Earnings Call: Q4 2018

Feb 7, 2019

Good morning, everyone, and welcome to our Q4 call. I'm happy to be here today with our CFO, Bart Adam. We will go through the Q4 results and the full year results. And then we will also talk about how we're accelerate the digitization of our company, provide you with a brief update related to the development of our intelligent products. And as always, we would obviously finish with a Q And A. So let us look at some of the highlights of the fourth quarter full year 2018. Q4 has been a very good quarter with strong growth and profitability improvements. We've had good commercial activity during all of 2018. And the strong sales, together with solid cash retention are the 2 main growth drivers behind 5% organic growth in the quarter and 6% in the full year. And we should also note I'm very happy about the fact that we had good growth across all the segments from North America, Europe, and Ibero America. And 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 issued 5.5 percent operating margin in the quarter, which is a 0.2 improvement versus last year. And on a full year basis, we improved the margin to 5.2%. And in terms of earnings per share, we had 12% improvement in real terms before items affecting comparability. So 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. But during the quarter, we also initiated 2 major transformation programs that are more forward looking and really then, for shaping a stronger, secure task in the future. Related to these programs, we recorded items affecting comparability of SEK 187 1,000,000. And 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. So we have initiated actions and 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 markets. And we have Solutions and electronic security, we grew with 21% in real terms during 2018. And I'm also really happy to say that we are progressing well with integration of the acquisitions that we closed during the first half. Of 2018. And then referring obviously to Kratos in the U. S. Automatic alarm in France Alphatron in the Netherlands and a few other major acquisitions. But let us now shift the focus to the performance We have had solid growth in the 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. And I should also note that we have solid client retention. It is also 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. And looking at the So when we are closing 2018 looking at most metrics, it is a very good performance by our North America team. Shifting then the focus to Europe, we had growth of 3% in the quarter and 4% for the full year. And 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. But we've had very good commercial activity in Europe. Most countries, almost all countries actually are contributing to the growth But I would like to highlight good support from Belgium, Germany, and our guarding business in Turkey that are doing all through or doing really well. Shifting then to the operating margin in Q4, we improved to 6 point 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. But 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. So 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. And looking at profitability, we had a good development overall in 2018, but a weak Q4. And from an external perspective, it is a challenging operating environment in Argentina, but I should also mention that from an internal if we have not been satisfied. And due to this, we have made some management changes and now putting an action plan in place to improve as we go forward. But 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, and our team in Spain have continued successfully drive version of, contracts to solutions, but also similar to the comments that we made in the 3rd quarter result we should note that some of these contracts are more of a short term nature. But 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 now initiate but I will come back and talk to those 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. And these are slides that you probably also recognize from the investor update. And we believe at that time that we could reach sales on SEK100 1,000,000,000 for the full year. And yeah, here we are. So we did. And 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. When we move then to the next slide, moving to the operating income, here we see that that has also been steadily growing over the last 6 years, ending now for 2018 at 5.3 1,000,000,000 Swedish with the margin then at 5.2 now where, yeah, back in 2014, we had an operating margin of 5 point 0. Then as to the EPS before items affecting comparability, that has been growing also over the same period from a bit over 5 Swedish kroner to now a bit over 9, actually 9.17. And I believe we can lay label this as a 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. And while at the same time, we have been and will continue to prepare for the future. When 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 IS 29 standard, and that is a standard that deals with hyperinflation accounting and 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 results and a small impact within the financial items line. And that is further commented Turning now to the numbers on this slide, as as commented by Magnus, the quarter showed 5% organic sales growth and the full year ended on 6% and the operating margin improved 0.2% in the quarter and then 0.1 in the full year. And we are really happy with that development. When we look at then the acquisition related costs, these were quite high in the quarter. You also see that in the full year, these were SEK120 1,000,000 compared to SEK48 million last year. And from that SEK120 1,000,000, there is SEK 80,000,000 that relates to the Kratos acquisition in the U. S, as we also commented on in our Q3 report. I can say that 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. I'm 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 then, in the full year, we had -455,000,000 of items affecting comparability. And that is now the 180 7, we booked in relation to the 2 announced transformation programs, and we had another SEK268,000,000, of course, related to the cost saving programs in Europe. I need to emphasize, but Magnus will come back to that that the nature of these items affecting comparability is quite different. As I said in relation to Europe, this was a cost savings program, whereas in relation to the 2 announced