Earnings Call: Q1 2018

May 2, 2018

Okay. Good afternoon, everyone, and warm welcome to the Q1 results presentation. I am Magnus Alquist, President and CEO of the company since 1st March this year. And before that, I've been heading up the European division since August 2015. I'm here today, together with Bart Adam, our CFO, and, we will do these calls together as, as we go forward. Maybe handing over to you, Bart, just for a brief introduction. Now together with Magnus happy to be here today, and we will run you through our quarter presentation. Thank you. Good. We have a strong foundation as a company. And, I usually try to spend quite a lot of time with our team members in the countries and areas. But since I started in March, I've also spent a, a lot of time in the other regions together with our customers. And, I just wanted to to start by saying that the customers value, the work that we do, and they buy into our strategy. And this is encouraging, and I see a lot of opportunity for us to grow and develop the business in the coming years. But so it's clear for me that the opportunity is there, but I also see that we have an opportunity to speed up the transformation with the strategy that we currently have. And so let us look at some of the highlights from the first quarter. It is supported with strong growth and our team in North America are leading the way. We also have good recovery in Europe the first quarter in terms of the growth. We achieved organic sales growth of 6%. And it's good to see that we have solid growth rate across all the different business segments. And our price increases have been on par with the wage increases. And in this quarter, we issued an operating margin of 4.7% 13% a real change in our earnings. Per share. But before we look at the performance by division, let us just take a brief look also to progress in the strategically important security solutions and electronic security business. Here, we achieved growth of organic growth of 16% in the quarter and, real sales growth of 20%. And we are also ramping up some larger security solutions in the court in this quarter. And just to mention one example, with a automotive manufacturer in Germany, where we are providing a full range of protective services in 1 integrated solution. But we also have a number of solutions and new solutions that we have won and that we're implementing with more midsized customers. We also announced a number of acquisitions in this quarter, and we'll come back to that later in the call when I talk a little bit about the importance of some of those. So let us now look at the performance in the different segments. And we start with North America. We had a very good start of the year with good new sales and very strong organic sales growth of 8% in the quarter. The customer retention is good. And as previously reported, we are ramping up a few larger contracts that we started towards the end of Q4. And the sales of, security solutions and electronic security represented 16% of the total sales in the quarter. So all in all, from a growth perspective, solid performance by our North America team. And if you turn to the next page, we're looking then at the margin. We had a stable margin in the quarter at 5.5%. And this operating profit margin was supported by higher organic sales growth, but hampered by the lower margin on some of the new large guarding contracts. If we then turn to Europe, And we are now growing at a higher pace in organic sales growth terms than what we did before. We had the increases on the refugee related business that start that we started to ramp up in the second half of twenty fifteen. And we did have good growth in almost all the countries and organic sales growth of 4% in the quarter. And the reduction of the refugee related business continued in Q1. And this reduction represents approximately 1% negative impact on the organic sales growth. But also positive to see client retention is significantly improved and we also then had sales of security solutions, electronic security, representing 21% of the sales. But while we had good growth in Europe in the first quarter, I am and we are not happy with the operating profit margin, And there are a few factors behind the weaker operating profit margin in the first quarter. One was a, a weak start in the electronic security business in Turkey. And this business I should emphasize is more volatile due to the timing of the projects. And it is a temporary impact we have a positive outlook for the remainder of the year. And the second factor is relating to unusually high sickness rates, and that then generated higher than normal costs. And this was in a number of countries in Europe, but particularly in Belgium and in Germany. And then, the last part, as previously mentioned, we did have a reduction of the refugee related business in the quarter. Which also then contributed to a slightly lower margin. And if we then turn to Ibero America, We had a good quarter in our Ibero America division with organic sales growth of 9%. And if you're looking at the the 9% in comparison to what we had last year, and this is primarily driven to, by reduction in Argentina. And part of that is inflation rate inflation related. And the other part is, related to some of the changes in the portfolio. But we had solid organic sales growth in Spain where the team is doing a very good job and driving growth on security solutions and electronic security. And on divisional level, Solutions And Electronics Security represented 25 percent of the sales, in the division in the 1st quarter. And we had good development, in terms of profitability in Iberia America improving OPM to 4.4%. And this positive development was driven by Spain with a very good development of high margin Solutions And Electronics Security business. And but I would also like to mention that some of the Solutions contracts in Spain are short term contracts. Argentina burdened the margin due to startup costs and some turnover in the contract portfolio. And with that, I would like to hand over to Bart for more details on the financials. Very good. Many thanks, Magnus. So let's now turn to some further financial details to the quarter. And we start with