of course, we have the 650 and 550 as we have mentioned. It's about 50/50 you could say 50/50, 2019 and 2020 both for the items affecting comparability and for the capital expenditures.

As to your last question receivables and factoring we use no factoring in the company. So that is I can be very clear around that and we have no intention to use factoring either.

Factoring is just another way of financing the company. Then as to the ITIS savings.

Yes, we so based on this program we see SEK300 million of ITIS savings and that will materialize along the journey we see a huge opportunity as well to further develop and invest into what Magnus showed the intelligent products and that basically some of that will be used for investing further into that and nothing will be operating expenditures. We haven't really decided how much.

That will become clear during the journey and also on how big we further estimate the opportunity and how much we can accelerate around that. So I think I cannot give you a precise answer there, but I can provide you with our thinking around that.

Thank you.

Hi there. Good morning.

Thank you for taking my questions. Firstly, I just wanted to know what precipitates the North American business transformation more in North America first and now and what sort of thresholds do you use to assess the progress of these transformations?

And secondly, just to confirm is the 300 million Krona savings and group IT perpetual from 2022? And finally, what is the U.S.

labor churn rate currently running at the moment? Thank you.

Yes I can start with the first question. When you look at this program is something that we have been studying the opportunity and the feasibility of this for quite some time.

And we do have good momentum in the business but we also have an ambition to also really transform the company create a stronger company in the future. So when we have been looking within the organization how we're spending our time, where are we potentially wasting some time, how can we free up time to be more time with customers, etc.

We have then basically looked extensively at all the aspects of the business in North America and came to the conclusion that with an integrated platform we are now in a very good position to modernize and to create applications and tools that are really helping the business and helping our frontline to do a better job all the time. And a big part of that I think I mentioned earlier as well is that we're also then freeing up time, less administrative, more than time with customers, but also with this platform able to bring better services also to our customers.

So this is also really building a foundation that is going to last us for quite a long time to also be able to enhance the overall proposition that we have to our customers. So North America we felt now is a good time.

We have good momentum. We are investing for the future to become stronger, but this is obviously always done based on quite extensive feasibility study but also then we need to have good confidence which we do that there is going to be return on this investment and that's really the context for embarking on that journey now.

Do you want to take the other one Bart?

Yes. I think as to your dimensioned savings the SEK300 million, yes that is perpetual than annual savings that then should continue after 2020.

And as said before some of that we will invest into further development of the intelligence services as well. U.S.

labor churn rates for the entire North America they were around 63% last year and then for the full year around 68.

Great, thank you very much.

Yes, good morning. My first question is regarding the IFRS 16 impact.

Could you be a bit more specific please on the impact that we should see at the EBITDA level, EBIT level and on an income level from IFRS 16? Second question is, if you can provide any guidance on CapEx for 2019 if anything beyond and certainly just a clarification on the tax guidance for the year.

So I think so are you guiding for 28.5. No, I'm not a tax expert but I know basically is that 28.5 more or less a new run rate that we should be assuming also for the outer years or is 2019 a bit exceptional from a tax perspective?

Thank you very much.

Shall I start with the last question here? Yes the 28.5 is we used to be around if you remember 2016-17 we were hovering there around 28, 29 and then we dropped down this year because of largely the U.S.

tax reform to 25. Now what happens in the U.S.

is that there is the beat tax the so-called beat tax which is levied on foreign payments is increased, the rate on that is increased from 2018 to 2019 and that is then basically causing a reverse effect from the benefit from that we enjoy so to say in 2018 that we largely reverse that effect going into 2019. So that is the big movements that we see.

There are of course other countries as well here and there which lower and increase their rates and then also of course our tax base moves at such. In some countries we have more profit development and in other ones.

So assuming all of that and taking all of that into consideration then our best judgment is right now 28.5 based on what we see in 2019 and you could assume that that is also the rate going forward unless of course other tax changes would start to apply then in the future from other countries or from the U.S. I don't know.

Coming to IFRS 16 yes that is a tricky one and there is some disclosure around that in note number two. In the report I think you will find a lot of details there.

So as said on the assets the main impact come basically from that we are renting out buildings today, we are renting buildings in our operations and we are also using leased vehicles, those are the two main elements. And then when you so to say create the actual value of our future payments that is how IFRS 16 works then you come to that those are worth SEK3.4 billion in assets and of course you have to recognize the same thing on the liability side.

