Earnings Transcript for SECU-B.ST - Q2 Fiscal Year 2024

Magnus Ahlqvist: Good afternoon, everyone and a warm welcome to our Q2 Updates. We are shaping the leading company in the security industry and the execution of the strategy is generating results. We had solid performance in all business segments in the second quarter, delivered 5% organic sales growth and the real sales growth for technology and solutions was 8% when we were excluding the impact of the divestment in Argentina. The operating margin improved to 6.9% and this was driven by all business segments this quarter. And I want to highlight that the actions initiated in Europe with emphasis on active portfolio management and increase in price thresholds for new business are starting to generate a positive impact as Europe represented the largest year-on-year improvement in the results. And stronger demand and improved operational efficiency in aviation also contributed to the improvement in Europe. Importantly, the price wage patterns in the group is slightly positive in the first six months. And looking at the cash flow, the operating cash flow was 60% in the second quarter, this is roughly in line with our expectations and we are in a solid position to deliver a strong full year 2024 outcome. Looking at the net debt to EBITDA ratio, it is stable at 2.9. And I just wanted to highlight as well is that as we are closing out now the first half of 2024, almost two years have passed since we made the transformative acquisition of STANLEY Security. And in the process, we created Securitas Technology. And this is the milestone I would just like to provide a few highlights and reflections in terms of where we are right now. So today, Securitas Technology is the second player in the electronic security market worldwide. And based on the strong offering and very good work by our team, we are developing existing business and winning new business at a healthy pace and this is resulting in 8% organic sales growth in the most recent quarter. We have also surpassed SEK1.25 billion in recurring monthly revenue and issued more than $50 million in synergy takeouts and the operating margin has improved significantly in the last two years. And we largely finished now with integration work in North America and are driving good progress in Europe. So in summary, there is still work to be done but our teams have done tremendous work during the last 24 months. And when you look at Securitas as a company, we have improved our client offering to another level with the creation of Securitas Technology; and this business obviously plays a very important part in our future. So building on this, there has shifted performance -- shift to the performance in the different business lines. And we're also making very good progress in the security services business. The growth if we start in there, in security services, was 1% in Q2. And as previously announced, the termination of a larger aviation contract in North America had a negative impact on the growth but we feel good about the commercial momentum, new sales across the group are healthy. The EBITDA margin of 5.6% represents a significant improvement versus last year, with improvements across all segments but like I mentioned, Europe deliver the largest improvement. And here performance in our aviation business also contributed to the good development. The real sales growth in technology and solutions was 7% in the quarter and the operating margin improved to 10.4%. And as commented, two years after STANLEY acquisition, our global technology business is stronger than ever. And as stated on the previous slide, we delivered a healthy organic sales growth of 8% in technology in the second quarter. And this number also represent the favorable mix change since we are driving higher growth in the more profitable parts of our business. And shifting them to the performance in the segments and we'll start with North America. And there we recorded a 2% organic sales growth. We have good installation sales momentum in technology and we are growing the technology business at a faster pace than the market growth. But the already mentioned termination of an airport security contract had a negative impact on the services growth in the quarter. But having said that, commercial activity is good and we expect to recover topline momentum in services in the coming quarters. The share of technology and solutions represent 38% of sales in North America in Q2. Looking at the client retention, 86%; I just wanted to highlight that number is lower than normal and it was negatively impacted by the airport contract termination. Turning then to the profitability where we delivered a strong operating margin of 9.2% in the quarter. And the development was driven by the technology business where cost synergies higher operational efficiency generated positive impact on the performance level. And after the successful integration efforts, we are now also operating at a different scale and sophistication today in North America. And this is from product installations to service and maintenance and this is visible in higher service delivered to our clients but also higher profitability. Looking at the services side; the operating margin in Guarding was stable in the second quarter. So moving down to Europe where we delivered 8% organic sales growth, healthy price increases in the services business are contributing in a significant way. But as in previous quarters, the inflationary environment in Turkey account for a significant share of the growth. And technology and solutions also contributed with good growth in Europe. Shifting to profitability, where we’ve set an operating margin of 6.4%. And this is a significant improvement versus the same period last year; security services is the main reason behind the improvement. And here active portfolio management and increase in the price thresholds for new business are generating a positive impact on the Guarding portfolio margin. And the airport security business also contributed as I mentioned earlier, with improved operational efficiency and also the uncertain seasonality impact and stronger demand. Operating margin in technology also improved but here we still have some negative impacts from ongoing system and support transitions that we explained in the Q1 report. So I'm very pleased to see the improvement in Europe but having said that, we do have a lot more work to do. And we continue to drive higher margin requirements for new contracts, active portfolio management and cost actions in the Guarding part of the European business to ensure that we deliver a significant improvement in the margin also going forward. Moving then to Ibero-America, where our team continue to drive positive development. The organic growth was very healthy at 8%. And when comparing versus last year, the decline in growth if you're looking at the short year is due to the divestment of our business in Argentina. The organic sales growth in Spain increased to 9%, thanks to price increases and strong technology and solutions momentum. And in Latin America, the organic sales growth continue to be driven by price increases. Shifting then to the profitability development with 6.8% operating margin which is a substantial improvement versus last year. And we are seeing solid margin improvements in security services, as well as in technology and solutions. And a positive revenue mix change is contributing to the improvement as well as the divestment of our business in Argentina where we had below average margins. So reflecting on the segments and the state of the business, I'm really glad to conclude that we are driving improvements across all business segments and have a positive outlook for the second half of the year. And with that over to Andreas and some more details on the financials.