programs, now this is forward looking investments. When we go further down in the income statement, you noticed that our financial expenses are also quite high in the quarter, included in this 154,000,000 here that you see is a 1 off of SEK 40,000,000 related to Argentina. And that 46,600,000 is is due to, well, as a result of the very high interest rates, we were confronted with very high interest cost on some interest bearing debt items in Argentina. The interest in Argentina, as you know, has peaked to as high as 60, 70 percent, as of summer. And now we have settled and refinanced all of these interest bearing debt items from Argentina and we took the one off costs related to this in the quarter. So this is a one off effect of minus SEK46 1,000,000 that hits the quarter and that why 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 400,000,000 for the full year. That is about SEK 100,000,000 for the per quarter then. As mentioned before, there is a small positive impact from IS 29, So the run rate excluding IS29 is around -1000000 per quarter. Then we take a look at the tax line, the applied tax rate for the quarter and the full year is 25%. And that compares to almost 40%, actually, 39.8% in the 4th quarter from last year. And 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 20 full year tax rate was 31.5 And that then included one of 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 percent in 2017. Now 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 percent in 2019. And this increase is largely impacted from, basically reversed effects from U. S. Tax reform related to the so called B tax. So while the 1st year in the U. S. Tax reform, we benefited in the 2nd year that has been largely reversed. You then notice in the bottom, of course, the difference between EPS and EPS before items affecting comparability. And that entirely connects them 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. Okay. Turn to the next page and then take a look at the effects from the different currencies and here to the right on the slide, the foreign exchange rates in Swedish kroner are the quarter end rates And we see that both the U. S. Dollar and euro have strengthened quite a bit versus the Swedish kroner at the end of Q4 compared to the same quarter last year, respectively, 8.34 percent up. The euro during the quarter was around 10.2to10.3level after it had peaked to around 10.7 in third quarter. The U. S. Dollar has been hovering around 9 Swedish kronor during the quarter ending then at 8.94, at the end or 12 month consolidated nominal results were, so to say, positively impacted from both the euro and U. S. Dollar when comparing to last year. The Argentine and Peso continued to be around minus 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 So, we then turn to the next page and take a look at the effects from the different currencies. Sorry. I'm moving on to the balance sheet now instead. And 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 suffered from a few negative effects. We commented on those also a bit at the Q3. Basically, you could say that the DSO, the day sales outstanding increased, and this was primarily in security services North America, where the CAS Collection at year end was below the plan. And as commented before, we have an invoicing system change transition in the Netherlands, causing some payment delays and that continued in the fourth quarter. And then finally, the interest hike in Argentina is also causing some payment delays from our customer us. 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 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 we'll be shown as fixed assets and then there will be shown a similar debt item on the liability side. So due to IFRS 16, the net debt will increase But so of course, will the EBITDA and the EBITDA increases because some items that were previously recognized as expenses in the EBIT will now become depreciation and interest. And for Securitas, we estimate the increase of assets and net debt which is with each SEK3.4 1,000,000,000. And I will come back to that also on the leverage effect. Moving to the next slide, then we look here exactly at the net debt, and this stands now at 14.5 1,000,000,000 coming down from 15.7% at Q3, and it was 16.7% at the end of Q2. So quite some improvement here compared to Q2. We started the year with 12.3% and the developments is then reflects the development from the operating cash flow as just explained. And then also we paid out a bit more than SEK 1,700,000,000 related to the different closed acquisitions and all of these of course were disclosed to the market. And we paid also over SEK1.4 billion in dividend. The net debt was also impacted from the earlier commented for an exchange development. As you can see here, at the bottom, and that added SEK758 1,000,000 in translation to the net debt since January 1. Still you see then here that for the period end to the far right of the slide, the net debt in relation to the EBITDA, a still on a healthy 2.3, in line with our mentioned expected development. And we see here the development over the years and that has been hovering between 1.92.4 and now, as I mentioned, at a healthy level of 2.3. Turning back to the issue then of the IFRS 16 implementation, we can see that the leverage then that is not debt to EBITDA will increase with about 0.2. So the 2.3 from year end 2018 in a way will under IFRS 16 then become SEK2.5 billion. So that is the effect of adding the SEK3.4 billion estimate right now to the debt, to the debt but also at the same time, of course, to the asset side. Then going to the next slide, as we have been writing about or board of directors has approved 2 major transformation programs. The 1st program will radically modernize our global ISIT foundation will create a global ISIT organization as well, and and and this is about preparing for future development at the same time. And once finalized, The IT costs in the group is expected also to be reduced by some SEK300 million upon completion in 2022. The second program is a business transformation, in Security Services North America. And here, this is expected to positively impact the operating margin in North America. And the operating margin is expected to be supported up to 0.5 percentage points by 2022. Of course, everything else being equally. Related to these two programs, we'll make some yes, some serious investments that is we will