Securitas AB (publ) (SECUB) Earnings Call Transcript

Good morning, everyone, and welcome to our Q3 report that Matteo and I are presenting from Stockholm this morning. So let's go straight to the performance highlights. This is a quarter with some clear positive developments, but also a few areas with some weakness. And the adjusted sales growth was 3%, and at a high level, North America contributed with solid technology and solutions growth, but Europe was weaker. The real sales growth in Technology & Solutions improved sequentially to 6%, and this was supported by the performance in technology in North America. And similar to the last couple of quarters, the installations order entry growth was very strong in the technology business. So we had record level order entry in North America and Iberia America. And from a strategy execution perspective, I am very pleased with the fact that we are increasing the share of technology and solutions across all segments. The adjusted operating margin was 8.2%, and this was supported by the highest Q3 margin to date in North America, so very good development. But Aviation in Europe had a very negative impact. And if we look at the underlying business performance, so that means when we exclude European Aviation the operating margin for the group is at 8.4%, so 20 basis points impact. And I will go through the main reasons in the European section, but given the poor performance, our team has initiated actions to ensure that the aviation performance returns to acceptable levels. And looking at the earnings growth, the aviation issues in Europe burdened and we recorded a flat operating margin in the quarter and EPS improvement is 6% in the first 9 months of the year, and the cash flow was healthy at 82%. And as previously commented, the active portfolio management activities in Europe and America were finalized in Q2, but we expect the continued negative top line impact from the terminated contracts during the coming quarters. And the quality of the portfolio is now significantly stronger today as we transition to driving profitable growth. And related to CIS, the transfer of the last remaining contracts with the federal government is expected to be concluded by the end of October. So this month. And this means that there is no further government-related revenue recognized in that business. But as previously communicated, we keep the commercial cleared business. And we are very glad to have this concluded a few months before the targeted end date, and it also means that we can then focus on the core business. PAUSE So let's then move to the performance in the business lines and the segments. And as a result of the technology momentum, the share of Technology & Solutions reached 35% in the quarter. The real sales growth in Technology & Solutions was 6%, as I mentioned before, North America Technology & Solutions contributed together with very strong T&S performance in Ibero-America. The real sales growth in Securities Services was 1% in the quarter when excluding the impact of the government business closed down in North America. We had decent growth in North America, but the main negative drivers for aviation and the impact of active portfolio management in Europe and Iberia America. And when I look across the different segments, our Suite services offering continues to be well received in segments such as data centers, defense and pharmaceuticals with long-term partnerships and high-quality security services offerings are highly valued. But in certain markets and client segments, demand trends remain somewhat more cautious, and this is resulting in a more selective purchasing behavior with an emphasis on price and also with longer decision cycles. And we manage this dynamic effectively in North America, while market conditions in Europe and Ibero-America remain somewhat more fragmented. And this is also then something that has impacted the top line growth in the quarter. So with that, we then move to the segments, and we start with North America, where we recorded a continued sequential sales growth increase and margin improvement. The organic growth of 3% was driven by both the technology and the Guardian business lines. And technology installation and sales were strong with continued record level order intake and backlog growth. Strong commercial momentum and good portfolio new sales also supported the organic sales growth in Guarding. The pink to business is smaller, as you know, but continue to hamper the North America growth as a result of the termination of a large temporary contract. And that contract I can mention, we have until the end of this year in the comparatives. And the recent divestment of the GG Aviation business also had a negative impact on the real change in operator results in the quarter. But with good commercial momentum, the sales growth in Technology & Solutions increased to 7%. And the operating margin improved 20 basis points despite the weakness in Pinkerton. So all in all, very good delivery by our North America team. And then we move to Europe, where the total performance was below our expectations, primarily as a result of negative impact from the airport security business. The organic sales growth was 2%, supported by price increases in Turkey. And in the services business, as I mentioned before, active portfolio management had a negative impact on the growth but we recorded improved new sales activity in the quarter. Real sales growth in Technology & Solutions was also below expectations at 3% with decent growth in technology but lower than expected in solutions where we had some terminated contracts. The operating margin in Europe was 8.1% in the quarter. This represents a 30 basis point decline versus a very strong comparative and the main issue was the airport security business with negative impact on the profitability. And just to give some better understanding of this because this is somewhat of a surprise and definitely disappointment also from my perspective, there are 3 main factors behind the poor performance in aviation when comparing to Q3 last year. And as we commented last year, it was also a very strong third quarter in aviation. But the first 1 is the situation in the Middle East, that burden will reduce number of flights and similar to last quarter, approximately 20% demand reduction in key markets like Germany. And second, some contracts were converted last year in Germany from price for passenger to fixed hourly contracts. The changes were implemented at the beginning of this year, but the biggest impact of these changes happened during the summer season, which is the peak traveling season. And with the demand picture changing in combination with the new contracts, this had a negative, significant negative impact on the profitability and associated negative leverage in the third quarter. And the third issue is related to a very challenging start-up period of a new major contract in the Netherlands. And it goes without saying, this performance is disappointing and well below our expectations, but our team is now taking actions to drive improvement in aviation during the coming quarters. So all in all, weaker development in Europe in the third quarter, but as stated, actions are underway to improve. We then shift to Ibero-America, where we had stable development of the business. sales growth was 5%, and this was driven by very strong growth in Technology & Solutions and price increases in security services. So similar to last quarter, there is a negative impact on the growth from active portfolio management. But our team are driving good conversions and new sales of Technology Solutions and the real sales growth in Technology & Solutions was very strong at 14%. The operating margin was stable at 7.9%. Strong growth in Technology & Solutions contributed, but overall margin was held back held back by negative leverage on the cost base in security services. So overall, solid results from our Ibero-America team despite some of the near-term headwinds. And if we then look at the totality, we're driving disciplined execution of our strategy and looking at Q3 as a whole, we're very pleased to North America with increasing sequential growth, continued margin improvement. Ibero-America was solid and we delivered below expectations in Europe, but primarily related to the very significant impact from aviation. And similar to previous quarters, we recorded very good growth and margin development in the EMEA business, which is reported in the other segment. And as commented earlier, we increased the share of technology and solutions to 35%, and client retention is stable around 90%. So that, we turn to the finance section, and welcome Matteo.

