Earnings Call: Q3 2018

Oct 26, 2018

Good afternoon, everyone, and a warm welcome to our Q3 results call. I'm Magnus Alqvist, and I'm glad to be here today with our CFO, Bart Adam. Today, we'll go through the 3rd quarter results and then we will have a Q and A session. So let us look at some of the highlights of the third quarter. We have good commercial activity and solid customer retention in the quarter, and these are the 2 primary growth drivers. We issued 6% organic sales growth, and we are very happy to share that we have solid growth across all business segments in Q3. The macroeconomic conditions in most IQ markets are favorable And like in previous quarters, we have a share price increases that are on par with the wage increases in most of the key markets. The restructuring utility for Europe is now being implemented. And looking at profitability we achieved an operating profit margin of 5.6 percent in the quarter and 13% improvement in LTS. And this is before items affecting comparability. After week, first half, we had good cash flow in the quarter. We are leading the security services industry, and we have a strong focus on continuously improving our protective services offering. Looking at the sales of security solutions and electronic security, we had 22% real sales growth year to date when including acquisitions. And during this quarter, we have continued with the integration of some of the technology acquisitions that we closed order in the year. But now let us turn to the performance in the different business segments. And we start with North America. We had solid new sales and a 5% organic sales growth in the quarter despite more challenging compared is from Q3 in 2017. And from a customer engagement offering and commercial perspective, we are very strong in America or in North America, I should say, and it is another solid quarter from the team. It's also a very strong quarter from a profitability perspective. The 9 months margin is 6.1% and we had a margin in Q3 of 6.5%. We had good leverage and strong performance in guarding and risk management that contributed to the operating margin improvements. The QC operating margin also contained a positive one off impact related to payroll taxes. So all in all, it's a very good performance from a top line perspective and also from a profitability perspective from the North America team. Turning to Europe, we have a combination of solid customer retention and strong commercial activity that are now generating good growth rates. And I emphasize this because we have now had two quarters with 5% organic sales growth in Europe. And we're really happy about the fact that almost all the countries are delivering good growth. When looking at the margin in Europe, we have a slight decline compared to Q3 last year. And this is related to some operational inefficiencies, and particularly in France. And the restructuring program that we announced in July to reduce coal is now being implemented, and we have an expected payback time of about 2 years. Let us now then turn to our Iberoo America division. We had solid growth in the quarter and organic sales growth came in at 14%. And this was primarily driven by very strong performance in Spain. Security solutions, electronic security account for 26% of our sales year to date. So continued good momentum in terms of driving the strategy. And when looking at the profitability, we have very strong improvement year on year and operating profit margin of 4.7% in the quarter. Spain is the main contributor to the margin improvement. And in Spain, the Guardian market is becoming somewhat healthier, from a pricing perspective, but we also have very good commercial activity and good momentum with our solutions and electronic security sales. But similar to the comment that we made in the Q2 results, we should note that some of the contracts that we have in Spain are more of a short term nature. Argentina was burdened in the results in Q3, and we expect challenging operating conditions during the coming quarters. But all in all, it is a very good development by our team in Spain and our total Ibero America business. With that, I am happy to hand over to our CFO, Bart Adam, for some more details regarding the financials part. Okay. Many thanks, Magnus, and a good afternoon to all of you out there. So let's take a closer look now into some further financial details to the 9 months and the quarter, and we start with the income statement. As a first mention, I shall mention that as of July 1st, we have adopted now the IIS 29 standard. That is the standard that deals with hyperinflation accounting, and we have implemented this standard in relation to Argentina, as I said, as of 1st July. And the goal of the standard is very straightforward, and that is to provide more meaningful data recognizing the effect from the high inflation and that both for the balance sheet and for the income statement. But while the goal is easy, I would say that the implementation is very technical it is, you could say almost an art by itself. Now I will save you from all the details and to cut along story short, the impact of security theft on our consolidated numbers is not very meaningful. The impact on the balance sheet is an increase in assets of SEK290 1,000,000 and the same amount, of course, increased that in equity. And that fully relates to the revaluation of the open balance sheet on July 1st. And then during the quarter, we need to reevaluate the income statement as well. And again, the and again, the balance sheet and the conclusion of that, that there is almost no effect on sales and operating result. The most significant impact is within the financial items line, actually. Where you might not expect it maybe, but it is, which is positively impacted from the standard by SEK 18,000,000. As I said on the other lines in the income statement, we have no meaningful impact. And I can provide you further details if you're interested. But I think that would lead us to far here, right, right now. Now we have also tried to make all of your and our lives simple. And when you have calculated the key ratios of organic growth percentage and real change percentages, we have treated the effect from IAS 29 similar to any currency change. So that makes that the organic growth percentage and real change percentages are fully compatible to, how this were calculated before the adoption of IS 29. So no impact on organic growth percentage or needs on real change percentages because of this standard. As I said, further details, we are we would be happy to share with you. And there's also a lot available in Note 1 and 3 to the report for the ones that have that are interested. Maybe one other thing to mention is that IS 29 has been adopted without any restatements for historical periods, so no changes in the historical periods. So when we leave this technical matter now, again, to the numbers, as commented by Magnus, both the quarter and year to date show organic sales growth of 6% and the operating margin improved 0.1 