Securitas AB (publ) (SECUB) Earnings Call Transcript

Good afternoon, everyone, and welcome to our Q2 update. We are going through extensive transformation of our business, and I'm glad to say that we are progressing well with that work and delivering improved performance across the board. So looking at some of the highlights from the second quarter. We have continued with good organic sales growth momentum at 11%. And our technology solutions business is an important driver with 12% real sales growth. And this, as previously communicated, is excluding STANLEY Security until 22nd of July this year. But we're looking at the totality, while the primary driver of the organic growth was price increases, we recorded good volume growth in technology solutions and within the airport security business. And the operating margin improved to 6.6% versus 5.8% last year. Technology and solutions business line is the main driver, including significant margin accretion from the STANLEY acquisition. And we are on par in terms of price wage in the first half of the year and in light of lower inflation levels that we are seeing now, we are expecting some normalization of which increases during the coming 6 to 12 months. The operating cash flow was 46% in the second quarter. The integration of STANLEY is progressing well in terms of integration process and cost synergies. And it's also really good to see a growing pipeline in terms of commercial synergies, and I will comment on that a little bit before we open up for the Q&A. And during the quarter, we announced the extension and expansion of a multiyear contract of one of the world's leading technology companies and this to me is further proof that we are becoming the choice for demanding clients who are looking for a strong technology and people partner. And as communicated earlier and during the last couple of years, we have an active focus on sharpening our business to ensure that all parts are fully aligned with the strategy and our financial objectives. And as a consequence of this work, we have taken the decision to divest our business in Argentina. The macroeconomic prospects are weak and the business environment is challenging, as we have commented for a number of years. And these factors, in combination with limited opportunity to execute our long-term strategy with a healthy financial performance or the main factors that led to this decision. And we continue to assess our business according to the same principles going forward. So let us now then shift to look at the performance in our business lines. And at the beginning of this year, we started to provide this more granular information to enhance the visibility of our performance and also the journey to 8% by the end of 2025. We had high real sales growth, as I commented, or 12% in security services and the main driver is price increases but also complemented by significant volume growth in the Aviation segment. Profitability in North America was stable, but we recorded a solid improvement in Europe versus Q1 and this led to a margin of 5.1% in the quarter. We have high continued momentum in technology solutions with 12% to the sales growth, but once again, excluding STANLEY Security. The operating margin came in at 10.3% in this business line, which is somewhat higher compared to Q1. And with that, we are looking then at the performance in the different divisions. And starting with North America, where we have good continued momentum with 7% organic sales growth. While price increases play an important role, we've had good commercial activity with strong new sales that contribute to this growth. And the technology business also supported the growth with improved installation sales and a healthy backlog. Technology and solutions offering is now stronger than ever in North America, and these sales represent 31% of total sales in the division. And the client retention as well, I want to highlight has improved to 88% in the quarter, and we are winning new business at better margins. And looking then at the profitability, where I believe we have set a new quarterly margin record with 8.3% in the quarter. And the technology business was the main driver behind this improvement with good installations, improving recurring revenue portfolio and cost synergies. And in terms of the integration work, as we previously communicated, we are ahead of plan in North America, and this has also generated a positive impact in terms of cost synergy realization. Guarding business was stable, positive contribution from active portfolio management and leverage, but somewhat burdened by medical costs and cost of risk. So I think when you're looking at the second quarter also at the first half of the year, we have regained now the top line momentum, but thanks then to a stronger-than-ever client offering and solid work by our teams, also very good profitability development. And shifting then to Europe, where we had another quarter with 13% organic sales growth. And here, strong price increases to balance wage is the most important driver behind the growth, along with the impact of hyperinflationary environment in Turkey. But having said that, we have positive portfolio growth in solutions and aviation that also contributed. And with STANLEY, we have a very strong offering in Europe, and technology solutions now represent 33% of the total sales. Client retention in Europe was somewhat affected by active portfolio management, but solid at 90%. And shifting then to profitability, we had a good improvement with 5.9% operating margin in the quarter. And we continue to carefully manage the profitability of all contracts and active portfolio management together with positive contribution from technology and solutions, including STANLEY, are the main drivers of the improvement in profitability along with enhanced cost control. Labor market is still somewhat challenging, even though it's better now compared to 6 or 9 months ago. And while we have seen an improvement in sickness, we have elevated costs for subcontracting that had a negative impact on the profitability. But as commented in the Q1 update, since I wasn't that satisfied with the performance in Q1, our European team have now delivered quite some improvement, but we maintain a key focus on a few areas. And the first one of those is increasing the margin requirements for new contracts. We're working actively to terminate or renegotiate low-margin contracts and important focus in the next 3, 6 and 12 months, accelerating the STANLEY integration. And we have implemented strong cost measures, but there is still more work to be done here in Europe. And moving then to Ibero-America, where we recorded 24% organic sales growth in the quarter. And the inflation-driven increase in Argentina is the main driver of the high-growth number and obviously, with the divestment that we have announced of Argentina, the gross numbers will be normalized going forward without that hyperinflationary impact. Organic sales growth in Spain was 3%. This number was supported by price increases and strong technology sales. But as in the previous quarter, growth was negatively affected by active portfolio management. Technology solutions sales represented 31% of sales in the quarter, client retention solid at 92%. And looking then at the profitability dimension, where our team delivered a stable margin of 5.9% in the quarter. Healthy momentum with technology and solutions sales, supported the operating margin as did active portfolio management. And increased wage pressure in Spain is burdening the margin at the beginning of this year, as we previously commented, but the situation improved in the second quarter. So all in all, strong improvement in terms of margin in Europe, good progress delivering according to the plan or our plan when you look at the totality of the business. So I think with that, handing over to you, Andreas, for more details on the financials.