the income statement. Of course, on this page, the same KPIs as commented by Magnus, so we'll not repeat that. But would like to mention that the 2017 comparatives for the group have been restated for IFRS 15. This restatement results in a relatively minor change for the year. That is a SEK 20,000,000 increase of the operating income for the full year. The reason behind is that under IFRS 15, we now activate or paid sales commissions, whereas before these sales commissions were less just expensed as those were paid. But now under IFRS, we need to treat that differently. That is to activate and depreciate. So this is, in essence, only a time difference and is being accounted for at the group level. In the quarterly report, you find under node 2 quite an extensive overview of the numbers affected from IFRS 15. Turning to the tax rate then, the applied tax rate was 25.5 percent in the quarter. And that's a number that percentage is in line with our statement from the of 2017 that we released just after the U. S. Tax Reform was announced. We will continue to assess the tax rate as more details and interpretations to the U. S. Tax reform become available. This is especially related to the so called beat, which is the base erosion abuse tax, which we also need to further understand how that affects certain flows. You shall remember also that the 2017 group tax rate was 28.4 and this 28.4 then exclude a percentage related to the one of negative effect from the U. S. Tax reform related to a revaluation of certain deferred tax assets assets, which happened and taking a look at the effects from the different currencies, we see here that compared to the same quarter last year, both the U. S. Dollar and the Argentine, Argentina peso have reduced their valuation against the Swedish kroner quite a bit respectively, minus 6.7% and minus 29%, whereas the euro on the other hand has strengthened quite a bit as well. And the numbers mentioned here are the quarter end rates. The net effects of this on the different lines in the income statement can then be seen from the difference between total change and real change. And you notice that on the sales line, the net effect that is the difference between total change and real change is 3%, meaning that the real change is actually 3% higher than the total change. So the negative effect from mainly the U. S. Dollar and the Argentine in a peso outweighs the positive effect from the euro. And then you can see a bit of the same development more and more or less in line with the sales development for operating income. And earnings per share. So ending up then in the real change of earnings per share at 13%. I move to the next slide. Yes, we had, we returned to the cash flow and the balance sheet. First of all, it shall be noted also that related to IFRS restatement, the cash flow basically remains unchanged. But that now we have some SEK400 1,000,000 extra net assets compared to IFRS, to before IFRS 15. And these are activated historical paid sales commissions to the extent those have not been amortized yet. We had a weak cash flow during the quarter. The first quarter is always a relatively weak cash flow because of seasonality. But this first quarter was worse compared to other first quarters. We used some cash, of course, to fund the organic growth. That is normal. Especially in the U. S. With the 8% organic sales growth lever there. But then the main reasons of the weak operating cash flow is largely due to a negative impact from Easter and such, mainly in Europe. To put it simple there, some of our customers did not pay or invoices ahead of month end due to Easter Friday. And at the same time, because of the timing of Easter Monday, where we had to pay certain employee related accruals and, VAT, for instance, just before the weekend. So the two effects together then, the late payments coming in from our customers and the early payments because of this, employee related payments and VAT then meant a quite considerable negative cash flow at the end of the quarter. Important to mention though is that in the early days of April, we had a very good cash flow, and that has been confirmed now throughout also the ending of the month of April. Just want to flag out also just to set a bit your expectation that the Q2 closing and the Q3 closing is also quite unfavorable for the cash flow because of weekend timing in relation to the quarter end, whereas always when the last day or the 2 last days of the month of the quarter are ending in the weekend. That always puts some stress on when the exact payments come in, mainly from our customers. As talked about before, the net investments include also the CapEx for customer solution contracts, That is for the equipment that we put up at customer sites when we built and provide a security solution. And then going forward, the total capital expenditure, including this equipment for solution contracts will be approximately 2% of group sales in total on an annual basis I move to the next slide, and then of course, you see the effect from the cash flow on the net debt, which has increased to 14.4% and that is the result from the free cash flow, of course, as a result from the operating cash flow, in combination than also with certain acquisitions made. As we have announced, during the course, we have made and close certain acquisitions and Magnus will come back a little bit on the nature of those acquisitions later on. You also see here on the on the slide, the relationship between net debt and EBITDA throughout the years and now also the first quarter is put there as well. And you could see that at leverage of 2.4, we are still very well in line with our own objectives here. And with the recent development in with development in the past. Turning then to Slide 17. Yes, we have strong financing in place. This chart shows the maturity of our financing that we have in place, and we issued now in March, a new million bond, in replacement of a bond that matured also during the month. The coupon for the new bond was 1.25%. And we have no other important facility maturing for the period 2018, 20192020. The first maturity now of importance is 2021. And by this, I think I hand back to Magnus. And before we open