Good morning everyone, welcome to our Q4 call. I am happy to be here today with our CFO, Bart Adam. We will go through the Q4 results and the full year results. Then we will also talk about how we are accelerating the digitization of our company, provide you with a brief update related to the development of our intelligent products. As always, we will obviously finish with a Q&A. Let us look at some of the highlights of the fourth quarter and full year 2018. Q4 has been a very good quarter with strong growth and profitability improvements. We have had good commercial activity during all of 2018. The strong sales together with solid customer retention are the two main growth drivers behind 5% organic growth in the quarter and 6% in the full year.
We should also note, I am very happy about the fact that we have good growth across all the segments, from North America, Europe, and Ibero-America. Like in previous quarters, we have been successful in terms of balancing wage costs with price increases, and this is an important focus also during 2019. We achieved 5.5% operating margin in the quarter, which is a 0.2 improvement versus last year. On a full year basis, we improved the margin to 5.2%. In terms of earnings per share, we had 12% improvement in real terms, before items affecting comparability. When you look at the overall momentum that we have as a company and the performance, we are doing really well and also carrying strong momentum going into 2019.
During the quarter, we also initiated two major transformation programs that are more forward-looking and really then for shaping a stronger Securitas in the future. Related to these programs, we recorded items affecting comparability of SEK 187 million. We will talk more about these programs later during the call. Looking at cash flow, Q4 was decent, but we were not satisfied with the full year performance. We have initiated actions to analyze the development and also then to take actions to improve as we go forward. I should also note that the board of directors have proposed an increase of the dividend to SEK 4.40. We have the best offering in the security services industry, and this is really the reason that we are also growing faster than the market. We have a strong focus on continuously improving our protective services offering to our customers.
When you are looking at the sales of security solutions and electronic security, we grew with 21% in real terms during 2018. I am also really happy to say that we are progressing well with the integration of the acquisitions that we closed during the first half of 2018, then referring obviously to Kratos in the U.S., Automatic Alarm in France, Alphatron in the Netherlands, and a few other major acquisitions. Let us now shift the focus to the performance in the different segments. First, let us look at North America. We have had solid growth in North America during 2018 and achieved 5% organic growth in Q4, and this is then despite high comparatives. We are winning in the market, growing faster than the market, and we have strong commercial activity that had continued at a high pace throughout all of 2018.
I should also note that we have solid client retention. It is also a very good quarter from a profitability perspective. We have good leverage from the growth, and solid performance in our risk management contributed to 6.3% operating profit margin in the quarter. Looking at the full year, we improved the margin from 5.9% to 6.1%. When we are closing 2018, looking at most metrics, it is a very good performance by our North America team. Shifting the focus to Europe, we had growth of 3% in the quarter and 4% for the full year. There was a slight negative impact from the continued reduction of refugee-related sales, and that had almost a 1% negative impact on the growth in the quarter. We've had very good commercial activity in Europe. Most countries, almost all countries actually, are contributing to the growth.
I would like to highlight good support from Belgium, Germany, and our guarding business in Turkey that all three are doing really well. Shifting to the operating margin in Q4, we improved to 6.3%, and this is thanks to good growth and also improved cost control. The cost savings programs that we announced during the summer of last year is running according to plan and had a small positive impact in the quarter. This turnaround, obviously after a more mixed result in the first half in Europe last year, we are now strong ending on a significantly stronger note going into 2019. Let us then shift to Ibero-America. We had good organic growth of 14%, which was in line with the previous quarter. Spain is the main driver behind this development, with double-digit sales growth.
Looking at profitability, we had a good development overall in 2018, but a weak Q4. From an external perspective, it is a challenging operating environment in Argentina. I should also mention that from an internal perspective, we have not been satisfied. Due to this, we have made some management changes and are now putting an action plan in place to improve as we go forward. We do expect some continued challenges in the operating conditions in Argentina in the next couple of quarters. Spain, on the other hand, delivered strong performance through 2018. Our team in Spain have continued successfully drive conversion of contracts to solutions, but also similar to the comments that we made in the third quarter results, we should note that some of these contracts are more of a short-term nature.
All in all, we have good momentum as a company. We're carrying good momentum into 2019 and are also very excited about the transformation programs that we're now initiating. I will come back and talk a little bit more about those after an update from our CFO, Bart Adam. Bart?
Many thanks, Magnus. Good morning to everyone. Before we take a look into some further financial details to the quarter and the full year, I believe we can say that we added another good year to our track record. These are slides that you probably also recognize from the investor update. We believed at that time that we could reach sales on SEK 100 billion for the full year. Yeah, here we are. We did. We can say that we have been on a steady increase of our top line since 2013 through a combination of organic and acquired growth. We move then to the next slide, moving to the operating income.
Here we see that has also been steadily growing over the last six years, ending now for 2018 at SEK 5.3 billion, with the margin at 5.2% now, where back in 2014, we had an operating margin of 5.0%. As to the EPS before items affecting comparability, that has been growing also over the same period from a bit over SEK 5 to now a bit over SEK 9, actually SEK 9.17. I believe we can label this as a quite solid and sustainable development. I think these three slides are, for me, a witness to our position in the market that we have built over the long years. While at the same time we have been and will continue to prepare for the future. We turn now to the quarter and the full year and the income statement and some details around that.
As at the Q3, I can mention that as of July 1, we have adopted the IAS 29 standard, and that is the standard that deals with hyperinflation accounting. We have implemented that standard connected to Argentina. The impact on Securitas has also, as in Q3, not been really meaningful. There is almost no effect on sales and operating result, and a small impact within the financial items line. That is further commented under note one and three in the report. Turning now to the numbers on this slide. As commented by Magnus, the quarter showed 5% organic sales growth and the full year ended on 6%. The operating margin improved 0.2 in the quarter and then 0.1 in the full year. We are really happy with that development. We look at then the acquisition related cost, these were quite high in the quarter.
You also see that in the full year, these were SEK 120 million compared to SEK 48 million last year. From that SEK 120 million, there is SEK 80 million that relates to the Kratos acquisition in the U.S., as we also commented on in our Q3 report. I can say that for Kratos, the acquisition integration has progressed well, and that in line with our comments made at the Q3, the integration costs related to Kratos now has been fully recognized. Not mentioned on this slide here, but I can also say that the integration of the Pronet acquisition that we have made in the summer now in 2018 in Turkey is progressing very well and in line with the plans we had made.