When we then move a little bit further down, we move to the acquisition related costs. You see that in the year to date, in the 9 months, these were SEK 41,000,000, compared to SEK20 1,000,000 in the 9 months of last year. And from that SEK41 1,000,000, there is SEK25 1,000,000 that relates to the Kratos acquisition in the U. S. So you shall expect that the total estimated acquisition related costs for Kratos will be about SEK 75,000,000 in total, and we expect that all of these costs will be recognized in 2018. We announced this before as well. And so you can count for Kratos with approximately another SEK 50,000,000 to come in Q4. On top of this SEK41 million that we have now in the year to date. When we go further down in the income statement, you noticed that our financial income and expenses are pretty much flat in the 9 months versus the same period last year. And that is, respectively, minus 287 and minus 282 for last year. Note, however, as mentioned before, that the financial income and expenses amounted to 92, 91,000,000 in the quarter, But, as mentioned before, that was positively affected by plus 18,000,000 sec because of IS 29. So the run rate excluding IS 29 is around, minus SEK 10,000,000 actually in the quarter. It is impossible to currently say if and what the effect will be from IS 29 in the fourth quarter, but as Argentina is only 2% of total group, we shall not expect anything too meaningful. And the difference will actually occurred, because of the difference between the inflation that will happen in Argentina and the 4 quarter and the development of the foreign exchange rate in Argentina. Then we move to the tax line. The applied tax rate for the 1st quarter and the 9 months is 25%, 25% 0 And that compares to 28.5, for the 1st 9 months of last year. And the reduction is, of course, due to the lower US tax rates as from 2018 as a result of U. S. Tax reform. Then as you can see, as well, the 2017 full year tax rate was 31 point 5.5. That is, however, including a 1 off tax expense of 3.1 that was booked in this fourth quarter last year. So excluding this one off tax expense, it was 28.4. We will have time to continue to assess the tax rate going forward. There is this so called beat tax in the US as well. The base erosion abuse tax, which, will gradually increase actually, and we have to see how that impacts our tax rate going forward. And we plan to come back during the fourth quarter or at the fourth quarter with more information to this. You then notice in in the bottom, a difference between EPS and, EPS before items affecting comparability. And then I should say that the EPS before items affecting comparability for 2018 excludes then the 1 off effect related to the restructuring in Europe. That is the SEK268,000,000 that Magnus also mentioned. For 2017, for the 1st 9 months, you notice, I'm sorry. I will skip to the next slide, Slide 13. So when we then turn to the next page and take a look at the effects from the different currencies. The numbers mentioned here to the right, the foreign exchange rate in Swedish kroner, they are the quarter end rates, and we see that both the US dollar and the euro has strengthened quite a bit versus the Swedish kroner at the end of Q3 compared to Q3 last year. That is respectively 8.1% and sorry, 8.4% and 7.8% up. You could say that the euro has peaked during the third quarter round 10.7%, but then it returned back to the 10.3%, 10.4% level, at the quarter end. And the U. S. Dollar has been hovering around the 9 SEK during the entire quarter, then ending at 8.8582, actually. At the end of the quarter. Or 9 months consolidated results, nominal results were then positively affected from both the euro and the US dollar when comparing to last year. So our nominal numbers got some tailwind from the currency. The Argentina peso, however, as you can see here as well, reduced substantially compared to a year ago. That is minus 50% compared to last year at the quarter end. So 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 estate, rechange. And you notice here that, and related to sales, there's a difference there of 1% total change at 9% and real change at 8%. And then when you go down in the income statement, actually, the gap widens a little bit And that is because the impact of the Argentina peso is less when you go further down in the income statement compared to the euro and the U. S. Dollar. So, turning into the next slide, we turn to cash flow and and and and then later on to the balance sheet. We had a strong cash flow from operating activities during the quarter, still year to date, a bit below last year, And we suffered there from a few negative effects that I also talked about in Q2. It's the same effect It's the regulatory change in France, change of invoicing system in Netherlands and the interest hike in Argentina causing some payment delays. But all in all, we expect that we are seasonal in our cash flows and we expect that Q4 should be a strong cash flow quarter. Okay. I shall also add of course that the strong organic sales growth that we are seeing throughout now is of course consuming some working cash as well, impacting the cash flow negatively. The 3rd quarter, I shall also mention, ended in a weakened, and that does not help the cash flow from operating activities during such And, when we look at it, it stands now at 15,700,000,000 Swedish, where it was 16.7 at the end of Q2. We started the year with SEK 12,300,000,000 of net debt, and the development since then reflects the development from the operating cash flow as just explained. And then also we paid out a bit more than SEK 1,600,000,000 related to closed acquisitions. All of which were, of course, disclosed earlier, and we paid also over SEK 1,400,000,000 dividend. Then at that, as you can see, it also was also impacted from the, earlier commented foreign exchange development. And as you can see here on the slide, that added 723,000,000 in translation to the net debt since January 1st. Do you see that here for the period end when you look at the graph, at the far right here on the slide and then let that in relation to EBITDA is still on a healthy 2.5, and we see it also the development over the years. And when we compare this quarter and to the year end from previous years. We are now at leverage a set of 2.5, and you can expect that based on some seasonality and everything else equal, this shall go down by year end. I can also mention that during the quarter, the annual, extensive impairment test has taken place. And the result of this is that we do not have to recognize any impairment losses, meaning that the recoverable amounts exceed the book value of the different cash generating units. And by this, I think I have explained what I'd like to explain, and I hand back to Magnus and be happy to answer any questions later on. Very good. And thank you Bart. Before we open up the Q and A, I would just like to share a few updates related to our strategic work and some of the focus areas. This is a slide that you have probably seen a