up for questions, I just would like to spend a few minutes to talk a little bit about our strategy. And, we talk quite a lot about security solutions and electronic security. And I felt that to provide some context, it would be good to share just one case. Today with an example of a solution that we have implemented in Germany. So this is going to be a video, and we're going to start streaming it now. We are one of the biggest scrapper metal recycler in Germany. And so our business is to produce and collect scrap for the secondary industry of steel Mills. And for the production of new steel. We have 2 aspects in security. People come into our yards, steal the metals. And the second one is prevention of fire. This is what I expect from the security side. We have a new product, which is called RBS, for the metal dealing and recycling industry. Our solution depends on camera system, with day and night cameras, thermal cameras, with analytics and so on. When somebody goes into the site, our analytics, our computers sending an alarm to our sock, and then we manage everything. And then we come to the site with our guards. But we have a second one. We solved the problem of the fires, which are thermal cameras. We have the thermal cameras, which are spotted on the metal heaps. And when the metal heaps gets very hot, then, it reaches a certain degree. And after that, we get it allowed. And so we call the fire department or we call the customer here at the site when they are here so they can watch it and, measure the whole situation. Before we are We have, we have an, human control system, also based on, on an video part, but, in the time when we are not on the yard, there was an security person. And, yeah, this is how we did it. The customer is really happy with it. We now implemented it in more than 10 customer sites over the whole Germany. We are very satisfied, with the system it's running well. And, of course, there are minor adjustments. We have to do with Securitas, but the system runs, and we are still It's a good security solution because we combine everything, people, technology, and the stuff together, and that's the new phase of security. Good. I think this is a good case for a couple of different reasons. One is that we developed this solution after conducting a risk analysis to really fully understand the customer's needs And then we integrated a number of different protective services into 1 integrated solution. What I also like, and I think also from a customer perspective, is that this is also something that we have been able to replicate a similar solution for the same customer across a number of different locations as well. But if we turn then to just a few comments about the acquisitions, we have announced and or closed a few important acquisitions during the last few months. And, just wanted to make a few comments starting with Kratos, public safety and security. This is one of the top 10 systems integrators in the U. S. And with the Kratos acquisition, we're able to build on the strong foundation that we have put in place in electronic security after the acquisition of Diebold in 2016. And then if you ask the question, what will then create us really at? Well, it's a good team but it would also give us a footprint and proximity to the customer through the regional branch network across the United States. Another acquisition is that we have closed is, automatic alarm. And this is one of the leading electronic security companies in France, a strong team operation and a nationwide network. So I think that this acquisition will mean a little bit to France what the Diebold acquisition meant to our presence in electronic security and capability in North America. It will also help to further strengthen our leadership position in the French market. Next one I would like to cover is Alphatron. This is also a a leading system integrator in the Dutch market that will also help us to really reinforce our position as a leader in the market, but also then significantly enhancing our electronic security capability. We also made, one regional acquisition in the South Western part of Germany, Sidorch Birakham, which is a company with a combination of guarding mobile monitoring. And then also Johnson and Thompson in Hong Kong, which is helping us and strengthen our electronic security capability, in that market as well. So if we continue, I think this is a picture that you have seen before, about the journey that we are making from stand alone services to in integrated security solutions. And, we continue to drive this development towards integrated solutions We see that as when we are going towards the right, in the picture, towards more integrated solutions, we are not only making or creating better customer satisfaction and loyalty, but also significantly higher margin on this business as well, thanks to adding more value to the customer. And if you looked at what does security solutions and electronic security look like in terms of total figures, then from 2014 onwards We have had a good development. And, here, obviously, you see that, we had 18% of group sales in the full last year of security solutions and electronic security sales. And before we wrap up, as I mentioned at the beginning, We have a solid foundation and a very exciting journey and opportunities ahead. And since I started on first it has been a, a reason to also reflect a little bit about the different stages and phases that we have gone through as a company where we are right now, but also where we are going tomorrow as we write the next chapter in the history of Securitas. And I think the, when you look at this picture, we have had a clear ambition to be a leader in security services from the 1990s onwards. Something that we have also realized that ambition on a local level and also on original and global level. And then a number of years ago, we launched our Vision 2020 strategy and with a clear ambition of being a leader in Protect services. And this has then been a lot more about solutions, about electronic security, fire and safety and corporate risk management. And and that work continues. I would still argue that we are in the early stages. So this is work that we have to continue to