In the financial year, in the full year, we had -SEK 455 million of items affecting comparability, that is now the SEK 187 we booked in relation to the two announced transformation programs. We had another SEK 268 million, of course, related to the cost-saving programs in Europe. I need to emphasize, but Magnus will come back to that the nature of these items affecting comparability is quite different. As I said, in relation to Europe, this was a cost-saving program, whereas in relation to the two announced programs now, this is forward-looking investments. When we go further down in the income statement, you notice that our financial expenses are also quite high in the quarter. Included in this SEK 154 million here that you see is a one-off of SEK 40 million related to Argentina.
That SEK 46 million is due to, well, as a result of the very high interest rates, we were confronted with very high interest costs on some interest-bearing debt items in Argentina. The interest in Argentina, as you know, has peaked to as high as 60%-70% as of summer. Now we have settled and refinanced all of these interest-bearing debt items from Argentina, and we took the one-off cost related to this in the quarter. This is a one-off effect of -SEK 46 million that hits the quarter, and that by this is also totally solved. When we look at the full year financial income and expenses, and we take away this Argentina one-off from the full year number, then we get to run rate of about SEK 400 million for the full year. That is about SEK 100 million per quarter.
As mentioned before, there is a small positive impact from IAS 29, the run rate excluding IAS 29 is around -SEK 105 million per quarter. We take a look at the tax line. The applied tax rate for the quarter and the full year is 25%, that compares to almost 40%, actually 39.8%, in the fourth quarter from last year, 31.5% for the entire 2017. The 2018 tax rate has benefited from the lower U.S. tax rates based on the U.S. tax reform. As said, also the 2000 full year tax rate was 31.5%, that then included a one-off tax expense booked in Q4 of 2017 related to the same U.S. tax reform. Excluding this one-off tax expense, the tax rate was actually 28.4% in 2017.
Important to mention is that we have further assessed our tax base and the rates going forward, and our best judgment is that we will have a tax rate of 28.5% in 2019. This increase is largely impacted from basically reversed effects from the U.S. tax reform related to the so-called BEAT tax. While the first year in the U.S. tax reform we benefited, to the second year, that has been largely reversed. You then notice in the bottom, of course, a difference between EPS and EPS before items affecting comparability, and that entirely connects then to the items affecting comparability as commented upon, and also to this one-off tax expense from Q4 2017, basically related to the U.S. tax reform. Turn to the next page and then take a look at the effects from the different currencies.
Here to the right on the slide, the foreign exchange rates in Swedish krona are the quarter end rates, and we see that both the US dollar and the euro have strengthened quite a bit versus the Swedish krona at the end of Q4 compared to the same quarter last year, respectively 8.3% and 4% up. The euro during the quarter was around 10.2-10.3 level, after it had peaked to around 10.7 in the third quarter. The US dollar has been hovering around nine Swedish krona during the quarter, ending then at 8.94 at the end. Our 12-month consolidated nominal results were, so to say, positively impacted, affected from both the euro and the US dollar when comparing to last year. The Argentine peso continued to be around -50% compared to 12 months ago.
All in all, the net effects on the different lines in the income statement can then be seen from the difference between total change and real change, and the effect becomes a bit bigger when we move further down in the income statement. You note that then in the end, for earnings per share, before items affecting comparability, the real change stands at 12% for the full year, and that has to be compared to our long-term target of 10% EPS growth. We then turn to the next page and take a look at the effects from the different currencies. Sorry. I move on to the balance sheet now instead. We had a good cash flow in the quarter, as Magnus said, a decent cash flow from operating activities during the quarter, but we were not satisfied with the full year. We suffer from a few negative effects.
We comment upon those also a bit at Q3. Basically, you could say the DSO, the Days Sales Outstanding, increased, and this was primarily in Security Services North America, where the cash collection at year-end was below the plan. As commented before, we have an invoicing system change transition in the Netherlands, causing some payment delays, and that continued in the fourth quarter. Finally, the interest hike in Argentina is also causing some payment delays from our customers. I shall also add, of course, that the strong organic sales growth, especially in Security Services North America, resulted in increased use of operating capital employed, impacting then the cash flow negatively. As said, we were not satisfied with the full year cash flow, and we will further analyze and work with the issue and see how we can improve this.
I shall also mention here that we now have prepared for the IFRS 16 implementation. IFRS 16 is a standard that deals with leasing contracts. In essence, as of 2019, all equipment that is leased today will basically be considered as capital expenditures in the balance sheet, so will be shown as fixed assets, and then there will be shown a similar debt item on the liability side. Due to IFRS 16, the net debt will increase, but so of course will the EBITDA. The EBITDA increases because some items that were previously recognized as expenses in the EBIT will now become depreciation and interest. For Securitas, we estimate increase of assets and net debt with each SEK 3.4 billion. I will come back to that also on the leverage effect. Moving to the next slide.
We look here exactly at the net debt. This stands now at SEK 14.5 billion, coming down from SEK 15.7 billion at Q3, and it was SEK 16.7 billion at the end of Q2, quite some improvement here compared to Q2. We started the year with SEK 12.3 billion, and the development since then reflects the development from the operating cash flow, as just explained. We paid out a bit more than SEK 1.7 billion related to the different closed acquisitions, and all of these, of course, were disclosed to the market. We paid also over SEK 1.4 billion in dividend. The net debt was also impacted from the earlier commented foreign exchange development, as you can see here at the bottom. That added SEK 758 million in translation to the net debt since January 1st.
You see here that for the period end, to the far right of the slide, the net debt in relation to the EBITDA is still on a healthy 2.3, in line with our mentioned expected development. We see here the development over the years. That has been hovering between 1.9 and 2.4, and now, as I mentioned, at the healthy level also of 2.3. Turning back to the issue of the IFRS 16 implementation, we can see that the leverage, that is net debt to EBITDA, will increase with about 0.2. The 2.3 from year-end 2018 in a way will under IFRS 16 become 2.5. That is the effect of adding the SEK 3.4 billion we estimate right now to the debt, but also at the same time, of course, to the asset side. Going to the next slide.
