Earnings Call: Q4 2019

Feb 6, 2020

Good afternoon, everyone, and welcome to our Q3 Q4 and 2019 conference call. I'm here today as usual with our CFO, Bart Adam, to go through the performance in the quarter, followed by a Q and A session. So let us start with the performance on a group level. Expectations, but looking at the full year with 4% growth, we grew faster than the market. Q4 was not a strong quarter from a margin perspective. The operating margin of 5.3% was lower than the same period last year. And this was primarily related to some temporary factors in North America and a weaker Q4 in Europe. The price wage balance was slightly behind in 2019, and this remains a key focus area as we enter 2020. But we had a strong cash flow in the quarter. On a full year basis, we issued almost SEK4.9 billion in operating cash flow. And in terms of dividend, the board will propose increase in the dividend from to 4.80 Swedish krona. 2019 was also an important year because this was the year when we initiated significant modernization and transformation programs in the company. And I will talk a little bit more about this in the strategy session towards the end. But let us now turn to the progress of solutions and electronic security. We had 10% real sales growth during 2019, and we continue to strengthen our technology and electronic security capability. And we recently announced 2 important acquisitions, freedom security in Australia and TECCO security in Spain. And with these 2 acquisitions, we welcome teams with a lot of competence in electronic security and we further strengthened our leading offering in 2 important markets to secure it to us. But after the strategic review that we conducted in 2018 2019, we also communicated the ambition to double our Electronic Security And Solutions business by 2023. And these types of acquisitions play an important role in realizing our ambition. As in the previous quarters, we like to show, customer reference cases and this we do to enhance the understanding of our offering and of our solutions. And this time, we're going to show a customer reference case from the National Gallery in London. So if we can please play the video. There's a lot of art in 1000000 a year. I think that puts us in the top 10 visitor attractions or cultural attractions in the world. Every single day there's a different challenge, so we can only make that work with a client that we're membership with. One of the advantages of a secure test as a partner is that they're so big that they can actually react to the demands of the gallery at an instant. If we're very busy all of a sudden, they can respond to that. If we're quiet, they can respond to that in a way that we can't. So every facet that we have that we can bring to bear to look after this collection, we use and we use to the best of our ability. So that includes people, obviously, and includes technology and includes intelligence and organization of their scale and size means that they are up to date with all the latest technological developments and we can benefit So we built a brand new control room with access to 100 of digital 4K cameras. Technology is absolutely crucial in delivering what we deliver on a daily basis. The way that we approach this particular change program is that it was well thought through, well planned and well communicated, and there was fantastic consultation. A client wouldn't come to us and ordinarily expect us to deliver a visitor engagement experience. What they're going to have are happiest app, a more secure environment and a more commercially viable operation. That takes time, but if you do that well, then you can land it well, and that's what we did. Yeah. I hope you liked this case. This is a demanding and value to the National Gallery with our great people and know how and integrated security solutions from guarding to advanced technology. With that, let us now turn to the performance in the divisions and we're starting with North America. We had a temporary decline in North America and 2% organic sales growth in the quarter. We had a transition in our Critical Infrastructure Service part of the business. And this had a 1% negative impact on the organic sales growth. Our 5 guarding regions and the Pinkdom business were the main drivers of growth in the quarter. And the work to offer integrated solutions to our clients continue with high focus and security solutions electronic security account for 18% of the North America sales in 2019. The operating margin in the quarter was 6.1% and this was due to the impacts from the temporary decline in our Critical Infrastructure services business. And the operating margin was supported by good development in Our 5 guarding religions, our Securitas electronic security business, where the team did a really good job and also in Pinkerton. When looking at the full year, we've had a good year in North America despite then the relatively weaker 4th quarter. So with that, that has then turn to Europe. The organic sales growth in Europe was 1% in the quarter and this is then in line with the run rate from Q3. But the lower growth is related to the previously announced contract losses in France and the UK. And from a growth perspective, We had decent performance from Belgium, Germany, Turkey, and the Nordic countries. And security solutions and electronic security accounted for 22% of sales in the business segment in 2019 and a few percent higher than that in the 4th quarter. The operating margin was 6.1% in the quarter, and this margin was supported by the cost savings program in Europe and gains related to settlement, existing defined benefit plans in Norway, but hampered by Sweden, Belgium, and the Netherlands. So all in all, continued weaker performance in Europe compared to the previous year. And with that, that does then turn to Iberoo America. The organic sales growth in Q4 was 10% and the lower growth is primarily related to continued reduction of some of the short term security solutions contracts that we have in Spain, but good continued development, security solutions and electronic security now representing 27 percent of the sales. And looking at the margin, the operating margin improved to 4.8% in the quarter, primarily thanks to Spain, and this is a positive development. But I should also mention that we have weak comparatives from Q4 last year related to Argentina. And we have now concluded the investigation in Argentina that we have talked about in 2019. And I'd like to make just a few comments related to this. The success of Securitas a company has been built on good values. And we are very disappointed by the breach of trust displayed by certain individuals in Argentina. But we have taken proactive action and decisive actions to deal with this matter and also made significant management changes. I should also mention that from a financial perspective, we have adequate provisions at year end. But looking ahead, we are reinforcing our compliance program prevent the similar situation from arising again in the future in Argentina or elsewhere. And with that, happy to hand over to you Bart for more details on the financials. Very good. And many thanks, Magnus. So, let's look at the financial information