Securitas AB (publ)

Good morning, everyone, and welcome to our Q4 2020 call. Bart Adam is sitting in Brussels; and I’m Magnus Ahlqvist, I’m sitting in Stockholm today.

2020 has been a very different and a challenging year due to the impact from the pandemic, but it’s also been a year when we have taken important steps in driving the modernization and transformation of Securitas. But before we look at the performance in the quarter, I would like to express my deep gratitude to all the Securitas team members, our partners and clients for your terrific contributions and leadership in 2020.

And looking at Q4, we continued the positive improvement trend from the second and the third quarter. Organic sales growth was 1%, with very positive impact from North America, but continued negative impact from aviation that affected the growth rate in Europe and Ibero-America.

Our operating margin improved to 5.3%, same as the pre COVID levels in Q4 2019, and the operating margin was supported by strong performance in North America and Ibero-America, slightly hampered by Europe and the other segments. And we were on par in terms of price wage in the full year.

We had a continued strong operating cash flow in the quarter with positive timing impact related to COVID-19, then helping some of the cash generation in 2020 on a temporary basis. We continue to take actions to drive the transformation agenda, and we’re progressing well with several important electronic security acquisitions that we closed in 2020.

And to sharpen the business and focus on markets where we can generate significant impact and profitability, we decided in 2020 to execute a market exit in 11 markets. And we have now executed nine of those in the last few months and expect the remaining two to be completed during the first half of this year.

The Board of Directors are proposing a dividend of SEK 4 for 2020 and this is at the maximum range of our dividend policy. Turning then to Solutions and Electronic Security.

Solutions and ES businesses have been negatively affected by the corona pandemic, but we achieved 5% real sales growth in the year. We realized a number of important acquisitions in 2020 and the acquisition of Stanley Entities and five strategic markets was closed in early November, and the integration is progressing well.

In December, we closed the acquisition of FE Moran in the U.S. and FE Moran is a high-quality operation and team with strong monitoring and integration capabilities.

These acquisitions are important to enhance our client offering in key markets and for our ambition to double electronic security and solutions by 2023. And we are very glad to welcome these teams to Securitas.

Let us now then turn to the performance in the different business segments. And as usual, we’re starting with North America.

And we had a strong continued recovery, as you can see on this slide, in North America and organic sales growth in the fourth quarter of 4%. This improvement was driven by our Guarding and Critical Infrastructure Services businesses, and we generated significant extra sales in the quarter that offset some of the temporary portfolio reductions that are related to the pandemic.

We had a solid operating margin in the quarter at 6.4% and we had good performance across all different areas of the business from a margin development perspective. Guarding was the main contributor, thanks to higher extra sales, but we also had good support from critical infrastructure services with extra sales, including some retroactive billing.

Shifting then to Europe, where we had 1% negative organic sales growth in the quarter. These tend to be compared with 1% positive same period last year.

And this was mainly due to the impact from aviation, primarily then related to COVID pandemic and the impact on our airport security business and some previously announced contract losses. Slightly higher extra sales had a positive impact on the growth in Europe in the quarter.

Looking at the profitability perspective and the margin. Margin in Europe improved significantly versus second quarter and the third quarter of 2020 to 6% in Q4.

Looking at the decline versus Q4 last year, and that was primarily related to the negative impact from COVID-19 due to the impact on our aviation business. And similar to previous quarters, the negative impact on related idle time costs have, to some extent, been offset by corona-related government grants in several countries.

Shifting then to Ibero America. We had organic sales growth of negative 1% in the quarter, and the sales growth in Latin America declined due to negative impact from the pandemic, primarily on airport security and weak performance in Peru.

But we recorded positive growth in the important market of Spain, but also Argentina, but at lower levels versus the fourth quarter in 2019. Security Solutions.

Electronic security reached 30% in the quarter, and this was supported by the TECO acquisition that we have successfully integrated during 2020. And after the acquisition in January last year.

The operating margin in the quarter was a strong 5.3%. And we had strong performance in Spain, Portugal in the quarter, despite the challenging environment.

And the operating margin was further supported by year-end reconciliation of accruals in Spain. And we are taking further actions to improve the performance in Argentina and Peru.

And with that, now shift the focus to our financials and handing over to you, Bart.

Thank you, Magnus, and welcome to all of you. Good morning here from Brussels from the home office.

Sorry, we are shifting to the wrong slide here, just a second. Here we go.

Well, this was a quarter during which the impact from the corona was, of course, still important, and we can see that such impact further reduced compared to the earlier quarters. And our business, I would say, confirmed great resilience again and also a clear path of recovery.

Of course, the operating income has been affected from the corona situation, negatively mostly than from the airport security business and, of course, the idle time of some of our employees. The operating income was supported then from extra sales to support our clients with the pandemic, and by different proactive cost-saving actions as initiated within the different parts of the businesses.

Then also, the operating income has been positively affected by around SEK 230 million in corona related government grants and support measures in the quarter. But these grants and support are then offsetting, to some extent, the increased cost levels from the idle time.