Andreas Lindback: Thank you, Magnus. Starting with the income statement where we had 5% organic growth in the quarter and delivered a 6.9% operating margin where our European and Ibero-America business were the main drivers of the margin improvement. Looking below operating result, there are no major news related to the amortization of acquisition-related intangibles nor acquisition-related costs. Items affecting comparability was minus SEK243 million where SEK219 million is related to our STANLEY integration and SEK24 million is related to the European and Ibero-America transformation program. And as usual, I will come back with some more details here shortly. Looking at the financial net which is coming in that SEK617 million which is SEK76 million higher than last year and this is mainly due to increased interest rates. The impact for my IAS 29 hyper-inflation was SEK27 million with a similar impact also last year. Our full year estimate remains at SEK2.4 billion excluding IAS 29 and FX gains and losses. So in other words, unchanged compared to the estimate in Q1. Moving then to tax and here the forecasted tax rate for the full year is unchanged at 26.5% which is a slight decline compared to 26.8% last year. Let us then move to our IAC programs and looking first at the European and Ibero-America transformation program; here we had reduced cost in the second quarter. We are now leveraging our previous investments into the platform design and implementation program to have a more scalable and cost effective rollout. In the second quarter, the cost was SEK24 million and the cost run rate will continue to be at the lower level the rest of the year and the estimate for the full year remains around SEK150 million. In our STANLEY integration program, we announced a total cost of approximately US$135 million after the acquisition. The synergy takeout and integration continues to make good progress in Europe. In North America, we are closing down several integration work streams and although there are some important activities on the IT side remaining, we are at the end of the integration phase. And as we have mentioned earlier, we are also going through a period of heavy lifts in the IT integration and platform implementation work generally and this work will continue throughout 2024. We have decided to make additional investments into the program to ensure a robust IT and platform integration and estimate to land around SEK550 million to SEK600 million this year compared to the previous estimate of SEK400 million. Looking at the left hand side, we have been going through a period of investments into our transformation programs and the STANLEY integration over the last years. The IAC cost peaked in 2023, with a total cost of SEK1.35 billion for the year. And in 2024 the investments are significantly reduced and we expect to land between SEK700 million to SEK750 million for the full year impacting both, our EPS growth and cash generation positively throughout 2024. Moving down to an overview of the FX impact on the income statement and here we saw limited impact from currencies in the second quarter compared to last year. On sales, there was 1% negative impact from FX and a similar impact on the operating result in the second quarter where the differences on EPS level mainly derived from different currency mixes below operating results. The second quarter EPS real change excluding items affecting comparability was 8%. And in essence, this is derived from the real change on operating campaign 8% as well, positively impacted by the 5% organic growth in combination with our 30 basis points margin improvement. We then move to cash flow where we -- as expected due to the Easter Timing differences compared to last year had stronger operating cash flow in the second quarter. The operating cash flow was SEK1.7 billion or 60% and to be compared to last year in Q2 when it was SEK1.2 billion or 46%. The cash flow was further supported by reduced growth and an improved situation related to the ERP challenges in our transformation and STANLEY integration program that we have previously communicated. And these positive effects were partly mitigated by a reduced account payable position in the quarter which was against a strong comparable last year. The free cash flow was SEK429 million and was impacted by negative timing effects related to tax payments and increased interest payments due to the increased interest rate environment. We remain with the estimate for the full year that the finance net will be around minus SEK2.2 billion in terms of cash. All in all, we delivered a decent operating cash flow in the second quarter and we are in a good position to deliver a full year operating cash flow within our financial targets of 70% to 80% for the full year. We then have a look at our net debt which landed at SEK41.9 billion; this is up SEK4.3 billion from the start of the year, impacted mainly by the SEK1.1 billion dividend we paid out in the second quarter. The negative free cash flow of SEK0.9 billion but also materially impacted by the weakened Swedish krona compared to year-end which increased our net debt with SEK1.7 billion. Looking at the net debt to EBITDA which was down to 2.9 when comparing to Q2 last year when it was 3.3. And it continues to remain below our financial target of a net debt to EBITDA of less than 3 despite the seasonally weak free cash flow generation in the first half of the year, the dividend paid and the negative FX impact that I mentioned earlier. Moving on to have a look at our financing and financial position; we continue to have a solid financial position. None of our facilities have any financial covenants and the liquidity position remains strong in the quarter at SEK5.2 billion. We also have our RCF facility of more than €1 billion in place until 2027. And it remains fully undrawn as per the end of the quarter. And as I mentioned earlier, we currently have less maturities to refinance after the bond issuance that we did in the beginning of the year. We continue to focus on refinancing higher cost step to minimize our interest cost. And in this quarter, we refinanced part of the [indiscernible] with a new bank loan facility at substantially lower margins. After the upgrade to triple B in Q1, we also continue to see strengthened credit metrics from S&P as they now also increased our liquidity rating to strong from adequate. So all in all, we are continuing in an unchanged way to continue on driving good cash flow generation, deleveraging our balance sheet and as always, we remain committed to our investment grade rating. So with that, to you Magnus.