to the quarter and the full year and starting as usual with the income statement. As of January 1, 2019, we have adopted to IFRS 16, And as you know, we have implemented this standard without any restatement of comparatives. So, 2019 is now the 1st full year accounted for under IFRS 16, sorry. And by that, we have recognized leases and rental agreements as assets in the balance sheet. This created a quite substantial negative net effect on our income statement. As shown here, in the table to the upper right, on the operating result level, there is a positive effect in the full year of plus SEK80 1,000,000 But then this is offset by a larger negative effect on financial items of minus SEK 400,000,000 minus SEK 148,000,000. So leaving a net negative of -68 percent on income before tax. And that is in effect of about 1.5 percent of our income before tax for the full year. Looking then at items affecting comparability, we accounted for SEK 83000000 in the quarter. And that is then adding up to a bit more than SEK 200,000,000 for the full year. And that is in line with the earlier communicated amount of around SEK 200,000,000. These items affecting comparability relate entirely to the 2 transformation programs we disclosed and talked about before. In Q4 last year, we accounted for minus SEK 187,000,000 as items affecting comparability. And that related also to the 2 transformation programs back then. In the entire 2018, we accounted for, in total,455 1,000,000 as items affecting comparability, and of such amount, 287 related to the European cost saving plan, and that was accounted for in Q3 SEK650 1,000,000 of items affecting comparability that shall be accounted for related to the 2 programs. And that during the period of 2019, 2020 and some part into 2021. And that SEK 650,000,000 is on top of the SEK 187 million is still the relevant amount to consider. For 2020, we could see an amount of around SEK250 1,000,000 everything depends a bit on the speed of the different implementations, and we can confirm that the 2 programs are on track. Then as to the financial income and expenses, we accounted for minus SEK140 million in the quarter, and minus 578 for the 12 months. As said, this number is negatively impacted from the adoption of IFRS 16, and such impacts with the earlier mentioned SEK 148,000,000 in the 12 months compared to 2018. The additional difference then, in the full year compared to the same period in 2018 as well comes from increased net debt. And then further from increased U. S. Dollar interest rates and the U. S. Dollar foreign exchange rates as well. And last year, in 2018, then the financial income and expenses were impacted by a one off effect of minus SEK46 million in Q4, and that's related also to Argentina. In Q4 last year, we have settled and refinanced the high interest bearing debt items in Argentina, and we took the 1, of course, related to that. In Q4 of 2018. So as we are talking now about Argentina anyhow, and as Magnus mentioned, we have now been able to close the investigation in Argentina. And tax corrections for a total amount of SEK 130,000,000. And I can confirm we are fully provided for such amount of corrections at year end. There are a few other related costs, contingencies, risks for which we have accounted for at year end and for which we believe also to have adequate provisions. I should mention that based on the conclusions from the investigation and the actions taken, there might exist some further exposure, but it is our judgment that there is no further significant financial impact for the group. I shall also add that the tax correction did not have any impact on our 2019 full year tax rate And also for any other costs there that we have accounted for, this has been largely offset by a few other positive matters. So both these items have not impacted any of our margins or tax rate. Then when we take a look at the tax line, or previous estimate for the full year group tax rate in 2019 was around 27.6 percent, and we ended now on 27.2 percent, confirming the expected increase from 25.00 from 2018. And as said, there is no real impact in this percentage from the Argentina tax matter. We turn then to the next page, and we consider here then the effects from the different currencies. As always, the number to the right are the foreign exchange end rates in Swedish kroner measured at quarter end. Both the U. S. Dollar and the euro, they weakened somewhat during the quarter. But then they recovered again towards the end, during actually the month of December, still ending stronger than the year end rates at the end of twenty 18. As you can see here, the U. S. Dollar ended on 9.32, 4% stronger than end of 2018, and the euro ended on 10.43, almost 2% more than end of 2018. The Argentine of Peso then stayed around 0.16 to the Swedish kroner, and that is then 30% lower than compared to 12 months ago. Due then to the combined effects from these different currencies, our quarterly consolidated income statement was positively affected when comparing to last year. Our total numbers, nominal numbers got some tailwind from the currency in the quarter, And this affects adds then to similar effects that we have seen during the 1st 9 months for the full year. In the 12 months, on sales, the total change was 9% and real change of 6%. So a 3% tailwind from currency on operating income level, total change of 8% for a real change of 3%. So here, a 5% tailwind. And then on EPS before items affecting comparability, there's a total change of 5% and a real change of minus 1. And the real change in APS was negatively impacted by the adoption of 16, as mentioned before, as well as by the higher tax rate, of course, compared to 2018. Together, these two factors impacted with, minus 4.5%. So adjusting the real change in EPS before items affecting comparability would have been then around 4% in 2019. And I think that is the 4% that we should compare to our target of 10%. And I would say that during a period of initiation of important transformations, combined with important also management changes, or 10% target was not reached, reached, but there was still a positive development from our entire business of 4% on EPS real change before then the external changes that impacted. So, slide 14, we go to the cash flow, and there's definitely some good news here. We are happy to see a strong cash flow coming in during the quarter, adding them to earlier good 9 months as well. And so in total, we had SEK 4,900,000,000 in cash flow from operating activities for the full year and the free cash flow then of more than SEK3.2 billion, I think both numbers are pretty much record high. As mentioned before, the net cash flow is not impacted from IFRS 16 leases. However, while the net amount is not impacted, some of the individual lines are. And we see in the full year net investments here, we see net investments of SEK320 1,000,000, and that results from investments of SEK 3,000,000,000 and reversal of depreciation of 2.7. And it shall then be understood that IFRS 16 by itself increased the investments with close to 1,000,000,000 actually. So, if it's with IFRS 16 then, or CapEx CapEx could, you could say, gets inflated, and that is from around 2,000,000,000 