And this amount of SEK 230 million was distributed over the totality of the business, but with the biggest weight within Security Services Europe, where we also have the most people on temporary unemployment. In earlier quarters, if you remember, this amount of corona related government grants and support was in the second quarter approximately SEK 350 million, and in the third quarter, approximately SEK 200 million.

And this goes largely hand-in-hand with the development of the number of people on temporary unemployment schemes. Back in mid-April, we had then at the worst point in time, over 10,000 employees on temporary unemployment.

And this reduced 7,000 mid-July, further reduced the 3,000 mid-October, but now we surged somewhat to 4,000 mid-January. Of course, in alignment with the development of the pandemic largely.

The operating income was then negatively impacted by increased provisioning levels of SEK 80 million in the quarter. And this amount of SEK 80 million relates to increased risks in our business environment, mostly for collection risk of receivables.

On the amortization of acquisition-related intangibles, that is a bit higher to the run rate you have seen in previous quarters, but there has been a small one-off adjustment here in this number in the quarter. Then we go to the line of acquisition-related costs, and that included some of the transaction costs related to the acquisitions we made in the fourth quarter, as commented by Magnus.

We then turn to the line of items affecting comparability, and we accounted in this quarter for SEK 420 million as items affecting comparability. Of this amount, SEK 192 million relates to the transformation programs that we accounted for in Q4, SEK 113 million relates to the cost-saving program, as we announced back in Q2 of this year.

And then I should also say that the exit from 11 countries, which was mentioned as well, creates here a net expected loss of SEK 117 million on these 11 entities. So this is the – what we expect as a net loss from these exits, SEK 117 million.

And that was also fully accounted for in the fourth quarter as part of items affecting comparability. And then these three items then add up to the SEK 422 million you see here on the slide and further details can be found in note six to the report.

For the existing transformation programs, I mean, for the ones we announced two years ago, we referred from the start to a total of SEK 650 million that would come in during the period 2019 to 2021. And referring to that for 2020, we have said earlier, we could see an amount of around SEK 250 million for the full year, and we landed actually a bit below that number.

Then important to understand is also that we accounted for a bit more than SEK 100 million related to the newly announced transformation program, and that explains then the higher quarterly number that you can also see in Note six for the transformation programs. Then we turn to the financial income and expenses.

These were positively impacted, of course, by the favorable net debt development and also the exchange rates for the interest income and expenses. We move to the tax line, and where the full year tax rate comes in at 27.4% versus 27.2% last year.

And an earlier estimate for this year of 27.0%. The full year tax rate has been impacted from non-deductible capital losses and impairment of assets relating to what we mentioned before, the exit from 11 countries.

So that created some non-deductible costs. Okay.

And then we move to the next slide. We consider here the effects from the different currencies on the quarter.

And here, we can see that there has been a relevant negative effect during the quarter, a headwind from the foreign exchange during the quarter of around actually 9% to 10%, as you can see here on the level of sales and operating income. And that you can see from the difference between total change and real change on the different lines.

Actually, the negative effect from foreign exchange on sales was close to SEK 2.5 billion in the quarter. And on operating income, it was negative on around SEK 160 million in the quarter.

The euro dropped a bit during the quarter here compared to the same quarter last year, but then we were especially affected from the weaker U.S. dollar compared to a year ago, a continuation of what we started to see happening already as from Q2.

We move to the next slide, and that is our cash flow. And here in the fourth quarter, we had a good cash flow coming in of more than SEK 1.5 billion as cash flow from operating activities, adding then to earlier good quarters and a total for the year of actually SEK 7.2 billion as cash flow from operating activities.

And that is a historical number. Capital expenditure by itself was close to SEK 2.8 billion and is trending to the lower side of the 3% of group annual sales, and that then, as you know, includes IFRS 16.

The operating cash flow was positively impacted by collections. We had good collections in the quarter, but we shall also add that the operating cash flow was helped by the lower organic sales growth and by the corona payment relief measures.

These relief measures amounts for the full year to a bit below SEK 1.5 billion from timing relief of payroll tax and value-add tax payments in Europe, but mostly from the U.S. and actually, this number is a bit higher compared to our earlier expectations.

So we end the year with SEK 5.9 billion of free cash flow, which is a strong performance. So I believe we can conclude we had a strong cash flow coming in during 2020, also actually when excluding the close to SEK 1.5 billion from the corona related relief measures.

We move on to the net debt. And the net debt ended at SEK 14.3 million at year-end, considerably down from the SEK 17.5 million at the start of 2020.

We had a positive free cash flow of SEK 5.9 billion, as we just commented on the previous page. And then an amount of SEK 1.8 billion has been paid for acquisitions as we close on a few larger acquisitions in Q4, as mentioned by Magnus, and then we paid a bit over SEK 400 million in items affecting comparability as well.

And we paid a dividend in December 2019 the dividend for SEK 1.7 billion. All in all, these combined effects then reduced the net debt with around SEK 1.8 billion, but then there is a further positive effect of EUR 1.3 billion in translation, ending then the net debt on 14.3%.

Moving to the graph on this slide. Remember that the increase between 2018 and 2019 on the net debt level was a result of the implementation of IFRS 16, which increased the net debt with a bit more than SEK 3 billion.