So that also becomes net debt. So that is how it works, the mechanics of that.

What it means to our operating result as some of these items will become, so we now have an expense in our income statement which will become basically depreciation on the one hand and financial items on the other hand. The effect on our operating result will be an improvement of a little bit more than SEK0.1 billion and then of course interest will increase with the same amount a bit more actually than SEK0.1 billion around 135 we actually estimate.

But still we need to go to the entire cycle which we will do now in Q1 when we for the first time, will close under IFRS 16 but we want to give you that guidance already now. Yes, I think that is the best thing that I can say around that.

And then of course -

What is incremental depreciation?

Sorry?

What is the incremental depreciation? I missed to go through the note 2, sorry.

700 to 800 if I remember well. 800.

Thank you.

You also had a question on CapEx with the explanation I gave now. What was your question there?

Just what do you expect for CapEx for this year as a normalized CapEx? This is extra CapEx link basically your two transformation programs but what would be your best estimate for the recurrent CapEx for the year?

We commented that our normal run rate would be around 2% CapEx to sales and that now you could expect will increase a little bit with the two mentioned programs for 2019 and 2020.

Thank you very much.

You are welcome.

Yes thank you. Good morning.

Two questions if I may. The first is on the U.S.

restructuring. If I understand correctly your explanation, it's mostly saving initiative time to reallocate the resource to commercial effort.

But in terms of the net margin gain that you esteem at 0.5% how much is actually hard cost savings and how much is actually dependent on that commercial success that you expect to get from these efforts because I understand it takes about three years to achieve. So it seems that it is more conditional on the top line in that?

I was curious about your views under the organic slowdown that you see in Q4 especially as we continue to see some high inflationary rate for wages. I'm just wondering if you could give some color on the competitive landscape and what you see panning out for this year in the U.S market.

That's the first question and the second question is on the European side. You already started a restructuring effort.

Here we're talking hard cost-benefit. Could you give us the exact number for the benefit in Q4 at the EBIT level and what you expect to be in 2019 please?

Thank you.

I think when you're looking at the North America business transformation program we are not breaking down the 0.5% in different components but what we do see that we have significant benefits from modernizing, significant benefits from harmonizing also then to also get scaled benefits from one integrated platform and systems. While at the same time then with better tools like we said, we also expect real savings in terms of administrative effort.

Well at the same time when we do that we would also be able to build better systems that will enhance the way that we are engaging with our customers and also the customer offering. So it is quite a comprehensive program and that's the reason we call it a business transformation program.

But we are doing well today in North America. So I also want to highlight this that this is not ready to address the fundamental problem these are forward-leaning investments that we are doing to become stronger tomorrow and that is also why we're very confident about the improvements that we're going to be able to derive while this program or after this program is fully implemented.

If you look at the organics sales growth overall in 2018 we are growing we believe significantly faster than the market. We also had higher comparatives in Q4 and when you look then at the overall commercial activity we have healthy activity in North America and coming into 2019 with good momentum.

So there is not so much to say about that part. One question that quite often comes up of course it's also wage inflation how are we able to handle.

Well when I look at 2018 we have been able to handle in a very good way in North America. It's also more of a dynamic situation there with our customers and this is something that our North American team have been very successful in doing and obviously also focused on continuing to be able to do as we go forward.

And then in Europe I think you've asked some question also then about the specific impact from basically the cost reduction program that we announced in conjunction with the Q2 results. There is a small impact in the fourth quarter.

The majority of the profitability improvement is coming from good commercial activity top-line growth and overall better cost control and with contribution from a number of the different units as well in Europe. So I hope that answers your questions.

Anything else to add, Bart?

No. Maybe to once more emphasize these are not restructuring programs here.

It's different from the European program that you have seen at the Q3 which was more a cost saving program. These are transformation programs but at the same time I should also emphasize that the savings, the benefits are quantified benefit it's not like betting on hope or anything.

It's quantified benefits line by line. And basically what it does I mean if 85% of your cost base is stuff this is really about improving and working more efficient with our staff base and you can imagine that there's quite some improvement potential there if you use new tools and modern technology with this platform then that is scalable with 100,000 people at once.

Yes that was it.

Yes and maybe to add some more flavor to that I mean, we are digitizing the entire business. We have vast presence.

