Securitas AB (publ)

Welcome everyone to our Q1 update. Andreas and I are doing our call today from Stockholm. We are at an exciting time and we're creating a unique position in the security services industry, shaping a security solutions company which is at the forefront with world-leading technology and expertise. And looking at a few highlights of the quarter, the growth momentum is good, and we recorded an organic sales growth of 12% in the quarter. We had double-digit organic growth in technology with a healthy backlog, and the solutions growth was even stronger. So we call that strong double digits, and those two combined generate a 13% real sales growth, also when excluding the impact from standard security. And the growth in North America was bolstered by strong commercial activity in general and one more significant contract win and expansion as we have previously announced. And of course, as in previous quarters, the high price increases contribute strongly to the growth. The operating margin improved to 5.8% versus 5.1% a year earlier. And the margin accretion from the Stanley acquisition is significant, but also good contribution from the growth of our legacy technology and solutions business. And as important as ever, we are balancing price-wage in an inflationary environment. But we do have some challenges in Europe, primarily related to labor scarcity and some temporary factors, and I'll come back to those in a while. Looking from a cash flow perspective, Q1 is normally a lower quarter, but we recorded some improvement versus 2022. And another very important message at a high level before we go into numbers is that the integration of standard security is progressing well. And turning to the next page, we are now enhancing the visibility of performance across the different business lines in the business. And we feel that this is an important step in facilitating enhanced visibility of our performance and in the journey to 8% operating profit margin by the end of 2025. And we have outlined the business now in three different categories. The first one, that we call security services, essentially includes our onsite, our mobile guarding services, as well as the aviation business. The second category is technology and solutions. And the last category includes our advanced risk management business, together with costs for group functions. So let me share a few comments related to these numbers and to the performance. So when you're looking at the performance, we have real sales growth of security services, where the main driver is price increases. And from a profitability perspective, the development in North America was positive in the quarter, and at the same time, we were below expectations in Europe, due to continued challenges related to labour shortages, some start-up costs and also negative cost leverage. And looking at the technology and solutions business, the growth number at 77% is obviously very high, but when you exclude the impact of Stanley, the real sales growth was a strong 13% in the quarter. And the profitability in this part of the business came in at 10.1%. And the strong integration progress with synergy realization is progressing at a good pace, particularly in North America, which has been and is according to plan. And this contributes to the operating profit margin. And we will share this information on a quarterly basis going forward. And I believe this will enhance the understanding of the current performance, but also how we are actively shaping the business now with an increasing emphasis on technology and solutions and enhancing profitability in security services. So with that, let us shift to the performance in our different geographies. And starting, as always, with North America, and our momentum continues to grow. We had good momentum going into 2023, and this was further bolstered by the expansion and win of a significant client contract, price increases, and generally speaking, good commercial activity. Installations business grew at a good pace with a continued healthy backlog. And it's also important to point out here that we are growing at a good pace while we're driving extensive integration work and good progress together with Stanley Security. And our technology and solutions offering is now stronger than ever to our clients. And these sales now represent 31% of total sales in North America. The client retention rate is generally good, but when you look at the 85%, this number is negatively impacted by active portfolio management. So that means when we are terminating lower margin contracts, if we are not able to renegotiate them or convert them into solutions. And this is fully in line with the strategy, and we are winning new business at better margins. If you then turn to the profitability, and this is the real highlight, because here we recorded the highest Q1 margin ever at 7.6%. The Guardian business unit improved with positive impact from active portfolio management and leverage, but the main driver of the modern improvement is the technology business. We're progressing well, as I said, with integration work, and we're ahead of plan in terms of cost synergy realisation. And looking at the underlying business, the performance in Stanley Security has improved significantly versus a weak start last year. And we also recorded solid development of our legacy technology business. Corporate risk management business is also contributing to the improved profitability in North America. So looking at North America, very good regain momentum on the top line and another record quarter in terms of operating margin. And let us then shift to Europe, where we recorded a very high 13% real sales growth. And as I mentioned before, high level of price increases is the most important driver behind the growth, but we also have solid portfolio growth in solutions, which is contributing to the growth along with good growth in the technology business. And as in the previous quarters, a few percent of the growth number is related to hyperinflationary environment in Turkey. But due to labor shortages, we are still in a situation where we have to decline work, which obviously has a negative impact from a growth but also profitability perspective. Looking at the margin, we had a slightly improved margin versus last year at 5.1%. But having said that, when you consider the positive impact from technology and strong solutions growth, this margin is below our expectations in the quarter. Our team has