So when comparing to 2018, we end 2020 now with the same net debt, but that then includes SEK 3 billion for IFRS 16, which was not there in the 2018 number. So a remarkable development.

The net debt in relation to EBITDA is on 2.1 compared to 2.2 at the end of 2019, and I believe this is a strong number as a judgment from our strong balance sheet. Okay.

Then we move to the financing side, and we have here our debt maturity chart. We have good liquidity at quarter end with SEK 4.7 billion in liquidities.

We have earlier said that we renewed RCF, a facility now with 10 core banks, for a total amount of SEK 10 billion, and the facility is for five years with the possibility to extend to 2027, actually. And this RCF is also fully undrawn at this quarter end.

We have a eurobond maturing now in February now this month of EUR 350 million, and our plan is to refinancing that with a similar facility. And that should be no problem, of course.

We continue to have ample headroom in our rating, and we have no financial covenants in any of our facilities. Based on our strong balance sheet with a net debt to EBITDA, they’re at 2.1, and with our solid financing in place, I believe we are very well positioned for the future and in a strong position to accelerate the transformation.

And with that, I can hand back then to Magnus in Stockholm.

Very good. Thank you, Bart.

So I would now like to share a few updates regarding our transformation programs. But first, a few comments related to the corona pandemic.

So with the unfortunate development of the pandemic also now during the recent months, we are still facing a situation with significant uncertainty and some challenges. But we are working with clear priorities since January last year to manage the situation and always maintaining a high degree of preparedness.

And we have been reporting a number of people on temporary unemployment schemes. And as Bart mentioned, we had a slightly higher number in January at 4,000 people compared to 3,000 in October.

But let us now shift focus to a progress update related to the transformation programs. So two years ago, we started a period of significant modernization and business transformation to ensure that Securitas – and to ensure the leadership of Securitas in our industry.

And the global IT and North America programs that we announced two years ago were the first programs in this journey. Both of these programs are running according to plan, and we are expecting to reach the targeted objectives.

And when you look at North America, we had delivered on a number of critical milestones in the second half of 2020. And in that process, also gaining valuable knowledge that is relevant for the programs in the other divisions that I will talk about in a few minutes.

But with the Q2 2020 report, we also announced a cost reduction program, which was related to the impact from COVID-19. And these activities are progressing well, but there is still uncertainty related to a number of aviation contracts, but we’re working through as swiftly as we can while maintaining our obligations to our clients.

But as part of our strategic review and to sharpen our operational focus and profitability, like I mentioned at the beginning, we decided to exit 11 smaller countries where we consider the current and future business opportunity to be limited. And we have completed nine of these exits during the last few months, and we expect to exit the two remaining countries during the first half.

And if you then ask the question, well, what does that mean for Securitas as a company? Well, these are smaller markets, low profitability markets, but what we are achieving is to remove complexity and to have a sharper focus and ability to drive the strategy and value creation in the remaining footprint that we have around the world.

So as commented earlier, we are on plan to complete the work with the first two programs, North America and Global IT, towards the end of 2021 and now shifting the focus to realize the targeted impact in 2022. And since we are driving quite some change in the company, we made this slide just to give a simple overview also in terms of the time lines.

And I should highlight here that when we talk about items affecting comparability that Bart referenced, essentially then those are ending in 2021 or at the end of 2021 related to the global IT program and North America business transformation. But for the programs that we’re announcing today, business transformation in Europe and Ibero-America, we’re initiating the last phase of this extensive modernization and transformation journey that we initiated two years ago with significant investments, but also with clear deliverables.

And it’s important to highlight that when we announced the North America transformation program in 2019, we did communicate that we were going to analyze Europe. And after a thorough analysis and preparation, we are now ready to start the second major phase of this transformation program in Ibero-America and in Europe.

The target is to increase the operating margin in Europe to around 6.5% and Ibero-America 6% by 2024. Approximately SEK 1.4 billion will be recognized as items affecting comparability between 2021 and 2023, and investment of approximately SEK 1.1 billion.

But to give some more flavor, I believe it would be valuable to look at European program in some more detail. So that is essentially what we’re in the process of doing and also the expected outcome.

So looking at Europe, this program represents a fundamental step. It’s a strong grip to strengthen our European business and to drive the strategy at scale.

And we achieved this through focus on a few key areas that you see outlined here in the blue boxes. First one is building a common operating model for Europe, and key aspects of this include organizational blueprint, aligning European country organizations and brand structures over time, rolling out best practices to ensure that all business lines, including guarding, are performing well, but also to ensure a similar way of working to enable cross country system implementation over time.

And the second major component is the modernization of IT systems and tools. So a few important initiatives here include rollout of common HR systems across Europe, modernizing ERP in a few key markets where we have the largest needs, and also initiatives like piloting leading edge recruiting and workforce management systems.

And there, I should highlight, there is a lot of opportunity with modern systems and tools that are highly relevant also for us to leverage, given the scale and the size of our operation and the number of employees. The third important activity is to accelerate and drive solutions in Electronic Security.