We have a scale advantage and with some of the first, even if they're early products in terms of our intelligent products we really see in that we are able to create and add significant value leveraging our data and then obviously being smart about how we process in that data to enhance customer value and that is the reason that we are so excited as well about now being able to launch these programs because with these programs to be able to launch more advanced products at scale will also require a strong ISIT foundation and that has to be scalable. It's got to be solid.

It's got to be secure. So we are really excited about now starting to make these steps to be able to then realize and also then really push the agenda forward in the next three to five years.

Thank you.

Hi good morning. Firstly just a question on depreciation with the additional CapEx but also a number of write offs, what are your expectations for depreciation or incremental depreciation charges for them through the next couple of years and can I just check when you talk about the 300 million EBITDA savings from the IT program that is post any adjustments for depreciation?

Secondly related what is the expected regional split of those savings from IT and then thirdly you talked about 450 million cash cost from the other items. What is this?

Is it mainly redundancies or what type of cost are those going to be?

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

So with additional CapEx so the 500 odd million over the next couple of years there will clearly be higher depreciation charges but you're also writing down some assets which will lower depreciation charges. Can you just quantify on an annual basis the net impact of those two factors please?

Yes on a net basis as you commented upon the SEK200 million non-cash is then assets that we take out of the balance sheet and we will put 500 million instead and that will start to be depreciated as of largely 2021 as we start to use then this these platforms as well. So it's a bit of an impact there but it's not a large impact at the same time.

These things are amortized depreciation normally over five to six years over the lifetime and potentially even longer for some of the lifetime of these assets. Then you had, we're talking about the SEK450 million cash costs, some of that is restructuring but a large part is also when you do this type of transformations you need people that help you with implementing those types of platforms and so on.

And these costs can under IFRS not fully be CapExed. That is why we take some of these costs then as well as part of the items affecting comparability because otherwise we would have to take them into the operating margin and then we would have to explain you all the time.

So with this set up, we keep a very clean operating income statement where you can be able to follow the normal development of the business and then we take the other items as items affecting comparability.

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

Is that correct?

That is post the addition depreciation. Correct.

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

No. As said, we are bringing in external people as well that help out with this transition during these two-three year implementation time we are bringing external people yes.

What was your question there on the split of the savings?

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

That is basically, in large we have today 55 countries, 55 different IT organizations each of them having their own data centers, each of them having their own set ups and that is what we will break global and cluster that also in ten clusters around the world to delivery hubs. And that will basically, if you move from 55 data centers to few ones that is basically where the saving will come in.

You will create scale that you don't benefit from if you do it just country by country. That is based on modern technology, cloud based technology, based on also the communication opportunities that you have today that you didn't and the network opportunities that you have today that you did not have three, four, five years ago and that is really where we will take the savings from.

So data centers network connectivity but then of course we have 55 different ISIT organizations today, which we will globalize and bring into one organization and that will create some benefits of course.

Thank you very much.

Yes. So I have a question on the Ibero-America segment.

Do you expect any impact from minimum wage increases in Spain in Q1 going forward and also the internal challenges that you have seen in Argentina for how long do you think you will have these?

Yes. So when I look at Spain there are increases, Spain and also Portugal.

We have a good track record in terms of being able to cover wage increases with price increases campaigns and that is obviously something that we are at full speed with that work as well in Spain right now. I should also mention that a lot of the strengths that we have in the business in Spain is related to being able to offer solutions.

So we are also in a good position. One is obviously to manage the price wage balance with price increases, but we are also offering alternative solutions to our customers and that is also an attractive proposition when there is cost pressure potentially.

Argentina it is, to your question, it is an external, it's a challenging environment but we've also then not been satisfied with some of the things that we have done internally in terms of how we have managed this situation. So we have made some changes and we expect that we're going to have challenging conditions in the next couple of months and quarters but obviously with strong attention we generally speaking have a strong business in Argentina and then right now to navigate this as well as we can in the next couple of months and quarters.

Q - Carina Elmgren And then the new product that you're launching the Insight, is this going to be like integrated to your security solutions going forward or is it a separate product that you will sell and how would like the business model and margins be affected? Could you maybe give some more color on this?

And also how big scale have you started this? And how do you expect it to ramp up going forward?

So when we look at this like I mentioned before this order days and the Insight’s product is it's very much a product which is then one of the products that we are building now which is based on the ability to make predictions and to assess risk. I always look at what are the pain points that we are addressing from a customer perspective and is the customer willing to pay for the value and that's obviously they're also going to be the kind of the basic tests for a number of these products that we are developing.