recognize as items affecting comparability approximately DKK 650,000,000 and then also another CapEx amount of SEK550 1,000,000 and this will be recognized in the period 2019, 2020. The cost that will be recognized as items affecting comparability are mostly in impairment of assets that become obsolete with the implementation of the programs, some organizational restructuring charges, but also then some other nonrecurring items. And with this, I'm happy to hand back over to you, Magnus. Thank you very much, Bart. And we would now like to provide you with an update regarding this transformation programs and also to share a little bit about the early development of our intelligent products. This is the slide that you have seen in our investor update outlined in the strategic phases, so essentially where we're coming from, the strong foundation that we have but also where we are heading. And I mentioned this many times before, we have a strong federation 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. So we call that our guarding core. But then 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. And during the next phase, our ambition is to build on this foundation and become the leader in intelligent security. So yesterday, we announced 2 major transformation programs, and the the first, is a group level program where we're working to consolidate, rationalize and modernize our ISIT delivery. And with this program, we are creating a global ISIT organization where we are shifting from managing ISIT in more than 50, countries around the world to creating 10 strong clusters. And one global ISIT organization. Other things we are doing, creating 1 collaboration platform, And we're also then leveraging shared data centers and cloud platforms to essentially build and modernize a higher ISIT capability. As Bart commented, we are expecting IT costs to be reduced by SEK 300,000,000 upon completion in 2022. But it is also important that there are efficiency aspects of this and productivity aspects, but for us, when we're looking at our intelligent, products and intelligence security, with data driven, intelligent security, to be able to drive that at scale, does require a solid and secure and also then scalable ISIT foundation. And 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. And the objective here is to create the modern and integrated platform for people management, workforce management, and finance. And this is very much about streamlining, core operational processes, modernizing our way of working internally, and with our clients. And from, 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. So so 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 how we are, conducting the business, but then with integrated platform significantly more than modernized and efficient tools, etcetera. We see an opportunity to support the operating profit margin improvement up to 0.5% by 2022 onwards. And 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. So if we then shift to the next slide, coming back and talking a little bit about intelligence security. And for those of you who were with us at the investor update in September, which was quite a lot about our intelligence security vision, And as we have communicated, we are working now across a number of different areas, and with the development then of new intelligent products and services. And one of those is related to crime prediction. And I should say that we are now adding our 1st intelligent products to our portfolio during 2019. And it's early days, and these are the first steps but we are very excited to now show you a first product that we call Insights. And an Insights is a good example where we are leveraging our size and access to relevant data to create So let us look at the 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. So 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. And we should emphasize that it is 30 days, but from the friendly user trials during the last 6 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. And in the future where scale and data availability are critical, we are uniquely positioned to lead the transformation of the security services industry. And it's also in this slide that you should look at the transformation programs that we are now launching. So to start to wrap this up, at the investor update, we also talked about what are the key focus areas right now. And 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. And we continue to strengthen our protective services leadership And with these 2 transformation programs, we are really accelerating the transformation through modernization of our ISIT capabilities and platforms to really build a different level of capability for the future. So with that, we would like to wrap it up. I think it is quite clear from the graphs that, that board showed that 2018 has been a really good year, and with strong organic growth and positive profitability development, We are delivering in terms of accelerating the transformation to lead the development of this industry in the future. So with that Barton and I are now happy to open up for a Q And A. Thank you. And our first question comes from the line of Olasiz from UBS. Please go ahead. Your line is now open. Good morning, everyone. And just three questions from my side. Please. And firstly, just a bit of more detail on the restructuring programs announced last night. And of the 1,000,000 Swedish krona, 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 high margins in North America, which already best in class? And lastly on working capital, should we read this increase in DSO as a structural step up in the working capital requirements for large contracts? And what sort of mitigating actions are you willing to take for? I know some of your peers have started securitizing more and more of the receivables. And so what sort of actions are currently on the agenda? Yeah. 