Securitas AB (publ)

Good afternoon, everyone, and welcome to our Q2 update. We are going through extensive transformation of our business, and I'm glad to say that we are progressing well with that work and delivering improved performance across the board. So looking at some of the highlights from the second quarter, we have continued with good organic sales growth momentum at 11%. And our technology solutions business is an important driver with 12% real sales growth. And this, as previously communicated, is excluding Stanley Security until 22nd of July this year. But we're looking at the totality. While the primary driver of the organic growth was price increases, we recorded good volume growth in technology solutions and within the airport security business. And the operating margin improved to 6.6% versus 5.8% last year. Technology and solutions business line is the main driver, including significant margin accretion from the Stanley acquisition. And we're on par in terms of price wage in the first half of the year. And in light of lower inflation levels that we are seeing now, we are expecting some normalization of wage increases during the coming six to 12 months. The operating cash flow was 46% in the second quarter. The integration of Stanley is progressing well in terms of integration process and cost synergies. And it's also really good to see a growing pipeline in terms of commercial synergies. And I will comment on that a little bit before we open up for the Q&A. And during the quarter, we announced the extension and expansion of a multi-year contract with one of the world's leading technology companies. And this, to me, is further proof that we are becoming the choice for demanding clients who are looking for a strong technology and people partner. And as communicated earlier and during the last couple of years, we have an active focus on sharpening our business to ensure that all parts are fully aligned, with the strategy and our financial objectives. And as a consequence of this work, we have taken the decision to divest our business in Argentina. The macroeconomic prospects are weak and the business environment is challenging, as we have commented for a number of years. And these factors in combination with limited opportunity to execute our long-term strategy with a healthy financial performance are the main factors that led to this decision. And we continue to assess our business according to the same principles going forward. So let us now then shift to look at the performance in our business lines. And at the beginning of this year, we start to provide this more granular information to enhance the visibility of our performance and also the journey to 8% by the end of 2025. We had high real sales growth as I commented, or 12% in security services, and the main driver is price increases, but also complemented by significant volume growth in the aviation segment. Profitability in North America was stable, but we recorded a solid improvement in Europe versus Q1, and this led to a margin of 5.1% in the quarter. We have high continued momentum in technology solutions with 12% ESS growth, but once again, excluding Stanley Security. The operating margin came in at 10.3% in this business line, which is somewhat higher compared to Q1. And with that, we are looking then at the performance in the different divisions and starting with North America, where we have good continued momentum with 7% organic sales growth. While price increases play an important role, we've had good commercial activity with strong new sales that contribute to this growth. And the technology business also supported the growth with improved installation sales and a healthy backlog. Technology and solutions offering is now stronger than ever in North America, and these sales represent 31% of total sales in the division and the client retention as well i want to highlight has improved to 88 percent in the quarter and we are winning new business at better margins and looking then at the profitability where i believe we have set a new quarterly margin record with 8.3 percent in the quarter and the technology business was the main driver behind this improvement with good installations improving recurring revenue portfolio and cost synergies And in terms of the integration work, as we previously communicated, we are ahead of plan in North America. And this has also generated a positive impact in terms of cost synergy realization. Guardian business was stable, positive contribution from active portfolio management and leverage, but somewhat burdened by medical costs and cost of risk. So I think when you're looking at the second quarter, also at the first half of the year, We have regained now the top line momentum, but thanks then to a stronger than ever client offering and solid work by our teams, also very good profitability development. And shifting then to Europe, where we had another quarter with 13% organic sales growth. And here, strong price increases to balance wage is the most important driver behind the growth, along with the impact of hyperinflationary environment in Turkey. But having said that, we have positive portfolio growth in solutions and aviation that also contributed. And with Stanley, we have a very strong offering in Europe, and technology and solutions now represent 33% of the total sales. Client retention in Europe was somewhat affected by active portfolio management, but solid at 90%. And shifting then to profitability, we had a good improvement with 5.9% operating margin in the quarter. And we continue to carefully manage the profitability of all contracts and active portfolio