Magnus Ahlqvist: Many thanks, Andreas. So just a few comments related to the strategy execution and value creation before we open up the Q&A. We are making good progress in shaping the new Securitas with a strong and comprehensive client offering. And one positive thing now is that as we all completing more of the heavy integration work, we also have more time to spend with our clients. And when -- on being engaged with the clients and also many of the leaders in the team, we've had quite a lot of interaction over the last couple of months. And I just wanted to share a few points in terms of what I've been hearing from them. Because when you look at the current environment, there is quite a lot of uncertainty, we have an elevated threat landscape, clients existing but also potential clients are looking for a strong partner with deep security expertise. And when they're looking at the future, they're also looking for a long-term partnership approach. The rate of change in technology is also quite high, they're also looking for a partner that can make a complex world more simple. So important that not only brings technology and guarding capabilities but important that is adding sharp security and risk knowledge together with digital capabilities to create a leading security equation for tomorrow. And this is something that in a way, you can say that from a societal perspective the uncertainty we're seeing in the world is obviously regrettable. But we are also seeing and also feeling increasingly more confident in terms of the value that we can bring to our clients. And I think this was one of the main reasons that we are winning important contracts and also have good confidence in terms of the commercial activity going forward. And one thing that I mentioned in the quarterly -- in the CEO comment is that, last month we signed a new global contract with the leading technology company and this is a sizeable contract with a global scope but what makes it unique is that this is a so-called vested contract. And this means that the client has shifted the focus to the outputs, so that is the outcomes that they want us to deliver together with them, as opposed to the input and the input is more internal; so we want X number of hours or X number of cameras and sensors on a particular location. And we will work now in close partnership to build and also then optimize an advanced security program where we leverage our knowledge, presence and technology, as well as digital capabilities. And we mentioned this one and I was keen to mention it because it's just one example; but we have a very promising pipeline with opportunities that will help and also drive valuable growth as we go forward. Because this is obviously about value creation and as we all finish in the standard security integration work, like I mentioned, we can now shift a lot more focused operation of value creation and generating also enhanced shareholder value. And we have clear focus areas as we outlined in the capital market state in March this year, to then deliver a strong operational value. But apart from a stronger offering we're also building a more scalable business now and our digital capabilities are starting to drive meaningful impact. So the progress is good. We have a strong focus across the company to achieve our 8% operating margin target by the end of 2025. So in summary, then looking at the quarter we deliver across all segments 30 basis points improvement in the operating margin to 6.9% [ph]. We are improving the operating model and security services in a significant way, as well as in technology and solutions. So this is a clear step in the right direction. But I also want to make clear that we can and we need to do a lot more. By looking at the progress we are executing on the strategy and this is generating results. So, with that I am happy to open up the Q&A.

Operator: [Operator Instructions] The next question comes from Suhasini Varanasi from Goldman Sachs. Please go ahead.

Suhasini Varanasi: Hi, good afternoon. Thank you for taking my questions. I have two please. One on the IAC costs that are going up linked to STANLEY. Can you give a little more color on what's driving the increase, please? And instead of just that it goes up again in future. Secondly, you probably have six quarters left till the end of 2025 and you’re maintaining the 8% margin target. Currently the margins are running at 7% levels. By when should we expect material shift in the margins? I appreciate that there has been improvement on a year-over-year basis in 1H already this year. But what are your other plans to get the extra 100 basis points on margin expansion? What can we look forward to, please? Thank you.

Andreas Lindback: Thank you. Starting with the IAC. I think related then to the STANLEY program, I think it's first important to mention, I mean we are driving really deep integration here where first of all, this was a carve out and we are integrating the STANLEY business into our existent -- also technology business. And here the teams have done a great work over the last year on that integration. There have been some cost pressure throughout this year; that's one part. But secondly, we have also decided to increase the scope in certain areas to really make sure as we are -- when we are finalizing the integration, we are coming out in really good shape with platforms and an IT infrastructure that will really support the business going forward, both to grow but to continue to drive operational efficiency as well. So those are the main reasons there. And then when it comes to the risk of future cost increases, that is never our intent. We are tracking this on a monthly basis together with the team with clearly defined sort of cost streams, etcetera. So this is our current estimate that we also expect to hold up.

Magnus Ahlqvist: And Suhasini, I will comment on the second question as well. But I think it's also important to understand, I mean when we started integrating and driving the work of standard security, we are now driving and building kind of deep integration in terms of our capabilities and platforms. And so we're really building for scale because if you look at that, we have a very significant part of the business which is recurring revenue, we have a very significant part which is service and maintenance. And what we have also seen and most notably in North America but also a few countries in Europe is that we're not just standing up a separate business here and kind of adding that on the side, we are leveraging the capabilities that we had in Securitas before but then also really shaping a new kind of harmonized capability where you're working with technology across all the key markets. And that's something that I'm convinced it's going to serve us really, really well. So I just wanted to highlight that because we're making some of those decisions. Yes, we could do a little bit less if we wanted to but we're also so convinced based on the track record and also the delivery. And all of that capability translates to better client delivery in terms of service level but also significantly higher efficiency and also profitability for ourselves. And coming to the second question; we shared an ambitious plan to get to 8% at the end of 2025. We outlined also in the capital markets there which are the key components in the bridge in terms of how do we get there. And here obviously, yes, we have six more quarters but we also have very clear focus areas in terms of driving the technology and the solutions which we are doing at the good pace. And really actively also finishing the work on the Guarding portfolio. And there the majority of the work is no longer in North America, it's more in Europe and Ibero-America that we need to complete and really get that done. That in itself, obviously, also with an underlying improvement in terms of profitability; and also the growth profile, that that will also mean that there is going to be -- well, there has to be a meaningful also kind of revenue mix change as well between the different parts of the business. But that we are doing also to make sure that we are really the shaping a new profile. And then, I believe that there is good progress. But like I mentioned at the end of the call, there is still a lot more that we need to do and definite to get done. But we have a clear agenda there but then we also continue to assess all parts of the business. I've said that many times, everything that we have in the business has to be fully aligned with the strategy but it also has to support our 8% margin target by the end of next year. So we have a strong commitment, it means high pressure, absolutely; but we also feel that it's very important that we also complete and get this work done because then we -- it's also more upto us. So we then think about how we are maximizing shareholder value, also then in the mid and the long-term. And that's really the entire focus that we are driving in the company now. But we should also remember that the offering that we have to our clients, it's stronger than any other company can offer. And that's also the reason that we're also winning trust, we’re winning new business, at better margins as well than what we have done in the past. I mean there is also a positive kind of momentum that would also help and support this -- shaping a new profile over Securitas to higher profitability level.

Suhasini Varanasi: Thank you for that. If I may ask just one very quick question. I think in your report, you did mention that there is a US government investigation into the critical infrastructure business. Do we have any idea on the timing of when this investigation will conclude? And given that it’s already been separated from your core North America business, should we then anticipate maybe a disposal of this business in the future? Thank you.