As we have been writing about, our board of directors has approved two major transformation programs. The first program will radically modernize our global IS/IT foundation and will create a global IS/IT organization as well. This is about preparing for future development at the same time. Once finalized, the IT cost in the group is expected also to be reduced by some SEK 300 million upon completion in 2022. The second program is a business transformation in Security Services North America. Here, this is expected to positively impact the operating margin in North America. The operating margin is expected to be supported up to 0.5 percentage points by 2022. Of course, everything else being equal. Related to these two programs, we will make some serious investments.
That is, we will recognize as items affecting comparability approximately SEK 650 million, another CapEx amount of SEK 550 million, and this will be recognized in the period 2019-2020. The cost that will be recognized as items affecting comparability are mostly impairment of assets that become obsolete with the implementation of the programs, some organizational restructuring charges, but also some other non-recurring items. With this, I'm happy to hand back over to you, Magnus.
Thank you. Thank you very much, Bart. We would now like to provide you with an update regarding these transformation programs and also to share a little bit about the early development of our intelligent products. This is a slide that you have seen in our investor update outlining the strategic phases, essentially where we're coming from, the strong foundation that we have, but also where we are heading. I mentioned this many times before. We are in a good position. We have a strong foundation as a company, and we have good momentum. All of this has been built on what you see in the lower part of this picture, which is really our strong guarding capability.
We call that our guarding core. In more recent years, we have also developed the best offer in terms of protective services to our customers, and the ability to then integrate these services into solutions. During the next phase, our ambition is to build on this foundation, and become the leader in intelligent security. Yesterday, we announced two major transformation programs. The first is a group level program where we're working to consolidate, rationalize, and modernize our IS/IT delivery. With this program, we are creating a global IS/IT organization where we are shifting from managing IS/IT in more than 50 countries around the world, to creating 10 strong clusters and one global IS/IT organization. Other things we are doing, creating one collaboration platform, and we're also then leveraging shared data centers and cloud platforms to essentially build and modernize a higher IS/IT capability.
As Bart commented, we are expecting IT costs to be reduced by SEK 300 million upon completion in 2022. It is also important that there are efficiency aspects of this and productivity aspects. For us, when we're looking at our intelligent products and intelligent security, with data-driven intelligent security, to be able to drive that at scale does require a solid and secure, and also then scalable IS/IT foundation. That is the reason that we are so excited about now really embarking and starting to drive this change. The second program is a business transformation program focused on North America. The objective here is to create the modern and integrated platform for people management, workforce management, and finance. This is very much about streamlining core operational processes, modernizing our way of working internally, and with our clients.
From all the work and the pre-studies that we have done related to this, I think that one of the most important benefits with this program is that with modern tools and modern applications, our teams in the front line will spend less time on internal, more administrative issues, and we will free up more time to engage and drive development with our customers. This is a little bit why we call it the business transformation program, because it's really touching all the ways in terms of how we are conducting the business. With integrated platform, significantly more than modernized and efficient tools, et cetera, we see an opportunity to support the operating profit margin improvement up to half a percent by 2022 onwards.
I just want to highlight again that there are clear efficiency and productivity gains to realize with these programs, but they are also critical to build the capability to develop and to launch new intelligent services at scale. If we then shift to the next slide, coming back and talking a little bit about intelligent security. For those of you who were with us at the investor update in September, we talked quite a lot about our intelligent security vision. As we have communicated, we are working now across a number of different areas, with the development then of new intelligent products and services. One of those is related to crime prediction. I should say that we are now adding our first intelligent products to our portfolio during 2019.
It's early days, and these are the first steps, but we are very excited to now show you first product that we call Insights. Insights is a good example where we are leveraging our size and access to relevant data to create higher value to our customers. Let us look at a brief movie to see what this is all about.
Securitas have long experience from risk assessment. We gather security data and make observations on a global scale. We combine this with intelligence to create products that bring value to our clients. Today, we are in the beginning of our journey, and we have our first intelligent product in use, Insights. Insights is our application for data-driven risk prediction. Let me show you. By searching specific locations, we can view the risk for different events for our clients. We can pan and zoom to see how these risks varies across geography. With this, we can have insightful client conversations about their risk and how it varies over time, and we can tailor our security offering based on their specific needs. This is only the beginning, and by adding data-driven intelligence, we can provide better security solutions and bring more peace of mind to our clients.
Great. As you can see in this example, we are now starting to leverage our vast amounts of data to create new products and better security for our customers. We should emphasize that it is early days, but from the friendly user trials during the last six months, I have seen the impact to the relationship and the dialogue with our customers when we bring this high level of knowledge and insights to them. In the future, where scale and data availability are critical, we are uniquely positioned to lead the transformation of the security services industry. It's also in this slide that you should look at the transformation programs that we are now launching. To start to wrap this up, at the investor update, we also talked about what are the key focus areas right now.
We have a high focus on our customer value proposition. We know that we have the best offer in the market, but now also very excited to launch one of our first intelligent products. We continue to strengthen our protective services leadership. With these two transformation programs, we are really accelerating the transformation through modernization of our IS/IT capabilities and platforms to really build a different level of capability for the future. With that, we would like to wrap it up. I think it is quite clear from the graphs that Bart showed that 2018 has been a really good year, with strong organic growth and positive profitability development. We are delivering on our strategy in terms of solutions and electronic security, and we are now taking very important steps in terms of accelerating the transformation to lead the development of this industry in the future.
With that, Bart and I are now happy to open up for a Q&A. Thank you.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press zero one on your telephone keypad, and you will enter a queue. After you are announced, please ask your question. Once again, that is zero one on your telephone keypad for any questions. Our first question comes from the line of analysis from UBS. Please go ahead. Your line is now open.
Good morning, everyone. Just three questions from my side, please. Firstly, just a bit of more detail on the restructuring programs announced last night. Of the SEK 650 million, can you please help break out the level between cash and non-cash charges? I know you've already suggested that a decent proportion will be impairment rather than restructuring. Secondly, you've seen pretty strong margin momentum already through 2018 in North America. Can you describe how the increase in CapEx will translate into higher margins in North America, which are already best in class? Lastly, on working capital, shall we read this increase in DSO as a structural step up in the working capital requirements for large contracts?
What sort of mitigating actions are you willing to take for, I know some of your peers have started securitizing more and more of their receivables, what sort of actions are currently on the agenda? Thank you.