drive for the next five, ten 15 years in the market. And then obviously when we're looking ahead, we have the exciting opportunities in terms of intelligent security. And this is all about, how do we leverage information to work smarter to provide better security for our customers, to work more efficiently internally. And obviously, the higher that we go in this picture, we add higher value to our customers and also to our shareholders. And so I think that there is, in terms of strategy. This is just to give a little bit of a perspective on where we are and where we are going. But I am very optimistic about the opportunities that we have in the long term. And so to wrap up, Q1, it is the quarter with strong organic sales growth 6% earnings per share improvement of 13% and we continue to deliver on our strategy in terms of security solutions and electronic security, now then accounting for 19% of our total sales in the quarter. So I think with that, Bart and myself, now happy to open up for questions. Thank you. Our first question comes from the line of Bilal Aziz of UBS. Please go ahead. Your line is open. Good afternoon, everyone. Just three quick questions for me, please. Can you pass break out the contribution from the large contracts in North America within the quarter. And I appreciate margins start lower, but is there an expectation to bring these contracts to the U. S. Average are these likely to be dilutive going forward as well? And second question on wage price can you perhaps give us an indication of what level you're currently seeing in the U S and how that perhaps differs by some of the more largest states you are present in? Tied to that, can you give us an update on your staff turnover in the U S as well and how that's tracking versus the fourth quarter? And very finally, in Europe, can you perhaps help us with where exposure now stands to the total refugee related contract and how do you see that evolving with respect to what you see as purely one off and likely to fade away further this year? Thank you. Okay. Thank you. I think I can start in terms of the first question with the new contract, correct, the margin is so the initial margin is lower. But our ambition with contracts is that we improve the margin up to normal levels over time. I think in terms of the price part, do you want to comment on? Yes, I think your question related to the price risk in the U. S, correct? Exactly. It relates to wage inflation, yes. Yes. So I mean, there are some statistics floating around which shows very high increases in wages, but we don't see those percentages. We have never seen those percentages over the last 10 years, and we don't see them right now either. I mean those statistics, if you look at them, just month by month, they can fluctuate a bit, but the longer trend in those statistics is probably right. However, now commenting, trying to answer your question, we do see wage increases, which are a bit over 2% right now between 2% and 3 And the price increase in U. S. Is on par with that wage increase. And that is what we see right now going on in our business in U. S. Then of course, you do see quite some fluctuations and differences between different states. In some states, it can go up to 5%, 6% and then in some other states, it's 0. And it's the mixture of all the different states where you are in and where you have the business then dictates the average. There was also a question about the staff turnover as well. Yes. I mean, the staff turnover in U. S, has been some team in the past, and we deliberately took away the reporting on that because we believe there was an over focus on that number. I mean, There are many important KPIs in our business to follow. Staff turnover is one of them, but we we decided then to take away the staff turnover. And the development as such has been more or less in line with previous quarters, nothing remarkably either that we want to hide or walk away from. It's just that we feel it's not that relevant in view of many other KPIs that you could that we track internally. And then I think the last question was related to the refugee related situation in Europe. I think to give some context to that, we saw very strong increases in the second half of twenty fifteen. And I just want to mention before anything else that with, we have been able to fulfill many of these services, and that's something that we're also, proud of. But if you then look at the growth rates, it peaked in 2016, And then we had a decline in 2017. And if you look at the run rate, Q1 sales are around SEK200 1,000,000 SEK, so around SEK 800,000,000 on an annual basis. And this is something that we are expecting to decline over time, but it's difficult to say exactly how quickly it depends on a number of different factors, some of them are not really within our control, but SEK 800,000,000 annual run rate. Thank you. Our next question comes from the line of Srini Vassa Saraconda of HSBC. Please go ahead. Your line is open. Yes. Hi. Good afternoon. A couple of questions for me, please. First on cash flow. We understand, Q1 has a seasonality impact, but a one point $6,000,000,000 cash outflow in other operational capital employed looks too high compared to any of the quarters we have seen in the last couple of years. So could you give us some color like what's happening there? Where did the cash go into? And also on the staff churn thing, I understand you believe that it's not an important KPI, but just trying to understand if your staff churn goes up, isn't it your staff recruitment costs and training costs go up and how will that impact your margins? And are there any measures you're taking to control that. Okay. Bartier, maybe to start with the cash flow question. As you as you rightfully said, we always have some seasonality, especially in Q1, or, change in other operating capital employed is never very good. You can also witness that from last year's and from other quarters before. The difference and that is coming from the fact that, for instance, we pay out certain employ related accruals that are there in the balance sheet at year end, for instance, related to incentives, which are then paid out during the Q1. We also pay typically during the