Thank you, Magnus, and good afternoon, everyone. We start as always with the income statement. With the double-digit organic growth continued in the second quarter, we saw an 0.8 percentage point margin improvement compared to last year, driven by a strong mix change into technology and solutions through the STANLEY acquisition and related cost synergies, but also through strong sales growth and margin improvement in our legacy technology and solutions business. Looking below operating result, the amortization of acquisition-related intangibles was SEK 157 million in the quarter, stabilizing over the last quarters after the STANLEY acquisition, which is also explained in the difference to last year. Items affecting comparability was a bit more than SEK 300 million, SEK 170 million of this is related to the STANLEY acquisition and SEK 141 million is related to the ongoing European and Ibero-America transformation program. And as usual, I will come back with more details related to this shortly. The financial net is coming in at SEK 541 million, which is materially higher than last year, where the main reason is the financing related to the STANLEY acquisition where we had SEK 402 million of cost in the second quarter. We had SEK 26 million of positive effects from IAS 29 hyperinflation, which is on a similar level to last year. And the remaining difference then is related to increased interest costs related to our legacy pre- STANLEY debt. We have seen interest rates continuing to increase throughout Q2 as expected and for the full year, we estimate to land slightly above SEK 2 billion. Going then to tax, here, the forecasted full-year tax rate is 26.8%, which is basically unchanged compared to the estimate in Q1 and no major news here on the tax side. And before moving on, I just want to remind everyone again that the number of shares used for calculating earnings per share are adjusted for the bonus element of the rights issue in line with IAS 33, as I mentioned also in previous quarter here, and you find more information on Page 21 in the report. Then we have a more detailed look into our programs related to items affecting comparability, where the 2 remaining ongoing programs are the European and Ibero-America transformation program and the cost related to the STANLEY acquisition. Looking then first into the European and Ibero-America transformation program. And as we have mentioned before, the European program is a broader program in comparison to the North America and Ibero-America programs. Outside the modernization and digitalization of our HR, operational and financial platforms, it is also targeting to implement one operating model across Europe and to sharpen our solutions business and organization. And the work related to the common operating model and our solutions business has been progressing well, shown also by the strong solutions growth and profitability improvement in Europe. However, we have then also been executing the core platform rollout at lower pace the last quarters to ensure we calibrate the program with the STANLEY integration and also to ensure that we are maximizing cost efficiency. We are through this calibration phase now and continue to roll the platforms out. And this means that the program will go into next year and will also be concluded in 2024. From a financial point of view, this has some but limited impact. In Q1, we estimated the full-year 2023 IAC spend related to the program to be between SEK 600 million to SEK 700 million. As you can see, this estimate is, in essence, remains the same also now in the second quarter. However, we will then also have a spend of SEK 150 million IAC and SEK 100 million in CapEx due to the delay into next year. Looking at the total program for all the years, the total IAC spend is then SEK 150 million higher than the original plan of SEK 1.65 billion, while the CapEx spend is a bit more than SEK 200 million less than the SEK 850 million budget. So on its totality, we are still within our cost budget, and this is also despite a weakening Swedish kroner that should be said as well. Moving on then to the IAC related to the STANLEY transaction. And here, as you know, we announced total cost of approximately USD 135 million at the start of the program. The integration continues to progress well, where we are ahead of plans with our synergy takeout in North America and ramping up for further synergies in Europe. In the first 6 months, we had SEK 285 million of cost in this program. And since the announcement up until Q2, we have invested SEK 800 million in IAC, and we estimate the full year 2023 spend to be around SEK 600 million. In other words, a bit more than SEK 300 million for the second half of this year. So to summarize, we estimate the full year 2023 IAC to be around SEK 1.25 billion to SEK 1.3 billion for the whole group, with a sharp decline into 2024 due to the limited spend from the transformation program unless we are finalizing the STANLEY integration. And there are no further plans for any new transformation or modernization programs beyond that. Moving then to Argentina. And as Magnus mentioned, we then divested our whole operations there at the end of July. And if we look at the financial impact, we expect this to lead to a capital loss from the divestment of around SEK 3.5 billion, which will then also be booked as items affecting comparability in Q3. The vast majority of this impact is related to accumulated FX translation losses, which has been built up over many years in line with IAS 21. And this is normally smaller amounts, but has a major accounting impact here due to the hyperinflation. And it should be said that this is cash flow neutral. Cash flow-wise, the transaction in itself will have limited impact, but one of the reasons for the divestments is the hyperinflation situation in Argentina, which has been a drain to their working capital. So from that perspective, we will see a positive impact going forward. Looking at the income statement, the sales of Argentina in the last 12 months was SEK 2.5 billion, and the business had lower