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. So there 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 product to our customers. But for some of the financials part, I think maybe you want to comment. As to the cash non cash, you could say largely SEK200 1,000,000 will be non cash items. From the SEK650 1,000,000 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 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 be much more, effective in what they'd be able to do and how they can communicate with our customers. And 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 and 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. So 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, and especially also the electronic security technology uses a bit more capital compared to the to the guarding business. So we have been investing further into electronic security and technology due the year in North America, we have benefited from high growth as well in North America. So that 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. So I hope we did say, answered your questions. Thank you. Our next question comes from the line of Alan Wells from Tigran. Please go ahead. Your line is now open. Hey, good morning guys. Just a few for me please. Just following up on a couple of Delau's questions there as well. Of the I guess what is total billion P and L and CapEx charges, is there any way you can sort of help us in terms of phasing of those charges between 2019 2020 just so we can understand the and the structure of the cash flow profile over the next 2 years? 2nd question, if you can maybe just touch on the 1,000,000 of IT investment savings that you highlight, the language seems to allude to the fact that some of this might be it in the future. Maybe you could talk about how much of that will be captured versus reinvested. And then maybe just on the question that the Vilar on the foreseeable 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 over the next few years, please? Thank you. Yeah. As to your first question, of the SEK 1,200,000,000. So we have taken now SEK 200,000,000 in this quarter. And then of course, we have the 650 and the 550 as we have mentioned. It's about fifty-fifty, you could say fifty-fifty, twenty nineteen and twenty twenty, both for the items affecting comparability and for the capital expenditures. As to your last question, receivables and factoring, we use no factoring in the company. So that is, 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. Then as to the ITIS savings, yes, we so based on this program, we see SEK300 1,000,000 of IT IS Savings, and that will materialize, along the journey, we see huge opportunity as well to further develop and invest into what Magna showed the intelligent products. And 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. And so I think I cannot give you a precise answer there, but I can provide you with our thinking around that. Our next question comes from the line of Jared Bardier 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? And what sort of thresholds do you use to assess the progress of these transformations? Secondly, just to confirm, is the SEK300 1,000,000 savings and group IT perpetual from 2022 And finally, what is the U. S. Labor churn rate currently running at the moment? Yeah. I can start with the first question. When you look at this, 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. And so 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 to be more time with customers, etcetera, we have then basically looked extensively at all the aspects of the business in North America. And 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. And 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. So this is also really building a foundation that 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. So North America, we felt now is a good time. We have good momentum. We are investing for the future to become stronger And, and, but this is obviously always done on, on, based on quite extensive feasibility study, but also then we need to have good confidence which we do, that there is going to be return on this investment. And that's really the context for embarking on that journey now. Do you want to take the other one, Edward? Yes, I think as to your dimensioned savings at SEK300 1,000,000, yes, that is perpetual than annual savings that then should continue after 2020. And as said before, some of that we will invest invest into further development of the intelligent services as well. US labor churn rates, for the entire North America, they were around 60 3% last year and then for the full year around 68. Thank you. Our next question comes from the line of Matija Gavollett 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 can provide any guidance on CapEx for 2009 and if anything beyond? And thirdly, just a clarification on the tax guidance for the year. So I think, so you're guiding for 28.5. No, I'm not a tax expert, but basically is 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 is We used to be around if you remember 2016, 'seventy, we were hoovering there around 'twenty eight, 'twenty nine, and then we drop down this year because of largely the U. S. Tax reform to 25. Now what happens in the U. S. Is that there is the beat tax, the so called beat tax, which is levered on foreign payments is increased, the rate on that is increased from 2018 to 2019 that is then basically causing a reverse effect from the benefit from that we enjoy so to say in 20 18 that will largely reverse that effect going into 2019. So that is the big movements that we see. There are, of course, other countries as well here and there, which lower and increase their rates and then also of course our tax base moves at such. In some countries, we have more profit and then more profit development than in other ones. So assuming all of that and taking all of that into consideration, then 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, tax changes would start to apply then in the future from other countries or from the U. S. I don't know. Coming to IFRS 16, yes, that is a tricky one. And there is some disclosure around that in note number 2 in the reports. I think you will find a lot of details there. So as said, on the asset side, what 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 2 main elements. And then when you So to say create the actual value of our future payments, that is how IFRS 16 works, then you come to that. Those are worth 3.3 SEK3.4 billion in assets. And of course, you have to recognize the same thing on the liability side. So that also becomes net debt. So that is how it works, the mechanics of that. What it means to our operating result as some of these items will become So 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 1,000,000,000 And then of course, interest will increase with the same amount, a bit more than actually than SEK0.1 billion around SEK100 1,000,000,000. Yet 35, we actually estimate, but still, we need to go to the entire cycle, which we will do now in Q3 in Q1. When we for the first time, we'll close under IFRS 16, but we want to give you that guidance already now. Yeah, I think that is the best thing that I can say around that. And then, of course, as we add [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Sorry? So what is incremental depreciation? So how am I planning it to go through the notes too? Sorry. 