Q1, some insurances, which are then valid for full year and then they are paid in the Q1. So that is part of the normal seasonality. On top of that, what we had this year is because of the timing of Easter. And Easter was just there right in the split between March April we had to pay certain employee related payables, which are normal payables for the normal payroll, on a certain day, the first day of the month they need to be paid. And as that was then, Easter, Easter Monday, then we had to, pay that, make those payments before the weekend. The same on VAT, some deadlines that you have to respect in relation to these payments, because of the timing of Easter Monday, we had to bring those payments over to March instead of paying it out the 1st day of April. So that is basically what happened asked your second question, staff churn. Well, it is an important KPI. Of course, but this one important KPI probably out of 10 orders that we follow as well, which are as important And that is why by only giving this KPR to you, we feel that distorts a bit of total picture. Measures taken, of course, measures taken maybe to mention as well, if you if you talk to our operational people in the US, they would say more important than staff turnover staff retention. And by staff retention, we mean, okay, I had so many people employed a year ago, how many people of those are still with me. And that number has basically not changed too much over the last quarters. That number has been pretty stable on an acceptable normal level. So it is the people that stay for a short time with us that churn faster. That is basically the thing. That does not have a too big impact on our quality of the services because that is, of course, a key element, because the people that are there a long time in place, they just stay in place. And it's them who are delivering the basic quality of the service. The measures we take, of course, is to increase wages. That one of the measures in connection to our customers, also to, in connection to that, of course, if the price wage is too high so to say for the customer, we can always offer a solution as well, which is a second way of handling it in a commercial way with the customer and helps and also to drive the strategy on electronic security and solutions. Don't know if that answers your question. I will see you. Thank you. A follow-up on the cash flow thing. You have mentioned that even Q2 on Q3 has a quarter ending falling on a weekend. So given that the Q1 had that impact reversal of this some of this cash in the 1st weeks of April means that your Q2 will be normal despite of weekends falling mean, the quarter end falling on the weekend? Yeah. Normally, in the sense that we have recovered from the Q1 effect, the ending of Q1, but we will face the same effect at the end of Q2. So from that sense, we will not recover during Q2 if he then will take Q2 as such. We will not you could expect to see more recovery in Q2, but it will be pretty much a normal Q2. That is what I want to say. Okay. Okay. Got it. And, on the wage inflation thing, I understand you saying you were able to pass through the wage inflation thing. But your electronics sales has been increasing, which is a pretty high margin. But still why were the margins stable year on year? I understand the new contracts have come at a low margin, but that should be very less part of your overall revenue. I mean, just trying to understand the equation there, like how much those contracts had impact on your margins and how much your electronic sales has improve on the margins? Well, we have basically seen a normal development, a normal contribution from the electronic security and solutions. So nothing new there. Yes, the 2 or the couple of basically 2 large contracts that we started in Q4. In Q4, we were hampered a bit from the startup costs, but we also commented in that these contracts, as they are so sizable, they will impact the margin a bit negatively as well. So they are below average margin. The reason so then as that as those contracts will run, we will then improve the margins along the contract duration. Basically, it means that we come better at planning, less overtime, less idle time, Also, the training costs will reduce over time, typically they are higher at the start of the contract. So that is why over time, these contracts should improve their margins. I cannot give a specific timing on that. Thank you. Our next question comes from the line of Mikael Linde of Delmskabank. Please go ahead. Your line is open. Apologies, sorry, Ehrlichol, and is the question after the next question actually comes from Sylvia Barker of Deutsche Bank. Please go ahead. Your line is open. Hi, good afternoon. I've got 3 areas of questions, please. Firstly, starting with the organic growth in North America in Q1, So just to understand the sequential movement from 6 to 8. So you have 1 extra month from the large contracts. You said that you had some extra sales in Q4, which they haven't necessarily repeated. So have those kind of extended further? And then maybe the final bucket in terms of the price, what has happened to price in Q1 versus Q4? Then I'll take the other ones after. Yes, I can start Magnus here and make a few comments. So we do have, all in all, a strong activity overall across all the different areas of our North America business So that is in the guarding side. It is in the different areas of business. So it is a very strong quarter from a general perspective. I think, Bart, maybe do you want to comment on some of the sequential change? Are we able to give some more granularity? Yes. As commented in Q4 was held by some extra sales in the U. S. Coming from the hurricanes, if I remember well, and there were no hurricanes now in Q1. So no effect from that. Then the 2 large contracts were ramping up during Q4, so we did not have a full impact during Q4. But now they had a full impact during Q1. I think that is on that. And then on the price, yes, we commented that the price increase at this point in time is around a bit more than 2% between 23% and that is also, of course, included in the organic growth. So yes. Okay, great. Thank you. And on the price increases, do you feel that as you are kind