done a really good job balancing historically high wage increases with price increases, but there are a few factors that negatively impact the margin. As in previous quarters, various effects related to the labour shortage negatively impacted the margin in Europe, and this is very much related to higher costs for subcontracting and reduced capacity for high margin extra sales. And that is all related to the fact that if we don't find people, we cannot take on more of the higher margin extra sales type of business. But then we also had startup costs related to a larger aviation contract that also impacted the margins. And if you then look at what are we doing to improve performance in Europe, well, there is a few different actions. First one, increasing the margin requirements for new contracts. We also need to step up how we are working actively to renegotiate or terminate low margin contracts. Tighter cost measures have also been put in place to ensure positive leverage. And we've also made some leadership changes with the new leader in Europe and a number of important additions and changes in the last couple of months. And I expect to see improvement from these measures going forward. From a client perspective, we are stepping up solutions efforts, leveraging our strong technology and presence. So to conclude Europe, some margin improvement, really good growth in terms of solutions and technology, which is fully in line with the strategy, but security services part and the onsite garden business hurting, and here we need to take strong actions now to make sure that we improve the performance. And moving then to Iberoamerica, where we recorded 22% organic sales growth in the quarter. The inflation-driven increase in Argentina is the main driver of the high growth number. Spain, as you all know, is a very important market in our Iberoamerica division, and here we recorded 6% organic sales growth. And as in the previous quarter, our team in Spain is doing a good job driving active portfolio management and that has some negative impact on the growth. Technology solutions are a critical part of our offering and these sales represent 31% of sales in the quarter. And shifting then to the profitability in Abera America, where our team delivered a stable margin of 5.8%. We have good momentum with higher margin technology and solution sales that supported the operating margin as did active portfolio management. On the negative side, increased wage pressure in Spain is burdening the margin at the beginning of the year, but we expect to improve the balance during the coming quarters. So that concludes the overview on a group level in the different segments, and then handing over to you, Andreas, for quite a lot of details today regarding the financials.

Thank you, Magnus. Starting by having a look at the income statement. where the growth continued to accelerate in the quarter, as Magnus mentioned, with 12% organic sales growth, and our operating margin was 5.8%, where the Stanley acquisition was a strong contributor to the result and also delivered a healthy margin. Looking below operating results, the amortization of acquisition-related intangibles was 154 million in the quarter, on the same level basically as in Q4, but higher than last year due to the 5.5 billion allocated to intangibles in the PPA related to Stanley. And this also leads to approximately 375 million per year in amortization. Items affecting comparability was 281 million in the quarter. 115 million of this is related to the Stanley acquisition and 166 million is related to the ongoing European and Ibero-America transformation program. And as usual, I will come back with more details on IEC shortly. Moving to the financial net, here the cost came in within the range we guided for in the last quarter at 428 million in Q1. And the main reason for the material increase compared to last year is the financing of the Stanley acquisition where we had 310 million of cost in Q1. We had positive impact of 51 million from IAS 29 hyperinflation in Turkey and Argentina, which is an increase of 39 million compared to last year. And the remaining difference to last year of 62 million is then mainly related to increased interest costs related to our legacy pre-Stanley debt. Going to tax, here the forecasted full-year tax rate is 26.8%, which is then back to normal levels after 2022, where we had a positive 2.6% non-recurring impact from the tax cases won in Spain in the fourth quarter last year. And before moving on, I just wanted to highlight again here that the number of shares used for calculating earnings per share are adjusted for the bonus element of the rights issue in line with IAS 33, as I've also mentioned in previous quarters and you find more information on page 19 in the report. If we are then moving on to the next slide, we have some additional information related to the different programs under IEC. And the two remaining ongoing programs are the European and Ibero-America transformation program and the integration, restructuring and transaction cost program related to the Stanley acquisition. looking at the european and iberia america transformation program here the iberia america part is running well on track and so are also most of the activities in the european transformation program but as we've mentioned earlier we are temporarily executing with a slightly lower pace related to the core it platform activities to ensure that we calibrate the program with the stanley integration and also to ensure that we're maximizing benefit realization and cost efficiency At the program start, we announced 1.4 billion in items affecting comparability and 1.1 billion in capex over 2021 to 2023. We then updated the numbers based on the new cloud computing accounting regulations that was announced in 2022, which meant CAPEX was reduced to 150 million and IEC increased to 150 million. So in other words, the full IEC program budget is 1.65 billion and CAPEX 850 million. In the first quarter now in 2023 the IEC cost was 166 million and over 2021 and 2022 we have invested a bit more than 1 billion in IEC and we estimate for the full year of 2023 the number to be between 600 to 700 million. On the capex side, we have seen lower capex need compared to our original plans, and we estimate to land north of 500 million total capex investments by the end of 2023. So all in all, we are estimating to be below the total budget by the end of the year, while there may be some residual costs