Thank you, Magnus, and good morning all. As usual, we start with the income statement. Reported organic sales growth was 0% and the operating margin improved by 10 basis points to 8.2%. Adjusted for this SEIS government business being closed down, organic sales growth was 3%, while the adjusted operating margin was 8.2%, 10 basis points below last year. Operating income was flat in real terms in the quarter and increased by 4% over the first 9 months. Looking below operating results, there are no material developments in amortization of acquisition-related intangible nor in the acquisition-related costs. item affecting comparability was SEK 36 million in the quarter, compared with last year, the year-on-year comparison is heavily impacted by the SES Paragon closedown of SEK 1.5 billion reported in Q3 2025. Excluding the divestiture of the SCS closedown, item affecting comparability amounted to SEK 46 million in the quarter compared with SEK 65 million in the corresponding period last year. The cost in the quarter were related to our transformation program in Europe and in line with our plans. We continue to expect total cost for 2026, excluding the capital gain for the divestment to be in the range of SEK 225 million to SEK 215 million. We are currently adjusting the phasing of some elements of the European transformation program. This is expected to result in a lower activity level and lower program-related spend in the fourth quarter. However, during quarter 4. We expect to utilize part of the remaining amounts for additional restructuring and optimization action across the group that qualify as item affecting comparability. Year-to-date, ISC remains positive at SEK 102 million due to the capital gain of $223 million, resulting mainly from the divestment of Global Elite Group in the U.S. in the first quarter. Our finance net was $364 million, a reduction of $55 million compared to last year. We continued the positive trend of reducing finance cost and interest rate and our debt leverage is decreasing. Consistent with our previous communication, we expect finance net for 2026 to continue to improve and come below SEK 1.6 billion compared to the SEK 1.8 billion for the full year 2025. Going forward, the year-on-year benefit is expected to moderate each quarter as leverage normalize and comparative become tougher. Now moving to tax. I want to start with some good news. The Supreme Court in Spain has ruled in our favor in the tax case, which dates back many years ago. While this is noncash item, it had a positive impact on our net income in the quarter through the reversal of the related tax provision. For the full year, we now forecasted a tax rate of 27.9% and excluding the capital gain from the divestment of Global Eli Group and the reversal of the Spanish tax provision. This is slightly above our previous forecast of 27.5%. And mainly due to the higher tax cost in the U.S. EPS benefited in the quarter from both the lower finance net and the reversal of the Spanish tax provision, which was treated as ISE. Earnings per share before item affecting comparability amounted to SEK 3.28, and the real EPS declined by 3% compared with last year. While we continue to see benefit from a lower finance net, this was more than offset by a higher tax charge in the quarter, with operating income remaining flat in real terms. For the first 9 months of 2026, our currency adjusted EPS, excluding IFC, increased 6% compared to last year. Now moving to the FX effect in the quarter. Currency had a positive translation effect on reported operating income in the quarter while the real change was flat. Turning now to cash flow. We delivered another solid quarter. ending at SEK 2.6 billion, corresponding to 82% of operating income. For the first 9 months, as Magnus said, cash generation is slightly below last year at 71% versus 74% in -- the cash flow in the third quarter was lower than last year, primarily due to higher CapEx and change in operating payables. Trade receivables improved compared with the first -- with the second quarter although the improvement was partially offset by continued strong installation sales. We remain well positioned to achieve our full year cash flow at 80% to 90% and of operating income before amortization. As mentioned, the capital expenditure was higher than last year at 2.9%, but remain below our target. The free cash flow ended at SEK 2 billion and year-to-date improved by SEK 94 million compared to last year.