management, together with positive contribution from technology and solutions, including Stanley, are the main drivers of the improvement in profitability along with enhanced cost control. Labour market is still somewhat challenging, even though it's better now compared to six or nine months ago. And while we have seen an improvement in sickness, we have elevated costs for subcontracting that had a negative impact on the profitability. But as commented in the Q1 update, since I wasn't that satisfied with the performance in Q1, our European team have now delivered quite some improvement, but we maintain key focus on a few areas. And the first one of those is increase in the margin requirements for new contracts. We're working actively to terminate or renegotiate low margin contracts. and important focus in the next three, six and 12 months accelerating the Stanley integration. And we have implemented strong cost measures, but there is still more work to be done here in Europe. And moving then to Ibero-America, where we recorded 24% organic sales growth in the quarter. And the inflation-driven increase in Argentina is the main driver of the high growth number, And obviously with the investment that we have announced of Argentina, the growth numbers will be normalized going forward without that hyperinflationary impact. Organic sales growth in Spain was 3%. This number was supported by price increases and strong technology sales. But as in the previous quarter, growth was negatively affected by active portfolio management. Technology solution sales represented 31% of sales in the quarter, client retention solid at 92%. And looking then at the profitability dimension, where our team delivered a stable margin of 5.9% in the quarter. Healthy momentum with technology and solution sales supported the operating margin, as did active portfolio management. And increased wage pressure in Spain is burdening the margin at the beginning of this year, as we previously commented, but the situation improved in the second quarter. So all in all, a strong improvement in terms of margin in Europe, good progress delivering according to the plan or our plan when you look at the totality of the business. So I think with that, handing over to you, Andreas, for more details on the financials.

Thank you, Magnus. And good afternoon, everyone. We start, as always, with the income statement. where the double-digit organic growth continued in the second quarter, and we saw an 0.8 percentage point margin improvement compared to last year, driven by a strong mixed change into technology and solutions through the Stanley acquisition and the related cost synergies, but also through strong sales growth and margin improvement in our legacy technology and solutions business. Looking below operating result, the amortization of acquisition related intangibles was 157 million in the quarter, stabilizing over the last quarters after the Stanley acquisition, which is also explained in the difference to last year. Items affecting comparability was a bit more than 300 million. 170 million of this is related to the Stanley acquisition and 141 million is related to the ongoing European and Ibero-America transformation program. And as usual, I will come back with more details related to this shortly. The financial net is coming in at 541 million, which is materially higher than last year, where the main reason is the financing related to the Stanley acquisition, where we had 402 million of cost in the second quarter. We had 26 million of positive effects from IS29 hyperinflation, which is on a similar level to last year. And the remaining difference then is related to increased interest costs related to our legacy pre-Stanley debt. We have seen interest rates continuing to increase throughout Q2 as expected, and for the full year, we estimate to land slightly above 2 billion SEK. Going then to tax, here the forecasted full-year tax rate is 26.8%, which is basically unchanged compared to the estimate in Q1, and no major news here on the tax side. And before moving on, I just want to remind everyone again that the number of shares used for calculating earnings per share are adjusted for the bonus element of the rights issue in line with IS33, as I mentioned also in previous quarter here, and you find more information on page 21 in the report. Then we have a more detailed look into our programs related to items affecting comparability. where the two remaining ongoing programmes are the European and Ibero-America transformation programme and the cost related to the Stanley acquisition. Looking then first into the European and Ibero-America transformation programme. And as we have mentioned before, the European programme is a broader programme in comparison to the North America and Ibero-America programmes. Outside the modernization and digitalization of our HR, operational and financial platforms, it is also targeting to implement one operating model across Europe and to sharpen our solutions business and organization. And the work related to the common operating model and our solutions business has been progressing well, shown also by the strong solutions growth and profitability improvement in Europe. However, we have then also been executing the core platform rollouts at a lower pace the last quarters to ensure we calibrate the program with the Stanley integration and also to ensure that we are maximizing cost efficiency. We are through this calibration phase now and continue to roll the platforms out. And this means that the program will go into next year and will also be concluded in 2024. From a financial point of