Magnus Ahlqvist: Yes. I think since you bring it up here, this is something that we have disclosed quite some time ago. We cannot really influence, we just collaborate fully with the authorities in terms of the investigation. It is related to the relationship that we had with various business entities, then -- they were then essentially direct or indirect parted [ph] to contracts with the US government. And there is -- I mean, it's related to alleged misconduct by certain former than Paragon [ph] employees. And if you look at that, we can't really comment on the timing. As always, if we find any type of wrongdoing, we'll make sure that we do right. So we do collaborate as much as we possibly can. We're obviously hoping that we can conclude that sooner rather than later because clarity is always good and we can put that behind us but that's really where we are. In terms of speculation about divestment -- to potential divestment or not; I mean we never comment on any speculation. The only message that I want to share and just re-emphasize is the fact that we have been working over the last couple of years in terms of assessing every part of the business just to make sure that it's supportive and aligned with our strategy, mid-term and also for the longer term; and that includes all parts of the business that we have. I think that's as much as I can comment at this point in time.

Suhasini Varanasi: Yes, of course. Thank you very much.

Operator: The next question comes from Remi Grenu from Morgan Stanley. Please go ahead.

Remi Grenu: Thanks for taking my question. A few as I may. So, the first one is around the pricing contribution to the 5% organic growth. If you could break down that, that would be helpful. And what specifically is linked to the hyperinflation in Turkey? Also interested in what's implied for volume growth? And how you expect that volume to evolve overtime, especially in the context of the large contracts you were referring to? Is this having a significant impact? That would be the first question. The second one is on the comments you've made on tax payments and it being a phasing issue. So if you could give us more flavor on what that is and whether we should expect the reversal in the second half? And the last point is on this global contract with a client which I think you said is more focused on the outcome rather than quantified number of hours worked, etcetera. So can you maybe help us understand how the pricing work on that kind of contract? And how you've made sure that you've embedded clauses or looking at the project related risks there and to avoid situation like the one we've seen with this aviation business in Europe? Thanks.

Magnus Ahlqvist: Good. So maybe I can take the first and the third question. And then you take the tax question, Andreas. When you're looking at the growth at 5%, I believe roughly 2% of that is related to Turkey. If you're looking at, you know, then mathematically, roughly half of the growth in Europe related to the hyperinflationary environment. And the volume -- I mean, if you're looking at the growth in terms of the services part of the business, it is primarily price driven growth when you're looking at that part. And that's really by design because we are taking a very tough approach in terms of the profitability requirements. And that's for business coming in which is coming in at that good margins, I should emphasize but it's then also really addressing lower or poor performing contracts as well. So in terms of the volume, yes, it's mostly price related goals in the services side. I want to highlight, technology, we're delivering good growth. And that is also something which is important because we have been driving a lot of integration effort, one of my key concerns that I also shared publicly that we have to avoid is that we become too inwardly focused. And I don't think that is the case, our teams are doing a good job there, we're also coming out stronger with significantly stronger capability. And there like I mentioned, 8% organic growth in technology. I mean, that's a good 8% and that's a really healthy number and definitely above the market growth according to my assessment. So I think that is hopefully giving you some flavour. And if you're looking at the contracts to your third question; it is a unique one. I think it's actually an industry first, that is something of this type of a scale. And the interesting thing here is that we're essentially then for quite some time together with this client and reviewing where they are. But then as opposed to taking an approach where they are saying we want more officers here or more hours there, or specifically more cameras or sensors in that location, it's -- the discussion has focused on what we have always believed is going to be the future of this industry. And at this standard we built a really good understanding in terms of what are the outcomes that they are looking for. And then they come to us and say, “can you help us and optimize and deliver those outcomes”. And that's something which is obviously -- it does require a lot of trusts and I think that trust is there because we really share good values between these two companies. But we also share a clear view in terms of how to operate a security program in the most efficient but also effective manner. So while this is the first one, I definitely don't believe this is the last one; I think this is just sort of a longer term trend that in some shape or form, we will be able to also then build based on these learnings. Two other points that are important. One is that there is a clear agreement and expectation that we leverage all of our competence and protective services here. So this is then including not only our guarding and technology capabilities but that we're also infusing significantly more digital tools so that we also become more dynamic, more insight driven and that would also enable us to be more responsive but also to be able to optimize on a more dynamic basis based on potential risk level. When you look at the pricing, more of the responsibilities then because I think that was your question as well as then, essentially then within a certain envelope is to say, “okay, how do you optimize the program within that type of envelope?” And that's obviously very much up to us how we then make that happen. But everything that we are doing is then obviously in full transparency. And once again, linking everything to the outcomes that we want to deliver and this client is really looking for. So yes, I hope that gives you at least some further understanding in terms of the logic. I'm a firm believer in this and we kind of having more and more discussions going clearly in this direction. And that is very much because of a few factors; uncertainty level, elevated threat, increasing complexity, faster development in terms of technology. So it's also more and more difficult for many of our clients to also keep up and to be the best at this. This is when they're looking for a strong partner and this as you know, has been our kind of wanted position for quite a while that we should be the clear number one choice for any department [ph] that is looking for that because the clear expectation from my side is that this is going to generate a better security program, more effective but also more efficient one in terms of cost of ownership for the client because we then also have a shared interest in terms of running it as efficiently as we possibly can't together. So it is unique and we will obviously share more also as we are progressing with this one. and also other potential clients that are on the same lines.

Andreas Lindback: Related to the tax question; if we are looking at the taxes paid in the second quarter, there was approximately SEK460 million higher than then in the second quarter last year. Slightly more than half of that is a timing impact from 2023 where we could postpone preliminary tax payments in the US and that was then paid in Q4. So that part will then -- you will see that in the comparables for the fourth quarter. The remaining part here is basically not only but -- the majority is related to top-up payments for 2023 tax payments that were paid this year. So there we will have to see what the timing impacts will be; so watch the end of this year related to the 2024 tax payments as well.