And we are achieving this by a dedicated organization and leaders for solutions for Electronic Security but also for our Securitas operation centers in the key countries. Reinvesting some of the efficiency gains in operations in further capacity in solutions organizations, and developing frontline sales tools for solutions enabling the entire organization to sell in an easy way and engage with a client for successful delivery.

The fourth area, we’re investing significant amounts in further digitization of our front-line people, all the way to the digital interaction with our clients. And we do this to enhance the work for our people and, hence, also enabling improved client value.

So this – some of the key activities here then include modernizing the digital tools we use for interactions with clients and officers. Further driving the use and penetration of these tools with benefits for clients and Securitas.

And we also see this as a platform for innovation that, over time, will allow us to create superior insights and value to our clients. All of this has been carefully prepared, carefully analyzed.

And we’re obviously now launching the transformation program to achieve results, but with minimal disruption. But this is a multiyear program, but we are very excited about getting started on this important journey.

And all of these activities are fully aligned with the strategic objectives that we have also shared on a group level to drive our intelligent protective services strategy at scale, transforming guarding with improved margins, supporting our ambition to double solutions in electronic security, and enhancing client value. So with that, we should sum up the quarter.

So we continued the positive development from previous quarters with improving organic sales growth and operating profit margin in Q4. And we are still in a challenging situation related to the pandemic, but we are actively managing this situation with clear priorities and actions.

And with the announcements today, we’re taking the next significant step in the transformation journey that we started two years ago. But before the Q&A, I just wanted to mention that we have made a number of announcements today, and one announcement is that Bart will step down from the CFO position in August this year.

And that Andreas Limbach, who is currently leading our EMEA division, will become CFO. And Bart, it’s still very early days and we’re going to continue working for the next 6 to 12 months, but I just wanted to say thank you to you.

You have contributed tremendously during many years with Securitas with your leadership and contribution. And I’m still looking forward to working with you during the coming 6 to 12 months.

But with that, we are now ready to open up the Q&A session. Thank you.

Thank you. Good morning, and thank you for taking my questions.

So I’ve got three, please. To what extent of the extra sales driven by COVID proving stickier than you thought?

Or are some of those extra sales now dropping away in certain geographies as potentially things look a bit brighter. The second question, provisioning in Europe seems to be increasing or that’s what’s alluded to in the commentary.

Can you give more details on which clients are concerning you that relates specifically that provisioning? And then finally, on the previous transformation program, you guided to SEK 350 million to SEK 500 million of restructuring costs.

Now it’s saying that will depend on airport business and government grants, but it’s not entirely clear. Do you still expect to be in that range in total and where within that range do you think is the most likely outcome?

Thank you.

Yes. Thank you, Edward.

In terms of the first question related to the extra sales, yes, they are very much COVID related. But there has also been a certain stability in these extra sales when you’re looking at the last six, seven, eight months.

And part of that is obviously related to a continued challenging situation for the world in terms of the impact from COVID. When I look in then from a longer-term perspective, I should highlight that the extra sales are obviously short-term nature, but they are also helping and compensating temporary reductions that we have in the ongoing portfolio.

So this is obviously something that we are carefully monitoring in terms of what is the development month by month, but also then discussing with clients as well what are the things that we also need to change in the security equation also related to health and safety, for example, in the post COVID era. So I think the simple answer is, yes, there is stability, but we’re also then working with clients to also be able to project and also try to address some of the needs that they will have after.

And on the provisions in Europe, I can make a general comment, and that is that we’re still seeing significant uncertainty. We have not had significant realized bad debt or issues in terms of accounts receivable, like Bart and I have commented on since the beginning of last year.

We closed the monitoring and obviously managing any potential exposures very, very carefully. And this is a responsibility that is cascaded throughout the entire organization.

But we are taking the approach that there is significant uncertainty in the environment. And for that reason as well, we feel that we’ll rather be well consolidated going into 2021.

Bart, any additional comments on that one or maybe on the third question in terms of the SEK 350 million to SEK 500 million?

Yes. In terms of the extra sales, I would just like to comment that we also see some new services emerging then around the vaccination centers, just as additional flavor here.

On the provisioning in Europe, I think there must be some misunderstanding, Edward, because we have not been increasing compared to earlier quarters, at least, if that was your question, not sure. But compared to earlier quarters, we have reduced the provisioning levels.

And I think we have ended now the year, as Magnus also said, in a very good way with a good balance sheet in relation to potential risks that we are facing. When it comes to the transformation programs, I think you referred there to the restructuring program that we announced in Q2.

And as you rightfully said, that was announced with a range of SEK 350 million to SEK 500 million. We are trending to the higher end of that range, and that is mostly related to Ibero-America that also has taken, compared to Q2, that has been more affected now in Q3 and Q4 from the pandemic, where we are also taking then some extra measures.

But I mean, that range is still the value change. But as I said, trending definitely to the higher end of that point.

And then it will depend on what happens to aviation, what happens also to government grants, how long will they last or not, if we would be outside that range, so to say. But still within the range, but on the higher end of it.

And then as we also commented now on the line of cost savings, we have also accounted in this quarter now for the SEK 117 million related to the exit from the 11 countries. So the 11 countries has been, in its totality, accounted for when it comes to the exit costs related to that as part of the SEK 230 million that you will find in Note six.