view, This has some but limited impact. In Q1, we estimated the full year 2023 IEC spend related to the program to be between 600 to 700 million. As you can see, this estimate is in essence remains the same also now in the second quarter. However, we will then also have a spend of 150 million IEC and 100 million in capex due to the delay into next year. Looking at the total program for all the years, the total IEC spend is then 150 million higher than the original plan of 1.65 billion, while the capex spend is a bit more than 200 million, less than the 850 million budget. So on its totality, we are still within our cost budget, and this is also despite a weakening Swedish krona, that should be said as well. Moving on then to the IEC related to the Stanley transaction. And here, as you know, we announced total cost of approximately 135 million US dollar at the start of the program. The integration continues to progress well, where we are ahead of plans with our synergy takeout in North America and ramping up for further synergies in Europe. In the first six months, we had 285 million of cost in this program, And since the announcement up until Q2, we have invested 800 million in IEC. And we estimate the full year 2023 spend to be around 600 million. In other words, a bit more than 300 million for the second half of this year. So to summarize, we estimate the full year 2023 IEC to be around 1.25 to 1.3 billion for the whole group. with a sharp decline into 2024 due to the limited spend from the transformation program unless we are finalizing the Stanley integration. And there are no further plans for any new transformation or modernization programs beyond that. Moving then to Argentina, and as Magnus mentioned, we then divested our whole operations there at the end of July. And if we look at the financial impact, we expect this to lead to a capital loss from the divestment of around 3.5 billion, which will then also be booked as items affecting comparability in Q3. The vast majority of this impact is related to accumulated FX translation losses, which has been built up over many years in line with IAS 21. And this is normally smaller amounts, but has a major accounting impact here due to the hyperinflation. And it should be said that this is cash flow neutral. Cash flow-wise, the transaction in itself will have limited impact, but one of the reasons for the divestments is the hyperinflation situation in Argentina, which has been a drain to their working capital. So from that perspective, we will see a positive impact going forward. Looking at the income statement, the sales of Argentina the last 12 months was 2.5 billion krona, and the business had lower margin than the Ibero-America segment's average. In the second quarter, Argentina represented 20% out of Iberoamerica's 24% organic sales growth and around 2% of the 11% group organic growth. Moving then to an overview of the FX impact on the income statement. Here we had continued positive impact from currencies, although slightly less than in the first quarter. mainly as the comparable US dollar rates have increased. The total FX impact on sales was 6%, and when looking at operating results, the FX impact was slightly higher at 7% due to the higher profitability in the North American business with a bit less impact on the EPS. The EPS real change excluding items affecting comparability was minus 14%, with negative impact from the adjusted numbers of shares by IS33 from the rights issue. On a constant share basis, the real change excluding items affecting comparability was 12%. And this is derived from the real change on operating income being strong at 42%, positively impacted by the Stanley contribution and solid result development, while the increase of amortization of intangibles and financial net impacted negatively, leading to the 12%. We then move to cash flow, which continues to be a prioritized area for us across the business to ensure we deleverage our balance sheet after the Stanley transaction. The second quarter is coming in at 1.2 billion operating cash flow, which is an improvement of a bit less than 300 million compared to last year, while the percent to operating income is down from 53% last year to 46% this year. Looking first at the capital expenditures, Here we spent around 1.1 billion or 2.8% of sales, which is at the same level as in the second quarter last year. And we continue to see investments into our solutions contract, which confirms the positive momentum in that business. And we also continue to see investments into our existing transformation programs, as we have discussed and announced previously. Looking at the full year, we continue to expect to land below 3% of sales in capex, and for clarity, that includes then Stanley and IFRS 16. The strong organic growth in all segments continued to have negative impacts on the count receivables, while the DSO for the whole group was flat compared both to last quarter and to Q2 last year, which is not a bad outcome in the current environment. Overall, no major movements in the other operating capital employed. I should say that there are no significant payroll timing differences in the quarter, so neutral also from that perspective. If we then look at the free cash flow, we have a slight improvement compared to last year, but the free cash flow is hampered by the increased negative cash flow from the financial net, which is due to increased interest rates, but also as our new facilities are paid throughout the year, while the Eurobond we have done most in the past mainly is paid in the first quarter. Paid taxes are then somewhat down due to high comparable payments