I can make a comment and then hand over to Bart. First of all, I really want to highlight that these are not really restructuring programs. These are programs that we are undertaking to create a stronger capability of basically have a stronger platform in the future. They are more future and forward-looking programs that we're investing in now to be able to accelerate the pace of change in terms of bringing intelligent products to our customers. For some of the financial part, I think maybe you want to comment.
As to the cash, non-cash, you could say largely 200 million SEK will be non-cash items from the 650 million SEK you mentioned. As to the margin improvement in North America, yes, we have healthy margins in North America, absolutely, based on the scale of our business, based on the strong customer relations that we have been building over the years. What we are doing now is really modernizing and bring the entire company, the 100,000 people into a new scalable platform where we will benefit from modern technology, where we will improve and free up time for our branch managers to be much more effective in what they'll be able to do and how they can communicate with our customers. We are quite sure that that will deliver us additional margin improvement. We are well-positioned in North America. As said before, we have talked about that.
We have there a very scalable organization, this is then a further really good opportunity to further scale and take benefits from the scale that we have in North America and our customer focus as well. That is the main items there. When it comes to the working capital, yes, that is also to some extent, of course, related to the fact that we have good growth in the U.S. As commented before, the U.S. is a business which uses a little bit more capital compared to, for instance, the European business. Especially also the electronic security technology uses a bit more capital compared to the guarding business. We have been investing further into electronic security and technology during the year in North America. We have benefited from high growth as well in North America.
That shifts the balance a bit further into further capital increase from then driven from North America. Anything you would like to add, Magnus? No. Good. I hope we did answer your questions.
Thank you very much.
Thank you. Our next question comes from the line of Allen Wells from Exane. Please go ahead. Your line is now open.
Hey, good morning, guys. Just a few from me, please. Just following up on a couple of Bilal's questions there as well. Of the, I guess, what is total SEK 1.2 billion of P&L and CapEx charges, is there any way you can sort of help us in terms of phasing of those charges between 2019 and 2020, just so we can understand the structure of the cash flow profile over the next two years? Second question, if you could maybe just touch on the SEK 300 million of IT investment savings that you highlight. The language seems to allude to the fact that some of this might be reinvested in the future. Maybe you could talk about how much of that will be captured versus reinvested.
maybe just on the other question that Bilal asked on the receivables side, I think he was alluding to the potential use of factoring. Could you maybe disclose what level of factoring you have within the business, and how you expect that to transition over the next few years, please? Thank you.
Yeah. As to your first question, of the SEK 1.2 billion, we have taken now SEK 200 million in this quarter. Of course, we have the SEK 650 and the SEK 550 as we have mentioned. It is about 50/50. You could say 50/50, 2019 and 2020, both for the items affecting comparability and for the capital expenditures.
Yeah.
As to your last question, receivables and factoring, we use no factoring in the company.
I can be very clear around that, and we have no intention to use factoring either. Factoring is just another way of financing the company. As to the IS/IT savings, yes. Based on this program, we see SEK 300 million of IS/IT savings.
that will materialize. Along the journey, we see huge opportunity as well to further develop and invest into what Magnus showed, the intelligent products. That basically, some of that will be used for investing further into that, and that then will be operating expenditures. We haven't really decided how much. That will become clear during the journey, and also on how big we further estimate the opportunity and how much we can accelerate around that. I think I cannot give you a precise answer there, but I can provide you with our thinking around that.
Okay.
Okay, thank you.
Our next question comes from the line of Chirag Vadh ia from HSBC. Please go ahead. Your line is now open.
Hi there. Good morning. Thank you for taking my questions. Firstly, I just wanted to know what precipitates the North American business transformation, why North America first and now? What sort of thresholds do you use to assess the progress of these transformations? Secondly, just to confirm, is the SEK 300 million savings in group IT perpetual from 2022? Finally, what is the U.S. labor churn rate currently running at the moment? Thank you.
I can start with the first question. When you look at this program is something that we have been studying the opportunity and the feasibility of this for quite some time. We do have good momentum in the business, but we also have an ambition to also really transform the company and create a stronger company in the future. When we have been looking within the organization, how we're spending our time, where are we potentially wasting some time, how can we free up time to be more time with customers, et cetera? We have then basically looked extensively at all the aspects of the business in North America.
Came to the conclusion that with an integrated platform, we are now in a very good position to modernize and to create applications and tools that are really helping the business and helping our frontline to do a better job all the time. The big part of that, I think I mentioned earlier as well, is that we're also then freeing up time. Less administrative, more than time with customers, but also with this platform able to bring better services also to our customers. This is also really building a foundation that is going to last us for quite a long time to also be able to enhance the overall proposition that we have to our customers. North America, we felt now is a good time. We have good momentum. We are investing for the future to become stronger.
This is obviously always done based on quite extensive feasibility study. Also, then we need to have good confidence, which we do, that there is going to be return on this investment. That's really the context for embarking on that journey now. Do you want to take the other one, Bart?
Yes. I think as to your dimensioned savings, the SEK 300 million, yes, that is perpetual then annual savings that then should continue after 2020. As said before, some of that we will invest into further development of the intelligence services as well. U.S. labor churn rates for the entire North America, they were around 63% last year, and then for the full year, around 68%.
Great. Thank you very much.
Okay.
Thank you. Our next question comes from the line of Matija Gergolet from Goldman Sachs. Please go ahead. Your line is now open.
Yes, hello. Good morning. My first question is regarding the IFRS 16 impact. Could you be a bit more specific, please, on the impact that we should see at the EBITDA level, EBIT level, and net income level from IFRS 16? Second question is if you can provide any guidance on CapEx for 2009 and if anything beyond. Thirdly, just a clarification on the tax guidance for the year. You're guiding for 28.5. I'm not a tax expert, basically, is the 28.5 more or less the new run rate that we should be assuming also for the outer years, or is 2019 a bit exceptional from a tax perspective? Thank you very much.