We have done friendly user trials of this particular product over the last six months and I have seen significant improvement in terms of the engagement with our customers, the dialogue with the customers when we're essentially bringing much better knowledge leveraging our presence and our scale in our data in terms of assessing risk. But then we are also working on the commercialization of this.

So we will start to roll some of these products out during 2019, but then like we mentioned as well to be able to scale these products we also need to upgrade our ISIT platforms and that is also one of the reasons that we are now really driving this transformation programs as well is to be able to launch more digital products, intelligent products as scaled as we go forward.

Thanks.

Hi guys. Thanks.

I just wanted to clarify something really quick. At first regards to the U.S.

labor churn rate you mentioned that it was 63 last year increases to 68 this year but the North American one quoted in your annual report last year was 78. So I'm just wondering whether the discrepancy is here or maybe if I misheard.

And then additionally to the investment programs it's mentioned briefly in the press release that there's the potential to roll out a similar plan in Europe and I'm wondering if you could give any color on kind of the potential magnitude of that? I know you'll update next half but any additional information you might be able to give?

And if that's correct then why is a similar program not being considered for Ibero-America as well and if there's any potential there additionally? And yes I think that's it for me.

Thanks.

If you don't mind I will start with the second question related to Europe. We have seen and we are convinced based on the study and the analysis that we have done in North America that this will really help and modernize and really put us in a better position in terms of how we all operate in the entire business and but that is the case for North America.

In Europe we are looking at that but it's still early. So we're doing a pre-study and looking at the opportunity essentially to create the synergies and also then the improvements across the European footprints.

But that's something that we will have to come back to at the later time because it is early days for us in terms of assessing that. But one thing I can say is that we will only do and we will only deploy that type of a program if there is return on the investment but we will come back in the second half of this year with an update in terms of what we're concluding if there feasible business case or if there is not.

Bart do you want a comment on the first question?

Yes. Where as to the U.S.

labor churn rate yes, I should say that we have started to report on that because we felt there was a too big emphasize on that it's not by just understanding the percentage that you can understand the whole development in the business. What I would like to say though we follow it also of course on different levels and people are working with this on different levels and there are different reasons why there is churn.

But I can say that the churn has increased in U.S. from 2017 to 2018 and the number we refer to as a different type of metrics and the one we used to report to you but it's basically along the same lines.

The one we used to report outside was really the toughest one you could imagine the most toughest definition that you could put on yourself when measuring churn rates. So that is the difference now with the other amount that we mentioned.

But there was an increase in the churn rate yes.

And just on the first question I was wondering if I just get a comment on why it's a similar investment programs also being considered at least discussed for Ibero-America since it is being implemented for North America and considered for Europe? And then lastly sorry, just to ease, put some incremental cash, some cash outflows into the business over the next few years.

I am wondering if this has any sort of impact on you guys as M&A strategy maybe being a little bit more cautious on where you spend money on acquisitions in the next few years because of this? Thanks.

Yes. So on the first question when we say Europe in that case it's actually the Continental Europe and not our definition of Europe.

So we're including Spain and Portugal in that assessment as well. We obviously have a global ambition we're building for global scale and capability which means that we will look at all of these aspects but Europe is obviously from a size perspective and impact the other really big important after North America.

So that's the reason that we focus on Europe at this point in time.

As to the M&A question, I mean we start from a very healthy balance sheet. It has been healthy over the last years and we managed that carefully of course or if anything we are rating as well is really in a very good position and if anything it's more trending up actually our rating.

So we are in a very good position with our balance sheet. Yes this will of course affect.

It's around 500 million this year, 2019 next year but in the larger things this is not a huge impact as well. So we will continue with M&A and carefully look after different targets but we felt here that we had a good 2018.

We are starting off very well going into 2019. This is then about preparing for the future in 2021 and 2022 and we also believe we need to take those actions and support that from our balance sheet.

So yes, this will affect a little bit of balance sheet. The starting point is very good at the end of the balance sheet and we will continue with acquisitions as well and we have quite some leverage capability if we would come across a very good target.

Thank you.

Yes good morning. We're keeping you busy for a long time this morning with questions.

So I just have a couple of clarification if possible. Looking at the transformation program so starting off with the 300 million you're looking to save out of the IT platform.