per year to now an amount of SEK3 1,000,000,000. Should also say that we had good cash flow, and we are happy about that, but it has also been helped to some extent by the lower organic sales growth. Still, we are satisfied with the outcome and we have heart We have worked hard with the issue and we will work more with it going forward. We go to the next slide, and we'll take a look here at the net debt. And it ended at 17.5, as you can see here in the bottom of the slide, up from SEK 14,500,000,000 at the start of the year. There is a quite considerable impact, of course, from the implementation of IFRS 16, which made a net debt increase with almost SEK3.3 billion. As you can see here on the line, lease liabilities, And then of course, we have had a dividend that was paid in May of SEK1.6 1,000,000,000. And as you can see here, also the currency translation the revaluation also added more than SEK0.5 billion in translation to the net debt. And then we have the acquisitions we paid for during the year and that is close to SEK 600,000,000. Adding all these effects that I mentioned before now from the start of the year, that adds around SEK 6,000,000,000 in total to the opening net debt So we would have been around 20.5 percent, but then from there, of course, we reduced with a free cash flow of 3.268 and then we end on 17.5 net debt at year end. And that we are pleased with and you can see here to the right of the slide that the net debt in relation to EBITDA is on 2.2, and that is after IFRS 16. And before that, it would have been on 2.0 to be compared to the 2.3 from 12 months ago. So we have been able to bring down our leverage during the year. And then to the next slide, which is a slide you have seen before as well, that is basically explaining the impact from IFRS 16 on our different KPIs. Nothing more to explain here. And with that, I'm handing back over to Magnus. Thank you very much, Bart. And so before we open up the Q And A, let me just share a few words regarding the strategy and transformation. And for those of you who participated in the Capital Markets Day that we had in December, this is just a brief recap as well. But if you look at the journey that we are on, we have built our success, very much based on being focused on security. Clear focus on security, but then continuously also enhancing the offering to protective services and now intelligence services as we go forward. So the strategic direction for the next phase is not really a change of direction. It's more an acceleration and that we are accelerating the transformation to reinforce our leadership position in the industry and by having the best offering to our clients. And in 2019, we have launched important programs and that part referenced as well to modernize and to digitize the entire business. And one of those, obviously, with the one important objective, I should say, is to enhance efficiency and productivity, and that is then represented in the lower part of this picture. But at the same time, we continue to invest in our offering with focus on electronic security, integrating and selling solutions and intelligent data driven services. And we also have a business transformation ongoing in North America, and that is progressing according to plan. And we are also analyzing the best and optimal approach to undertake this type of a program as well in Europe, but we will come back at a later point in time when we have that ready. But as part of the strategy work, we have also defined our wanted position, and that is to be the intended and protective services partner. And we identified 3 focus areas to be able to reach this wanted position with our clients. So all the strategy work and the focus that we have within the company is really focused on 3 areas: client engagements, protective services, leadership and innovation that is essentially how we enhance and improve our offering. And then the 3rd aspect is then, how do we also drive higher efficiency. So we can free up resources, but also then create better value over time. So to conclude this, we are really accelerating the transformation, but we are acting from a position of strength. And we do see new opportunities in a large and growing and dynamic market. And like I mentioned, we have 3 key focus areas that we need to work on and that we are working on to reach our wanted position. And we're clear targets. And a very solid team. We are now ready to execute on this. So with that, to sum up, and coming back to the performance in the quarter in 2019, we had organic growth of 4% in the year, stable operating margin of 5.2 percent, relatively weak 4th quarter, But if you look then also at the strategically important solutions at electronic security now accounting for 21% of our total group sales. But we also then, as I highlighted earlier, in conjunction with the Stratatore communicated our ambition to double electronic security and solutions by 2023. And we are taking concrete actions to achieve this ambition. And with that, now happy to open up for the Q And A. Thank you. Our first question comes from the line of Paul Checketts from Barclays. Afternoon guys. I think I've got three questions, please. The first is on the recurring theme of the price wage balance. Could you give us an update on how the timing for your negotiations through this year and if they're successful at what point we might see a positive move on margin. That's the first one. The second is on contract losses. Today, there's been one way and one last and they're roughly even each other out. But if we look back over the last year, there have been quite a few contract losses when you reflect on that, is there something why do you think it's been that there's been quite a few or is it just part and parcel of business? And then the last one is the results of the investigation in Argentina. You mentioned a few times. Can you tell us what actually happened there? And Bart, I'm just struggling to understand how it hasn't had any impact on the numbers. Would you maybe have to do with the accounting, but can you run us through that? Thank you. So in terms of price wage balance, to give you a little bit of perspective, in 2019 fourth quarter, we had a slight improvement but we were behind for the full year. This is obviously an area where we have a high focus and emphasis. We also have a good track record So it goes without saying that this is a very important focus area for us as we're now entering 2020. When you look at the timing, to your question of the negotiations, a lot of this is typically happening in the 1st part of the year. And so significant efforts starting in the summer of last year and then a lot of the negotiations throughout Q1 and Q2. And so that is really the main point. But that could also differ depending on countries and circumstances. But to give a rough idea that, that is really where we have the emphasis on that work. To the second question on the contract losses, We lost some significant contracts in Q1 and Q2 and also obviously had an impact throughout 2019. And part of that is part of the normal business, but I think one other aspect, and I also mention that some of those contracts were lower margin contracts. Some of them