of coming through just because the comments on the front page in terms of that being a focus again for Q2? Kind of are you just do you have have you increased prices for more than 1 quarter of the clients that you wanted to increase basically or is it the same proportion as we go through the year or have you disproportionately already managed to increase prices kind of early on in Q1? Is it going to get easier or more difficult as we go through the year? So one comment is that we are quite happy with the way that we have been able to balance price and wage in the first quarter. And I think we also have a strong track record overall making that happen. And the ambition, of course, is that we continue to do that as we go forward as well. But then there are always differences between different regions and also between countries in terms of the timing. So some of the work will continue in the coming quarters. And then in some specific cases, there could also be other factors that would trigger a need to look at the price increases. And those could also be regulatory changes, etcetera, as well. So I think that is the high level context in terms of where we are with the important price wage balance. So just a very quick follow-up on that. So by region, broad region, where are you matched and where are you not matched or running ahead? No, I don't think we comment on any specifics, but in general, we are in good shape. We have done a good job in Q1. Okay, great. Thank you. And then just two very quick ones. So in Europe, excluding sick pay, which seems to be the only the only kind of one off item perhaps in the quarter, would you have had a flat margin in Europe? And then what do you expect for the rest of the year? And then lastly, just on the Electronic Solutions, should we assume that you've got 10% on that piece that you've shown? Would that imply that the rest is around 4% now as we see the split today? Is that the right way to think about it? Thank you. Yes. The reason that we called out the higher than average costs related to the sickness rates is that they were unusually high in the quarter. And there is, when we're looking into some of those details, there is a certain seasonality as well, depending on the time of the year. In Europe as well. One of the other impacts, of course, was the weaker start in the electronic security business in Turkey. And then I think the third one that we have commented earlier as well is then that this refugee related decline where it is approximately SEK 100,000,000 less compared to Q1 last year and the first quarter. And those three reasons are about equal in size, you could say. And if we mention a reason, normally it has to be around 0.1 before we mention it. Okay, great. Thank you. Thank you. Our next question now comes from the line of Mikkeland of Danske Bank. Please go ahead. Your line is open. Yes. Hello. Two questions. First of all, on the European margins, you mentioning the overcapacity or the loss of related sales and the higher LEAP and Turkey. But if you look at this from a longer perspective, I mean, the worst margin in 7 7 years and you managed to increase the share of security solution and electronic security. So it's the main, I mean, it's the main thing here still price pressure on the traditional man guarding? Is that the main, if you look at this from a longer perspective? Yes, I think when we, I mean, 1st of all, we have continuously invested quite a lot in the strat today, and we continue to do that in Europe as well. And so that is one. When you look at the growth of solutions and and electronic security, that is at growing at the healthy pace. And it is also adding margin, as we have shown. On the gross margin operating margin basis. So I think that it is a it is a combination of factors, but having said that, I mentioned earlier as well, Q1, it is a weaker quarter we are not happy with that to operate the margin. And that's obviously something we're working to also recover as we go forward. Okay. And just a follow-up on the earlier question regarding the price and wage balance, is it fair to assume that the majority of employees get seller increase in the beginning of the year. So the toughest quarters in terms of this equation is the first one. Yes. That is correct. The 1st quarter is the toughest one. The 2nd quarter is also still on a reasonably high level. So by midyear, normally we get a good view on the total year. Is how it works. But the larger part is Q1 and then also quite sizable part Q2. Just adding one comment to your your previous question, what you should also consider and what we have missed out a bit maybe on the outset also the strategy is actually that the guarding is growing very fast as well. So we do see good growth in electronic security and solutions. Yes, absolutely. But in nominal terms, the guarding is growing faster, if not more, if you look at the longer term perspective there on one of the slides, I mean, we have grown the electronic security solutions with SEK 10,500,000,000 from SEK 6,500,000,000 to SEK 16,700,000,000, but regarding in the over the same period has grown from SEK 6 $4,000,000 to $76,000,000. So in nominal terms, that has even grown faster. So that is also a little behind the whole equation on the margin question. Okay, yes. Thank you. Thank you. Next question comes from the line of Stefan Anderson of SEB. Please go ahead. Your line is open. Thank you. Two questions for me then. Sorry about being on this thing with the wage increase here, but Coming back to the U. S, I guess, the European side, you have labor agreements for most of it. So looking at the U. S, You're saying 2% to 3% wage increase at the moment. What is your ability to actually go back to your clients during the year if this ends up being higher as we move along into 'eighteen, let's say it moves up to 4%, 5%. You have very high employee turnover as well. So just what is your opportunity there? Are you do you have a possibility to push that if that were to happen or is that something we have to be aware of if it happens? Yes. So the dynamic are a little bit different, like I highlight, Stefan, in the U. S, it is more dynamic and more flexible market in that sense. So when we do see, that