Could you give us some indication what your group wide IT cost is for the moment so we can get an idea for what kind of savings you are looking at from a total perspective that would be great? Then just clarification also on your opportunity that you see for doing a similar program in Europe as in North America, would you consider that looking at the feasibility study that you already have a more advanced platform in Europe to start with than you have in the Americas, you don't really need to do the same kind of action to generate the kind of opportunity we're looking at?

And then finally, just on this French Airport contract that's now is going out as of Q2 could you just indicate if this is a below average or a higher margin than the average for the European operation? Thank you.

As to your first question there to give you a bit of perspective of the cost base when we talk about the SEK300 million savings, actually we are talking about a current spent which is a bit higher than SEK2 billion.

Excellent.

And to the questions related to Europe yes you were right in the sense that in North America it is obviously dominated by one major country being the U.S. So we already today have a different starting point and if you look at Europe we have operated and we are operating then focused on very much on a country level up until this point in time.

And it does vary as well the maturity and the capability that we have with our different platforms in Europe and that is one of the reasons that we're also studying this in detail. But I just want to highlight as well we will only embark on that type of program if there is a strong business case.

So that is an important point to make. Looking at the French airport contract we highlight that because of the size of the contract.

It is a well-run contract that we've had. We don't really comment on specific margins, but it was not a low margin contract.

It's a contract that we would have liked to keep.

Thank you very much.

Thank you. Good morning everyone.

On Europe it's a clear improvement in the margin sequentially I think actually compared to the past seven years we've never seen this sequential improvement in the margin. Can you elaborate a little bit?

I know you sometimes comment on large year and adjustments and so forth. Can you elaborate on really what is and maybe also a comment on how much of the savings program that is already kicking in this quarter, and then elaborate around what you're seeing in Europe?

Why is improving so dramatically?

Yes I'm glad that you also see the substantial improvement and we have had and this is really going back a few years with the increase of the refugee-related business. And there we obviously fulfilled an important role.

It generated quite a lot of extra in contract sales, but then it was also quite a painful transition, transitioning out of a number of those contracts in that business when that was gradually being wind down. So I think that one issue that we've had and that we also talked about in 2018 is that we had to take a tighter grip on our cost development and when you're looking at a very simple level in terms of how we’re growing costs in relation to how we're growing sales we are now in a healthier position overall.

But we also have good contribution from a number of countries. France obviously has been burdening significantly in 2018, but we have many other units that have been performing really well.

So I hope that gives you somewhat of a flavor. We've also had better commercial activity in 2018.

The offer that we have it does resonate. We have a stronger offer than anyone else in the market.

So we have a pretty good momentum as well, I believe going into 2019. Was there specifically to Europe?

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

What I am looking at is also the sequential trend from Q3, 2018 to Q4, 2018 which is a different world when looking at the margin trend and development. Is there any or is it just general where you’re driving in more cost focus culture and we see that your country managers are really pushing in another way to get cost down or is there any more tangible factors that are in play?

No I would say it's more of a holistic view. I mean cost obviously like I mentioned before, we did have a period of transition that was fairly challenging and when you're looking at the margin development that obviously starts with the gross margin and the pricing and they're like as Bart correctly highlighted as well, we've also had a stronger and more successful price wage outcome in 2018 than what we had in the previous year.

But then also, I should also highlight that between some of the quarters we have a significantly higher share now as well of solutions and electronic security. So they will also be depending on different projects there will be some variations as well and some more volatility than what we have been used to in the past.

But the general picture is we are going in the right direction.

Thank you. And one last question on the other segment actually.

The top line [indiscernible] that was considerably stronger than the market had expected, I know Johnson and Thompson have been coming into the number. But they got far from explain all the deviation there.

What is driving that? Is it FX or is it generally very strong organic growth underlying as well?

When you're looking, I mean we're not talking so much about our Middle East and Asia region because they are on a percentage basis smaller, but part of the answer is coming from healthy growth organically and also some decent profitability improvement as well by our team in what we call the EMEA region. So that is really the main driver behind those numbers.

I should also mention that but a lot of the business there, we are also benefiting from our global presence and we are also becoming better in terms of now bringing our customer value proposition to customers that want the relationship which is then cross-border on a global level.

Thank you very much.

Hi. Thank you.

I just want to ask a little bit on return metrics as I calculate these return is 38% on the first program and 46% return on the investment in the second program. How much more can you invest in this and also how fast?

And if you could elaborate a little bit more on the longer-term return metrics for you going forward and also if you as the business is evolving more into IT is changing incentives internally more to return on capital in employing metrics?

