Securitas AB (publ) (SECUB) Earnings Call Transcript

So Magnus, back here again. I apologize. It seems like we had a WiFi connectivity issue temporarily, but I hope that this is not going to be stable connection for the remainder of the call. Okay. Hello, everyone. I apologize. It seems like we had an interruption on the Internet connection. So we are restarting here, but we had only done a couple of minutes. So I apologize for the inconvenience. So welcome to the Q2 and the first half report that Matteo and I are hearing from Stockholm this morning. And today, we will provide an update on the performance. And before the Q&A, I will also make some comments related to the Capital Markets Day that we had in London last month. But if we are switching then straight to the performance highlight, this is a quarter with some clear positive developments, but also a few areas where we are performing below our plan. And starting with the growth, the adjusted sales growth was 3%. And the growth in Technology in North America was a clear positive development, while the growth in Europe was lower as a result of active portfolio management and significant negative impact in aviation. Real sales growth in Technology & Solutions improved sequentially to 5%, and this recovery was supported by improved performance in technology in North America. And what is really positive is that the order entry and the backlog in the technology installations business increased significantly across all geographic regions and technology momentum is building as we're going into the second half. And from a strategy execution perspective, we are increasing the share of technology solutions across all segments, which is fully in line with the strategy. The adjusted operating margin improved to 7.6%. And this was the result of positive exchange when we are growing T&S or Technology & Solutions at a higher pace but with some negative impact from lower top line growth in services. We have now improved the operating margin 22 quarters in a row. And looking at the earnings growth, operating income increased 3% in the quarter, and it should be noted that we had approximately 1% negative impact on the real change due to the divestment of the GG Aviation business in North America. Earnings per share improved 7% in the quarter and 11% in the first half. And the cash flow was healthy at 87%. The strategic assessment program was finalized in Q2, as was the active portfolio management activities in Europe and Ibero-America. And we have been driving these programs over multiple years with a significant positive impact on the company with a stronger focus and a higher quality of our business. But as we look ahead, it remains important to continuously work to optimize and calibrate the business, but it's good to have those programs behind us since we can dedicate more focus on client engagement and driving the commercial agenda. At the Capital Markets Day in London in June, and there, I just want to say thank you to all of you who were participating. We announced the strategy and how we are winning during the coming period towards 2030. And we also announced a headline target of achieving average annual growth in EPS of 10%. So let's then move to the performance in the business lines and the segments. And we delivered margin improvement in both business lines with 11.3% for Technology & Solutions and 6.3% for services. The real sales growth in Technology & Solutions was 5% in the quarter. And as commented earlier, strong recovery in installation in North America contributed. The commercial activity in electronic security around all regions around the world is very good now, and we are noting a strong order intake and backlog development in the second quarter. The sales growth in Security Services was 0% in the quarter when excluding the impact of the government business to be closed down in North America. And this flat development is a consequence of active portfolio management and negative development in aviation, but also a mixed picture in terms of the dynamics in the development of our customers' business in different vertical segments. So with that, we're shifting to the reporting segments and starting, as always, with North America, where the sales growth increased sequentially and the margin was stable. Technology installation sales improved in Q2 after a very slow start in Q1, and sales growth was stable in the guarding business. The [ Pinkerton ] business is smaller, but continue to hamper the North America growth as a result of the termination of a large temporary contracts. And when comparing to last year, we should also highlight that the recent divestment of the GEG Aviation business had a negative impact on the real change in operating income in the quarter. Real sales growth in Technology Solutions was 5% in the quarter. And as highlighted earlier, we're seeing increasing momentum in technology installations, significant growth in order entry and backlog. But despite some of the top line softness, the operating margin was stable in the second quarter, 20 basis points up in the first half of the year. And we are then moving to Europe, where we generated continued margin improvement despite negative impact from the airport security business. The organic growth was 2%, and the growth was supported by price increases and primarily related to Turkey. And looking at the services business, active portfolio management had a clear negative impact on the growth. The Aviation business was negatively impacted, like I said earlier, and this was now throughout the quarter, and it's all related to the situation in the Middle East and the reduced number of flights. So we have seen demand reduction in aviation in key markets like Germany of approximately 20%, and this had a significant impact on sales and profitability. And from a total growth perspective, the impact from aviation is approximately 1% negative impact on the overall growth in Europe. Real sales growth in Technology & Solutions was 4% and the operating margin in Europe was 7% in the quarter, and the margin improvement was driven by Technology and Solutions business lines. Securities Services margin was positively impacted by active portfolio management by -- but negatively impacted by aviation. So all in all, somewhat mixed results development in Europe in the second quarter. So let's then shift to Ibero-America, where we had a decent development of the business. Organic growth was 5%, and this was driven by very strong growth in Technology & Solutions and price increases in security services. There is a negative impact on the growth from active portfolio management, but our team are driving good conversions to Technology Solutions. And the sales growth in Technology & Solutions was very strong at 13%. And similar to the European division, we have now completed the active portfolio management program in Ibero-America and now transitioning to business as usual with ongoing portfolio optimization. The operating margin was flat at 7.5%, and strong growth in Technology & Solutions contributed, but overall margin was held back by negative leverage on the cost base in security services. But looking at the first half, it's a good start to the year by our Ibero-America in [indiscernible] So to summarize the performance, we are driving disciplined execution of our strategy with continued margin development. And as previously commented, growth came in below expectations in some areas, but we are seeing increasing momentum in the technology business. And while not reported externally, we had very strong sales growth and margin development in the EMEA business, which is reported in the other segments. Client retention is stable when you exclude the impact from the closedown of the government business in North America. And with that, handing over to you, Matteo, for the finance update.