few times before where we outlined the margin journey as we are converting from standalone guarding services to security solutions. And this work is an important area of focus for us. But like in the previous quarter, we would like to give you a little bit of a flavor of what does this mean and also to share a brief video. And this time, it's going to be a video about the work we do in our aviation segment. So let us have a look. Airports are growing and growing fast. The first step is to be sure that the We control each potential and we control them with the password for the security and for the safety of them. We have intelligence on our cameras. And if the intelligence was going to tell us one day of the situation at a customer's site. The key point is for increase throughput of passenger. He can integrate less and values control from the passenger, so how to improve passenger experience during control. And the 3 years are not of the area. They are in a new operation. So the line never stopped. We're talking about customer friendliness customer satisfaction about crowd management. We have also some technology to utilize the target. We use some docks in Smell, Chicago, detect even some explosives. We install radar installations with us. Detect people, cars, trucks, planes, animals, everything. You can detect what you want. The more sophisticated the technology becomes, the higher the profile of the people, the more training is needed, the more supervision is needed, and the recruitment becomes more and more important We are not in in this new business model, the manpower provider, but a solution provider for the customer. The security, what costs, it's causing me to, to another value for, for our customers. It has to go together. Aviation specialization with the basics of Securitas. And that's that would make the difference. Good. Our aviation team are doing a really good job across a number of airports around the world. And as you can see in this video, there is a approach to providing the best security solutions as well as a strong emphasis on customer experience. And I think that this is a good example that brings to life how we combine digital technology and knowledge. And looking at the growth of security solutions and electronic security, we continue with healthy growth rates. Security solutions and electronic security accounted for 20% of group sales in the 1st 9 months of this year. And now to a brief update related to acquisitions. Now during the last six months, we had spent a lot of time and effort on integrating some of the technology acquisitions that we closed during the first half of the year. But I'm glad to inform you that when we look at, for example, the acquisition of Kratos, automatic alarm and Alphatron all of this integration work is going in a positive direction. In September, so last month, we arranged an investor update in Stockholm where many of you who are most likely on the call now it. And we did that to talk about our current situation, but also to give a flavor of our strategic thinking for the future. And when looking at the near term, I see 3 areas that are important focus areas for us. First one is to developing the customer value proposition. 2nd one is continuing to strengthen our protective services leadership And the third one is about modernizing our ISITIC capabilities and enhancing local and global efficiency. And these are important things internally, but also when you look at the first two, these are also two current topics that we have in a lot of the dialogue with our customers. At the investor update, we also shared our views regarding our strategic phases. And we have a strong foundation with the best protective services offering in the market today. And we are leading the development of the security services industry. But when we talk about modernization, this is very much related to building the platforms and the capabilities to ensure that we not only lead the industry today, but that we develop the highest value to the customers also in the future. And this next phase is all about security, driving the development of the industry and being the leader in intelligent security. So with that, I would like to wrap up our part before we open for the Q And A. And I would like to highlight that it is a good quarter. We have the best offering in the market We have good commercial activity. And importantly, we have high customer retention across all the different segments. And the reason I mentioned that is that this is one good indication as well of the satisfaction of the customers and that we're not only good at winning customers, but that we also develop the relationship over time. And these factors have helped us strong growth across all segments and 6% organic sales growth year to date, but also in the quarter. And a positive development in terms of the operating margin. And with that, Bart and I are now happy to open up for questions. Thank The first question comes from the line of Mikael Hoang from Dan Slabank. Hi, Michael Hirtowski. A few questions. The first on France, you mentioned certain regulatory changes burdling the margins in the quarter. Could you describe a bit what that was? And also in North America, where you had this one off gain related to the payroll taxes, if you could say if you could quantify how large that one time affect the loss. Yes, that's the two questions. Magnus here. I will take the first question and then I will let Bart comment on the second. When it comes to France, we make a few references related to internal factors and those are problems that we are dealing with. We've had some inefficiency, and we also made a leadership change during the summer. So we also have a new leader for our French business as of Q3 this year. But those issues we are dealing with, the reference we're making to the on the factors is that there are a few. And one is related to the so called subsidies, So CICE, that, that that or, basically, reduce this year and then eliminated towards the end of this year. And this or this is is sent the outcome of decisions that have been made by the French government. Another change, which is impacting us is training related rules as well. So there is also now a fixed period in terms of training requirements. And this also then has some impact on our cost as well. I should mention that that the regulatory changes is something that we are used to dealing with. And the important part here, of course, is that we are working with our customers so that the customers understand the impact of the changes and that we are then also able to recover that impact also through price increases. And that is absolutely the ambition as well. But there are fairly fundamental changes that were affecting the entire sector, and that is also part of the reason why we, we talk about them in the report. Then Bart, do you want to comment on the U. S, tax relief? Absolutely. So that relates to the overhead that we pay on top of the, wages to the guards in U. S. And that was there was a positive one