700, 800, if I remember well, 800. Thank you. Thank you. You also had a question on CapEx, but 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, this is extra FX linked to basically your 2 transformation programs, but what is the, what would be your best estimate for the recurrent CapEx for the year? We we commented that, our normal run rate would be around 2% CapEx to sales and and that now you could expect will increase a little bit with the 2 mentioned programs for 2019 2020. Welcome. Thank you. The next question comes from the line of Amariq Pula 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. But in terms of the net margin gain that you estimate 0.5 percent, 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 3 years to achieve. So it seems that it's more conditional on the top line. In that regard, I was curious about your views under the organic slowdown that you see in Q4, especially as we continue to see some high inflationary rate 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. And the second question is on the European side. You already started a restructuring effort. Here we're talking hard across 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. Yes, good. Yeah. And we can, I think when you're looking at the North America business transformation program, we are not breaking down the 0.5% in different components? But we do see that we have significant benefits from modernizing, significant benefits from harmonizing also then to also get scale benefits, from 1 integrated platform and systems. While at the same time then with better tools, I we said, we also expect real savings in terms of administrative effort. Well, 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. So it is quite a comprehensive program, and that's the reason we call it a business transformation program. But we are doing well today in North America. So 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. And that is also where 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 organics organic sales growth, Overall, in 2018, we are growing, we believe significantly faster than the market. We also had higher comparatives in Q4. And when you look then at the overall commercial activity, we have healthy activity in North America and coming into 2019 with good momentum. So there is not so much to say about that part. One question that quite often comes up course, is also then wage inflation, how we're able to handle, well, when I look at 2018, we have been able to handle in a very good way, in North America. 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. And then in Europe, I think you've asked some question also then about the specific impact from, from the risk, basically the cost reduction program that we launched in or that we announced in conjunction with the Q2 results. There is a small impact in the 4th quarter. The majority of the profitability improvement is 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, in Europe. So I hope that answers your questions. Anything else to add Bart? No, maybe to one more emphasized, 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 not like betting on hope or anything. It's quantified benefits line by line. And basically what it does, I mean, if 85% of your cost base is tough, This is really about improving and working more efficient with our staff base and you can imagine that there's quite some improvement potential there if you use new tools and modern technology in with this platform then that is scalable with 100,000 people at once. Yes. That was it. Yes. And maybe to add some more flavor to that. I mean, we are digitizing the entire business we have vast presence. We have a scale advantage. And and with some of the first, even if they're early, product in terms of our intelligent products, we really see in that, that we are able to create and add significant value. Leveraging our data and then obviously being smart about how we're processing that data, to enhance customer value. And 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 ISIT foundation. And that has to be, scalable. It's gotta be solid. It's gotta be secure. So so 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 3 to 5 years. Okay. Thank you. Our next question comes from the line of Andy Grobler from Credit Suisse. Please go ahead. Your line is now open. 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 for them through the next couple of years and kind of just check when you talk about the 1,000,000 EBITDA savings from the IT program that is post any adjustments for depreciation? Secondly, and related, what is the expected regional split of those savings from IT? And then thirdly, you've talked about 4 1,000,000 cash cost from the other items. What is this? Is it mainly redundancies or what type costs are those going to be? Could you repeat please your first question that I didn't really capture that? Okay, sorry, but with additional CapEx, so the 500 odd 1000000 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 you as commented upon the SEK200 1,000,000 non cash is then assets that we take out of the balance sheet and we will put 1,000,000 instead then that will start to be depreciated as of yet largely 2021 as we start to use then these platforms as well. So it's a bit of an impact there, but it's not a large impact the same time, these things are amortized depreciation normally over 5 to 6 years over the lifetime and potentially even longer of some of the lifetime of these assets. Then you had we're talking about the SEK 450,000,000 cash cost. 