Thank you very much.

Thank you. Good morning, everyone.

So starting with the costs related to the new transformation program, the SEK 1.4 billion. Can you split that out between write-downs and cash cost?

And how do you see the cash costs splitting between different buckets as well? And then on the aviation impact.

So am I right in thinking that, that’s about a 3% to 4% negative, the group organic at the moment? You have been renegotiating aviation contracts, so interested whether you have actually now reached an agreement in some places where you might be exiting contracts.

Can you give us any guidance in terms of top line impact from contracts which will not be continuing in 2021? And then finally, could you comment on the organic development during the quarter?

So you hopefully gave us September at plus 1.5% organic. Could you comment on December and into January as well?

Thank you.

Sylvia, I can – thank you for your questions. I can start with number two and three, and then I’ll let Bart comment a little bit on the cost related items on your first question in terms of the transformation programs.

Aviation, well, you’ve assumed 3% to 4%, it’s a little bit lower in the lower part of that range or slightly below when you’re looking at the impact in the quarter. The process, in terms of aviation contracts, it is not very, very easy because we have, as we commented on earlier quarters, a number of contracts that are still running another year or two years.

But we are working through this, all the main contracts with essentially two main outcomes. One is that we are renegotiating to the contract which is sustainable or we work towards terminating as quickly as possible.

But this is fairly hard work, and it does take some time. That also then means that it depends quite a lot on what happens in terms of recovery in the aviation sector in general over the next three, six, nine, 12 months as one important factor.

But then obviously, also the degree of success that we have in renegotiating these contracts. So yes, this is also the reason that I highlighted that we are still facing some uncertainty related to aviation.

On the question in terms of the organic sales growth in the fourth quarter. We’re not breaking that out, but it was fairly evenly split when we’re looking in the quarter without breaking out any detailed figures.

Bart, do you want to comment on the programs and the cost assumptions?

Sure. On the SEK 1.4 billion, Sylvia, that you mentioned, a bit more than SEK 200 million relates to asset write-offs.

Retirements. And then the SEK 1.2 million remaining, so to say, would be cash cost.

But you also asked about the other buckets, not sure what you wanted to know there on this then remaining SEK 1.2 billion?

Yes. It’s the remaining SEK 1.2 billion.

I guess, how much of that might be redundancies versus implementation costs?

No. The vast – yes, the vast majority of that is implementation cost, integration costs.

There’s also only a limited part in restructuring. But all of that is cash cost, the SEK 1.2 billion.

Okay. So if we think about what you’re actually doing, it’s mainly around the systems rather than reorganizing in any way how Europe or Ibero-America run.

Historically, you said that Europe is very fragmented compared to, let’s say, the U.S. You have a lot of duplication of costs.

So just trying to understand, I guess, where the savings will be coming from mainly.

So I can comment on that part. So I mean, when you look at one common and very important aspect here is when you look at Europe, we have, obviously – and if you contrast to North America, we have a number of countries.

We have very – or different degrees of maturity between different countries, also in terms of the product mix. Where we are with the general business mix in the value chain, which also means that there is a significant spread as well in terms of profitability.

One very important aspect of this work is to drive more alignment of the organization but also processes so that we can achieve real scale benefits across Europe. And that, obviously, in combination with a sharper focus in terms of organization and resources to sell solutions with clear leadership, same on electronic security same with our operation centers, we believe that that’s going to make us sharper and stronger, but also to be able to really drive a higher value business mix across all key markets over time.

But some of that alignment, obviously, does take some time as well. So this is – I mean, you should look at this as an aggressive investment in terms of strengthening our capabilities, but also then with a common operating model and digitization, enabling us to drive the strategy at scale across Europe.

So those are really the core components here. So it is a mix of different aspects when you look at the European transformation program.

Yes. No, that’s very helpful color.

If I just – final comment. In terms of how you think about when a cost item is one-off versus just part of normal kind of activities or investment, just what is the thinking around that SEK 1.2 billion being actually split out as one-off?

Yes. Well, the thinking is that, obviously, this is something which is something – very significant investment and transformation, something which is outside business as usual, definitely.

And so we have chosen to report this very clearly as items affecting comparability so that you can also follow very clearly what we are investing into these programs and what they are costing. If you would mix it in the operating result, you would just have to explain all the time what the effect is.

So now it’s very clear there. You can easily follow it.

And as we say, we consider it as unusual because it is investments that you probably only face like every 10 or 15 years. And it’s really transformation of the business at scale.

And now we are also finalized. This is the last version of it.

We have done the North American transformation, which is working very well and according to plan. We have used those learnings and to also transfer that to Europe and to Ibero-America to really be able also to transform these businesses like we are doing in North America.

And then we will be a different Securitas when we come on the other side of the programs. So that is the whole thinking here, what we think is the right approach and also the most transparent approach towards the investors.

Magnus and Bart, just two questions from my side. The first two relate to the new transformational program that was announced.

Just to follow up from Sylvia’s question, I just wanted to confirm the total cash impact here, right? The SEK 1.2 billion CapEx, is that in addition to the SEK 1.2 billion cash impact from the P&L?