were contracts that we definitely did not want to lose because they were contracts that we delivered good quality, but also generated good margins or healthy margins. But we haven't sold enough. So some of the commercial activity, that would have been needed to offset some of the contract losses that hasn't really been high enough But we did highlight that we had some improvement in the fourth quarter when you look at the overall, at the overall portfolio, development. So that is obviously, more of a positive thing as we're going into 2020. And if you look to the last question, that is related to Argentina. This is something that we brought up during 2019. And to your question, what has happened? Well, we had whistleblower complaints in 2018. And then we started to look into some of those allegations and that then triggered essentially that we started an investigation and, and we did that because we take all values and ethics extremely seriously. So when we are getting complaints through whistleblower or from other sources, we always investigate And that investigation we have been doing with external parties, we have concluded that very recently. But I would just like to make a few other comments as well before also handing over to Barton the financial impact on this. First of all, it's just to say that we are really disappointed about what has happened. Our values are very important to us and we don't compromise related to our values. We have built the entire success of Securitas based on good values. And we have zero tolerance for misconduct. But if you look at Argentina specifically, this is a country with less than 2% of our global sales. Less than that of our margin. But nevertheless, it is important that we are addressing those issues and And to the point then, we don't really see that there is a material impact on the financial position. Part of that is something I think, part, you can comment on in more detail. We have some accrued funds to be able to cover But we have taken throughout the investigations, very active and decisive measures. And some of that have been management changes other disciplinary actions as well. And obviously now make sure that we are strengthening our control system to be able to prevent something like this from happening again in Argentina or elsewhere. But I would also just like to say the last point is that when something at this happen, we, investigated And we have then proactively also approached the appropriate authorities with this information. But that is essentially sound I mean, that is where we are right now in this process. So I think with that part, do you wanna highlight also the, the financial question? Sure. So, as mentioned, the the largest finance financial impact sits in our tax line, and that was SEK 130,000,000 that is a cost there. And and then how it works is that on a net basis, this has not impacted our tax rate. And how it works in practices that we we follow and monitor all the time any different tax exposures and mat matters that we have at hand, and for this, we have set, different provisions aside. And at year end, 2019, within that provision, we had, at year end a surplus. And that's basically surplus now have we set that aside for the Argentina matter. And that means that then on a net basis, so to say, if you take some of these one off surpluses and you take this Argentina cost, it is it was basically netting out. So that is how it was not impacting the tax percentage or the tax line as such. And a bit the same thing, you could say, on the cost that we have incurred or that we have provided for in relation to, for instance, investigations, terminations, some costs for advisors. Also there is it it has not really impacted our our margins. What I mean is that at at yearend, we have accounted for all these costs, as I said incurred during 2019 or some further to be expected. But most have also been offset by a few other positive matters that create a positive one off. So if you net this one out, I mean, the Argentina matter has definitely not helped our margins but it's also not that I can say that there has been a very large negative effect. So all in all, it's more like on netting out on 0. Thanks very much. Can I just one quick follow-up on price wage balance? So if for argument's sake, if in Q1, you managed to successfully renegotiate some of the pricing on a contract. Would that instantaneously kick in over there be a lag? That would depend a little bit on the pricing agreements that we have with some of the clients as well. That could differ. And price wage is very important, but we have also, as I think we have shared in 2019, also looking at more of a broader total production costs as well because one thing that we have seen in 2019 is that with fairly tight labor markets, there has been a number of pressures in terms of general cost. And that is something that is important that we then cover with the price increases. But in terms of the timing, it does vary a little bit contract to contract, but obviously over time, there should definitely be a positive impact. Our next question comes from Karina Elmgren from Handelsbanken. Your line is now open. Yes, hello. A couple of questions from my part. Still on the wage increase price balance, you mentioned that Belgium and Sweden impacted margins negatively in Europe. So you would you then say that this is something else and not wage? Wage increases that you haven't passed through? So on Sweden, I mean, there, it's essentially the the contract that we terminated or that was terminated in November 2018, that essentially then strong comparatives. If you're looking at Belgium, there it was not the general price wage issue. It was more related to our favorable year end reconciliations. So those were the 2 main issues. When you look at price wage in Europe in 2019, it's essentially the Netherlands and France, where we've had some challenges and then we had a slight improvement in France in the 4th quarter. Okay. And then on, you said that you had quite a lot of new contract wins in Q4. Could you say a little bit in which regions or countries? And also, so I think I said that we had improvement And that was fairly broad improvement when you look at the portfolio and what we call the net change. But also then positive, especially positive new sales activity. But that was really spread over North America as well in Europe. And was this something that already had an impact in Q4 or something that should impact more going forward? I mean portfolio net change, that is obviously good to have right now. Some of the new sales that we are winning and that could also be done for contracts that are not starting until sometime typically then in Q1 or latest in Q2. And then maybe on the margin in Ibera, Americas said there was an improvement from Spain, but Peru is weighing and probably Argentina as well. So regarding the margin in Latin America, have you seen any changes there or should we expect it to be on a lower level going forward? Well, we we that we have challenging operating conditions in Argentina as we have commented throughout the last 4 or 5 quarters. If you look at Peru, also fairly challenging situation for us, so we have also taken under