margin than the Ibero-America segment's average. In the second quarter, Argentina represented 20% out of Ibero-America's 24% organic sales growth and around 2% of the 11% group organic growth. Moving then to an overview of the FX impact on the income statement, here, we had continued positive impact from currencies, although slightly less than in the first quarter, mainly as the comparable U.S. dollar rates have increased. The total FX impact on sales was 6%. And when looking at operating result, the FX impact was slightly higher at 7% due to the higher profitability in the North American business with a bit less impact on the EPS. The EPS real change, excluding items affecting comparability was minus 14%, with negative impact from the adjusted numbers of shares by IAS 33 from the rights issue. On a constant share basis, the real change, excluding items affecting comparability, was 12%. And this is derived from the real change on operating income being strong at 42%, positively impacted by the STANLEY contribution and solid result development, while the increase of amortization of intangibles and financial net impact negatively leading to the 12%. We then move to cash flow, which continues to be a prioritized area for us across the business to ensure we deleverage our balance sheet after the STANLEY transaction. The second quarter is coming in at SEK 1.2 billion operating cash flow, which is an improvement of a bit less than SEK 300 million compared to last year, while the percent to operating income is down from 53% last year to 46% this year. Looking first at the capital expenditures, here we spent around SEK 1.1 billion or 2.8% of sales, which is at the same level as in the second quarter last year. And we continue to see investments into our solutions contract, which confirms the positive momentum in that business and we also continue to see investments into our existing transformation programs, as we have discussed and announced previously. Looking at the full year, we continue to expect to land below 3% of sales in CapEx and for clarity, that includes then STANLEY and IFRS 16. The strong organic growth in all segments continue to have negative impacts on the account receivables, while the DSO for the whole group was flat compared both to last quarter and to Q2 last year, which is not a bad outcome in the current environment. Overall, no major movements in the other operating capital employed. I should say that there are no significant payroll timing differences in the quarter, so neutral also from that perspective. If we then look at the free cash flow, we have a slight improvement compared to last year, but the free cash flow is hampered by the increased negative cash flow from the financial net, which is due to increased interest rates, but also as our new facilities are paid throughout the year, while the Eurobond we have done most in the past mainly is paid in the first quarter. Paid taxes are then somewhat down due to high comparable payments last year related to our treasury operation and some withholding tax related credits in Europe. Important to remember that we this year have no further payments related to corona government relief measures in North America, which hampered the full year operating cash flow with SEK 700 million in 2022. All in all, a decent first 6 months, but we also have high expectations for the second half year and continue to work and strive to meet our targets of an operating cash flow for the full year between 70% to 80%. We then have a look at our net debt, which has increased approximately SEK 3.2 billion since the beginning of the year. In the second quarter, we paid a dividend of SEK 1 billion, and we also saw material negative FX impacts, which year-to-date is impacting the net debt negatively SEK 1.5 billion. The positive Q2 free cash flow is leaving us at a free cash flow of SEK 85 million year-to-date -- minus SEK 85 million year-to-date, and the IAC spend was SEK 680 million, altogether explaining the SEK 3.2 billion increase in the net debt. The adjusted net debt to EBITDA came in at 3.7x, which is then 0.1% higher than in the first quarter, impacted mainly by the dividend paid out in May and by the translation impact from the depreciating Swedish krona. And if we further adjust for the items affecting comparability, the net debt to EBITDA is 3.3x, which continues to give a good indication of the deleverage effect after the IAC programs are being finalized next year. We expect to see good solid deleverage in the coming quarters as our operating cash flows normally are strong in the second half of the year. It should be noted at the end here that we, this year also are making the dividend payment twice in Q2 now in May and in Q4 compared to one-time previous year, so there is 1/3 payment still to be done here. Moving on then to have a look at our financing and our financial position. Here, we continue to have a solid financial position. None of our facilities have any financial covenants and the liquidity position was strong in the quarter at SEK 5.5 billion. We also have our RCF of more than EUR 1 billion in place until 2027, and it is fully undrawn as per quarter end. And as we communicated already in the first quarter, we have refinanced the vast majority of our STANLEY debt bridge facility, and the last refinancing we did was to issue a 4-year euro bond of SEK 600 million in the beginning of April. By the end of the second quarter now, the bridge facility is still to be refinanced was USD 160 million, and we have now in July, repaid the final amount to close the bridge facility out completely. You may see further activity in the bond market going forward to refinance part of the term loan of Schuldschein facilities if the pricing differential is attractive. Looking then at the rating and the S&P rating remains basically unchanged in the quarter. And just to be clear, we're also continuing an unchanged way to be committed to our investment-grade rating and continue our focus on deleveraging our balance sheet after the STANLEY transaction. So with that, over back to you, Magnus.