off there, in this quarter. The the the impact of that, as you recall, we, we never mentioned anything well, if you say something, it's around 0.1% already in the margin and there's no difference this time. So the short answer is 0.1%. To your question. We improved in this quarter 0.36.2to0.5 in the year to date, we improved from 5.9to6.1. And the underlying is somewhere then between 0.1and0.2improvements, you could say, in the U. S. That we see in the quarter. Okay. Perfect. And my I also have just a final question on cash flow looking at the changes in accounts receivable and changes in other operating capital employed where you have this this buildup of related 12 months. You mentioned 3, 4 factors explaining this. But, look, you have the will will earlier this reverse? I guess, we we we we this is a bit of a total effect where you you go up on a higher level, then it's analyzed, but will something of what's what you are seeing from the Netherlands or or Argentina? Will this reverse become a positive impact in a 20 19? French ones shall not reverse. That is unless they change again the legislation, but that is just a one off change. So we will not recover from that. In the Netherlands, as we go forward with the system implementation, we should benefit from that, and we should get to a normal level again in the Netherlands, and that we hope that it will improve by year end. And then the interest hike in Argentina, yeah, we should also recover from that. I mean, that is because customers pay slower now than they used to do because of, yeah, cash shortage in the Argentina economy, but that should also normalize some point in time, more difficult to predict when that should happen. The next question comes from the line of Emerick Polan from Kepler Cheuvreux. Please go ahead. Your line is open. Two questions, if I may. The first one is on the French restructuring charge, the SEK268,000,000. It seems a bit higher than the range you flagged in the interim results. So could you explain why this amount increased? And also looking at the size, you mentioned a 3 year payback, that's a 0.6% margin improvement on a 3 year basis. So quite a material effect to expect going forward in the European division. So could you enlighten us on the down of improvement that we should expect over the next 2 years, just to get a sense of the acceleration of earnings, we could expect from that initiative and also the cash expense when we should expect the cash impact to be seen. That's for the restructuring question. The second question is on the U S. You mentioned the one off item. Inflation, wage inflation is still rising quite faster there. And at the same time, your organic growth is slowing a bit. In Q3. So could you help us understand the mechanics pass through and how you approach that equation of exploring organic growth and continued cost pressure. Yes. Thank you for the questions. First of all, just to make a clarification, so the we announced the restructuring program related to Europe. So the SEK268,000,000, those relate to the Europe wide restructuring program. And maybe to give some more background to that, we took that decision. We announced that in conjunction with the Q2 results. And that is a program that we undertake because we're not happy with the margin development. And the fact is that in some countries, our co has been growing, at too high of a pace. That program is related to certain different countries. And affecting mostly total vast majority in management and support functions. So not front time, till then bird spot, but management and support, and a little bit more than 300 people are affected in that program. We don't go into detail in terms of which individual countries are affected, but it's a safe assumption obviously related also to some of the references to make related to France, about operational and efficiency that France is is part of that program as well. So I think that is one part. Then there was also a question related to the margin improvement. Do you want to clarify that part there? Yes. I would just like to mention if we say a 2 year payback, that means that the annual savings will be around half of that amount. So within a restructuring cost of 2.68, you should count with half of the, that amount as annual savings. And then the the impact, the mathematical impact on the margin then comes straight from dividing that by SEK 45,000,000,000. And then you will end up somewhere, I think, between 0.2 a bit higher than 0.2%, something like that. And that is, of course, meant to reverse the negative development that we see on the cost level right now. So then, that should reverse some of that negative development. There was also a question about the U. S. As well. And And I think you made the reference point to the fact that the growth is slowing a little bit. We had very strong comparatives from Q3 that year, where we benefited in terms of a lot of extra sales related to the hurricane. And that is the main reason. If you look at wage inflation, we don't make any forecast about the future, but we have a good track record and our North America team also good. In terms of working with our customers, when there is a need to or when there is a pressure that they're also then able to to pass those increased costs onto the customers as well. And that is something that we have been good at doing for quite a long period of time. And and what I should add as well is that the the wage inflation as such, if you average that out over our business, that has not been on the very high percentages that some people think it might be. We have said before that on average throughout the cycle, we have 2% wage inflation year over year. And then in very good terms, you have been higher than that, more on the 3% closer to the 3 And it's also like that on this, on, at this time of the year, we are more, if you analyze at the short, close to the 3%, but it's not like the very high percentages that some people talk about. It's somewhere between 2% 3% in our case, averaging out over the entire territory of US as we are everywhere in US. And then we have been able then, as mentioned, to to compensate that with the right price increases. Okay. Thank you. Would you be able to quantify this is a comp effect from the hurricane last year? Just as a reminder. No, since we mentioned that it's definitely more than 1 somewhere between 1% 2%. Okay, thank you. And the next question comes from the line of Rajesh Kumar from HSBC. Please go ahead. Hi. Good afternoon, gents. Thanks for taking the question. You mentioned that your U. S. Wage inflation is running at 3% which is quite an interesting statistic given that some of your competitors are clearly talking about 4 to 5 the b Bureau of Labor Statistics data, which, you guys have not you, in particular, have a team, but, a security management team have referred to in the past is recording much higher numbers. So what is it that we are missing in terms of the difference between your exposure to the wage inflation versus what we are seeing in