Thank you, Magnus. We start with the income statement where we had organic sales growth of 0% improved the operating margin with 20 basis points to 7.5%. Now when we look at our performance, excluding the government business to be closed down within SCIS, we delivered an OSG of 3% and an operating margin of 7.6%, which is 10 basis points better than last year. The operating income adjusted for currencies improved in the quarter by 3% and in the quarter, we had, as Magnus already mentioned, circa 1% impact on real change due to the Aviation business disposal in the U.S. made in the first quarter. Looking below operating results, there are no material developments in amortization of acquisition-related intangible nor in the acquisition-related costs. Items affecting comparability was minus SEK 46 million which is a reduction of SEK 120 million compared to last year and in line with our plan. This is related to our transformation program that will continue throughout 2026 and as previously also communicated, we estimate to have a full year 2026 program cost between SEK 225 million and SEK 250 million. When we look at the year-to-date ISC are still positive SEK 138 million, due to the capital gain of SEK 213 million that we realized in quarter 1, primarily for the divestment of Global Elite Group in the U.S. Our finance net came in at SEK 355 million which is a reduction of SEK 124 million compared to last year. We continued the positive trend of reduced financing costs as interest rates and our debt level are decreasing. As communicated in Q1, we estimate finance net for 2026, continuing to reduce and land below SEK 1.6 billion compared to the SEK 1.8 billion for the full year 2025. Now moving to tax. Here, our full year forecasted tax rate remain at 27.5%, excluding the capital gain related to the divestiture of Global Elite Group, which is the same level as we had in the first quarter. Our EPS real change growth was at 14% in the second quarter. When excluding the effect of ISC, the EPS real change growth was 7%, supported by a 3% real change in our operating results and by a strong leverage from the reduced finance net. For the first half of 2026, our currency adjusted EPS, excluding ISE, increased 11% compared to last year. Quarterly results reflect FX headwinds, which were largely driven by USD. But as you can see here, lower than quarter 1. Turning to cash flow. We delivered another good quarter, ending at SEK 2.5 billion, which is corresponding to 87% of operating income. For the first 6 months, cash generation improved by SEK 458 million, reaching 65% of operating income. The year-to-date position is positively impacted by USD 41 million in Q1 due to the payroll timing in our guarding business in North America, and by Paragon net working capital release related to the closedown. The trade receivable negative change we see at quarter end was primarily driven by strong sales growth, particularly in North America, with a significant share of sales happening late in the quarter. In addition, the ERP go-live in Norway temporarily delay invoicing and collection processes. This timing effects are expected to normalize during quarter 3, resulting in a recovery of trade receivable and supporting cash conversion. The capital expenditure remain below our target at around 2.8% of sales in the quarter. The free cash flow ended at SEK 1.7 billion, supported by the strong Q2 operating income and reduce financial income, and expenses paid from the improved debt provision. The first half free cash flow improved by $752 million compared to last year. We continue to see an improved operating cash flow, and we remain focused on strong cash generation to meet our full year target of 80% to 90% of operating income. We then move and look at our net debt, which was SEK 32.7 billion at the end of the quarter. This is an increase of SEK 495 million compared to Q1 this year primarily related to the dividend payment of SEK 1.5 billion and the negative translation difference of minus SEK 513 million due to the weakened Swedish krona. Item affecting comparability remain according to plan. And as we anticipated during Q1, we are forecasting a cash flow for the full year 2026 in the range between SEK 800 million and SEK 850 million. Looking at the right-hand side, our net debt-to-EBITDA remained at the same level as Q1 at 2.2x, which is an improvement of 0.2x compared to Q2 last year. We are below our targets, and we want to continue to be below 2.5x and expect to continue to deleverage our balance sheet in the short term. Looking at our financing and financial position, where we continue to have a strong balance sheet, strong liquidity, and we remain without any financial covenants in our debt facilities. In the second quarter, we extended by 1 year our revolving credit facility and the new facility consists of 2 tranches, 1 of EUR 900 million, which will mature in 2031 and EUR 200 million, which will mature in 2029. Each of these tranches might be extended for another extra year. Going forward and looking at the maturity chart, we have very limited refinancing needs throughout 2026. And our focus will be to continue to amortize debt supported by a strong free cash flow generation. And finally, we remain committed to our investment grade rating. And with that, Magnus, I hand it over back to you.