Many thanks, Andreas. So before we open up to Q&A, just a few comments regarding the strategic direction, focus areas and the progress that we are making. And when you look at the financial targets that we shared in August last year, this reflects our strategic direction and ambition and the margin improvement to 6.6% in Q2, 6.2% in the first half of this year versus 5.4% last year are important steps towards our 8% target by the end of 2025. But to achieve the 8% in our long-term ambition, we have undertaken significant investments to create the new Securitas and our strategic focus is in 4 main areas: taking the lead with technology, quality guarding services with good profitability, establishing clear leadership as a solution partner to our clients and leveraging technology, digital platforms and data to drive innovation. And we continue to execute in all of these areas to make sure that we deliver superior growth and higher margins going forward. And all of this is based on our view, what it would take to be the winner in the security and safety industry of tomorrow. And this is about having a leading presence, being able to manage connected technology and intelligent use of data. And when you look at the company that we are creating, we have a unique position now with significant capability in each area and the ability to also leverage a combination of these capabilities to deliver the strongest solutions to our clients. And during the last couple of months, I've had the luxury of spending more time with our clients and been engaging with a number of local and global clients in North America, Europe and Ibero-America together with our teams. And it's clear to me from all of these dialogues that existing and also potential clients start to perceive a more future-oriented partner in Securitas. Technology and data are becoming increasingly important to the future security and safety equation. These are areas where we have significant strength now in combination with a quality guarding presence. And while we still have important integration, systems integration work to be done related to STANLEY over this coming 6 to 12 months, I am more and more confident regarding the strength of our offering to our clients and the commercial synergies that we will be able to generate in the coming years. So we are on a good path. And to sum up the quarter, executing on our strategy, taking important steps with margin improvement in Q2, we have strong technology and solutions momentum across all segments and progressing well with the STANLEY integration, which is one important driver of building the new Securitas. So with that, happy to open up for the Q&A.