Then my second question is on further sort of cost of transformational programs. I think we’ve had fairly good line of sight that this one was coming.

I was just wondering whether there are any more potential cost programs or transformational programs in the pipeline? And then my last question is on aviation.

If we look at Securitas’ aviation exposure going into the pandemic, it was about 7% of group sales, which at the time was about sort of SEK 8 billion of revenue. I just wanted to get an understanding and assuming we get back to a normal world, once you’ve renegotiated all your contracts and exited some of them, how big do you think your exposure would be thereafter?

If you compare it to the business running at SEK 1 billion prior to the pandemic. Thanks very much.

Thank you, David. Bart, do you want to take question one, and I will take the other two.

Yes. Sure.

So on the first question, that is a very easy one. The answer is yes.

So the SEK 1.1 billion CapEx, is that in addition to the SEK 1.2 billion cash from items affecting comparability, David. So that was a clear yes to your question there.

And with that, I hand back over to you, Magnus, on the other transformation, potential transformation programs in the aviation.

Thank you, Art, and thank you for the questions, David. On the further programs, well, it’s very important, I think, to emphasize that when we started in 2019, we communicated that we are entering a period of accelerated transformation and quite extensive transformation.

That’s also the reason that we share that we are looking at Europe. Now we have done and our European team, together with our IT team, have also done a rigorous job in terms of analyzing starting point and also the wanted position, where can we take the business.

So there, we feel very excited and also glad that we are now able to be able to drive that next step. I very much look at the announcements that we are doing today as the second major step.

We took the first major step in 2019 and 2020. We have been progressing really well with these programs according to plan.

And when I look at North America, obviously, as we are completing by the end of 2021, a lot of our focus there now is on benefit realization. But we also learned quite a lot in that process.

And we have also then looked at, when you look at Europe, knowing that it is more of a dispersed picture in terms of our business and the maturity and the business mix, et cetera, we’re taking a very strong fundamental grip in terms of really strengthening and aligning around a higher value business mix, more digitized, more modern, better for our employees. And as opposed to doing what we have done in the past, we will typically do things initiative country by country.

Now we’re taking a strong grip, looking at the best practices after then rigorous analysis to be able to launch that. So with that answer, David, I mean, I don’t have a crystal ball to look into the future.

But it’s very clear, from my perspective, that this is the second major step in our transformation journey, and we believe that the investments that we are doing over the next few years and what we have done in the last two years, they will serve us really well for quite some time in terms of strengthening our overall offering and efficiency and way of working. So I hope that gives you a reasonably clear answer to the question.

Looking then at aviation. Like you highlighted, around 7% of sales before COVID-19.

It is a slightly few percent lower number today based on the current run rate and also the impact in terms of Sylvia’s question earlier on the organic sales growth. And the simple answer here is that we are very clear internally, but also with our clients that it’s got to be a sustainable business.

And that’s something that I think anyone who is in a business would also be able to understand. And if that means that we’re going to have further reduction of aviation contracts, if we are not able to renegotiate to sustainably decent profitable contracts, well, then we will have to accept that.

But that is very much client by client. We feel good about our value proposition, the quality that we bring, but we have to make sure that everything that we do is good quality and that it is sustainable.

That is the only way that we can deliver the services that our clients are also expecting and the quality from Securitas with our people. So I think the simple answer is that we are operating a few percent lower than we were before and where that will go over the next six, 12, 18 months, that depends quite a lot and also on the work that we are doing in this process with our clients.

So two questions from my side. The first one is on those 11 countries that you are exiting.

What is the margin implication for the business regarding this? And the second question is regarding the other segment in your business areas, it was minus SEK 178 million in the quarter here, which is slightly down or up depending on how you see it, compared to the going rate for the recent quarters?

And what’s behind this increase here?

In terms of the exit program, I mean, this represent a fairly small part of our total sales. So around SEK 460 million.

So I think that is one important part. I should also say that they are not the most profitable markets that we have.

We have a clear ambition in terms of where we are moving in the business mix, but also the value chain. And there, we have deemed that the opportunity in terms of improving significantly there, where there is meaningful impact for the company, was quite limited in relation to the investments that are required.

What’s also important about the exit program is, because we don’t take this lightly, exiting markets where we have had a presence, but it is also a matter of focus. We’re removing complexity.

We’re enhancing focus on the markets where – that are really important for Securitas, but where there is also high importance for our clients as well. So I would say that the benefit that we are also seeking, of course, is improving simplicity by removing complexity.

And I should also highlight, operating in a market, it also then requires quite strong engagement at all levels to make sure that it’s a good quality operation in line with Securitas values, ethics, standards. And we want to bring our protective services offering in the markets where in the presence.

So that’s why we are increasing quite a lot to focus on the key markets where we can make the biggest difference for our clients, but also in terms of value creation. In terms of the other segment, you rightfully picked that up as well, is that it is a higher cost than normal.

This is related to some professional services where we had a significantly higher amount in the quarter. But that is a temporary nature.

So not something that you will see permanently going into the coming quarters.