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. And these costs can under IFRS not fully be CapEx. That is why we take some of these cost tests 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. So with this set up, 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. So of the extra depreciation, so the kind of 50,000,000 dollars, $60,000,000 per year, when you talk about the $300,000,000 savings by 2022, 2022 that is post the additional depreciation charge. Is that correct? That is post the additional depreciation, correct. Okay. Thanks. And you didn't mention the regional split of those savings. And 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 as said, we are bringing, external people as well that help out with this transition. During then this 2, 3 year implementation time, we are bringing external people, yes. What was your question there on the split of the savings? Yes. So you've talked about 1,000,000 savings from the IT program. Regionally, how do you expect that to fall? That that is basic. In large, we have today, 55 different. We have 55 countries, 55 different IT organizations, each of them having their own data centers, each of them having their own setups. And that is what we will break global and cluster that also in 10 clusters around the world and in 2 delivery hubs. And that will basically, if 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 receive 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 that you did and the network opportunities that you have today that you did not have 3, 4, 5 years ago, and that is really where we will take the savings from. So data centers, network connectivity, but then of course, we have 55 different ISIT organizations today. Which will globalize and bring into one organization and that will create some benefits of course. Thank you. Our next question comes from the line of Karina Elmgren from Handelsbank. Please go ahead. Your line is open. I have a question on the Ibero America segment. Do you expect any impacts from minimum wage increases in Spain in Q1 going forward? And also the internal challenges that you have seen in Argentina for how long do you think you will have these? Yes. So when you look at Spain, there are increases in Spain and also in Portugal. We have a good track record in terms of being able to, to cover wage increases with price increases campaigns. And that is obviously something that we we are, at full speed, with that work as well in Spain right now. I should also mention that, that, a lot of the strength that we have in the business in Spain is related to being able to offer solutions. And so, we are also in a good position. 1 is all 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 a cost pressure potentially. Argentina, it is, to your question, it is an external it's a challenging environment but we've also then not been satisfied with some of the things that we have done internally terms of how we have managed this situation. So we have made some changes, and we expect that we're gonna have, challenging conditions in in the next couple of months quarters, but obviously with strong attention, we generally speaking, have a strong business in Argentina, and then right now to navigate this as well as can in the next couple of months and quarters. Okay. And then the new product that you're launching the insights is this going to be like integrated to your security solutions going forward or is it a separate product that you will say in sale and how would the like the business model and margins be affected? Could you maybe give some more color on this? And also how how big a scale have you started this and how do you expect it to ramp up going forward? So 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 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. And that's obviously, they're 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 6 months. And I have seen a 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. But then, we are now also working on the commercialization of this. So so we will start to roll some of these products out during 2019, but then like we mentioned as well, to be able to scale these products, we also need to upgrade our ISIT platforms. And that is also one of the reasons that we are now really driving this transformation programs as well is to be able to launch more digital products, intelligent product at scale as we go forward. Thank you. Our next question comes from the line of James Encore from Jefferies. Please go ahead. Your line is now open. Hi guys, thanks. I just wanted to clarify something really quick. 1st, regards to the U. S. Labor churn rate, you've met that it was $63,000,000 last year increase in the $68,000,000 this year, but the North American 1 quoted in your annual report last year was 70 So I'm just wondering what the discrepancy is here or maybe if I misheard. And then additionally to the investment programs, it's mentioned in the press release that there's the potential to roll out a similar plan in Europe. And 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? And 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. And yeah, I think that's it for me. Thanks. If you don't mind, I will start with the second question 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 and, and modernize and really put us in a better position in terms of how we are operating the entire business. But that is the case for North America. In Europe, we are looking at that, but it's still early. So we're doing a pre study and looking at, the opportunity essentially to, to create the synergies and also then the improvements across the European footprint. But that's that we will have to come back to at the later time because it is early days for us in terms of assessing that. But one thing I can say is that we will only do we'll only deploy that type of a program if there is return on the investments. But we will come back in the second half of this year with an update terms of what we're concluding, if there is a feasible business case or if there is not. Barti, 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 emphasize on that. It's not just understanding the percentage that you can understand the whole development in the business. And what I would like 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 But I can say that the churn has increased in U. S. From 2017 to 2018. And the number we refer to as a different type of metrics and 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 rates. So that is the difference now with the other amount that we mentioned. But there was an increase in the churn rate, yes. Okay. And just on the first question, I was wondering if I get a comment on why or if a similar investment program is also being considered at least for Bureau America since it is being implemented for North