As to the return metrics you have very well calculated based on the amounts we provided. Yes this is of course as we say if you go from 55 ITIS organizations to one global one, there is quite some good benefits that you could achieve out of that especially also by moving to the newer technology which is available today in terms of both networking and storage processor capability.

And that is what we're really after here. So this is one clear pocket of benefits that we see and then of course we have the North American one where we have been preparing for this for quite some time now.

I mean we have worked with this for more than a year looking into how should we do this, how can we do this and of course North America is the first place where you look at this type of things because you can scale them up quite fast. So that is how you get to this quite good returns for these two programs.

As also Magnus talked about we will have a similar exercise for Europe, but as you can imagine that is a bit more sophisticated from the starting point as you're talking different languages, different jurisdictions and everything else as well. So that is why we need to even look more careful into that business case and we will see at the end of the day if we can come out with a very good business case we will do it if not then we will do something else.

We are here to make money at the end of the day and to make good returns as you rightfully mention and this will be the consideration how fast can we get to this benefit and also of course how much is needed to this to really build to further into bringing value to our customers by adding this additional new products that we have talked about. So that is also consideration; how much do we need this type of transformation in relation to that ambition that we have there.

So yes I think that is what I try to say here.

I think the second question if I understood it correctly that was more than are we adjusting our incentive systems more than in terms of return metrics as we go forward. Well that's not something that we are changing right now.

We have quite the robust and good incentive system today, but obviously continuously assessing if we need to make changes for the future.

Thank you.

Hi sorry to keep you with questions. Just a quick one here.

I just wanted to know what sort of wage inflation you are seeing across the North America region and in Europe as well? Thank you very much.

Yes. As commented before our business has a wage inflation of around 2% on a long-term basis and then in worse economical times that will drop to 1% and in better economic times that will increase to around 3% and that is where we are right now.

We are now around this 3% both in North America and in Europe basically. Yes.

Thanks very much.

Thank you and I hope I am the last one out here. So first one question on this program again or maybe a clarification I think you got the question before.

The IT savings how will that be divided among the regions? That's one and also regarding all these savings I mean full effect in 2022 but when can we expect to see the first benefit?

Would it come already in 2020 or will it be more like from one day to the other? And then the last question in Europe you spoke a bit about the CC tax changes or the change to tax credits before in 2018 that it was going to impact also Q4.

Could you quantify that and also what we should expect from that change as we move into 2019? Thanks.

As to the tax basically yes well as commented before this is largely impacted from the U.S. tax reform where at Q4, 2017 we had a revaluation of the deferred tax assets increasing than the tax line.

So that was a one-off. Then we benefited from the tax regime in U.S.

during 2018 and now there is a step up again in the tax rate for the U.S. related to this beat introduction and it's just how it will continue like this.

I'm speaking about France.

About France? Yes, the CC is another component adding yes, sorry.

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

Yes.

And how did that affect the margin because it was a cost thing? So how did it affect the margin in Q4 in Europe?

And how would it affect the margin going into 2019 when this tax credit is eliminated entirely or replaced by other?

So it affected negatively the margin in the fourth quarter because there was due again to the way the system was introduced we had during one month no benefit in France from the system during the month of December actually. And then, this will be as of 1st of June 2019 there's a new system in place that will largely but not entirely compensate how it was before and there will come another system in place more towards October, November in France that then will fill out a large part of the gap but at the same time we have embarked on a price increase in France connected to this change in CC because this is not only affecting us of course it's affecting the whole industry.

So we also are compensating that then a drop from the CC with price increase in France. Yes, I think that was that one.

Around the IT savings then and the split per regions well, I mean North America is obviously North America but you talked about IT savings. So related to that program that will largely affect all of the countries around the world, but a bit larger effect in Europe actually from that.

But it is spread all over the world you could say as well. So it's more or less equal with a little bit more effect in Europe.

And then of course to the timing of those savings as commented upon we expect that the run rate will really be there by 2022 when that will kick in and there will be some gradual impact in 2020-2021, but really the bulk of that will come more in 2022. Great.

So I think with that – yes did you have another comment?

No I just said thank you.

Great. So with that I would like to say thank you to all of you.

I think it was a bit longer than normal. Thanks a lot for dialing in and just to wrap that up as well.

We have strong momentum and we're really excited about the next steps that we are now taking as a company as well. So thanks a lot to all of you.