Three for me, please. So firstly, now that we’re in a more business-as-usual environment, are you seeing signs that clients are increasing their uptake of digital services?

And what do you see in terms of the pipeline here? And the second question, given that Biden has now been elected, what’s your view on wage inflation, given the backdrop of the $15 floor in the U.S.?

And then finally, Bart, I think you alluded to this earlier, but what new services do you think in the aftermarket after COVID?

Thank you. Looking at your first question there in terms of more of a business as usual.

Yes, that is the case. And we are also seeing – and one important part of the discussion with our clients is also then the post COVID period, what does that look like in terms of the service mix and the capabilities that we bring.

We are continuously enhancing our electronic security capability. And you’ve seen eight different acquisitions in key markets in 2020 that are greatly enhancing our offering and capabilities within electronic security.

That’s important from an electronic security business standpoint by itself, but it’s also enabling us to integrate electronic security with guarding and integrated solutions for our clients. So there, we believe that there is – this is the future.

This is obviously what we are investing in and actively working to move as well more of our services into this integrated solutions. In terms of the $15, when you look at the U.S., we like to offer attractive pay rates to our employees.

And that is the first message that I want to share. If you’re looking at the people that we have in North America, it’s – I mean, the vast majority of our people are already above $15.

So from that perspective, that is not something that we are looking at as a very significant change. What we do know, however, and looking at the past, we have always had a very strong capability in our North America team to also have a dynamic price and wage discussion and development over time.

And that is obviously also related to the service and the value proposition that we bring into the clients, which is all about great people and good quality and experience and the service. So with the $15, obviously, there is a number of discussions in terms of how that might or will be implemented, et cetera.

But we are continuously working to enhance our offering to the clients, but also the employee value proposition in the U.S. So in that sense, I believe that we have the good tools.

And we are also greatly increasing our electronic security and solutions capability as well. So we also have attractive offer to complement just the traditional man guarding in that sense.

So Bart, I think I hand over to you. You received the last third question.

Well, on the new services that you asked for, yes, we see, for instance, now services related to the vaccination centers, which are being put up in many different countries around the world where, again, we can play a role there, a good role in society as well to help out with the crowd management and all of those places around the world. And in some countries, we help them to make sure that, that works well.

So that is the type of new service, which will also be, of course, an extra potential extra service then more for the short term. On the long term, I don’t think we have seen major changes in demand.

But in some companies, of course, we do see that there are some extra measures being taken around also, social distancing and entrance and departure as well. But nothing dramatic, I would say

Just two from me, if I may. Firstly, on the transformation programs, you’ve got some quite hefty targets in terms of margin improvement.

When do you think about the bridge from where you are to where you’re going to hopefully be in a few years. Can you split that out in terms of how much is cost, how much is efficiency and how much is mix on that part?

And then secondly, and just a quick one, in terms of some of the cash payments that are going to reverse in 2021 and 2022. Can you just split those out between the two years, if possible?

Thank you, Andy. So on the transformation program in Europe, yes, it is a clear break with the past in terms of operating profit margin, if you’re looking at the last five, six, seven years.

But we have a strong belief that with these measures that we are implementing and with the program fundamentally strengthening the way that we are working, we should be able to achieve those types of levels in this time frame. I would say that very much is mix related.

It’s about really improving the mix that we are driving, and that’s obviously why we are doubling down in terms of emphasis on solutions, electronic security. That is a higher value to the client, but it’s also a higher-margin business for us with the richer content overall.

But then obviously, when you’re looking at operating everything or a number of processes over 20-plus countries in a fairly local way, we are also seeing that there is real efficiency and productivity gain by also leveraging knowledge and good practices, modern IT systems and tools to also enhance productivity and efficiency. So that is really the next part.

And I would say that this is not primarily a cost reduction program. It’s more of an aggressive fundamental strengthening of our capabilities and really aligning around the common operating model and the different aspects that I mentioned earlier.

But where we are realizing efficiency gains, obviously, the idea is then also that we are able to reinvest some of those in enhancing the service mix and the capabilities as we go forward. Second question – yes.

Andy?

Sorry, can I just follow-up on that? You mentioned the mix benefits over the next few years.

Just when we look back over the last five or six years, you had that quite positive mix shift towards electronic security and the margin has stayed basically flat through that period. What makes you think that the next few years are going to be markedly different from that as you go through this process?

Yes. So it’s – and that’s the correct reflection.

We have, and I mean we are fully convinced about the quality and the strength of the solutions and electronic security journey that we have made in Europe and also the value creation from this. But we’ve also seen a really mixed picture in terms of guarding margins where there has been pressure over time.

What I feel and see is very powerful in terms of the plans that we have and that we are now rolling out across Europe. Now it’s really taking a lot of the best practices, but also what we know is working and rolling that out at scale.

But really then enabling as well our people to do that at scale with better tools. So for example, some of the tools that we are leveraging to be able to sell solutions and integrated solutions in an easier packaged way, which is easier to sell but also easier to implement for our clients.

To do that, that scale is fundamentally important. So the last five years, I would say what we have – we have gained quite a lot in terms of the business mix on the positive side there, but then we have also lost some due to guarding pressures.