our new divisional leadership also made some management changes. So we're taking actions to improve but fairly challenging operating conditions that we are facing. Thank you. Our next question comes from the line of shirag Badia from HSBC. Please go ahead. Your line is now open. Hi, there. Thanks for taking my questions. Just back on the Argentine investigation. You mentioned that, as you said, there wouldn't be a financial impact on the group? And is there any possible other qualitative ramifications at a group level that could come from this? And secondly, just on the temporary decline in Northern and the U. S. Business due to critical infrastructure. Could you give any more color on where that decline came from? And just finally on a broader view, how do you view the trade off of organic growth or contract wins versus margin stability in this tightening labor market? Yes. Thank you. Bart, if you can take the 3rd question, I didn't capture that, please. And related to Argentina, We'll take this seriously because we'll take our values very seriously, and that's also the reason that we have investigated based on Securitas, values and ethics and our principles. And if you say, could there be a qualitative impact, well, It's not a good feeling when you have a problematic situation like this, but I feel that we have investigated. We have taken decisive actions terminated those people who were involved and we have a strong values driven leadership in place. That is the most important. We are continuously working with our compliance programs and that is locally as well as globally. I would say a positive trigger from having something like this happen is that, that also then raises the awareness of the importance. And it's also then a reason for us to step our efforts even further. So I think that is probably the main one that I would highlight that we are, that we can see based on where we are today. To your second question about the U. S, well, we made a clear reference to a temporary decline. And that is essentially because this related to our critical, infrastructure services business. And and when we it's it's essentially a transition in terms of, who is buying this specific service where we are facing out one then being replaced by another. And we expect that we will recover that in the near term. And if you then say, well, what does near term mean? Well, difficult to quantify weeks or months, but it's definitely not several quarters away. And so that is really the background that then also had a significant impact on the margin in the quarter. And if you then ask, okay, what is the Critical Infrastructure Services business? This is essentially business in the aerospace, defense, energy sectors, where we have private customers, but we also have public customers as well. So that is a more of a specialized segment that we have within North America. On your 3rd question, the prioritization between organic sales growth and margin stability, as I have understood your question, there our preference would definitely be for margin stability. And the reason for that is simply, I mean, are a market leader or second in the market in many of our markets, and we need to set an example of pricing discipline as well. And that is why we will always prefer margin stability over organic growth. Thank you very much. Thank you. Our next question comes from the line of Sylvia Barker from JP Morgan. Please go ahead. Your line is now open. Yes, hi, good afternoon. I missed a part of the previous answers. So I might repeat a little bit, but just on the critical infrastructure unit and the overall growth in North America, could you just comment on how temporary that impact is and also on what led to the other 100 basis points of slowdown sequentially. Then secondly, on the contracts you've announced in Europe, should we assume that they're both a bit of a margin drag in 2020 given you're setting up the German contract and that'll be ramping up? And also in Norway, if kind of the press is correct, you've actually lost 39 airports. So maybe you just in the near term have some stranded costs there. And then finally on the other line from an EBIT point of view, that missed a little bit again. You said that that's where your Intelligent Solutions investments are going. As we think about 2020. Should we assume that that run rate of kind of increase continues in the first half? So your 6 basis points of drug year on year are mainly focused in the first half? Thank you. To to the, the critical infrastructure services business. Your question was how temporary? And, and, and, and it's essentially a transition, So we, where we're facing out, the counter party or the procurer, if you will, and then facing in another one. And that is the reason that we see that this is truly a temporary matter. And the near term, I would say we will recover this, and that's our expectation in the near term, but it's it's difficult to say if that is weeks or months away, but it's definitely not 3, 4 quarters away, just to give a a better kind of view on the expected impact there. In terms of the, the the other aspect in terms of the growth related to North America, we had some larger contract losses and those that I commented on earlier is that we have not been able to compensate those with new sales, to that type of extent. So that is the other reason behind lower growth, but we also had very strong comparatives from 2018 as well in North American organic sales growth. In terms of Europe, I think the question there was related to the margin development, yes, significant contract win in Germany, and that's essentially then a win. It's an extension and it's also an increase. And that is a fairly large assignment, one of the biggest undertakings that we have and there could always be startup related issues as with any large new contract. In terms of Norway, obviously a regret that we have lost some of the aviation contracts there. And that is something that we try to manage through as well as we can. So I think that is really the key points on the commercial side. We also had final settlements of some defined benefit plans in Norway that have given us some benefit in 2019, and that's going to be the reverse impact. Obviously, positive from a long term perspective that we have this settled but there will be a slight negative impact when you're looking at 2020 versus 2019. Bart, do you want to take the other line question. Yes. As to the other line, as you have pointed out, Silvia, we have there an impact this year compared to last year of close to 0.1. And also for next year, we expect a further increase because of the investments we are making there in the transformation. And that is, yes, as mentioned before, around 0.6 We mentioned that at the Capital Markets Day, and that will a bit be more heavy in the first half of the year compared to the second half of the year. But the 0.6 is the full year rate increase of the same. Our next question comes from the line of James Winkler from Jefferies. Please go ahead. Your line is now open. Hey, thanks guys. My first one was, I mean, it's just still in the North American margin just to be clear, you've described it as sort of a transition. Is that essentially just you had a short period of time to quarter where you had no revenue associated with a bunch of employees who you're still paying until that transition period is over? And, within this specific headwind, was that fully because obviously before that, the trend in North America for the prior few quarters in a row was up sort of 20 basis points year over year. Was the full swing in terms of what you saw in Q4? 