going into 2024 from the temporary slower pace that we are running at that I also mentioned earlier. And here we will come back with further details the coming quarters. Moving on then to the IEC related to the Stanley transaction. Here we announced total costs of approximately 135 million US dollar, and the integration continues to progress well, where we are ahead of plans with our Synergy takeout in North America, which is also impacting our margins in a positive way. We saw good progress also in Europe in the first quarter, and we expect accelerated Synergy progress also there going forward. In the fourth quarter, we had 150 million of cost in this program, and since the announcement, we have invested 630 million in IEC, and we estimate the 2023 spend to be between 500 to 600 million. All in all, looking at the totality for the first quarter on the left-hand side, we have a total of 281 million of IEC in the operating income. Moving then... to an overview of the FX impact on the income statement. Here we had continued positive impact from currencies, although less than in previous quarters, and that's mainly as the US dollar comparable rates from last year increased, and this trend will continue throughout 2023 for the US dollar, but also for the euro. The total FX impact on sales was 6%, and when looking at operating result, the FX impact was slightly higher at 8% due to higher profitability in the North American business with similar effects also on EPS. The EPS real change excluding items affecting comparability was minus 12% in Q1 with negative impact from the adjusted numbers of shares by IAS 33. Looking at it on a constant share basis, the real change excluding IC was 15% positive in the quarter. And this is derived from the real change on operating income being strong at 42%, including Stanley, while the increase of amortization of intangibles and financial net impacted negatively leading to the 15%. We then move on to cash flow and cash flow continues to be a prioritized area for us due to the increased macroeconomic uncertainty. And of course, as we have strong focus on deleveraging our balance sheet after the Stanley transaction. The first quarter is coming in at 187 million operating cash flow or 9% of the operating income, which is an improvement compared to the negative operating cash flow we had last year in the first quarter. The first quarter is, from a seasonality perspective, the weakest cash flow quarter for us. And the reason for that is that we are making larger annual prepayments and payout incentives in the beginning of the year. Our DSO also increases somewhat after year end, as we normally see strong end of the year collections. If we go into some details here and start with CapEx, here we spent around 950 million or 2.5% of sales, which is at the same level as in Q1 last year. We continue to see an increase in our investments into solution contracts, confirming the positive momentum we have in that part of the business. And we also see continued investments into our existing transformation programs as we have previously announced. Looking at the full year, we continue to expect to land below 3% of sales in CapEx. And just to be clear, that includes Stanley and IFRS 16. The strong growth that we are seeing in the business now, also with increasing organic growth also in North America, continue to have negative impact on the account receivables in the quarter, while the DSO for the whole group was flat compared to Q1 last year, which is good considering the current environment. The negative development in other operating capital employed is mainly derived from increased annually prepaid costs, such as cost of risk and IT, together with the reduced account payable position by the end of the quarter. I should say here that there was no significant payroll timing differences in the quarter, so very much neutral from that perspective comparing year over year. All in all, an okay start to the year, and we continue to target to deliver cash flow within our target range of 70 to 80% also in 2023. And important, just as a reminder, that we this year have no further payments related to corona government relief measures in North America, which hampered the full year operating cash flow with 700 million in 2022. We then have a look at our net debt, and our net debt increased around 800 million from the beginning of the year until the end of the quarter. And in essence, this is related to the negative free cash flow and also the IEC payments we made of around 340 million in Q1. The translation impact had major negative impact last year, but here we now see a stabilization in the first quarter due to more stable FX environment. The stabilization of the Swedish krona in combination with good EBITDA growth from higher margins and also from price increases is supporting the net debt to EBITDA ratio and development where we landed at 3.6 times in Q1 compared to 3.7 times in Q4. And here we are slightly ahead of our plan D leveraging to be below three times in 2024. Please note that the 3.6 times I refer to here is including 12 months of Stanley EBITDA, while the reported number is 3.8 times. And as you may remember, Stanley had a weak first half of the year in 2022. So if we continue to perform well in the Stanley business also in Q2 this year, that will have a positive effect to our net debt to EBITDA development in the second quarter. If we further adjust for the items affecting comparability, the net debt to EBITDA is 3.3 times, which gives a good indication of the deleverage effect we will see after the IEC programs are being finalized. It should be noted that we this year will make the dividend payment twice in Q2 and Q4 compared to one time previous years, which will also have a positive timing impact on our net debt throughout the year. If we then move on and have a look at our financial position and the debt maturity chart, and we continue to have a solid financial position, none of our facilities have any financial covenants, and the liquidity position continues to be strong in the quarter at 5.4 billion. We also have our RCF of more than 1 billion euro in place until 2027, and it was continued also fully undrawn as per quarter end. If we then look at the 3.3 billion US dollar bridge facilities related to the Stanley transaction. Here, after the successful rights issue last year, we had the remaining bridge to debt facility of 2.4 billion US dollar, with maturity in July 2024 still to be refinanced. As we