there is, for example, a trigger of employee turnover increase seeing, there will always be a discussion also then an opportunity and an need together with the customers to also then, do adjustments So I think that the capability to your question, if wage increases at the higher pace is pretty good for us in terms of then also being able to balance that. Okay. My second question comes to I think lots of people touched on it on the technology side. I mean, you're showing your slide there that you've gone from 9% to 18% or you said 9 19% even of group sales, but that's a 10% increase. And then you said the margin is roughly 6 percentage point higher. So I mean, over these years, I guess your margin on the group level should have increased roughly 0.5% and it's actually flat in that period. So where do we actually see that this is materializing? Or when do you think we will see it on your accounting and not only you internally? Yes. I think I can make a few comments and also, for Bart later on. It is also important to recognize fact that we are winning quite a lot of business also thanks to the strategy and the direction that we have. So I think that is one important aspect in terms of us believing that we are growing faster faster than the also in advancing our positions to make sure that we're able to, to lead the development in this market, because we see not only that margins will come up, in the long term, but we also have customers that are more satisfied and also a lot of data points that indicate that the customers are also, and thanks to being more satisfied also staying significantly longer with Securitas as well. So I think that also the major points BART, do you want to make any other comments on this question? I think it's also valid to comment that if you If you look at the U. S, where things are just more scalable, from an implementation perspective, that there, we have seen the margin expansion. And then there are million other reasons, of course, also explaining the margin. But in U. S, in North America, we have seen the margin expansion. In Europe, we have been a bit distracted also by the whole refugee situation, which has also costed and burned a lot of management time and resources. And we are recovering from that as well. And as well in Europe, I mean, the implementation is a little bit less scalable compared to U. S. In U. S, I think I have commented before. You make one major big acquisition and now we add a second one and you really have a sizable platform in Europe, we need to go country by country to find those targets, just as an example, and doing a small acquisition or a larger acquisition just takes the same amount of time almost and resources. So that's a bit sitting behind your question. And then of course, we have seen that The guarding has been growing as well. And yes, there is some margin pressure on the traditional business. Yes, we should see that as well. Thank you. So what you're saying is that we most likely will see some positive effects on the margin from this as we go forward now? Well, you know that we don't guide you for the future. So you have to make up your own conclusions here. Thank you. Thank you. Our next question comes from the line of Alan Wells of Exane. Please go ahead. Your line is Hi, good morning guys. Just a couple of, I guess, just a slight clarification questions from me. I mean, sorry to go back on the point about the migrant work in Europe. Just want to understand this correctly because if I remember back in 1Q 'seventeen, you had this work declining margins in Europe, I think were falling above that ten points. It sounded like listening to the transcript was the second half of last year. There was a bit of this was basically being addressed and ultimately you were happy with with where that were, where that was. Sorry. So I I guess with this over capacity issues, it feels like largely addressed. I'm surprised there's still quite a material drag here. Could you maybe just provide a little bit about where we are in terms of what is actually dragging? Is it you've still got over capacity that you're happy to run with. That's a management decision, and how we should think about that being timing of that being removed? And then secondly, just I got a quick clarification question. You mentioned I think in your comments around Spain, you had some sort of tech solution contracts that were shorter term in nature. I just wondered what the background is for flagging that. I mean, are you highlighting the that there was some short term growth and margin uplift from these that may drop away this year. Just any background there would be would be helpful is to make sure we we capture this in our in our modeling moving forward So when you look at the refugee business, like I said, we peaked in 2016 in terms of of activity, where we have been doing a lot in many different countries across Europe. When you come 2017, there was a significant reduction as the situation is somewhat normalized. But we have still kept quite a significant activity in a number of countries. And that run rate that we mentioned now, SEK200 1,000,000 in the first quarter So that obviously then indicates around SEK 800,000,000 on an annual basis. And that we do expect will decline, over time. To your question about the overcapacity, this is something that we always have 2, watch, country by country and situation, by situation as well. It's, it's, in a sense, it's easier to ramp business up But if you look at Europe in general, I would say that we are taking specific actions in specific countries where we feel that this is needed, but we also have a number of countries that are in good shape and now normalized in a sense, when you look at the impact of the ramp up and also then the ramp down of the, of the related situation. So is it right just to make, is it right to expect that this out of a capacity issue in relation to the migrant numbers We'll continue through the next 2 to 3 quarters of this year. Well, I think, I mean, you know that we normally don't guide on the margin. So this gets close to that. It's on the same extent as it was last year. I mean, last year we commented on the overcapacity. Then also the drop was more heavy. Than