[Operator Instructions] The next question comes from Suhasini Varanasi from Goldman Sachs.

I had a few, please. You very helpfully gave the color on how much hyperinflation benefited growth in Ibero-America. Can you also give us that number for Europe and at the group level, please? The second one actually is on -- you mentioned that in Europe, you had seen some impact on revenues because of active portfolio management. Could you maybe give us some idea of what percentage of revenues saw the drag as a result of the contracts being let go? And last one is on margins. The U.S. margin and European margins have improved nicely in 2Q. Is there any reason outside of the annualization of STANLEY acquisition, why the improvement cannot continue into 3Q?

I can start with the first question when it comes to the hyperinflation there. If you're looking on the group level, Argentina and Turkey represents approximately 1/3 of our organic growth. And in Europe, it's actually the same as estimate as well around 1/3, maybe yes -- around 1/3 here as well. And for Argentina, I think we -- like you say, we have already gone through that. So I hope that brings clarity on that one. Looking -- Suhasini, the other 2 questions here in terms of active portfolio management, we have been very clear and very disciplined, especially in light of the labor market that we have seen, but also when you look at our ambition in terms of where we want to take the company in terms of our ambition of 8% towards end of 2025 to be much more disciplined in terms of pricing and profitability on contracts. And we call it out that there is a negative impact in terms of volume, but that is fine because we have an opportunity to also work with our clients to convert to solutions, a more integrated offerings where we essentially combine people and technology. And if a client is not willing to pay for the quality, then it's better that we dedicate our resources elsewhere. So active portfolio management has been an important theme. It will be an important theme also going forward. If you look then at the last question in terms of the margins, yes, I mean most positive, I think, with this quarter is a strong improvement in Europe compared to Q1, which was weak. But that's a combination of factors. If you're looking at Europe, most important is strong technology and solutions contribution and technology, that's obviously when we do more stand-alone technology installations projects with associated usually service and maintenance and monitoring. Solutions is when we are combining different services and solutions, we also had very solid growth that also contribute to positive margin and revenue mix, I would say, when you look at the European business. In terms of your question, if I understood it correctly, yes, we have leveraged STANLEY but partly also in line with expectation because there was a higher margin profile of that business that we acquired. So there has been significant positive impact of that. And I would say there, we have come further in North America, where we were very quick, but it was also the first priority in terms of synergy realization. Still some more work to be done in North America, but there it's more now related to systems integration and really building the kind of the engine in the machine that will become really, really strong for our clients, but also for us. And there, we still have quite some important work to be done over the next 6 to 12 months. But -- with that and for a mid- and a long-term perspective, absolutely more opportunity for margin improvement, but we need to make sure that we get all of that integration work properly done. In Europe, if you're looking at that impact there, like I said, we are now stepping up efforts in terms of further cost synergy realization. And similarly as well, a lot of important integration work to be done now over the next 6 to 12 months also in Europe. So I hope that addresses your question in a decent way.

Yes, thank you. I just had one quick follow-up. Just if you could give your thoughts around Q3 expectations, anything to watch out for.

Yes. So we never provide guidance. But I think when you're looking at the first half, we are delivering according to the plan that we have set for ourselves. I think that is important. We are in a period of really extensive transformation and with focus on the right areas. So I think that is the important thing from my perspective. And I should also say general momentum that we have with our offering is strong. That's also the reason that I gave some of the comments related to number of client interactions and engagements that I've had and our teams are having on an ongoing basis. More and more of existing and also non-existing or non-current clients are really starting to see the difference that Securitas is versus any other player in the technology space or with more traditional guarding routes. So I think that is also the strength of the offering. That's obviously something that will benefit us and also means that we are well positioned for the mid and the long term to also win good business and profitability in the market.

The next question comes from Anvesh Agrawal from Morgan Stanley.

I got [ few ] questions. First, Magnus, you talked about the extension of a contract with large tech player. I was just wondering how should we think about the impact? Does it generally come with an organic growth benefit like it did happen when you extend the contract in health care, I think, earlier in the year, and it did prove to be sort of accretive to the organic growth? Should we expect something similar with this one? Second is on cash interest, which is sort of lower, but the P&L interest was higher in Q2. Is that just the timing? And how should we think about the trends on the cash interest side in Q3, Q4? I appreciate you gave the guidance on P&L, but just wondering about the cash. And then what would sort of improve for your conversion to get to that 70% to 80% for the full year? And then finally, just a technical question on Argentina, again. And as you said, there is no real cash impact, but aren't you expecting any sort of cash in from the divestment? Should we put something in, in our model?