the headline statistics are your competitors' numbers. Well, it's difficult to comment on competitors' numbers and how they get to that conclusion, but we can only see what we see in our own business. We are throughout the U. S. So maybe it's also depending on where exactly you are in the U. S. Maybe also connected to which customer segments you are exactly exposed. Maybe also comment, impacted by how you have been dealing with wage increases historically. We have been increasing also wages during worst time periods, economical time period. So maybe all of that, you have to take into consideration. When you compare these numbers. The way statistics as such, our own conclusion on these is that over the long term, they are correct and they reflect that literally a right picture. But short term, if you compare more and more after month, they are probably impacted by also some movements. We do not really understand and they are not so reliable if you want to look at it at a really short term. Also, the same statistics will show that in some quarters, there have been wage reductions of minus 2% and minus 3% and minus 4%. We have never seen those either. So so but if you average it out, then how it looks like on a long period, they are correct. And and and I think our comments have been in line with that statistic all the time. Understood. That's useful to understand. It's just, a lot of different types of companies which employ staff in the kind of wage bands you have are talking about higher wage inflation. So, what intrigued offers that how you are managing to achieve the lower rate as a team at Securitas. You're clearly doing something right. And something different. And that is a bit, of trying to get to the bottom of, yeah. What I would like to say is that we are trying to treat our employees always in a very fair and a very constructive way as well. And and we are also trying to add other components to their environment and to their, to their working conditions as well. So it's, of course, wages are important. Done misunderstand, but it's also other things. And we also try to work on those things, not just year after year, but over a long time period. And so you you think your churn rate, as in last year reported, was running north of 70%. Has that reduced from that level or have it stabilized sequentially? We we don't need to know the number, but just qualitatively, if you quantify that for us. Essentially, it's in the same range. It's in the same way. Okay. That that is something to belong. Just as a short explanation to that, what we have seen is that there is 2 different, we have 2 different populations in our, in our employee base. You could say people that churn quite fast that stay with us for 6 months to a year, younger people, maybe maybe people that are in between jobs. And then we have the other, bandwidth of people that stay for a long time period with us that really say, look, I'm a security guard. I like this work, and I will remain a security guard. It's the latter part, which gives us stability to our operations. And it's thanks to these people that we can have the churn in the other people. So perhaps you have a larger proportion of younger people in the mix, which is why your inflation number, the auto slightly lower than the broader market. That could probably explain the whole dynamic. That's, yes, part also of the whole equation. Yes. I'm I promise this is the last one on the margin. When we look at the U. S. Margins, you, you're currently given the payroll contribution of 10 basis points So if I if I take your, slide 16 where you show the detail of how guarding works the security solution differs. And if I take the magnitude of the difference, approximately, and apply it to your US business, then the man guarding business margin seems like they went back by 15 to 20 basis points. And if I then take out the benefit from the payrolling, gains you've had that could be more like 20, 25 basis points could you elaborate on what's going on there, or is it just a hurricane comp? Yeah. I'm not sure if we have totally understood your calculation. It's a bit difficult to understand it like that. That's a straightforward one. You your US margins, well, what, 6.2% are going to, sorry, let me open your slide which, in in in the US, you have shown your margins going from 6.2% to 6.5%. Mhmm. So and the margins on electronic business, which was 15% of the group last year, is now 18 of North America last year. It's now 18% of North America. That that is something like 600 basis points higher than, the a man guarding business. So if I take your 10% margin assumption on the electronic security, which has gone from 15 to 18%, then that implies the rest of the business margins. Went from 4.75percentto4.56percent. Okay. I see where you come from. Yeah. So what I'm trying to understand is, is that a one off hurricane comp effect, or is it a phasing of wage inflation pass through, which we might see, basically, help your margins in the coming quarters. What is driving that on an underlying basis? The the the the there is a you're you're right in your calculation, but there is a misconception or some there's another thing you need to know. And that is creative business, which we acquired at a very low margin, as we also explained at the acquisition that it would not be accretive to our EPS, at least for this year and next year. So that is the explanation. So there, there is where it goes wrong from the start. Okay. So if we take that out, then your margins are flat. In the U. S, in the U. S. Guarding, we actually have seen some traction in our margins. Okay. Okay. So the margins have gone backward, but you've offset it by expanding your electronic business overall. Yes. Because the additional volume with PutumCom came with close to no margin. And the next question comes from the line of Paul Checketts from Barclays Capital. Please go ahead. Hi, gents. I've got three questions, please. Can I just return to the wage inflation in the U? S. Question. Do you feel that you've passed on all of the wage inflation you've experienced in the U. S? I know we had that conversation about the margins, but just summing it all up, is that where you said? That's number 1. The second is your comment about labor shortages becoming more prominent. Which countries are you seeing the most acute shortages? Please And then the last one is in the cash flow, you have the SEK 50,000,000 inflow from other operating capital employed. Can you just explain what that was, please? Yes. So on the first question in terms of the U. S. And are we able to pass on the wage inflation? Yes. Is the simple answer. Our team is doing a good job and kills dialogue with the customers and making that happen. And on the labor shortage, This is something that we are seeing in a number of countries. And it's obviously related to strong macroeconomic environment. We also see fairly low unemployment rates. And this is something that we just have to deal with we are fairly used to dealing with the wage cost increases and