this year. So this year, it's more part of, okay. It's 1% for the total division, which is important, but it's not on the same level as it was last year. So it will not help the margin in Q2 either from that perspective. It's not comparable to last year, no. Okay. Thank you. And then on the Spanish tech solution question. Yes. We had some, short term contracts there. I mean, contracts which were short term in nature They were not so much behind the growth. I mean, they are included in the growth, but these are very small contracts, I said, but quite profitable contracts as well. And those are short term in nature. So the moment that those short term contracts would reduce, then of course, that, that could affect EBITDA margin. So it's like alerting that the improvement that we see in this quarter could be hampered when those short term contracts fall away, some of them. And is there any way you could quantify that just in terms of helping us over the next couple of quarters when they potentially fall away? Yes. I mean, as we as you say, we alluded that there was short term in nature. So if we do that, it's normally 0.1. Okay. Thank you very much. Thank you. Our next question comes from the line of Henrik Nelson of Nordea Markets. Please go ahead. Your line is open. Good afternoon. Thank you for taking my questions. Firstly, on the solutions business, and thank you very much for providing organic growth and details per division there. It's very helpful. Organic growth was 16%. It's fairly flat year on year. Is this a level that that you're relatively happy with or what is your ambition for this segment going forward? I think from some Magnus here, I mean, this business we're growing and we're building this for the long term. And we started this journey a number of years ago, but we still have a lot of opportunity left So I think that we don't really specify any specific number in terms of the target and where we want to grow But if you ask the question, is there a lot of opportunity still out there? Yes. Absolutely. So we know when we have a lot of validation from the customers and the solutions that we have in with customers that this is definitely something which is important today, but will also be very important in the future. And then I would also say from a customer perspective, the adoption curve differs quite a lot as well based on what the customer what they, how they look at the world. Some people are saying, yes, this is the future, but we are not really ready yet. While some others are really driving the development together with us. And I think that that's also kind of normal adoption behavior over time as well, but we do that there is significant opportunities for us here in the mid and the downturn. Okay. And on subject also. Do I understand it correct that the margin accretion you achieve from the higher contract margin in this Solutions business. It's basically being reinvested to add the amount of initiatives and add further growth to that segment. Is that a fair way of looking at it? And is it possible then to talk about a point in time where you see these investments if that is correct way to view it where you see these investments sort of leveling out? Yes, it's a fair point that we continue to invest of the strategy as we work on. And we will continue to invest as well in even as Magnus also set into the next part of our strategy and to what shall happen beyond 2020. So we are here for the long term. And so it is the right conclusion that you're making there. I don't think we want to make a reflection on the point in time on what should happen when exactly But of course, at the end of the day, the goal is there to expand the margin. Okay. And two more questions for me, please. In Europe, did these sickness related issues also negatively impact your ability to deliver services and thus hurt the revenue in the quarter? Or was it only cost related? It was primarily cost related. Thank you. And one last on the U. S. Organic growth. Did you have a step up in the startup of contracts in Q1 compared to say, the 1st 3 quarters in 2017? Or is the growth accelerating primarily related to the large contract started in Q4? I mean, the acceleration is coming from these larger contracts, but we do have a very good activity and baseline of good growth in the U. S. We have time for one more So we'll hand to Andy Godbla of Credit Suisse. Please go ahead. Your line is open. Hi. Just one quick question from me, if I may. You talked about the impact of currency on revenues and EBIT during the quarter. On the Swedish kroner has been very weak relatively of late. If you mark to market with current or recent rates, what would the impact for the full year be, please? I haven't really calculated or I do not we have calculated it, but I have not have the numbers right with me right now. But as you said, the the effect ramped a bit up and then the both the dollar and the Argentine and the euro moved quite a lot during the quarter actually. So so based on that, you could say, it it then depends on how they will level out actually between the two. Between the U. S. Dollar and the euro as they are moving in opposite directions right now. And that is extremely difficult to forecast. So I think from my guidance, the best guidance right now is what we have seen in Q1. Everything else is more or less speculation on what foreign exchange rates will develop. But if you assumed that the rates were just going to stay where they currently are, so no kind of forecasting in that what would be the impact do you think on those metrics? Yes. I mean, where they currently are, we don't have we haven't made them mathematically. I mean, on the exact day here today, we have made them mathematics, but, yes, so many moving pieces in there. So as I said, they are outweighing each other a bit and the net will really be what the difference is between the 2, U. S. Dollar versus euro. Okay. Thank you. Good. So I think What's the last question for your time, Paul? So I'll hand back to our speakers. Yes. So thanks a lot. Everyone for participating. We have to wrap up. We have an annual general meeting, which is starting shortly. So thanks a lot to all of you. You very much. Thank you. Bye.