last year related to our treasury operation and some withholding tax-related credits in Europe. Important to remember 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. All in all, a decent first six months, but we also have high expectations for the second half year and continue to work and strive to meet our targets of an operating cash flow for the full year between 70 to 80%. We then have a look at our net debt, which has increased approximately 3.2 billion since the beginning of the year. In the second quarter, we paid the dividend of 1 billion, and we also saw material negative FX impacts, which year to date is impacting the net debt negatively 1.5 billion. The positive Q2 free cash flow is leaving us at a free cash flow of over 85 million year to date. minus 85 million year-to-date, and the IEC spend was 680 million, altogether explaining the 3.2 billion increase in the net debt. The adjusted net debt to EBITDA came in at 3.7 times, which is then 0.1 higher than in the first quarter, impacted mainly by the dividend paid out in May and by the translation impact from the depreciating Swedish krona. And if we further adjust for the items affecting comparability, the net debt to EBITDA is 3.3 times, which continues to give a good indication of the deleverage effect after the IEC programs are being finalized next year. We expect to see good, solid leverage the coming quarters as our operating cash flows normally are strong in the second half of the year. It should be noted at the end here that we this year also are making the dividend payment twice in Q2 now in May and in Q4 compared to one time previous year. So there is one further payment still to be done here. Moving on then to have a look at our financing and our financial position. Here we continue to have a solid financial position. None of our facilities have any financial covenants, and the liquidity position was strong in the quarter at 5.5 billion. We also have our RCF of more than 1 billion euro in place until 2027, and it is fully undrawn as per quarter end. And as we communicated already in the first quarter, We have refinanced the vast majority of our Stanley Debt Bridge facility, and the last refinance we did was to issue a four-year Eurobond of 600 million in the beginning of April. By the end of the second quarter now, the bridge facility still to be refinanced was $160 million, and we have now in July repaid the final amount to close the bridge facility out completely. You may see further activity in the bond market going forward to refinance parts of the term loan or shulchan facilities if the pricing differential is attractive. Looking then at the rating, and the S&P rating remains basically unchanged in the quarter. And just to be clear, we also continue in an unchanged way to be committed to our investment grade rating and continue our focus on deleveraging our balance sheet after the Stanley transaction.

So with that, over back to you, Magnus. Many thanks, Andreas. So before we open up the Q&A, just a few words. comments regarding the strategic direction, focus areas and the progress that we are making. And when you look at the financial targets that we shared in August last year, these reflect our strategic direction and ambition. And the margin improvement to 6.6% in Q2, 6.2% in the first half of this year versus 5.4% last year are important steps towards our 8% target by the end of 2025. But to achieve the 8% in our long-term ambition, we have undertaken significant investments to create the new Securitas, and our strategic focus is in four main areas. Taking the lead with technology, quality guarding services with good profitability, establishing clear leadership as a solution partner to our client, and leveraging technology, digital platforms, and data to drive innovation. And we continue to execute in all of these areas to make sure that we deliver superior growth and higher margins going forward. And all of this is based on our view, what it will take to be the winner in the security and safety industry of tomorrow. And this is about having a leading presence, being able to manage connected technology and intelligent use of data. And when you look at the company that we are creating, We have a unique position now with significant capability in each area and the ability to also leverage a combination of these capabilities to deliver the strongest solutions to our clients. And during the last couple of months, I've had the luxury of spending more time with our clients and engaging with a number of local and global clients in North America, Europe and Iberia America together with our teams. And it's clear to me from all of these dialogues that existing and also potential clients start to perceive a more future-oriented partner in Securitas. Technology and data are becoming increasingly important to the future security and safety equation. These are areas where we have significant strengths now in combination with a quality guarding presence. And while we still have important integration, systems integration work to be done related to Stanley over the coming six to 12 months, I am more and more confident regarding the strength of our offering to our clients and the commercial synergies that we will be able to generate in the coming years. So we are on a good path. And to sum up the quarter, executing on our strategy, taking important steps with margin improvement in Q2. We have strong technology and solutions momentum across all segments. and progressing well with the Stanley integration, which is one important driver of building the new Securitas. So with that, happy to open up for the Q&A.