Shall I start with the last question here? Yes, the 28.5. We used to be around, if you remember 2016, 2017, we were hovering there around 28, 29. Then we dropped down this year because of largely the U.S. tax reform to 25. What happens in the U.S. is that there is the so-called BEAT tax, which is levied on foreign payments. The rate on that is increased from 2018 to 2019. That is then basically causing a reverse effect from the benefit that we enjoyed, so to say, in 2018, that will largely reverse that effect going into 2019. That is the big movement that we see. There are, of course, other countries as well, here and there, which lower and increase their rates. Then also, of course, our tax base moves as such.
In some countries, we have more profit development than in other ones. Assuming all of that and taking all of that into consideration, our best judgment is right now 28.5%, based on what we see in 2019, and you could assume that that is also the rate going forward, unless of course, other tax changes would start to apply in the future from other countries or from the U.S. I don't know.
Okay.
Coming to IFRS 16. Yes, that is a tricky one. There is some disclosure around that in note number two in the reports. I think you will find a lot of details there. As said, on the asset side, the main impact come basically from that we are renting out buildings today. We are renting buildings in our operations, and we are also using leased vehicles. Those are the two main elements. Then when you, so to say, create the actual value of our future payments, that is how IFRS 16 works. You come to that those are worth SEK 3.4 billion in assets, and of course, you have to recognize the same thing on the liability side. That also becomes net debt. That is how it works, the mechanics of that.
What it means to our operating result as some of these items will become, we now have an expense in our income statement, which will become basically depreciation on the one hand and financial items on the other hand. The effect on our operating result will be an improvement of a little bit more than SEK 0.1 billion. Then, of course, the interest will increase with the same amount, a bit more actually than SEK 0.1 billion, around SEK 135 million we actually estimate. Still, we need to go through the entire cycle, which we will do now in Q1, when we for the first time will close under IFRS 16, we want to give you that guidance already now. I think that is the best thing that I can say around that. Then, of course, as we add this-
What is incremental depreciation?
Sorry?
Sorry, what is the incremental depreciation? I haven't had time yet to go through the notes, too. Sorry.
SEK 700, SEK 800, if I remember well. SEK 800.
Okay. Thank you.
You also had a question on CapEx, with the explanation I gave now, what was your question there?
Just what do you expect for CapEx for this year as a normalized CapEx? Okay. There's this extra CapEx linked to basically your two transformation programs. What would be your best estimate for the recurrent CapEx for the year?
We commented that our normal run rate would be around 2% CapEx to sales. That now you could expect will increase a little bit with the two mentioned programs for '19 and '20.
Okay. Thank you very much.
You're welcome.
Thank you. The next question comes from the line of Aymeric Poulain from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Thank you. Good morning. Two questions, if I may. The first is on the U.S. restructuring. If I understand correctly, your explanation, it's mostly saving administrative time to reallocate the resource to commercial efforts. In terms of the net margin gain that you estimate 0.5%, how much is actually hard cost savings, and how much is actually dependent on that commercial success that you expect to get from this effort? Because I understand it takes about three years to achieve, so it seems that it's more conditional on the top line. In that regard, I was curious about your views on the organic slowdown that you see in Q4, especially as we continue to see some high inflationary rates for wages. I'm just wondering if you could give some color on the competitive landscape and what you see panning out for this year in the U.S. market.
That's the first question. The second question is on the European side. You already started a restructuring effort. Here we're talking hard cost benefit. Could you give us the exact number for the benefit in Q4 at the EBIT level, and what you expect to be in 2019, please? Thank you.
Should I start?
Yes, good.
I think when you're looking at the North America Business Transformation Program, we are not breaking down the 0.5% in different components. We do see that we have significant benefits from modernizing, significant benefits from harmonizing also then to also get scale benefits from one integrated platform and systems. At the same time then with better tools, like we said, we also expect real savings in terms of administrative effort. At the same time, when we do that, we would also be able to build better systems that will enhance the way that we are engaging with our customers and also the customer offering. It is quite a comprehensive program, and that's the reason we call it a Business Transformation Program. We are doing well today in North America.
I also want to highlight this, that this is not really to address the fundamental problem. These are forward-leaning investments that we are doing to become stronger tomorrow. That is also why we're very confident about the improvements that we're going to be able to derive while this program or after this program is fully implemented. If you look at the organic sales growth, overall in 2018, we are growing, we believe, significantly faster than the market. We also had higher comparatives in Q4. When you look then at the overall commercial activity, we have healthy activity in North America and coming into 2019 with good momentum. There is not so much to say about that part. One question that quite often comes up, of course, is also then wage inflation, how we're able to handle.
Well, when you look at 2018, we have been able to handle in a very good way in North America. It's also more of a dynamic situation there with our customers, and this is something that our North American team have been very successful in doing and obviously also focused on continuing to be able to do as we go forward. Then in Europe, I think you asked some question also then about the specific impact from basically the cost reduction program that we announced in conjunction with the Q2 results. There is a small impact in the fourth quarter. The majority of the profitability improvement is coming from good commercial activity, top line growth, and overall better cost control, and with contribution from a number of the different units as well in Europe. I hope that answers your questions. Anything else to add, Bart?
Maybe to once more emphasize, these are not restructuring programs here, different from the European program that you have seen at the Q3, which was more a cost-saving program. These are transformation programs, but at the same time, I should also emphasize that the savings, the benefits are quantified benefit. It's not like betting on hope or anything. It's quantified benefits line by line. Basically what it does, if 85% of your cost base is staff, this is really about improving and working more efficient with our staff base. You can imagine that there's quite some improvement potential there if you use new tools and modern technology with this platform that is scalable with 100,000 people at once. That was it.
Maybe to add some more flavor to that. We are digitizing the entire business. We have vast presence, we have a scale advantage, and with some of the first, even if they're early products in terms of our intelligent products, we're really seeing that we are able to create and add significant value. Leveraging our data and obviously being smart about how we're processing that data to enhance customer value. That is the reason that we are so excited as well about now being able to launch these programs, because with these programs
To be able to launch more advanced products at scale will also require a strong IS/IT foundation, and that has to be scalable. It's got to be solid, it's got to be secure. We are really excited about now starting to make these steps to be able to then realize and also then really push the agenda forward in the next three to five years.
Thank you.
Thank you. Our next question comes from the line of Andy Grobler from Credit Suisse. Please go ahead. Your line is now open.