100% attributable, just the decline in Critical Infrastructure Services? Or was that also mix from the contract losses as well. And then just back to European Margins, the underlying sort of benefit of about sort of 10 basis points should have been about stable in Q4 because you also had to say getting easier as well as even though some of the cost savings were lapsed. I'm wondering if there's some specific areas that got worse and what you should expect? Going to next year? Yes. So to the North America question, James, we didn't hear you perfectly. So you have to is, don't hesitate. You can restate the question if we don't answer it. But if you look at North America, it was a transition And from that perspective, when you have a decline until you have then replace that with the corresponding increase. That's essentially where we were in the quarter. It might take some time But like I stated earlier, we expect that we're going to recover that in the near term. To your question about the financial impact, this is the reason that we are stating as well in the quarterly report, and we do that for a reason that this was the main and fairly significant impact in the quarter. But related to Q4, as an isolated quarter, not so much relationship to Q2 or Q3 in 2019? Yes, just adding to that, it was, as you said, I mean, the there was a temporary decline there where we still had the people to large extent on our payroll. That are servicing or serving that type of customer base. So that was really going on in Q4 there. And then we should see the top line connected to that business again coming up now during the next weeks months. And to the second question about Europe, it was really a mixed picture. And like I said earlier, I mean, we are not happy with the performance And we had some areas that performed quite well, but then we had a few areas where we had some, some, some, some real negatives. And those were very much related to the issues that I mentioned, about Belgium, where we had this year end reconciliations Sweden, which was more related to the comparatives from 2018. And in Netherlands, we have suffered throughout 2019 due to a negative price wage balance. And those were really the main issues that we had in Europe. Some improvement in France, I should highlight, which was positive. Yes, sure. And just to clarify that, I mean, it just means it got worse in Q4 year over year though. So I'm just wondering, you say obviously, obviously, all the reference things areas that you flagged before. So we're just wondering what you got worse. And then, just the last thing on the North I want to know if you're able to comment on the margins of the credit, if it starts to related to the rest of the division, if it's above tends to be a higher margin work? Yeah. So so so, I mean, in Europe, I think the other aspect that I would highlight is the the negative leverage when you look at the totality and that is obviously coming from the lower growth in the quarter. I would say that's the other would be another major factor. In terms of the margin, on the some of this business, some of that business is more, something you can look at as extra sales business, some of it is more contractually bound I think it differs quite a lot actually, between different contracts. So it's difficult to generalize too much about the margin level. But good healthy margins, absolutely. But the difference from in Q4 compared to earlier quarters or the full year, so to say, largely comes from the effect Belgium are back to Europe? Yes, back to Europe, yes. Yes. Okay. And just sorry, lastly, on the momentum of the new contract wins, excuse me, in Europe, you said on a net basis nearly flagged too, but on a net basis, sort of moving forward, do you expect new contract wins to be a positive impact in 2020 in terms of the impact on growth as you stand today in Europe? Yes. I mean, we don't give too much guidance, but we highlighted the favorable development in Q4. And that is, like I mentioned earlier, that's related to portfolio and it's also related to the new sales. If you're looking for leading indicators for us, new sales are always very important, of course. And even if we don't recognize revenue, during the quarter that we record the new sales, it does give an indication of what we have coming up. And that's something that we generally have to improve as a company during 2020 is that we have by far the best offering. And we know that when we do a good job with our client We win business and we keep and we develop that business as well. And that is why we also have to step up and improve, in all the divisions. And I would add that the wins that we have had are more midsized contract. It's not like one single big contract or anything except for maybe what we have mentioned there around the aviation side in Europe, other than that it had been more like midsized contracts and even smaller contracts so which in a way we like as well because they tend to be, yes, create less instability in a way if you wanted to put it like that. Yes. Okay. Thank you. Thank you. Our next question comes from the line of Edward Stanley from Morgan Stanley. Go ahead. Your line is now open. Hi there. I'm just trying to back out the growth contribution that you've got from electronic security in Q4 because you've given the numbers for 2019 and it seems to be half of your growth coming from, electronic security, but I just wonder if you back that out over time, it looks like the Mann Gardening growth rate continues to decline and these secure technology solutions continues to decline as well. So I'm just trying to work out the balance you think that will strike in 2020 between guarding growth and electronic security. And the second question, I'm struggling a little bit to reconcile the moving parts of the working capital, but can you confirm whether you have either used recently or currently used any factoring facilities? Thank you. I can start with the question your last question and the answer to that one, which is pretty easy and that is no. We do not use factoring and we do not intend to use factoring. And to your first question there, Edward, we we had real sales growth solutions and electronic security of 10 percent in 2019. Organic sales growth, which is then more related to the solution specifically was the vast majority of those 10%. And then some some was then related to electronic security. If you then look at the growth rate, I mean, with the ambitions that we have set out to double electronic security and solutions by 2023, we need to grow this with strong double digit every year. And that is really the ambition, a big part of that has to come from successfully converting to solutions some historically has also then come from acquisitions in electronic security. So that is really the perspective