And it's also not necessarily only a challenge for us. There's also quite a lot of opportunity. One is that we like to pay our people. So the important thing there, of course, is that we are just able to also commence the customers of the value. But we also have a strong offering and alternative solutions. And when we see these kind of patterns and Also, many of our customers are seeing and feeding the pressure as well in terms of finding people. So they are also more actively looking for alternatives. So I think that we are quite well positioned as well because we're always able to not only talk about price wage, but also to be able to look into alternative solutions. And that's something that we also quite actively encouraged in the customer dialogue. Labor shortage? Yes. That was 2nd. Yes. Okay. Yes, we are looking here into the detail your question on the overall operating capital employed and suggest we come back to that during the call. And the next question comes from the line of Karl Johan Bolinger from CNB Markets. Please go ahead. Yes, good afternoon. Most of my questions have already been answered in a good way. And just to check with you on kraftos, you mentioned, as you said before, that it was supposed come in with the margin dilution effect. But have you really seen that in this quarter or is there some seasonal effect in the numbers that, that will, say, turn out more aggressive in other quarters? Do you wanna take that, boy? Okay. On Kratos, we mentioned at the time of the acquisition that it's going to not be margin accretive during the beginning. And then the question was in terms of impact in the current quarter? Yes, in the current quarter, we have been consolidating the business as of the beginning of the quarter, basically. The integration is going well. It's a lot of focus on that. Or people are doing a very good job, both organizational wise. What we have, the intention with this acquisition was to strengthen or regional or local organization. And that has really been we have not joined the 2 organizations, the existing one and the, and the, the acquired one. And that has really strengthened a lot or or local regional infrastructure throughout U. S, which is really good, which will help us also to really help further local customers. The second focus point has been on the, integration of the IT, the systems, where, where we are transitioning over to our own systems from, from their systems. And that is going according to plan as well. Some more work needs to be done. But we think that by end of January, we will basically be done on all of that work, to a large extent, and and and then it we can go into a little bit more again business as usual mode, so to say. Impact as such, we have added the sales volume from the acquisition, but as I said, with close to no profitability. And then of course, we have incurred some of the acquisition related costs as mentioned before. And if I insert you're right. Most of the, let's say, the big part of the synergies that you saw in the acquisition will basically be realized now during the second half of this year. The the the the, the synergies, they will come in. No. The the integration only happened as of, July, so to say, the synergies will start to kick in as of next year. But you are doing the actions basically now to realize that. So we'll see them So we have from early 2019. Yes. All the restructuring costs will be basically be taken this year, absolutely. And then the upside should come next year. I mean, we're just to emphasize one point that I touched upon is that with the crates of acquisition, we are building stronger proximity in the different regions and closer to the customer. Also really complementing the strength that we have with our current SES business. So, and it is progressing in a good way. Going back to the earlier question on the operating capital employed, I've I've it's it's not just one line within this, although that has moved, so to say it's a it's a couple of lines together. And I think it's also largely related to the integration of the Kratos balance sheet, actually, where, for instance, things as deferred income have increased provisions have increased, prepayments have increased, which is typically for this type of business. So it's different lines. So I think we can go to the next question, The next question comes from the line of Henrik Maury from Nordea. Please go ahead. Thank you. Good afternoon. You mentioned these costs in Europe that has been rising a little bit too fast in 12, 13 different markets. Why did these countries let cost run away to begin with. And what was the root cause for for the issues that you need to handle right now? So when you if you go a few years back, coming back to end of 2015, That is where part of this situation started. And that was very much because we were ramping up quickly related to the residue demand. That then read it to you during 2016. And then we've seen a gradual decline in 2016 or in 2017 and also now in 2018. And we said that a few times before, that was works that we did a really good job, but it also took quite a lot of time and attention from the organization. And it's also then been the nature of a lot of that business, it hasn't really been contract portfolio. So it's also been a bit of a challenge to also scale down. When the demand or when some of those shorter term contracts were then terminated. So that is one. And the second one is that we are also investing quite a lot in our protective services offering and the strategy. And this is something that we have to balance. But then, there also came a point where I felt and we felt as a team that now the development is not strong enough and that's what we decided in and what we communicated with the Q2 results to take a much stronger grip. And that is what we are now doing. And that is why we're also then addressing the costs in number of the countries. And we obviously then doing that in countries where we get a real impact as well, but also those countries where we had an issue in terms of the cost development So it's not across all the countries in Europe, but it is a focused approach on these certain countries. Okay. And a follow-up on that, is it should we view that you've been investing now in solutions in Vision 2020? Now you said Have you maybe over invested in certain markets in those strategies? Is that is that or are you mainly cutting in other other parts of those businesses now? It's difficult to comment or assess market by market, but the important thing is that we are on a journey from standalone guarding services to really have a strong offering in terms of protective services. One of the reasons that we are winning a lot of business in Europe in North America, Vira America is because we have a strong offering. We have a good footprint. We have a strong offering, and there, I think we are well ahead of all the competition. And that's obviously something that we're building to be able to deliver now, but also to make sure that we are stronger tomorrow. Okay. Thank