Hi. Good morning. Firstly, just a question on depreciation with the additional CapEx, but also a number of write-offs. What are your expectations for depreciation or incremental depreciation charges through the next couple of years? Can I just check, when you talk about the SEK 300 million EBITA savings from the IT program, that is post any adjustments for depreciation? Secondly, related, what is the expected regional split of those savings from IT? Thirdly, you've talked about SEK 450 million cash cost from the other items. What is this? Is it mainly redundancies or what type of costs are those going to be?
Could you repeat, please, your first question there? I didn't really capture that.
Okay. Sorry. With additional CapEx, so the SEK 500 odd million over the next couple of years, there will clearly be higher depreciation charges, but you're also writing down some assets which will lower depreciation charges. Can you just quantify on an annual basis the net impact of those two factors, please?
Okay. Yes. On a net basis, as commented upon, the SEK 200 million non-cash is then assets that we take out of the balance sheet. We will put SEK 500 million instead, and that will start to be depreciated as of largely 2021, as we start to use then these platforms as well. It's a bit of an impact there, but it's not a large impact at the same time. These things are amortized depreciation normally over five to six years over the lifetime, and potentially even longer of some of the lifetime of these assets. Then we're talking about the SEK 450 million cash costs. Some of that is restructuring, but a large part is also when you do this type of transitions, transformations, you need people that help you with implementing those type of platforms, and so on.
These costs can, under IFRS, not fully be CapExed. That is why we take some of these costs then as well as part of the items affecting comparability, because otherwise we would have to take them into the operating margin, and then we would have to explain you all the time. With this setup, basically, we keep a very clean operating income statement where you can be able to follow the normal development of the business, and then we take the other items as items affecting comparability.
Just a quick follow-up. Of the extra depreciation, so the kind of 50, 60 million per year, when you talk about the 300 million savings by 2022, that is post the additional depreciation charge. Is that correct?
That is post the additional depreciation. Correct.
Okay, thanks. You didn't mention the regional split of those savings. Again, another follow-up. In terms of those implementation costs, are you bringing in external bodies to help you with this transformation program, or are you doing this all internally?
No, as said, we are bringing in external people as well that help out with this transition. During this two, three-year implementation time, we are bringing external people, yes. What was your question there on the split of the savings?
Yeah. You've talked about SEK 300 million savings from the IT program. Regionally, how do you expect that to fall?
That is basic. In large, we have today 55 countries, 55 different IT organizations, each of them having their own data centers, each of them having their own setups. That is what we will make global and cluster that also in 10 clusters around the world and in two delivery hubs. That will basically, if you move from 55 data centers to few ones, that is basically where the saving will come in. You will create scale that you don't benefit from if you do it just country by country. That is based on modern technology, cloud-based technology, based on also the communication opportunities that you have today, and the network opportunities that you have today that you did not have three, four, five years ago. That is really where we will take the savings from.
Data centers, network connectivity, of course, we have 55 different IS/IT organizations today, which we will globalize and bring into one organization, that will create some benefits, of course.
Thank you very much.
Thank you. Our next question comes from the line of Carina Elmgren from Handelsbanken. Please go ahead. Your line is open.
Yes. Hello. I have a question on the Ibero-America segment. Do you expect any impact from minimum wage increases in Spain in Q1 going forward? Also, the internal challenges that you have seen in Argentina, for how long do you think you will have this?
When you look at Spain, there are increases Spain and also in Portugal. We have a good track record in terms of being able to cover wage increases with price increases campaigns. That is obviously something that we are at full speed with that work as well in Spain right now. I should also mention that a lot of the strength that we have in the business in Spain is related to being able to offer solutions. We are also in a good position. One is obviously to manage the price wage balance with price increases, but we are also offering alternative solutions to our customers, and that is also an attractive proposition when there is cost pressure potentially.
Argentina, to your question, externally it's a challenging environment, but we've also then not been satisfied with some of the things that we have done internally in terms of how we have managed this situation. We have made some changes, and we expect that we're going to have challenging conditions in the next couple of months and quarters, but obviously with strong attention. We generally speaking have a strong business in Argentina, trying now to navigate this as well as we can in the next couple of months and quarters.
Okay. The new product that you are launching, Insights, is this going to be integrated to your security solutions going forward, or is it separate product that you will sell, and how would the business model and margins be affected? Could you maybe give some more color on this? On how big a scale have you started this and how do you expect it to ramp up going forward?
When we look at this, like I mentioned before, it is early days. The Insights product is very much a product, which is then one of the products that we are building now which is based on the ability to make predictions and to assess risk. I always look at what are the pain points that we are addressing from a customer perspective, and is the customer willing to pay for the value? That's obviously also going to be the kind of the basic tests for a number of these products that we are developing.
We have done friendly user trials of this particular product over the last six months, I have seen significant improvement in terms of the engagement with our customers, the dialogue with the customers, when we're essentially bringing much better knowledge, leveraging our presence and our scale and our data in terms of assessing risk. We are now also working on the commercialization of this. We will start to roll some of these products out during 2019. Like we mentioned as well, to be able to scale these products, we also need to upgrade our IS/IT platforms. That is also one of the reasons that we are now really driving these transformation programs as well, is to be able to launch more digital products, intelligent products at scale as we go forward.
Okay, thanks.
Thank you. Our next question comes from the line of James Winckler from Jefferies. Please go ahead. Your line is now open.
Hi, guys. Thanks. I just wanted to clarify something really quick. First, regards to the U.S. labor churn rate. You mentioned that it was 63 last year, increasing to 68 this year. The North American one quoted in your annual report last year was 78. I'm just wondering what the discrepancy is here or maybe if I misheard. Additionally to the investment programs, it's mentioned briefly in the press release that there's the potential to roll out a similar plan in Europe, I'm wondering if you could give any color on kind of the potential magnitude of that. I know you'll update next half, but any additional information you might be able to give. If that's correct, then why is a similar program not being considered for Ibero-America as well, and if there's any potential there additionally.
Yeah, I think that's it for me. Thanks.
Yeah, if you don't mind, I will start with the second question.
Sure
related to Europe. We have seen, and we are convinced based on the study and the analysis that we have done in North America, that this will really help and modernize and really put us in a better position in terms of how we are operating the entire business. That is the case for North America. In Europe, we are looking at that, but it's still early. We're doing a pre-study and looking at the opportunity essentially to create the synergies and also then the improvements across the European footprint. That's something that we will have to come back to at a later time because it is early days for us in terms of assessing that. One thing I can say is that we will only do and we'll only deploy that type of a program if there is return on the investment.