If you then look at the organic relationship between guarding only versus then goes without saying that we need to have a significantly higher pace of solutions growth over guarding growth. Operator, everything turned quiet on our side. Yes. The next question comes from Henrik Moby from Nordea. Please go ahead. Your line is now open. Hi, good afternoon. Thank you for taking my questions. Coming back to the temporary U. S. Contract transitions, I mean, it seems like it's around SEK 120,000,000. That was temporary lost in the quarter. Did I understand you correctly that you pretty much kept all costs related to that specific contract on board during the quarter. And just for my math, that would just in personnel costs imply around 1,000,000 to 1,000,000 shortfall. Have you been able to use this personnel in other parts of the operation? Or is that just a shortfall related to this specific event? Yes. So the 1% that's a pretty good met in terms of the numbers on the sales impact. The securitized Critical Infrastructure business is a highly specialized business. And I think in this particular case, if we had a temporary decline in terms of the revenue, we still had a significant part of the cost So that is really the assumption. And it was like we commented earlier, major impact in the quarter. So, I mean, with but with total costs for you normally running around in a contract like this, it would be 100,000,000 to 110,000,000 Is that what we should assume as a shortfall on EBIT or that would be too high? That's too aggressive. We have been able to reduce some of those costs temporarily as well to redeploy some of the of the people as well, but, but, that would be too aggressive assumption. But it has had to considerably impact of course. Okay. Thank you. And also coming back to the growth comments, I mean, you've been not able to compensate the losses with new sales during the year and now in this quarter you're quite upbeat around new sales in both Europe and U. S. And can you just walk us through what's really behind the slower sales contract losses in the beginning of the year? And then what is driving the more successful end of the year? Is it just temporary or have you now become more of an aggressive in trying to win contract? So first of all, I mean, we have the best quality and I'm convinced also the best offering We always protect our margins. So I think that that we are not becoming desperate to win a lot of new business But if you look at the first half of twenty nineteen, it was the time when we had a number of significant contract losses at the same time in Europe as well as in North America. And then obviously, it's everything becomes a lot easier when you have good top line growth and momentum. It's equally tough when you have slow growth or no growth on the top plan in our business because that also then always requires some adjustment. And but I would not say there are any specific factors. I mean, we have gone through and we go through each and every contract. And and I cannot really say that there is a specific pattern or any commonalities between those losses. We just have to focus on what we do well and that is to to win clients that really value the Securitas offering and also our strategic direction. And then we'll make sure that we we serve those clients and we develop those well over time. Is it possible that the 2018 program took management focus in the branches and that that then led to not as high pressure on new sales in the end of 2018 leading to those losses in beginning of 2019? It's I wouldn't generalize to say that, but one important aspect and I think Bart touched upon that a little bit earlier as well is that We are driving fairly significant transformation programs. And that is obviously one important role that we all have in the leadership team as well is that we really keep a focus on the ongoing business as we are aggressively really transforming the business. With modernization and digitalizing and also then building a stronger Securitas for the next 5, 10 years. But that is part of our normal job. And I also believe that a lot of the work that we are doing to transform enables us also to continuously improve our offering, and that's obviously something which is also helping in all the dialogue together with the clients as well. And maybe one thing to clarify, Henrik, is that the the the restructuring was not so much about the branches. It was more related to, yeah, more support back office people. Okay. Thank you. Sorry for taking a lot of time here. One more question, if I may, for you, Bart. Did you have any material effects from year end adjustments in this quarter? I know you mentioned Belgium earlier in this call and you mentioned something positive in Norway as well. Was it a material impact in the quarter in general? Well, you, you refer to 2 good examples there. Belgium and Norway, which we have pointed out, Belgium on a negative side, Norway on a positive side. We have had we always have some effects at year end, but I've had also said We also had, for instance, some costs related to Argentina. And these other matters have basically balanced out the Argentina matter then on a group level. So and these costs related to Argentina have been largely taken on a group level as well, but that has been balanced out by other positive one offs. Okay. Thank you very much. Our next question comes from Matija Gogullet from Goldman Sachs. Please go ahead. Two questions on my side both related to CapEx. When they look to your cash flow on pages in 13 of the presentation, You showed under the net investments for the year they're quite sharply down from $4.95 to $3.20. How should we interpret it? This? Is this just now you'll be more efficient or is this basically lower investments because you actually expect lower growth for the coming quarters? And maybe also say within that context, given the increasing weight of the tech enabled solutions within your mix, I would expect that CapEx to be the net CapEx to be a little bit up year on year. So some comments in that respect would be very welcome. And secondly, just a small technicality. I think you mentioned to that we should expect around 1,000,000 items affecting comparability for the for 2020? Is that also on a cash basis in in the cash flow statement, if it was going to be similar or is there any material difference? Okay. Thank you very much. Okay. As to the CapEx I mean, it can differ from 1 quarter to the other. Yes. I think 2018 was, the quarter 4. There was on the higher side. Maybe Q4 is this year was a bit on the lower side on the net investments. I mean, we do not really manage it from quarter to quarter. We manage it more on an annual basis. And there could be some movements there into when you compare different quarters. So I would not take it as a big indication of we are going down or we are going up. It's more the annual rate that you need to consider. Sorry, but on that, the annual rate is also down quite significantly from 4.95 to 3.20 Yes. Correct. Of course, the, the, the, depreciations also start to catch up more and more. I mean, we have had investments. Last year, we had a few larger ones related to, some of the acquisitions also we did