Yes. So the contract that we talked about at the beginning of the year, this is essentially what we have also been able to release externally. We do that because I feel that sometimes we only mention contracts if there is a negative, more significant change or something like that. So I think that is one reason. But the more important one is that, this contract is further proof to me that large and demanding and sophisticated clients place high value in Securitas, our values in our offering. And that is the reason that we also call this out. When you look at the growth impact, the immediate growth impact is more already reflected in Q1 and Q2. But then as in any case, with any type of the business that we have, obviously, also with an expectation that we can continue to grow the relationship also with this particular client. When it comes then to financial net cash flow versus P&L, I don't see any reason for any major differences. But of course, you need to take into consideration IAS 29 when you're making that calculation as we've been providing as well. Otherwise, I don't see any reason why there would be a difference. Like you rightfully say, there is timing differences for sure. But over the year, it should be similar. When it comes to the 70% to 80%, well, normally, we have a very strong second half, and we have really strong commitment from the whole team, so all the way from Magnus and myself down to all the leaders in countries as well to really drive through a strong cash flow in the second half year. And we have taken quite a lot of initiatives here as well, ensuring that we are having the right incentives in place related to cash flow this year that we have implemented. We have also implemented actions in terms of our accounts payable. We're also, of course, looking into inventory and how we can trim sort of CapEx. And then we are following up much, much tighter this year also on our general cash flow forecasting and our accounts receivable agings as well. So that makes me confident we will have a strong cash flow in the [ second ] year as well. Then it is like that we have that kind of seasonality in the business as well as where the second half year is stronger than the first half of the year. Again, remembering when you're looking at the comparables also the SEK 700 million we had, we paid out in North America last year that will not happen this year. When it comes to Argentina, there on your question, should you not expect to have a positive cash flow impact from the divestment? The answer is no. And it will be a limited cash flow impact, and that is also how it is when -- in the end, the valuation of the business is the future cash flows. And due to the hyperinflation situation, it's very difficult to have a strong operating cash flow in that business, and that is reflected in the valuation of it as well.

The next question comes from Neil Tyler from Redburn.

3 questions, please. Quick one, first of all, sticking with the topic of Argentina, any pro forma impact, if you like, of that disposal on the either sort of revenue or margin targets? Second question, returning to the renegotiation on the contract situation in Europe that you mentioned in your prepared remarks, do the contracts falling within this scope represents a material percentage of the European business, i.e., those that you are still keeping an eye on? And has these contracts been problematic for some time? Or they recently become more challenging due to the operational cost pressures? And then finally, to come back to the finance cost, thank you for giving us your full year guide. Can you just sort of help us understand what you assume for future U.S., Europe Central Bank rates moves over the second half within that figure?

I can start with the second question, then Andreas I hand over the other to you. When you look at -- I mean, we call that active portfolio management, Neil, and it's essentially about being disciplined in terms of, number one, to be very disciplined about the new business that we are winning in terms of margin and profitability requirements to make sure that we defend and generate good value. Second part, of course, is then to track the performance and viability of the business or how healthy it is over time. And that's something that we started to do in the Aviation segment a number of years ago. We've expanded that across the entire company. And we're doing that just to make sure that the business we have is in good shape. To your question, is it material? Yes. There is some volume impact. But if that is the case, I think that is the responsible thing to do because we have been consistently investing in better quality of our business. We have the opportunity to also work with our clients in terms of driving more integrated solutions that always generate better security equation and also better cost of ownership from a client perspective. So -- but when -- if a client is not willing to accept a reasonable price for the services, then -- and if they're not willing to convert into more of an integrated solution where we leverage our technology capability, then we humbly but firmly then terminate that business. And that is what we -- I mean, we have done that. We continue to do so as well. We are tracking this in different dimension. One is on a per contract basis but also in a geographic dimension to make sure that we are -- that we have a positive development in terms of profitability across all countries, areas and branches where we operate. And that work will continue. And this is also an important shift in the strategy. It's very important as well to achieve our ambition by the end of 2025 to achieve an operating more than on a group level at 8%.

On your first question related to Argentina, I mean, we provided in the last 12 months, basically top line of SEK 2.5 billion, right? And then also that the Argentina business have a lower margin than the Ibero-America average with some guidance also on the organic sales growth impact. So I'm just wondering there when it comes to the pro forma, what are you still sort of missing from your perspective there, so I understand the question.

No, no, that's helpful. Sorry, I hadn't spotted that information.

Okay, clear. So just to be clear, the last 12 months, SEK 2.5 billion sales, lower than average margin compared to Ibero-America average. And then if you look in the second quarter, Argentina represented 20% of Ibero-America's 24% organic sales growth. So I hope that helps. And then we also said around 2% of the group's 11% organic growth. When it comes to interest rates, I mean, first of all, we are making a comprehensive forecast, and that is, of course, based on the current interest rate, but also the current FX as well should be said. And we are then, of course, looking at an average for the year in terms of what kind of base rates we're applying to our forecast, right? So we are basically looking at the interest rates yield curves there as well. But yes, so that's to give you that input, but it's also more complex than that when we are doing the financial forecast and given the capital structure that we are having in place.