you. And one detailed question, if I may, and coming back to the CECI changes in France, you comment that Okay. Can you please give us when it first came into effect the first part of that and when do you expect the new cut? Will come into effect. And also, can you give us any comments on how big impact the new change will have? You mentioned by the year end or pick up by year end or fully, or is it November, December? I I believe that this scheme has been in place for many, many years. In France. At the beginning of this year, there was a 1% reduction. If I have all the facts correct, And then towards the end of the year, this year, this program is then eliminated. And it is a situation that and there had there were some previous plans to then compensate some of that impact with another scheme towards the beginning of next year, but has not been communicated, that has not going to come into effect until, I think, the fourth quarter of 2019. So that is the reason that we're watching this carefully. And the important thing is that we have an open diode also that we're able to balance so that we are able to then, as we always do, drive an aggressive and constructive dialogue together with the customer so that we're able to pass on the costs and balance those with the price increases. Okay. But when you say reduction of 1%, is that on top line or is it on the CSA program or a reduction of 1% of what. And then the the change by year end, you say it will be cut fully. It will be cut fully from which level. Yeah. We can I we can come back to you on that? If I think it is from 8 to 7 or 9 to 8 or something at that present, but it's better that we come back can confirm that, in detail, to you. I can confirm to you, actually. It is, with from, it's a system based, basically a subsidy system where you get based on the lower wage categories, you get a certain reduction of those wages. And it's that percentage that you get as reduction on those wages that will reduce going forward. Or that has reduced already this year. The strange thing is that the so the system has been reduced already this year. We will have, and then a new system will, in fact, it will be existing system, which is to exist in November this year. And the new system will come in place as of January next year, January 2019. And then it will further increase that system. The new system will then further increase during the third quarter of 2019 as it looks like right now. And in order then to compensate for the gap, because there will be a gap between the present system and the new system And then as Magnus said, we will then fill in that gap with the wage, the price increases that we are discussing with our customers as we do every year. But but some others are, I mean, it's all related to political decisions as well. And and we don't have visibility of all of those. I just wanted to make that remark as well, but we are on top of the situation and we will manage it as well. Okay. Thank you very much. And the next question comes from the line of James Winkler from Jefferies. Please go ahead. Hi guys. Most of my questions have been answered well, but if I could just revisit the outflow from accounts receivable, a bit higher than at least what we were looking for. You mentioned a few factors being kind of timing of payments in Argentina as well as just timing at the end of the quarter. What should we think about in terms of, expectation for Q4? Is it at least possible that the reversal of some of these, you know, it could translate into an inflow, like you've seen in a few quarters in the past, or is it more likely that you finished the year at a higher base receivable than the prior year and then these factors tend to kind of reverse in the medium term? Thanks. No. The the the planning and and what we expect is that we can go go bring down, quite extensively the DSO from where they were end of September towards end of December on the level they were last year. So then the change will be to stay connected to any growth that we have seen during the year and connected to any acquisitions that we have acquired. But, but on coming back to the DSO as such, this should go down considerably between September which ended on a weekend and year end, which does not end on a weekend. And the next question comes from the line of Andy Grubel from Credit Suisse. Please go ahead. Hi, good afternoon. I've got a few, but hopefully quite quick ones. In Iberia, America, could you just split down the growth rates between Spain and or Iberia and Latin America? Firstly, secondly, the proposals in Spain for the minimum wage to go up by 22%. What impact do you think that would have on your business? 3rd, just on Kratos, that was to the math on that is about a 20 basis point headwind to US margin during the quarter. Do you over time, do you expect quotas to get up to divisional margins. I'm so sorry. You you you mentioned the change in the in the system. I logged in a few days for December. Can you quantify how much or what headwind that will be just in Q4 for the December reality that it not been there and kind of on the same scene what you think will happen to group tax rates next year as CICE moves from being a tax credit to a taxable subsidy. And then lastly, just a bit of clarification, in an earlier question, you talked about in the U. S. And adding volume with no incremental margin. I wasn't quite sure what you meant by If you could just clarify, that would be great. Thank you. We're busy writing down the number or the questions here. So we remember all of them. Maybe I can start with your second question. And that was related to the minimum wage increase in Spain. And obviously, when something like that happens, it's always going to be a challenging opportunity and challenge and opportunity at the same time for us. The challenge is to, to convince customers of being able to also then accept the increase in the price. The opportunity for us is that we have a very good offering. And when we look at the Spanish team, protect the services offering and solutions, which is very strong. So we also have strong alternatives. And I think that is the way that you have to look at it from those 2 perspectives. And there was a question related, to the growth rates as well. And and you could say that the average for the is pretty much the average for both Iberia and then Latin America. Iberia is a bit lower than that. And Latin America is a bit higher than the average, and that is how you could see it. Okay. You had a question on Kratos and when we could come bring that business back. Well, actually, the whole idea is that we will add in the the capabilities and the and the employees from from Kratos to our own existing infrastructure. And then with that, we will go after, the market, of course, as you know, the electronic security business, it's a bit more volatile. It's not really a portfolio business all the time. It's more volatile. So you need to have a good sales machine in place and we will include now the Kratos organization into