Operator: The next question comes from Sylvia Baca [ph] from JPMorgan. Please go ahead.

Unidentified Analyst: Firstly, could you remind us what the revenue and profit are today from aviation in Europe on an annualized basis? Secondly, could you comment on wage inflation for this year in the group and across the three divisions? And then finally, third question is going back to the items affecting comparability related to STANLEY. I know you were asked that already but how much of that SEK550 million to SEK600 million relates to software? And how do you think about putting these costs above or below the line? And could you explain why they've been split out as exceptional? Thank you very much.

Andreas Lindback: Thank you. If we start with the size of our aviation business, it is around 6% of our sales on a global level. From a profitability perspective, we're not breaking out aviation business per se. Although all what we should say, there was a strong improvement in Q2 compared to Q1; that's the normal seasonality in the aviation business where the Q2 and Q3 are normally the strongest quarters as well. And we also saw good progress compared to last year in the aviation business here in the quarter as well, especially in Europe. When it comes to the IAC question related to software, this -- so, if we would capitalize anything which has become less with the cloud computing regulations that we're having a place to be clear; if we would capitalize the software licenses or other types of stuff, that would go in the balance sheet and go as CapEx just to be clear. So this is basically also -- when we speak, I see these are the project teams working with the integration -- I should say it's not only IT in this program, generally speaking, neither, it's also to drive out the cost synergies, it’s also brand integration, etcetera as well. But when it comes to the increase, we have seen that is mainly related to IT. So you're right from that perspective, there is a CapEx component to this as well and that would never go with items affecting comparability. Then you also had a question around wage inflation.

Magnus Ahlqvist: Can you just repeat the question, what was it and how it relates a bit to last year or what was the kind of -- what was the angle?

Unidentified Analyst: Yes, sure. No, just to get an idea of where I guess wage inflation is running out today. And maybe if you can discuss the three regions as the trends can be quite different.

Magnus Ahlqvist: So I think on a general level, if you look at starting in Europe, it's -- the wage inflation this year is lower than it was last year. Last year, we were still at somewhat elevated levels, I would still say on the totality, it is at an elevated level if you're comparing with a period going 10 or 15 years back. So that's -- that's essentially where we are in Europe. If you look at North America, lower wage inflation compared to the previous years; and I think that is coming a little bit on the back of the inflation coming down. It's usually faster, more dynamic in terms of increasing pressure, it comes up faster. Europe is seriously lagging when it's coming down, it's also coming down faster because it's -- for the lack of a better expression, it’s kind of more supply and demand driven but that's also a pretty good thing because there has been fairly low unemployment in North America for a number of years. And I think that's also been to the benefit of many people as well is that they've also been able to also enjoy higher wage increases for a period of time. But it is at a lower level now. Looking at the Ibero-America, I would say it's more like similar to kind of the European situation where it's lower than last year but still somewhat higher level.

Operator: The next question comes from Dan Johansson from SEB [ph]. Please go ahead.

Unidentified Analyst: I think I only have one additional one here. And that's on major events. You have the Euros now in Germany and now Olympics in France. I was just curious if that -- if you believe that helped you somewhat in Europe. And you saw good performance in these two important markets or whether you anticipate that could help you now in Q3? Thank you so much.

Magnus Ahlqvist: Thank you, Dan [ph]. I think that there are a couple of smaller kind of one-off positive impacts, if you're looking at Europe in Q2 that contributed. I mean if we mentioned something, it will typically be like 0.1 [ph] in the margin and that type of a range for the European margin. If you're looking at the Olympic [ph] -- and I think some of that may be related also to the European Championships. If you're looking at the Olympics, we've taken a stance and that's been a clear instruction from my side as well; we need to focus our efforts on our existing clients where we're building long-term value and the relationship. There's clearly been quite a lot of demand but we're not doing that much. So, I don't really see that there is going to be a meaningful impact related to the Olympics. And that's more a matter of just really staying disciplined and focusing our efforts, our people and resources where it really matters. And their priority one, two and three is on existing clients where we have an ongoing long-term relationship.

Operator: The next question comes from Raymond Ke from Nordea. Please go ahead.

Raymond Ke: A couple of questions from me. First out, regarding the increased scope of STANLEY integration that you talked about. Could you elaborate a bit in what way has the scope of this integration changed from what you targeted previously?

Andreas Lindback: Yes, thank you for that Raymond. I think when it comes to the IAC program and the increased costs, so two parts [ph]. We have seen some cost pressure as I mentioned, generally speaking. The second thing is, as we've gone along in the integration, related to our platforms and our IT infrastructure, both in Europe and in North America, we have seen additional opportunities. I mean, to be clear, we did this plan basically two years ago, so it's an evolving landscape. We have also meanwhile said that we need to take a break to make sure that we're also making cost efficient investments into this program in relation to the transformation program rollout as well. So along those lines, we have seen increased opportunities to continue to do deeper integration in terms of ERP platforms, in the technology business and many others IT tools as well. So it's a complex, it's a lot of different things; it's not one big project per se. But generally speaking, we will come out in a better position after this having a more robust platform to drive profitability, to drive our operational efficiency across the business.

Magnus Ahlqvist: And Raymond, I just want to emphasize what I said before as well. I mean, we know quite well now how we are structuring and how we operate in the technology business. Our team has been doing really, really good work here across North America and many markets in Europe as well. And they're obviously, what we are building now we're really building for scale and for operational excellence going forward. And that is also we’ve then taken a couple of positive decisions to them say, let's now continue and really drive that to completion because we are able to operate at a completely different level. And that's in client delivery but it's also in terms of profitability which is very much driven by the efficiency of the operation. I should also emphasize -- I mean, this is something that I've been open with since the beginning. Before standard security, we acquired a number of different electronic security or technology companies in a number of markets in Europe. Starting point then was quite different as well; so I mean, it's also an opportunity but also very significant needed now to also harmonize how we're working with harmonized processes, capabilities, the KPIs and all of that is very much kind of system and applications dependent, as well. And we're building a completely different engine now. And I think this is something which is really, really promising when we're looking at what we're able to deliver not only for clients but also for shareholders in the years to come.