Thanks, Matteo. So before we open up to Q&A, I would just to share a few key messages related to the CMD announcements and our journey ahead. And as communicated at the CMD in London last month, we are well positioned for profitable growth. The winners in the security industry in the future must deliver quality and offer the clients' technology, digital and intelligence-led capabilities. And with these capabilities, we are very well positioned to capitalize on the changing dynamics and to drive profitable growth. And with our new financial targets, we emphasize 10% annual average EPS growth over a cycle. And to us, this refers to the period leading up to 2030, which is the target year for our next strategic phase. And we have a long-term ambition to reach 10% operating margin. But after a period of extensive transformation, we are now making this shift to focus on profitable growth. And leveraging our unique offering, which is future-proof and clearly differentiated from our competition, we target around 4% to 6% organic growth and expect a continued mix shift to contribute to margin improvement. And we are now intensifying our efforts to commercialize, monetize the capabilities we have built, and this includes strengthening our commercial capabilities, implementing incentives to drive cross and upselling at scale but also training our client teams to sell more integrated services and transforming the business towards intelligence led. And all of these efforts will have a positive impact on the overall growth and driving the mix change towards higher added value services. And then regarding capital allocation, after a period of deleveraging after the Stanley acquisition, we have a strong balance sheet. We're building the M&A pipeline with emphasis on technology bolt-ons. And we will be disciplined and will return excess capital to shareholders. So to conclude this section, due to the changing market dynamics and rapid developments in technology, automation and AI, I expect the coming 5 years in this industry to be more transformative than the last 25. But when you look at our presence, our technology and digital capabilities, we are very well positioned for the next phase and are stepping up the engagement with our clients, and we continue to drive the execution of our strategy to be the trusted partner in intelligence-led security. So with that, Matteo and I are happy to open up the Q&A.

[Operator Instructions] The next question comes from Simon Jonsson from ABG Sundal Collier.