America and considered for Europe? And then, lastly, sorry, I'm just, you've put some incremental cash, some cash outflows into the business over the next few years. Wondering if this has any sort of impact on your guys' M and A strategy maybe being a little bit more cautious on where you've spent money on acquisitions in the next few years because of this? Thanks. Yes. So on the first question, when we say Europe, in that case, it's actually the continental Europe and not our definition of So, we're including Spain and Portugal, in that assessment as well. We we obviously have a global ambition we're building for, you know, global scale and capability, which means that we will look at at all of these aspects, but Europe is obviously from a size perspective and impact the other really big important after North America. So that's the reason that we focus on Europe at this point in time. As to the M and A question, I mean, we start from a very healthy balance sheet, has been healthy over the last years and we manage that carefully, of course. Or if anything, we are rating as well is really in a very good position. And if anything, it's more trending up, actually are rating. So we are in a very good position with our balance sheet. Yes, this will, of course, affect. It's around 500,000,000 this year 2019 next year, but in the larger things, this is not a huge impact as well. So we will continue with M And A and carefully look after different targets, but we felt here that in for we had a good 2018, we are starting off very well going into 2019. This is then about preparing for the future in 20212022. And we also believe we need to take those actions and support that from our balance sheet. So 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. And we have quite some leverage capability if we would come across a very good target. Our next question comes from the line of Colleen Bonnevier from DNB Please go ahead. Your line is now open. Yes, good morning. We're keeping you busy for a long time this morning with questions. So I just have a couple of clarification possible. Looking at the transformation program, so starting off with the 300,000,000 you're looking to save out of the IT platform. Could you give us some indication of 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. Then you have clarification also on the opportunity 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 America. So in the Americas, you don't really need to do the same kind of of accent to generate the kind of opportunities you were looking at? And then 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? As to your first question there, to give you a bit of perspective of the cost base when we talk about the SEK300 1,000,000 savings, actually we are talking about a current spend, which is a bit higher than 1,000,000,000. And to the questions related to Europe, yes, you you were right in the sense that in North America, it is obviously dominated by one major counter being the U. S. So we ordered it today have a different starting point. If you look at Europe, we have operated and we are operating then focused on very much on a country level. Up until this point in time. And it does vary as well the maturity and the capability that we have with our different forms in Europe. And that is one of the reasons that we're also studying this in detail. But I just want to highlight as well. We will only embark on that type of program if there is a strong business case. And so that is an important point to make. Looking at the French airport contract, we highlighted that because of the 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 trend sequentially. I think actually compared to the past 7 years, we've never seen the sequential improvement in the margin. Can you elaborate a little bit? I know you something comment on large year end adjustments and so forth. Can you elaborate on really what is and then maybe also a comment on the 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? Yeah. And I I'm glad that you you also see the, the substantial improvement We have had, and this is really going back a few years with the increase of the refugee related business And when when the and there, we obviously fulfilled an important role. It generated quite a lot of extra and contract sales. But then it was also quite a painful transition, transitioning out of a number of those contracts and and that business when that was, gradually being wind wind down. So so I think that one one issue that we've had and that we talked about in 2018 is that we had to take a tighter grip on our cost development and when you're looking at a 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. But we also have good contribution from a number of countries. France obviously has been burdening significantly in 2018, but we have many other units, that have been performing really well. So I hope that that gives you a, somewhat of a flavor. And we've also had better commercial activity in 2018 we the offer that we have, it does resonate. We have a stronger offer than anyone else in the market. So we have a pretty good momentum as well. I believe going into, to 2019. Was there Yeah, specifically to Europe. Yeah, I think we also had a successful price wage development during 20 '18, which was stronger in a way than the 1 during 2017, yes, and that also helps the development, of course. What I'm looking at here as a result of the sequential trend from Q3 2018 to Q4 2018, which it's a different world really when looking at the margin in trend and development. Is there any or is it just the you're driving in this more cost focus culture and you see that your country managers are really pushing in another way to get down, or is there any, you know, more tangible factors that bear in place? No. I would say it's more of a holistic view. I mean, cost obviously, like I mentioned before, we did have a period of transition that was fairly challenging. And when you're looking at the margin development, that obviously starts, with the gross margin and the pricing. And they're like, bought, correctly highlighted as well. We've also had a stronger and and more successful price, wage outcome in 2018 than what we had in the previous year. But then also I should also highlight that between some of the quarters, a higher share now as well of solutions and electronic security. And so 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. But the general