Raymond Ke: Got it. And secondly, just looking beyond 2024 and to confirm you still expect one-off to decrease sequentially, year-over-year from here, right?

Magnus Ahlqvist: Yes, absolutely. So I think what we have said when we had the capital market stay is significant decline in 2024. And then continue to drive that down also in 2025.

Raymond Ke: And when can we expect to get sort of more specific details regarding IAC beyond 2024?

Magnus Ahlqvist: Later this year?

Raymond Ke: All right. Thank you very much.

Operator: The next question comes from Viktor Lindeberg from Carnegie Investment Bank. Please go ahead.

Viktor Lindeberg: Thank you. Three questions from my side. You gave a number of magnets in your initial list, your remarks on SEK15 billion annualized revenue with high margin. Can you give us a hint of the growth pace that you've seen in the past year or two and maybe an expectation also for a run rate, shorter medium-term on this nice revenue stream? And second, looking at price wage now being slight positive in the first half, can you elaborate on this? And maybe touch upon that it seemed that you were a bit behind in Europe, at least in Q1 and then you have caught up? And maybe where do you have momentum now going into Q3 given price adjustments and also current contract portfolio? Final one is on North America. Looking at the mix with technology now coming up as a share of total revenue, it's increasing quite a lot sequentially, also euros a year but margins are essentially flat. So looking at this segment under mix change, is there something ongoing in the garden margin versus the technology margin or how should we read this? Thanks.

Magnus Ahlqvist: Thanks, Viktor. So, when I am looking at the reason that I highlighted the recurring revenue is that this is obviously an important quality aspect of the business. It includes monitoring maintenance, so essentially the longer term relationship that we have, whether it's higher predictability but also a higher profitability level and for that reason, it's an important KPI. Clear positive development looking at the last 12 months, we don't break out specific numbers but this is something we feel comfortable with. There is also a certain relationship, obviously, to held the overall growth because when we do that whale, we're typically very well positioned to also then play a more long-term relationship which then has a positive impact on the recurring revenue. So I think clear positive is the answer in terms of the growth rates. Looking at price wage, this is obviously in The guarding part of the business, very important activity and also something that we need to manage. We always like the positive here in the first six months and that's obviously very important. This is also something that I feel that we've managed really well in the higher inflationary period that we saw in terms of wage inflation over the last couple of years. And also managing well at this point in time. And good confidence in terms of the remainder of the year when we're looking at price wedge. And looking at North America, I wouldn't interpret too much their -- lower growth means a little bit lower leverage, obviously from an indirect cost perspective. But we are in good shape in terms of our North America guarding business, we are winning significant amount of business, we feel good about the opportunities and the pipeline going forward. So the expectation is good growth and also continued profitability development in the North American business. But it is important when you compare it obviously to the other regions, we are significantly above the profitability versus Europe especially. So the growth that we are driving in North America is obviously accretive also to the margin target overall, if you're linking it to 8%. But we feel good in terms of where we are in the business and our capabilities and also the outlook.

Andreas Lindback: On the price which I would also definitely link it to the successful APM work or Active Portfolio Management work that we see across as well, where obviously, one solution to increase profitability is to raise prices also without the corresponding wage increase or in the combination of the two. So that I would say is also one of the key drivers while we have been successfully manage that balance this year as well. A lot of great work by the teams on raising prices to increase margins.

Viktor Lindeberg: And maybe if I may just follow-up on that Andreas and Magnus on the different regions. You have a client retention in the US or in North America that is close to 85% and just above 90% in Europe. And looking at your -- I guess it's a terra [ph] balance on price increases versus client retention. But have you been more forward leaning in price increases in the US? I mean, there are many moving bits and pieces on why client retention is different. But could it be actually better to lower this retention rate to operate more with your profitability targets? More philosophical than hard numbers maybe.

Magnus Ahlqvist: Yes, no. I think two perspectives on that. There is quite a sizeable impact from the terminated aviation contracts when we're looking at that number. So I mean I would normally say Viktor that if we are in the 90%, 91%, 92% range there, we're typically doing quite well; that's also where I believe we average if we're looking over the long-term. That's an important indication because you can also correlate that very clearly to the customer satisfaction. So I think that is number one. Then obviously, we are driving very, very hard focus on achieving the 8%. But I also want to say -- I mean just reiterate what I mentioned before is that the profitability profile is different in North America, significantly higher level. We are here to maximize shareholder value, so I mean we are also then constantly thinking in terms of how do we optimize that for the mid and the long-term. So it's temporarily a lower number from my perspective and not so much to be worried about. The pipeline is strong. We have good confidence in terms of the commercial activity. And I also expect that we're going to see improving gross numbers in the next couple of quarters but also see that retention coming up.

Operator: The next question comes from Allen Wells from Jefferies. Please go ahead.