We will come back in the second half of this year with an update in terms of what we're concluding if there is a feasible business case or if there is not. Bart, do you want to comment on the first question?
Yes. As to the U.S. labor churn rate. Yes, I should say that we have started to report on that because we felt there was a too big emphasis on that. It's not by just understanding the % that you can understand the whole development in the business. What I would like to say, though, we follow it also, of course, on different levels, and of people are working with this on different levels and there are different reasons why there is churn. I can say that the churn has increased in U.S. from 2017-2018. The number we referred to was a different type of metrics than the one we used to report to you, but it's basically along the same lines.
The one we used to report outside was really the toughest one you could imagine, the most toughest definition that you could put on yourself when measuring churn rate. That is the difference now with the older amount that we mentioned. There was an increase in the churn rate, yes.
Okay. Just on the first question, I was wondering if I just get a comment on why or if a similar investment program is also being considered or at least discussed for Ibero-America since it is being implemented for North America and considered for Europe. Lastly, sorry, you put some incremental cash outflows into the business over the next few years. Wondering if this has any sort of impact on your guys' M&A strategy, maybe being a little bit more cautious on where you spend money on acquisitions in the next few years because of this. Thanks.
Yeah. On the first question, when we say Europe, in that case, it's actually the continental Europe and not our definition of Europe. We're including Spain and Portugal, in that assessment as well. We obviously have a global ambition. We're building for global scale and capability, which means that we will look at all of these aspects. Europe is obviously from a size perspective and impact, the other really big important, after North America. That's the reason that we focus on Europe at this point in time.
As to the M&A question, we start from a very healthy balance sheet, has been healthy over the last years, and we manage that carefully, of course. If anything, our rating as well is really in a very good position. If anything, it's more trending up, actually, our rating. We are in a very good position with our balance sheet. Yes, this will, of course, affect, it's around SEK 500 million this year, 2019, next year. In the larger things, this is not a huge impact as well. We will continue with M&A and carefully look after different targets. We felt here that we had a good 2018. We are starting off very well going into 2019. This is then about preparing for the future in 2021 and 2022.
We also believe we need to take those actions and support that from our balance sheet. Yes, this will affect a little bit the balance sheet. The starting point is very good in the balance sheet, and we will continue with acquisitions as well. We have quite some leverage capability if we would come across a very good target.
Okay. Thank you.
Thank you. Our next question comes from the line of Karl-Johan Bonnevier from DNB Markets. Please go ahead, your line is now open.
Yes, good morning. We're keeping you busy for a long time this morning with questions. I just have a couple of clarifications, if possible. Looking at the transformation program, starting off with the SEK 300 million you're looking to save out of the IT platform. Could you give us some indication what your group-wide IT cost is for the moment so we can get an idea for what kind of savings you are looking at from a total perspective would be great. Just clarification also on your opportunity that you see for doing a similar program in Europe as in North America.
Would you consider that looking at the feasibility study that you already have a more advanced platform in Europe to start with than you have in the Americas, so you don't really need to do the same kind of action to generate the kind of opportunities you were looking at. Finally, just on this French airport contract that's now going out as of Q2, could you just indicate if this is below average or higher margin than the average for the European operation? Thank you.
I'll take that. As to your first question there, to give you a bit of perspective of the cost base when we talk about the SEK 300 million savings, actually, we are talking about a current spend which is a bit higher than SEK 2 billion.
Excellent.
To the questions related to Europe, yes, you are right in the sense that in North America, it is obviously dominated by one major country, being the U.S. We already today have a different starting point. If you look at Europe, we have operated and we are operating and focused very much on a country level up until this point in time. It does vary as well, the maturity and the capability that we have with our different platforms in Europe. That is one of the reasons that we're also studying this in detail. I just want to highlight as well, we will only embark on that type of program if there is a strong business case. That is an important point to make. Looking at the French airport contract, we highlighted that because of the size of the contract.
It is a well-run contract that we've had. We don't really comment on specific margins, but it was not a low-margin contract. It's a contract that we would have liked to keep.
Thank you very much.
Thank you. Our next question comes from the line of Henrik Mawby from Nordea. Please go ahead. Your line is open.
Thank you. Good morning, everyone. On Europe, it's a clear improvement in the margin sequentially. I think actually compared to the past seven years, we've never seen the sequential improvement in the margin. Can you elaborate a little bit? I know you sometimes comment on large year-end adjustments and so forth. Can you elaborate on really what is, and maybe also comment on how much of the savings program that is already kicking in in this quarter, and then elaborate around what you're seeing in Europe, why it is improving so dramatically?
I'm glad that you also see the substantial improvement. We have had, and this is really going back a few years, with the increase of the refugee-related business. There, we obviously fulfilled an important role. It generated quite a lot of extra and contract sales. It was also quite a painful transition, transitioning out of a number of those contracts and that business when that was gradually being wind down. I think that one issue that we've had, and that we also talked about in 2018, is that we had to take a tighter grip on our cost development. When you're looking at the very simple level in terms of how we're growing costs in relation to how we're growing sales, we are now in a healthier position overall. We also have good contribution from a number of countries.
France obviously has been burdening significantly in 2018, we have many other units that have been performing really well. I hope that that gives you somewhat of a flavor. We've also had better commercial activity in 2018. The offer that we have, it does resonate. We have a stronger offer than anyone else in the market. We have pretty good momentum as well, I believe, going into 2019. Specifically to Europe? I think we also had a successful price wage development during 2018, which was stronger in a way than the one during 2017.
Yes.
That also helps the development, of course.
What I'm looking at here is also the sequential trend from Q3 2018 to Q4 2018, which is a different world, really, when looking at the margin in trend and development. Is it just the general you're driving in this more cost-focused culture, and you see that your country managers are really pushing in another way to get costs down, or is there any more tangible factors that are in play?
I would say it's more of a holistic view. Cost, obviously, like I mentioned before, we did have a period of transition that was fairly challenging. When you're looking at the margin development, that obviously starts with the gross margin and the pricing, and there, like Bart correctly highlighted as well, we've also had a stronger and more successful price wage outcome in 2018 than what we had in the previous year. I should also highlight that between some of the quarters, we have a significantly higher share now as well of solutions and electronic security. There will also be, depending on different projects, there will be some variations as well and some more volatility than what we have been used to in the past. The general picture is we are going in the right direction.