picture is we are going in the right direction. You. And then 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 you've also informed some have been coming into the number, but thus far can far from explaining all the deviation there. What is driving that? Is it FX or is it generally very strong organic growth underlying as well? When you're looking, I mean, we're not talking so much about our Middle East and Asia region because they are on a percentage base is 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. So that is really the main driver behind those numbers. Should also mention that, but 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 the value proposition to customers that want the relationship, which is then cross border on a global level. Our next question comes from the line of I just want to ask a little bit on return metric as I calculate this return is 38% on the 1st program and 46% return on the investment in the 2nd program. How much more can you invest in this and also how fast? And 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. And based on the amounts we provided, Yes, this is, of course, as we say, if you go from 55 IT IS Organizations to 1 global 1, there is quite some good benefits that you could re 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. And that is what we're really after here. So this is one clear pocket of benefits that we see and then of course we have the North American 1, where we have been preparing for this for quite some time now I mean, we have worked with this for more than a year looking into how should we do this? How can we do this? And of course, North America is the first place where you look at this type of things because you can scale them up quite fast. So so that is how you get to these quite good returns for these 2 programs. As also Magnus talked about, we will have a similar exercise for Europe But as you can imagine, that is a bit more sophisticated from the starting point as you're talking different languages, different jurisdictions and everything else as well. So that and that is why we need to even look more careful into that business case. And 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, then we'll do something else. We are here to make money at the end of the day. And to make good returns as you rightfully mentioned. And this will be the consideration, how fast can we get to these benefits And also of course, how much is needed to this to really build to further into bringing value to our customers by adding this additional new products that we have talked about. So that is also consideration how much do we need this type of transformation in relation to that ambition that we have there. So, yeah, I think that is what I try to say here. Then I think the second question if I understood it correctly, that was more than are we adjusting our incentive systems, more than in, 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 Jared Badier 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 Europe as well? As commented before, or business has a wage inflation of around 2% on a long term basis. And then in worst economical times, that will drop to 1. And in better economical times, that will increase to round 3. And that is where we are right now. We are now around this 3%. Both in North America and in Europe basically. Thank you. Our next question comes from the line of Mikael Lifestyle from Carnegie. Please go ahead. Your line is now open. Thank you. And I hope I am the last one out here. So first, one question on this program again or maybe a clarification. I think you got the question before. The IT savings, how will that be divided among the regions. That's one. And 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? And then the last question in Europe, you, you spoke a bit about the CC tax changes or the change to tax credits before in 2018 that it was going to impact also Q4 you quantify that and also what we should expect from that change as we moved into 2019 now? Thanks. As to the tax, basically, yeah, well, as commented before, this is largely impacted from the U. S. Tax reform, where at Q4 2017, we had a revaluation of the deferred tax assets increasing then the tax line, and So that was a one off. Then 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'm speaking about France. About France. Okay. Yes. The CC is another component adding, yes, sorry. The CC is another component adding to basically the increased tax increase in France in in the group. Yes. It is also that is part of I mentioned there are a few other countries as well and you rightfully point out that France which also has an impact from the CC, different type of mechanism that they have introduced now in France compared to how it was before affecting then the tax line, yes. And how would how did that affect the margin because it's a it was a cost thing. So how did it affect the margin in Q4 in Europe and how would it affect the margin going into 2019 when this this tax credit is eliminated entirely or replaced by other? So it affected negatively the margin in the fourth quarter because there was due again to the way the system was introduced we had during 1 month, no benefit in France from the system during the month of December actually. And then this will be as of 1st Jan 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. But at the same time, we have embarked on a price increase in France connected to this change in CC because this is not only affecting us of course, it's affecting the whole industry. So we also are compensating that then the drop from the CC with price increase in France. Yeah, I think that was that one. Around the IT savings then and the split per regions, well, I mean, North America is obviously North America, but you talked about the IT savings. So related to that program, that will largely affect all of the of the countries, around the world, but a bit larger effect in Europe, actually, from that. But it is spread all over the world, you could say as well. So it's more or less equal a little bit more effect in Europe. Yeah. And then 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. And there will be some gradual impact in 2020, 2021, but really the bulk of that will come more in 2022. Great. So I think with that, yes, did you have another comment? No, I just said the thank you. Great. So 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. So thanks a lot to all