Perfect. Thanks. So first of all, on the U.S., the margin specifically, if you can expand a bit more the different moving parts here, resulting in relatively flat margins year-over-year and also the phasing of these factors for the rest of the year. You mentioned, for instance, Pinkerton here, and we also have other factors that go in technology and also the margin lose from SAS. So yes, please, if you can expand a bit on the moving parts both this quarter and what you expect coming quarters on the margin -- on those margin effects.

Simon, Matteo here. So I think when you look at the quarter, the main impact related to the profitability in the U.S. is coming from the Pinkerton reduction. As we said, we had termination of a temporary contract end of last year, which is impacting quite substantially. And this is the main reason for the profitability drop in the U.S. going forward, very difficult. We don't guide for the second half, but we should be able to the comparison with last year's like-for-like is a bit more tough. The second half was a stronger, second half, but we believe that we can maintain our profitability in the U.S. business on a good level for the second half as well.

All right. And then I have a question on the SAS closure, where you are in sort of the pacing of that determination in relative trends compared to the last quarter [indiscernible]

Yes. So when you look at that since we announced it, we have been executed and the close down according to plan. And I would say slightly ahead of plan as well. So firm commitment to have finalized all of that by the end of this year. But we are obviously keen on doing it as quickly as we can. But there depending also on some of the interaction and approvals and things like that from some government agencies. So it's not entirely within our control, but we feel comfortable we're going to be able to have all that finalized, but at a slightly accelerated pace right now, which is positive.

All right. Could you give any color on what that means in terms of percentage of how much you've done so far?

We don't break that out, but it is going according to plan. So nothing more to say there.

All right. I understand. Then my second question is on [indiscernible] solutions specifically. I mean when you talk about the strong -- the orders got intake in the backlog is that across regions, I would say, and if we can do it specifically now here in this quarter, would you say that you were back to a more normal growth level? Or are there still any kind of temporary effects either positive or negative?

Yes. I would say, first of all, I only highlight it because it is a significant increase. And this is obviously very positive because we have been investing a lot in the electronic security business we have been now also through all the integration works. I mean we're now able to also focus full effort on driving the commercial engagement and also develop in the operations. So this is something that we are seeing across all geographic regions around the world. So that is really positive because that gives me a good feeling in terms of the momentum in the in the technology business. And we say that it's very much then the design and installations business, where we see this positive development. If you're looking the general and I think also a bit related to your last question, there is a clear difference between different vertical segments. I think on the totality, on the technology side, we are doing quite well. Obviously, when you're looking at the order entry and really strong backlog -- when you're looking at the guarding part of the business there, it's a little bit of a mixed situation between different vertical segments with some more strong and a few others are weaker. But on the technology overall, I think we are definitely at -- back at the normalized type of situation to address your question on the technology side.

Okay. Perfect. Then just one final follow-up on Pinto specifically here, given that it's a significant impact on the profitability. What do you see there in terms of offsetting factors you could do and what you are doing to mitigate that? Is it that you adjust the organization? Or do you expect to left the business and compensated? Or was it more temporary high levels before? Or what's your plan for that?

Simon, can you just repeat because I struggled to hear you, the first part of the sentence, which part of the business? Sorry? Yes. So when you look at that one, I mean, this is a fairly small business, but it's an important business within the corporate risk management space. We had a very significant contract that was a temporary contract that was terminated at the end of 2025. So it's unfortunately hurting quite a lot in the comparables when we're looking at the year-on-year. It's a good business. There is clear demand, but it's taking some time to then recover. And there, we're obviously having negative leverage, which is hurting quite a lot when you have fixed cost base and then a revenue number which is coming down. So that something that we are and our leaders are hard at work there to ensure that we address those ones, and that we also then rebuild the commercial momentum and also the positive growth impact because it had a significant negative impact in the second quarter on the growth and also on the profitability in North America.

Okay. So you'd rather looking to expand those again rather than adjusted organization basically?

I mean we always take action if we have a weakness in the top line, we try to take actions immediately, and that's something that we're trying to optimize now. But it's also an important business strategically. So I think it's also a matter of okay, we just have to kind of face the tough reality that we had that termination, but then it's about rebuilding at the same time. So I would say it's a little bit of both, Simon, to manage the business in a responsible way.