Allen Wells: Just a couple of follow-ups from me. Firstly, just on the margin, obviously 30 basis points of margin improvement seen in the quarter. If I annualized out the SEK50 million of synergies and adjust for the impact of Argentina, to me it suggests that the underlying margins in the business were broadly flat, maybe even down slightly, depending on what assumptions I put up on there. But as you sign the statement, the price wage balances is positive which suggests it's probably more positive in 2Q but I think you said it was neutral in Q1. You should also add some positive mixed benefits from equity portfolio management. So I'm just trying to understand why the underlying margin in this business is not improving or are there particular things that are going against? That'd be my first question. And then maybe just a couple of kind of short financial ones. The DNA -- I think we'll look at the cash flow statement, it’s about 30 basis points lower year-on-year, CapEx is lower as well. Just wanted to just check with you, is this level sustainable or would that need to increase at some point? I'm just mindful of the capital intensity of that tech business and growth there. And then on the one-offs as well, so just to go back to this. But if I look at the one-offs, you talked about SEK1.5 billion kind of cost to deliver at the time of the announcement. I think when I add the numbers up now SEK2.1 billion [ph], I think; so 25% increase. How do we think about the payback here on that additional spend that's going below the line? You mentioned it was about driving out synergies on the platform, etcetera. But the synergy number obviously isn't going up. So, is this just a net lower number or should we see an increase or more higher likelihood of getting to that -- to the 8% target? That'd be the third question. Thank you.

Andreas Lindback: Thank you. If I start with the second one which was clear related to cash flow and CapEx, we’re coming in at 2.8% CapEx to sales in the quarter; we will be below 3% this year. And -- so that is a sustainable run rate. On your commentary related to the technology business, the technology business in itself is not more CapEx heavy. The main organic CapEx driver we have is in the solutions business where you can say we have a CapEx investment of 4% to 5% of sales. Here there is also good material in the Capital Markets Day. So what is true though is that the technology business have a higher working capital requirement than in the guarding business. Then, when it comes to the [indiscernible] question, a bit challenging, honestly, not seeing your assumption to comment that there is no underlying margin performance outside US$50 million and the Argentina divestment. I'm happy to look at this closer separately. But overall, we see positive impact in the quarter in Europe where we have good development in the airport business. We see good development in our guarding business as well and we've also been driving good development in our North American Ibero business. So happy to take the details on the side but would not agree with the statement that it's only related to Argentina and cost synergies. Then when it comes to the one-off costs, again, the SEK2.1 million, I don't fully recognize but yes, this is an increase what we have -- what I mentioned here earlier in the call, correct related to that. I think investing this into our IT integration platform which will make our operations, our client position stronger; this will definitely bring value and it will support us growing the global technology business, it will help us to drive much more operational execution. So from that point of view, did -- I mean, this is a simple investment to be done to be honest. And it's also an important part for us to get to our 8% journey that we are delivering really good quality to our clients can follow-up financial performance, etcetera as well. So it was a simple decision from that point of view.

Allen Wells: I guess just to be clear, the additional spend is required to get to 8% rather than additive to the 8%?

Andreas Lindback: In the end but we are investing into here is to strengthen up our technology business with really strong platforms. And that is an important driver for us to continue to grow the technology business and drive the operating model in that business.

Operator: The next question comes from Carl Johan Bonavia [ph] from DNB Markets. Please go ahead.

Unidentified Analyst: Just coming back over to the active portfolio management, when you look at that what you're doing in that area today may be compared to what you did one or two years ago. How do you see the clients reacting to the price initiatives today? Is the retention rates better and they're more willing to discuss price increases? And maybe you're seeing a little less of assured and coming out of that than you probably expected to start with?

Magnus Ahlqvist: Yes. So this has been quite a mindset shift and mindset change internally, as well as externally, because as I commented over the last couple of years, there has been way too much volume focus in this industry and not enough quality focus when you're looking at quality margin and profitability. And I think they're everyone has to take certain responsibility for that. But this is obviously something we or actively driving change. And I would say that if you're looking at last year, we had a few key markets. I mean, in North America, we're largely done in terms of active portfolio management and it's also more dynamic. There's more focus now in Europe and in Ibero-America. Last year, we had a couple of countries who we started to really make good progress. We follow that up, obviously, in terms of our gross margin development so that we see what is the profitability down to individual contract level. We had a few countries then. What's starting to happen now is that more and more countries are already starting to drive clear improvement. And this is something I've commented on before. I have not been happy with the pace of the change. I would have liked this to happen earlier. Now it's starting to happen on a broader base. And I would say that as a rule, rather than an exception, the clients usually want to keep security as their partner. So, while it's been a new situation over the last couple of years to kind of address this in a firm but still humble way. This is increasingly successful as well. But I think it's also been a matter of us also having to shift a lot more on the focus on the value that -- and the difference that we are delivering. So, I would say that the good thing now is that it's happening on a broader scale. We still have work to be done in Europe, in Ibero America but we're also actively thinking about how do we also then leverage many good client relationships to also then convert into something which is more profitable, or more technology opportunities. For example, we can also help the clients but also to create a healthier overall profile in terms of the profitability. And there, we're making pretty good progress. Now there is good momentum in the first half of this year. We still have important work here in Europe to be done in the second half and also in the first half of next year. So that's really where we are. But it is a very important shift. We need to get that work done because this is all about just running a healthy business and a healthy value-generating business. And I feel that the confidence level is increasing in the organization.

Unidentified Analyst: And I guess, it also sounds very healthy if this active portfolio management is not really turning into an increasing churn rate at the end of the day.

Magnus Ahlqvist: Yes, you're right. And that's why I say it's rather the rule that we are keeping clients but at significantly then improved and healthier margins essentially. That's what it all is coming down to because that also enables us to dedicated resources to make sure that we can invest in the relationship and the delivery and then we create happier clients through better service but also better conditions also in financial results.

Unidentified Analyst: And just also pick your brain on the 8% and the 10% target you have talked about for the long-term. If you first look at the 8% target, do you envisage that the aviation business and critical infrastructure business is still part of the business to be and you're able to deliver towards the 8% target.

Magnus Ahlqvist: Yes. So, we have been clear. I mean, I don't comment on any specific speculation here in terms of potential divestments. We have included, I think, also communicated in March that strategic assessments also do play a role when you're looking at the bridge towards the 8%. And we just wanted to be clear also in terms of how we're looking at that. These are obviously different sources or parts of the bridge journey when you're comparing where we are currently to achieving 8% by the end of next year. And it's a mix of the different initiatives and actions that we are taking. Sorry, Karl-Johan, you had a question also on the 10%.