Yes. I'm sure it is. Magnus, just to come back to the first question. I suppose what I was really trying to get a sense of was clearly the active portfolio management is ongoing and necessary and operable. I suppose what I'm trying to get a sense of is whether there's a sort of a greater proportion of the European business moving within that scope or whether that's sort of broadly consistent versus a year ago, 2 years ago and so on. And I know -- and a lot of it started with the aviation business. But -- so it's really sort of -- is there sort of more or less of the business under that scope today than there has been previously?

Yes. So the scope, I would say, over the last 12, 18, 24 months has been the same. But it's also -- it does also require in some areas, somewhat of a cultural shift as well for people to be more firm and also to be able to say no. And I think that, to me, is just a matter of being very clear and very principal about the value and defending the value [Audio Gap] confidence is very high in terms of the strength of our offering. And when we talk about the active portfolio management, this is ultimately about ensuring that we're not just serving clients with high-quality services, but at low margins because it's not sustainable. So I think that's as much as we can say. The scope hasn't changed, Neil, but we keep on executing on this.

Okay. But it is -- sorry for the delay, but it's slightly dragging on growth at the moment in terms of organic growth, which suggests that you're probably within the 2 categories, you're terminating more than you're renegotiating. Would that be fair?

I think it's quite neutral when you look from a volume perspective, when you look at a pure guarding services, if we call them that. What is really important is that when you look at solutions, which is higher value for the client, higher value for us, there we have healthy growth numbers and that is also where we want to put more focus in terms of the overall business.

Just to give some additional color there. I mean, we see volume growth in our technology and solutions business. We see volume growth also in the aviation business that is then a smaller piece of our security services. But then if you look at the remaining part of the security services, it's mainly price-driven growth, as Magnus says, here is more neutral on the volume side.

The next question comes from Stefan Knutsson from ABG.

Magnus and Andreas, just a question regarding Argentina and the below average operating margin that you comment on, given that you don't have a positive view on the future cash flow of the business. Should we expect that is sort of running on a breakeven basis? Or is it after Ibero-America profitability? Or what should we expect there, really?

Yes, we are not breaking out that number, but I think Andreas commented, it's well below the average Ibero-America margin today.

And then also a follow-up on the items affecting comparability from the STANLEY acquisition, were the total scope still SEK 1.5 billion? I didn't get that number.

Correct. Nothing changed there. I can just also provide a bit more color on Argentina. It's not -- I mean, P&L wise, it's not loss making, just to make that sort of that clear, right? But it's with this hyperinflation in the country when you need to basically raise wages, I mean, the inflation is more than 100% in the country. You need to raise wages every quarter. Well, you have to wait, of course, then another 60 days before you get or similar to get paid from your clients. That's the equation from a financial point of view that is not working out. But then from a P&L point of view, they are not loss-making, but still below the average for the segment of Ibero.

Congratulations on the operational improvements.

The next question comes from Viktor from Carnegie.

I have 3 or maybe 4. I think they're pretty straightforward. Looking firstly at the central costs on the group here in the quarter, they come down quite a bit and just understanding behind this [ cyber ] down. Is this a new level or is there artificially low costs in light of less focus on maybe M&A and what's not, just to understand that level? Second, you mentioned cost of risk mitigating the margin performance likely in North America. Is this related to bad debt provisioning and maybe your view of macro going forward? And just be curious to see up here if that has moved and if that is something we should be mindful also going forward? Thirdly, you provided a helpful update on the synergy realization in Q1. Magnus, you mentioned about 1/3 of the expected USD 50 million synergies were realized by them. So could you maybe help us out where you are as of Q2 for both Europe and North America? So we know the run rate and trajectory here, starting off on those 3.

If I start with the central cost, you're right. If you look at our central cost, we have, over the last years, if you take a broader perspective over the last couple of years, we have invested quite a lot on a group level, investing both into our people organization, our communications, our business ethics and other functions. Now over the last 12 months, we have decided to keep a much better -- stronger cost control with those investments already in place, right? So one reason why you see good development there is that we are keeping tight cost control to ensure we get good leverage also now after the STANLEY acquisition. But then in the quarter itself, you had between SEK 25 million to SEK 30 million in one-offs basically, which is not related to any decisions to take any functions down, like you mentioned on M&A side or anything more of -- just one-off non-recurring in nature.