Okay, thank you. One last question on the other segment, actually. The top line and the BEAT that was considerably stronger than the market had expected. I know Johnson and Thompson have been coming into the number, but they come far from explaining all the deviation there. What is driving that? Is it FX or is it a generally very strong organic growth underlying as well?
When you're looking, we're not talking so much about our Middle East and Asia region because they are on a percentage basis smaller, but part of the answer is coming from healthy growth organically and also some decent profitability improvement as well by our team in what we call the EMEA region. That is really the main driver behind those numbers. Should also mention that a lot of the business there, we're also benefiting from our global presence, and we're also becoming better in terms of now bringing our customer value proposition to customers that want the relationship, which is then cross-border on a global level.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Fredrik Skoglund from Länsförsäkringar. Please go ahead. Your line is now open.
Hi, thank you. I just want to ask a little bit on return metrics. As I calculate, this return is 38% on the first program and 46% return on the investment in the second program.
How much more can you invest in this? How fast? If you could elaborate a little bit more on the longer-term return metrics for you going forward, and also if you, as the business is evolving more into IT, is changing incentives internally more to return on capital employed metrics.
As to the return metrics, you have very well calculated them based on the amounts we provided. Yes, this is, of course, as we say, if you go from 55 IT IS organizations to one global one, there is quite some good benefits that you could achieve out of that, especially also by moving to the newer technology, which is available today in terms of both networking and storage processor capability. That is what we're really after here. This is one clear pocket of benefits that we see. Then, of course, we have the North American one, where we have been preparing for this for quite some time now. We have worked with this for more than a year, looking into how should we do this, how can we do this.
Of course, North America is the first place where you look at these type of things because you can scale them up quite fast. That is how you get to these quite good returns for these two programs. As also Magnus talked about, we will have a similar exercise for Europe. As you can imagine, that is a bit more sophisticated from the starting point as you are talking different languages, different jurisdictions, and everything else as well. That is why we need to even look more careful into that business case. We will see at the end of the day, if we can come out with a very good business case, we will do it. If not, we will do something else.
We are here to make money at the end of the day and to make good returns as you rightfully mentioned. This will be the consideration. How fast can we get to these benefits? Also, of course, how much is needed to this to really build to further into bringing value to our customers by adding these additional new products that we have talked about. That is also a consideration. How much do we need this type of transformation in relation to that ambition that we have there? Yeah, I think that is what I try to say here.
I think that the second question, if I understood it correctly, that was more than are we adjusting our incentive systems more than in terms of return metrics as we go forward. Well, that's not something that we are changing right now. We have quite the robust and good incentive system today, but obviously continuously assessing if we need to make changes for the future.
Okay. Thank you.
Thank you. Our next question comes from the line of Chirag Vadhia from HSBC. Please go ahead. Your line is open.
Hi. Sorry to keep you with questions. Just a quick one here. I just wanted to know what sort of wage inflation you're seeing across the North America region and in Europe as well. Thank you very much.
Yeah. As commented before, our business has a wage inflation of around 2% on a long-term basis. Then in worse economical times, that will drop to one, and in better economical times, that will increase to around three. That is where we are right now. We are around this 3%, both in North America and in Europe, basically. Yeah.
Perfect. Thanks very much.
Thank you. Our next question comes from the line of Mikael Löfdahl from Carnegie. Please go ahead. Your line is now open.
Thank you. I hope I am the last one out here. First, one question on this program again, or maybe a clarification. I think you got the question before. The IS/IT savings, how will that be divided among the regions? That is one. Also, regarding all these savings, I mean, full effect in 2022, but when can we expect to see the first benefits? Will it come already in 2020 or will it be more like from one day to the other? Then the last question, in Europe, you spoke a bit about the CICE tax changes or the change to tax credits before in 2018, that it was going to impact also Q4. Could you quantify that and also what we should expect from that change as we moved into 2019 now? Thanks.
As to the tax, basically. As commented before, this is largely impacted from the US tax reform, where at Q4 2017, we had a revaluation of the deferred tax assets increasing then the tax line. That was a one-off. We benefited from the tax regime in the U.S. during 2018, and now there is a step up again in the tax rate for the U.S. related to this BEAT introduction, and that is just how it will continue like this.
I am speaking about France.
About France. Okay. Yes.
Yeah.
CICE is another component adding to basically the increased tax increase in the group. Yes. I mentioned there are a few other countries as well. You rightfully point out that France, which also has an impact from the CICE, different type of mechanism that they have introduced now in France compared to how it was before, affecting the tax line. Yes.
How did that affect the margin? Because it was a cost thing. How did it affect the margin in Q4 in Europe? How will it affect the margin going into 2019 when this tax credit is eliminated entirely or replaced by other?
It affected negatively the margin in the fourth quarter because there was, due again to the way the system was introduced, we had during one month, no benefit in France from the system during the month of December, actually. This will be as of 1st of January 2019, there's a new system in place that will largely, but not entirely compensate how it was before. There will come another system in place more towards October, November in France, that then will fill out a large part of the gap. At the same time, we have embarked on a price increase in France connected to this change in CICE, because this is not only affecting us, of course, it's affecting the whole industry. We also are compensating that then the drop from the CICE with price increase in France. Yeah, I think that was that one.
Around the IT savings, and the split per regions. North America is obviously North America, but you talked about IT savings, related to that program, that will largely affect all of the countries around the world, but a bit larger effect in Europe actually from that. It is spread all over the world, you could say as well. It's more or less equal with a little bit more effect in Europe. Of course, to the timing of those savings, as commented upon, we expect that the run rate will really be there by 2022, when that will kick in. There will be some gradual impact in 2020, 2021, but really the bulk of that will come more in 2022.
Great. I think with that, yeah. Did you have another comment?
No, I just said thank you.
Great. With that, I would like to say thank you to all of you. I think it was a bit longer than normal. Thanks a lot for dialing in and just to wrap that up as well, we have strong momentum, and we're really excited about the next steps that we are now taking as a company as well. Thanks a lot to all of you.