And it’s also important that with this program, obviously, with better tools, end-to-end from recruitment of our people, but also then all the way through engagement with our clients and developing the service mix over time. We also talk about transforming our guarding, and that is then to make the guarding a better performing operation and business as well.

So those would be the main parts that I would highlight, Andy, in terms of what we are doing differently. And it’s obviously also the extent at which we are driving this now across Europe, which is important and very exciting.

A few left from me, please. Firstly, going back to the SEK 117 million charge, just to clarify that, does that include the trading results of those regions that were being excluded from Q4?

Is this just purely the costs of exiting those regions? That’s the first question.

Secondly, following on from your point on guarding margins. You mentioned in October that annual contract negotiations needed to try to raise prices to recover things like PPE costs as well as just wage inflation.

Can you perhaps provide an update on the progress that you’ve made there? And then back to electronic security, the rate of installations in the U.S.

seems to have remained equally subdued despite fluctuations in lockdown restrictions. So the question is, do you see that meaningful backlog of business as still existing?

Or do you think that’s been more permanently sort of impaired or lost?

Thank you, Bart. Do you want to start with question number one?

I can take two and three.

Yes, absolutely. So on the SEK 117 million related to the exit of the cost, that is the entire costs related to the transaction.

So taking out the assets from the balance sheet, accounting for any income from the transactions. And then if you do that, all of that, you get to this net negative of SEK 117 million.

So that is that – the answer to the first question.

And related to question number two on the guarding, yes, it is a different context now due to – I mean, our first priority that we stated from the beginning is the health and safety of our employees. So we do see increased PPE costs.

This is obviously something that is one component in the total price production cost or price wage, that equation that we are managing. But it is also – I mean, it’s a lot of movement in the last 12 months.

And with that, of course, we have very high focus on how we manage this in the beginning and throughout 2021 with our clients. And we never guide in terms of this important activity, but we do have a strong track record in general, in terms of being able to manage that.

And also then obviously, frankly speaking, also that we have clients that appreciate quality and people and also appreciate the importance of the health and safety. So those are important discussions that are ongoing in any of those negotiations.

Looking to your third question about electronic security. Yes, this is one area that has been affected, and we see continued subdued type of situation, to use your wording, which I think is good.

And that’s very much related to lockdowns, uncertainty, many companies restricting access to buildings, but also then a lot of companies also managing through with a lot of short-term priorities that also then means that there is a little bit of a tentative position in terms of this picking up. So this is something that we are watching carefully, but we’ve obviously also taken a number of measures in terms of cost base, in terms of how we manage, so that we are flexible also to be able to resume and to accelerate when the situation is normalizing.

But it is somewhat of a tentative situation right now. Obviously, what does help is that we do have very strong team in electronic security in North America doing a tremendous job also in terms of client engagement, even if it’s under different circumstances that we have right now.

Most of mine answered, but two quick ones for – in terms of how to think about forecasting the cadence of the CapEx and transformation costs from today, I assume the asset impairment write- downs of SEK 209 million you quoted probably instantly in Q1 of this year. Should we assume, at best guess, the remaining SEK 1.2 billion of P&L cost is evenly split between the quarters of 2021 and 2023?

And then same for CapEx, the SEK 1.2 billion, should we just assume that it’s split evenly between the same – over the same period? Or is there another sort of consideration in that regard?

And then secondly, for the margin targets. I just want to confirm, obviously, you’ve done other programs which you expect to benefit the margin and such as the cost restructuring in Europe.

So I just wanted to confirm that the 6.7% is inclusive of the potential impact from that as well. And that, I believe, you previously quoted when you said the 20 basis points in North American margin, that wasn’t necessarily related to the level, 30 basis points higher than it was in fiscal year 2019.

I believe, when you announced it, it was just 50 points above where you would expect to be, all else equal, if that’s correct.

Maybe I should take the first question, Magnus. So on the costs related to the transformation programs, James, the write-downs, the asset retirements, will also happen during the course of the three years.

It’s not that we now, in Q1, will do a major write-down. Some of the assets we will continue to use during the transformation as well.

And then it’s only at the moment that the assets are taken out of their usage that we will write them down. So over the course of the program.

When it comes to the other costs, that will also – you can assume – the best assumption is, as you said, that it is 1/3 almost each year. And of course, that will also depend a bit on the more detailed planning as we will go forward.

But the thinking right now, to think of that as 1/3 each year, is the best assumption right now. And the same thing for the CapEx as well.

The cash flow cadence of that will also be around 1/3 each year during the program.

And James, on the margin targets, yes, the 6.5% is inclusive of the other programs and measures. Obviously, the cost reduction program that we announced in the summer was a response to the situation caused by COVID, but that has been considered and inclusive then in the SEK 6.5 million.

On the North America question, yes, we stated an ambition there to improve the margin up to 2.5% in North America and you should really look at that based on where we were at the time in terms of profitability. We announced that in February 2019.

And then obviously, we had a full year result in North America for 2018, which is kind of a reference point there.

Very good. Thanks a lot for all the good engagement and looking forward to seeing you.

Thank you.