into premises, which we did not have really this year. So that's a bit of impact there, that you can see from that, but but I mean, the guiding is really around SEK3 billion on capital expenditures after IFRS 16. Okay. Yes. Then, on the cash basis, for the items affecting comparability, this SEK 250,000,000 to a large extent, that will be, will be cash flow, but not entirely. I should look up to the exact numbers, but it's more like, yeah, somewhere around 108 I think, with free cash flow, but I would have to confirm that in detail, but it's not the same amount. Our next question comes from Alan Wells from Exane BNP Paribas. Please go ahead. Your line is now open. Hi, good afternoon. Just one very quick one for me on why those have been answered. Just on Spain and the impact from the short term contracts, obviously, flagged in the release, the sales organic sales decline in the fourth quarter, partly as related to the reductions there. Any way you can help us of quantifying what's left to run off there and any expectation you've got in terms of what the impact might that might be in timing as we move through 2020? Yes. So that part of the business, we have tried to be prudent in highlighting, that some of those are short term. Solution contracts. I I would characterize this and say that it's it's this kind of a decreasing impact, but there is still decent amount of that business still there. But, that is obviously one thing to then look at that decline The other one is we also taken actions and our Spanish team also taking active actions to also be able to it and to mitigate some of that decline as we go forward. But there is still some left. Thank you. Our next question comes from David Drew from Bank of America Merrill Lynch. Please go ahead. Your line is now open. Just 3 from my side. Firstly, on the transformation programs, my understanding was that the $650,000,000 would be recognized as an IAC over 24 months. Can you just confirm if this time in is on track? Then my second question, just just going back to the tax impact from the Argentina investigation, is there not a cash impact from the $130,000,000 contingency payments to the authorities. And then just lastly, going back to margins in Europe at the risk of funding repetitive, there's a lot of moving parts here. I was just wondering whether you could, for Q4, sum up whether there was a net impact on the margin from a under recovery in wage and for under recovery and wage inflation for the region as a whole? Thanks. Okay. Maybe on your first two questions. On the transformation. So I said that the million is still the number to account with. We set that out in the beginning that it would be largely 2019 2020, then we refined that a bit as we saw to as we, during, I think, Q1 or Q2 during this year, that it would go a little bit more into 2021 as well. We were refining the entire planning there on a more detailed level And so now for 2020, we should talk about 250 for this year and then the remainder of the 650 to come in 2021. On the tax impact, you are I can confirm that the cash flow impact should come 2020. And I think that answers your two questions there. And the third one, if I look at Magnus? Origin thin and the 130,000,000 tax payment. That one I covered. Good. And the last part then, and that was related to the margins in Europe. We did see an improvement in France. And to just elaborate a little bit more on that, there has been significant changes in some of the employee subsidy schemes, and and specifically deceased scheme. Some of the benefits of those disappeared about a little bit more than a year ago, but within the intention of being replaced with some other programs. And some of that kicked in in the fourth quarter, and that also had an impact a clear positive impact on our performance But beyond what we commented on earlier, that is really the main point of recovery in the fourth quarter. Okay. Thank you. Thank you. We have a follow-up question from Karina Elmgren from Handelsbanken. Go ahead. Your line is now open. Yes. Just a quick one, Bill. Would you say that you have seen any extra sales from, for example, airports linked to the increased control due to the coronavirus in the beginning of this year? Hi, Krishna. No. I don't really see that. I think from our perspective, when it I mean, when you talk about coronavirus, just put maybe some things a bit in perspective. From a business perspective, our EMEA region is around 2% of our total business. China is only a small part of that. So we have relative limited business in China. And then if you then look at, is there any type of indication of temporary demand or anything like that for specific services from Securitas? No, that is not the case. And we also, and I should also highlight that. Will you also take all of our employees safety and well-being seriously. And that's obviously a reason for us also with a number of employees around the world that we also the developments related to the coronavirus. BART here on one earlier question in relation to the cash flow from items affecting comparability. I looked it up and it's a bit higher actually. It's more around SEK 200,000,000. And I think I mentioned 180, just as a clarification. Thank you. Our next question comes from Stephen Groven from Deutsche Bank. Please go ahead. Your line is now open. I just want to dig into Ibero America a little bit. So could you just give us a little bit more color on exactly the developments around the, the Spanish contracts. So my understanding is obviously that they've been contributing significantly to to the growth rate and we're annualizing throughout Q2, Q3. And that obviously was coming to an end. Just within that, you are now saying that you've lost some of those contracts. Is that correct? And can you give us a bit of a look forward as to what that business looks like and how confident you are of potentially getting some of those contracts back And then within that business as well, I mean, clearly, I think Argentina is roughly 20% of Ebera America. Inflation there's about 50%. So just doing the math, I mean, that in itself should be contributing ballpark. 10 tips, just through inflation and it's something that you called out in the release as well. So if you could kind of give us a bit of color there and how much that was contributing, that would be really helpful. Yeah. So so so to give some more context, I mean, on this, short term solutions contracts in in Spain, there there is a an a negative impact, but it's a smaller negative impact on the organic sales growth now than it was in the previous quarter. We expect that these contracts will decline but like I mentioned earlier, we're also taking actions to try to mitigate, some of that some of that impact. Yes. Coming to Argentina, as you rightfully point out, Argentina is about 20% of, Ibera America as a division in sales. And then inflation is pretty high, but in our business, I don't think we have seen 50%. It has been a bit lower than that. So yes, it should then add, of course, considerably also to the growth in the division. Thanks a lot. If there appear to be no questions, I'll return the conference to you. Okay. So with that, thanks a lot to all you for joining us today.