And then Viktor, on the other 2 questions on cost of risk. No, it's not bad debt related. It's more related to the insurance market and to the insurance environment. That has been -- we have commented on that in the past as well, increasingly complicated over the last couple of years. So when you're looking at this one, this is a cost that I mean, number one, it's operationally something that we are managing. But number 2, it's also a cost that we also have to ensure that we are also able to pass on to clients over time as well. So it's -- yes, that's the main issue, but we are dealing with that related to the cost of risk question. On synergy realization, we are not planning on breaking out numbers every quarter. Like you highlighted, we said around 1/3 of the SEK 50 million end of Q1, we have progressed well -- since then as well, and that is where we are right now until we provide any further updates, but that's where we are. The progress is good. But we also have a very clear action plan in terms of what needs to be done over the next 6 to 12 months.

And maybe a final adjacent question, I guess, to synergy realization, but the transformation and integration programs in Europe, Ibero-America, you now comment on them being expected to conclude in 2024. Could you maybe help us a bit more on -- are we talking early late mid and maybe the quantum of this as you -- going back to 2021, highlighted all of equal margin impact expectations being about 50 bps on that program for Europe as a stand-alone. So anything you could help us out on guiding or helping us understand it better.

Yes. So I mean, what we have said in '24, it is really '24 as a year. We are not more granular than that. As we commented before, I mean we've also had very good progress in terms of building up solutions organization, harmonizing that -- that is order generating benefit. We did deliberately also pause some of the system integration and what we call building the new platform that we are rolling out across countries and partly there or very much related to the STANLEY acquisition to make sure that we avoid doing integration work twice. So I would say, Viktor, that work 2024 is needed. But it's also important that we put the stop, so that we also know that, okay, this is when we're entering the transformation program because it is really a heavy lift type of a project in terms of extensive modernization, digitalization of how we run the business. In terms of margin targets, when we communicate to the 8% by the end of 2025, these programs are fundamentally important towards that target, and that is the important one. I feel good in terms of the progress and confident also in terms of the value that we will derive, already realized value and significant value with the solutions part, but then also when you're looking at systems and more modern platforms to support a more efficient and digitalized business, that is also something that will generate really good value over time.

The next question comes from Raymond Ke from Nordea.

Three questions from me. First one, with inflation coming down in several geographies, have you noticed it becoming more difficult discussing price hikes with customers, maybe even a noticeable shift in tone when you compare the end of Q2 compared to the beginning of Q2? Second question, in Europe, have you noticed any change in the labor shortage situation during the quarter? And thirdly, Argentina and Turkey, both hyperinflationary environments but differ in many regards. Do you see similar challenges in the Turkish markets that you saw in the divested Argentinian markets?

Thank you, Raymond. On yes, clear questions. If you look at the inflation, yes, that's also the reason that I made the comment that as we're seeing inflation rates coming down, we expect also to see normalization in terms of -- or some normalization of wage increases. And that, I think, is just a natural one. It does naturally and logically translate, I think, to what you said as well is that, that also means that we're going into a phase with more kind of normal mechanism in the market. So when I look at North America, there, it's always more dynamic in terms of where do we need to be in the market, not so much of collective labor agreements, et cetera, that determine it's more the client relationship, our -- us protecting quality and margin in terms of the operation. So I think that's something that we are adjusting to. But I would also say, I mean, when you look at the general economic environment, clearly, that clients are also looking for cost efficiency. But there, I think that is just natural. I mean, we are a portfolio business. And the important thing is that we have significantly better strength in our offering when we have really strong capabilities in technology. So we can also then look more at the totality of the security equation. So I think that's something that we will be well placed to manage over time. If you're looking at Europe, we have seen some improvement in terms of the labor market situation. We commented on that in Q1, that is similar, I would say, also in Q2. Interesting to follow, obviously, what's happening over the next couple of months and quarters. But yes, all indicators, we'll probably say that it's going to be a softer labor market, I think, is a fair guess over the coming quarters based on current trends. If you look then at some of the dynamics of that in the second quarter, we've seen, on a positive side, sickness rates being down compared to a year ago. And that is obviously a positive thing for many different reasons. But we've also seen elevated subcontractor costs as well that have also then had a negative impact on some parts of the business, specifically more in aviation, where we are expecting to also drive further improvement as we go forward. And then on the last question, Argentina and Turkey, yes, the simple message is clearly, no. I don't see a lot of similarities. Yes, it's more of an inflationary environment. But if you look at Turkey, we have a very strong position in the market. And the external market is well functioning. We also have a very strong leadership team. We have strength in technology. We have strength in terms of guarding services. We are good in terms of also bringing this combination to our clients into integrated solutions and they are firmly committed to develop that business in a good way going forward.

The next question comes from Allen Wells from Jefferies.

A few from me, please. On the active portfolio management and the exiting of low-margin contracts, can you quantify at all the margin impact here at a group level, if possible?