our own sales machine and how we follow-up and how we set targets. And then based on that, that will start to drive the performance. And it will take we estimate it will take next year will still be rather a year of buildup, but then the real, so to say impact from from and the benefit from that should come in as of 2020. What else do you the problem is I can write down very fast, but I can't read my own reading. On on CICE, as the as we've changed from one system to another, there'll be no CPA in December. Can you quantify what impact that will have on year of in profitability? And then lastly, in an earlier question, you talked about the U. S. And adding probably no margin, and I was just, but I'm sure what you meant by that. Yeah. The the the CCI think we should not call to quantify that. We have not. We prefer not to quantify. And then the growth tax rate also, the group tax rate from CC, we will come back during the Q4 to with that information. Adding volume in the U. S. Without any incremental margin, then fully related to the Kratos volume. Okay. So it was so it wasn't a reference just so I'm clear that you weren't adding new MAND guarding? No, no, no, It was fully relating to the Kratos volumes. Okay. Thank you very much. And the next question comes from the line of Carolina Ellinkland from Hand Please go ahead. Yes, good afternoon. I have one question left that wasn't answered. The development in Argentina, you are seeing, to be weak and it was already weak in Q3, is this weakening as we're going into Q4, or should it stay at the same level as in Q3? Yeah. So so they they they are, I think, what we have commented that it is a challenging environment, and we also expect challenging operating conditions going forward as well. But as you also know, we do not guide on the quarter on quarter. We can give you the general direction and then the quarter. It's always depending on many more things and then just this thing. But it it doesn't look better today than it did yesterday. Let's put it like that in Argentina. Okay. Thank you very much. And the next question comes from the line of Bilal Aziz from UBS. Please go ahead. Good afternoon. And just one question, I suppose, one quick clarification for my flight, please. So in time 0, LatAm, you've benefited from some short term electronics security contract now for nearly 3 quarters. Do you expect me to change some more firm contracts and we've had them for a while? Right now or will they fade away at some point? And just for the classifications, can you perhaps explain why the move to IAS 29 and does also not impact organic growth in Ibera America as well. You know, specifically, there's a number in Argentina not half of the adjusted for the high inflation component as well. I can take the first question. So the reason we highlight the that they are short term contracts is because that's the nature of that business and then to be approved and that's the reason that we we keep disclosing that we do not know how long we are able to keep that part of the business. Then referring to your IS 29 question, what happens there is that, during the quarter, you basically need to inflate the sales from Argentina with inflation percentage, and that you apply. And then the next thing that you need to do, you need to normally, when you consolidate country into your income statement, you do that on the average rate, the currency rate of the quarter. In this case, because of this accounting standard, we need to bring it in at the end rate of the quarter, which is obviously lower than the average rate in Argentina as the currency rates are going down in Argentina. So the net effect of that, the increase because the inflation and the decrease because of this foreign exchange, average compared to year to quarter end rate basically, we'll give you the net. The net of that is actually that the sales has decreased with minus EUR 65,000,000, in, in the group then because of this effect. This one, we have then, as explained also, we have, in the organic sales growth, we have taken that out from any organic sales growth calculation. We have basically, no impact from this implementation on the organic sales growth calculation. That is We have implemented it. Organic sales growth calculation as such is not the standard. It doesn't follow an IFRS standard or anything. It's our own standard, you could say. And we have implemented in this way. It could be that it is the other way around next quarter that the top line is, so to say, helped from these two effects And then again, we will not impact any impact on our organic sales growth. We thought we believe that that was the best way of presenting it to you. You could say organic sales growth in our case, what it present, represents is basically either volume increases or agreed price increases with the customer. So what and that will be paid for. So the real hard terms in our contracts, the changes there with our customers, that is what we are getting reflected in organic sales growth. Everything else currency inflation is taken out. And we have a follow-up question from Rajesh Kumar from HSBC. Please go ahead. Hi, thanks for taking this question. Just one quick follow-up. So if we take out the creditors benefit, from, okay, from revenue growth. Of the 5 percent organic growth you've reported in the US, 3.5% to 4% looks like it's coming from electronic security, Is that about the right level of number or is it too high an estimate? Too high an estimate. I think you include now the Kratos volume into that number? Kratos was back 280 according to the numbers you've given. 280,000,000 krona. So it looks like it's 3a half on electronic security. Man, it goes from 15 to 18%. No. No. And that is the thing. I mean, this number from Kratos is not at all included in our organic growth. Not true. That is why you take it out from the, two numbers you've given, 13562025. In 2025, you'd re reduce the credit of contribution of 280? No. What I can say to make it simple is that that both that our guarding business was growing organically and that also our electronic security business, the business we have had was growing organically. So somehow there must be a misconception, but I suggest that that you come back to us with the detail of that, and then we can check your calculation because it's difficult to follow just on the phone. But I can confirm that both the guarding business was growing at a good reasonable percentage organically and that also our existing electronic security business was growing also at a reasonable organic growth percentage. So guarding basically, what I'm trying to work out is if the guarding was growing more than 3% or not. Because your your wage inflation is 3% and you pass through the wage inflation. The and I can confirm to you that the Guardian was growing faster. Okay, understood. Thank you. That's a no further questions. I'll hand back to the speakers. Okay. So then I think we are ready to conclude. Thanks a lot, everyone, for dialing in, wishing you a good weekend. Thank you.