Unidentified Analyst: Exactly, exactly. No, if you look at then maybe raising the bar up towards 10%, how much say, active or more portfolio management do you need to do to envisage that? Obviously, your performance in North America is already showing the way to some extent?

Magnus Ahlqvist: So the way I look at this is that we need to -- we set an ambitious target to get to 8%. We have full focus on making that happen. That is really to also be able to make a significant shift to ensure that the business that we have, it's a healthy business and it's also aligned with the long-term strategy and ambition that we have. It's too early to talk about the journey beyond that one. I think the most important is that when we have achieved that, we will also have a completely different shape of the business. We are then looking at -- and that's something I'm discussing quite a lot with Andreas already now as well. How do we also then maximize shareholder value in terms of a healthy growth, healthy profitability profile, healthy cash generation and the growth in cash and earnings per share to really be able to drive that and maximize the value based on the new shape of the company. But then it should also be said, technology is going to play a significantly more important part. Our digital efforts will also play an important part because those are also more scalable, more knowledge-based products and services and they will also have to deliver a meaningful impact as well in terms of the longer-term journey towards the 10%. But main focus internally and also in the dialogue with you is really ensuring that we continue to now drive improvement and that we deliver the 8%.

Operator: [Operator Instructions]. Please state your name and company. Please go ahead.

Neil Tyler: Yes, it's Neil Tyler, Redburn Atlantic. Quick one follow-up from me, please, around the margin trajectory again, specifically on the new -- on the technology and solutions business that you're bringing in and the contracts that you're accumulating there, I wonder to really ask about the operating leverage there. Does this business accrue at a normalized margin more or less immediately? Or are you already -- are you finding ways of improving the profitability of the contracts once they're up and running as they age. So, is it a case really of more mature business lifting its own margin on a sort of unit-by-unit basis?

Andreas Lindback: Thank you. So, if we look into the Technology & Solutions business and break it out a bit and start by looking at the solutions business, there normally -- there are no start-up costs or the like. Normally, you have fairly stable profitability throughout the first contract life cycle. Then throughout the longer term with these clients. Normally, we improve profitability as we are then renewing these contracts after 3 years going into the next 3 years. And that is basically because we are normally investing into technology in these contracts. And when you renew those contracts, you do some upgrades, you refresh the equipment but it's not the same kind of investments as initially. So that is how the profitability generally look like in the solutions business. When it comes to technology, I mean 60% of that business is then our installation business, where we are basically then installing and integrating CCTV access control at the client side. And the profitability there is very much up to really strong project management to make sure it happens. And if you have strong project management over the product life cycle, you will have a fairly stable profitability also in that business. But if you don't, you will have more fluctuations. Then the other part of the technology business is our monitoring and maintenance business. And that is a very -- like Magnus mentioned here, a high-margin, stable business, good client retentions and also very good from a cash flow perspective as normally you are invoicing in advance in those type of businesses or with shorter payment terms as well.

Operator: Please state your name and company. Please go ahead.

Magnus Ahlqvist: Can you please state your name?

Unidentified Analyst: Yes, sorry. Laurent [ph], Zadig Asset Management, a shareholder and your company.

Magnus Ahlqvist: Hello, Laurent. Now I recognize your voice.

Unidentified Analyst: That's good, a little bit of the French accent. Yes, you stated restructuring soles as of at the end of the year. Can you give me an idea of the magnitude in 2025 and beyond? And on the second question which is on the technology, do you think AI will help you to come up with some products with some value-added and better margin for you? That's my second question.

Andreas Lindback: Thank you. When it comes to the IAC, the message remains, as we mentioned here in the Capital Markets Day where we said that we do expect IAC to reduce going into 2025 compared to 2023. And at that point in time, the estimate for the 2024 -- sorry, for 2024 was SEK550 million. And we also expect it to continue to decrease thereafter in 2026. So, from the SEK550 million base in '24, we expect it to go down next year yes. That we will come back to later on. We have not gone out with that number.

Magnus Ahlqvist: And then related to AI, Laurent, I mean we have been investing quite a lot in terms of digital and software capabilities with machine learning and AI for the last 5, 6 years. So, we've also had a chance to learn quite a lot. Yes, there will be clear areas where we can apply AI. I think when you're looking at the -- not only at the technology business but already doing it with success in terms of optimizing our large-scale operations for efficiency optimization, for example, I think that is one. You also expect when you're looking at monitoring base, for example, I mean we are monitoring millions of sensors on a 24/7 basis. There is clearly a lot also in that space where this will be meaningful. And here, I think we just have to be smart as well in terms of piloting and testing, yes but also thinking about what do we do and develop ourselves and where can we also leverage good solutions also from partners. So clearly on the agenda and clearly the opportunities as well. And I think this is also coming back to one very important aspect. And I mean we had some discussions in terms of technology integration, really driving integration in terms of modern platforms, et cetera. We could only dream about leveraging AI at scale when we have strong modern platforms and also good data management, for example. If you don't have that, there's no way that you're going to be able to leverage new algorithms or AI technology at scale. And I think this is another reason that everything that we are building as well, it's really going -- 10 years ago. You can say we had everything almost locally in Securitas. Everything that we have been building for the last 5, 6 years have always been with the intention of building scalable solutions that we can also leverage at scale. And that is an important aspect also when we look at the AI opportunities going forward.

Operator: There are no more questions at this time. So, I hand the conference back to the President and CEO, Magnus Ahlqvist for any closing comments.

Magnus Ahlqvist: Very good. Thanks a lot, everyone, for good and insightful questions. As always, thanks for your interest in Securitas, also taking the opportunity to everyone in the northern hemisphere, I know many people are also going on vacation. So, we enjoy the summer holidays and looking forward to seeing you soon. Thank you.