The next question comes from Jaime Dan from SEB.

I hope you can hear me. A couple of questions from my side as well. Maybe starting a little bit on aviation. I think you mentioned that you saw an impact to your airport security business due to the political situation in the Middle East. If I heard you correctly, it was throughout the quarter, right? So -- and aviation is -- I know it's a smaller part of your business today, but it's still quite relevant for Q3 in particular. So should I read it as you don't expect an immediate pickup? Or how should I read how the situation is within aviation right now?

Thank you, Don. So yes, it's correct. We highlighted in the Q1 report. I mean, then we had essentially 1 month of impact in the month of March. Now it's throughout the quarter. And the size of the impact has been on the high side also in relation to my expectation. And just to give some flavor on that, I mean, we've seen approximately 20% demand production in terms of the capacity and that we are providing in terms of security screening work. As it happens, we are doing a lot of the work at terminals that have more exposure to the traffic to and from the Middle East. So that is obviously one that is negatively impacting. It's really difficult to say, obviously, how that situation is going develop because that's related to political matters that are difficult to project. But what we are doing, because we had like and I highlighted, we did have real fixed cost negative leverage that hurt also the operating margin quite a lot in Europe in the quarter related to the aviation. So that's something that we are now we've taken actions to try to adjust that. But the top line demand that is difficult to forecast. So I hope that gives a better understanding of the situation.

Yes, fully understood. Maybe continuing a little bit on what you said about intensifying your efforts to commercialize the capabilities you built within technology. Since you have that strong offering, what's sort of the missing link to drive that to growth a little bit of a mindset thing that you've been throughout the period of focusing maybe inwards and improving profitability and it takes some time to restart growth again? Or what's needed to drive a little bit higher growth here ahead?

Yes. I would say that when you're looking at this year, we've had a lot of emphasis and focus on creating a sharp and a quality portfolio. So in that sense, just the fact that we are done with the active portfolio management work that is important across all garden business, and that's obviously a significant part of the total business. We have also seen 6, 12 months, and I think I've been sharing a little bit about that as well, also been spending quite a lot of time and effort in terms of how we are strengthening our commercial capabilities, and that's partly leaders and leadership, some changes that we have been making to ensure that we're also bringing commercial leaders that are capable of also delivering the value proposition that we have now, which is stronger than ever, especially when I look at an increasing pace of shift towards more technology, more digital and risk-based capabilities. So that is another one. A third one is also the -- that we have also been building also more or driving more changes in terms of incentive models, for example, and those incentive models to ensure that when we now have really strong different protective services capabilities that we are driving cross-selling that we're driving upselling, but that we're also then doing more to be able to deliver more integrated and more intelligence-led capabilities to the clients. So all of this is fully in line with the strategy, but it is a little bit of a transition phase because we had very strong focus, obviously, on quality on operating margin achievement. Now we are shifting that focus back profitable growth and also then in selling a richer offering. So I think that's a bit where we are right now. And then as you know, nothing is happening at immediately, we can take actions, but it always takes a little bit of time before you also start to see the full impact. But I would highlight that -- when I look at the technology business, one of the most positive aspects about Q2 is the significant strength in order entry and backlog because that's obviously an area which is significantly important as we go forward.

Makes a lot of sense. Maybe a final one for you, Matteo. An increase in these sales outstanding. Is that a timing thing and we should expect that to revert during the second half of the year when your cash flows are typically stronger? Or what's driving that?

Yes. As I mentioned during the call, Dan, this is, I believe, a temporary effect, and we are expecting this to be normalized in quarter 3. That was mainly related to the strong sales evolution in North America technology, especially at the end of the quarter. Therefore, there is a bit of a timing lag there. And also, we had the ERP implementation in Norway, which we had a bit of a hiccup in the certain processes. One of those was the collection of AR. And I believe this one will be solved also in the next week. So this will be recovered definitely in quarter 3.

The next question comes from Andy Grobler from BNP.