communicated already in October, our strategy was to diversify the sources of debt financing in the takeout while also ensuring we remain with good flexibility in the debt portfolio if market conditions would improve. And the main reason behind the strategy was that the bond market pricing back in October last year was not very attractive to us at that point in time. And at the same time, we were also in no rush as we had a 24-month bridge in place with good pricing. The first major step for us in the takeout was to execute a 1.1 billion euro term loan in the beginning of the year. The facility is four years where the banks and us together can agree to extend for one more year. Then in the beginning of March, we entered the Schullschein market for the first time, opening up for us a new source of funding that will also be available for us going forward. Here we raised approximately 300 million euros, where the majority of the funding have maturity of five years. This left us at quarter end in a position where we had refinanced the majority of the bridge to debt facility and secured long-term funding where the term loan and the majority of the shulchan can be refinanced in advance if we would prefer. Meanwhile, the bond market pricing has improved, which is why we decided to issue a four-year 600 million euro bond in the euro market in the beginning of April. The bond was oversubscribed more than three times and the margin was 120 basis points with a very small new issue premium paid. And this puts us in a good position today where most of the bridge to debt facility has been taken out. Only 160 million US dollar is remaining and we have no need from a liquidity point of view to do any further refinance in the coming quarters. But you may see further activity in the bond market to take out the remaining bridge and possibly refinance part of the other facilities if the price in differential is attractive. We are remaining with floating interest rates for now related to the term loan, also related to the new bond and the vast majority of the shield shine, while the remaining legacy debt portfolio is a mix of fixed and floating. And we do so to have the flexibility to refinance early. But we may also look into increase our fixed part of the portfolio if yield curves are becoming attractive going forward. With the existing refinancing in place, we will see a somewhat increased financial net when you're comparing to Q1 over the coming quarters. Of course, then subject to the interest rate movements, currencies and so on. Looking at then at the right hand side of the chart of the maturity chart you see a maturity peak of over 30 billion now in 2027 but here it's important to note that the RCF backup facility that matures that year will be refinanced earlier and the term loan could either be extended into 2028 or refinanced in advance so this is very much a manageable position going forward. Moving to our rating, here S&P confirmed our existing rating at BBB- with stable outlook again in Q1. And overall, I would say the dialogues with S&P are positive, where they recognize we have taken good actions according to our plans post the Stanley acquisition. And we continue in an unchanged way to focus on our D-level strategy of the acquisition and remain fully committed to our investment grade rating. So with that, I hand over back to you, Magnus.

Very good, and thanks a lot, Andreas, for a good overview and a number of important milestones achieved in the quarter. We are at an exciting time now in Securitas, and a number of actions that we have initiated during the last few years started to contribute to building and leading solutions offering to our clients based on world-leading technology and expertise. And the shift in offering is also starting to translate into improving margins. And I just wanted to make a few comments related to the new financial targets that we announced in August last year, to reflect a bit on the strategic direction and how we are shaping the new securities. Technology solutions momentum is good. as we highlighted with 13% real sales growth when excluding the positive contribution from standard security. And the margin improvement from 5.1 to 5.8% in Q1 is a clear step in the right direction towards our 8% target by the end of 2025. So this is really about shaping securities to be future ready, clearly differentiate the position and offering in our industry. And how do we achieve this? Well, we have four main focus areas in our strategy. and uniquely positioned to deliver integrated solutions now to our clients. And the differentiation enhanced value to our clients will generate significant margin improvement over time. We firmly believe that the four focus areas to take the lead in technology, bringing quality guarding services with focus on profitability, Integrating solutions to our clients and leveraging modern platforms and connectivity and data that we generate to drive innovation will help and transform the company and enable us to reach the targets. And all of this is based on our view of what it would take to be the winner in the security services industry in the future. And this is a future which is very much about leading presence, connected technology and intelligent use of data. And looking at the company that we're creating, we have a unique position now with significant capability in each area and the ability to leverage combination of these capabilities to deliver the strongest solutions to our clients. And as we've highlighted here during the call, we still have a lot of Stanley integration work ahead of us over the next six to 12 months. But many clients that our team members and I have been in dialogue with myself during the last few months are now starting to get really excited about the capabilities that we are able to bring. and the partnership opportunities as we go forward. And this will obviously translate to increasing commercial opportunities in attractive business areas over time. So to sum up the quarter, we are executing on the strategy, delivering an improvement in the margin to 5.8, good commercial momentum, growth with technology and solutions, and we have solid development across the business, but with one weakness now, and that is insecurity services in Europe, but a known issue, and we are also addressing that with clear actions. Importantly, as we highlighted, we're also progressing very well with the Stanley integration. So I think with that, now happy to open up for the Q&A.