From here in onshore...

Okay. Perfect. So then we then move and we look at our net debt which was SEK 31.5 billion at the end of the quarter. This is a decrease of SEK 1.2 billion compared to quarter 2 this year despite SEK 702 million negative currency translation effects. Items affecting comparability remain according to the plan -- and as anticipated during Q1, we are forecasting a cash flow for the full year 2026 in the range between SEK 880 million and SEK 850 million. Looking at the right-hand side, our net debt-to-EBITDA is now at 2.1%, which is an improvement of 0.1x compared to Q3 last year. We are below our target net debt to EBITDA of less than 2.5x and expect to continue to deleverage our balance sheet in the short term. Looking at our financing and financing position. We continue to have a strong balance sheet, strong liquidity, and we remain without any financial covenants in our debt facilities. Now looking at the maturity chart 1.5 billion maturity was repaid in full at the beginning of October, leaving no further refinancing needs in 2026. We continue to focus to amortize debt supported by a strong free cash flow generation. Finally, a further confirmation of our stronger financial position was the S&P upgrade of our long-term credit rating from BBB to BBB+ and with that, Magnus, I hand it over back to you.

Thanks a lot, Matteo. So before we open the Q&A, just a few words regarding the longer-term development -- and I also wanted to share some feedback on our strategy from our clients. And I just need to confirm that we are now on the right page here. Okay. A few months ago, we shared the new financial targets for the next phase. We decided to make our targets sharper and more ambitious, and we are fully committed to delivering on these numbers in the coming years. And 1 important change was the introduction of the target of 10% average EPS growth. And the 10% comes from 3 main drivers. The first 1 is about growth. And we aim to grow organically by 4% to 6%. And per year, which would allow us to increase market share. Today, we have all the components required to deliver intelligence-led security at scale. Second, margin improvement is another important part of the mix, and we aim to expand margins by 20 to 30 basis points per year, driven by efficiency and mix. And across an upsell opportunity between our business units as well as the possibility to sell more integrated services will improve our mix and therefore, also the margins. And third, disciplined capital allocation, deleveraging and value-accretive M&A. And on the M&A theme, we have been focused on building a quality pipeline during the last 12 months and now looking at attractive electronic security bolt-on targets that represent aggregate sales around SEK 2 billion. But since launching our strategy this summer, I met with clients across 3 continents. And the response has been very positive with both existing and prospective clients recognizing the value of our ambition to become the trusted partner in intelligence-led security. And our clients see compelling value in our emphasis on quality and in a more dynamic intelligence-led approach. And while this represents a shift from established industry practices, there is also strong support for the direction. And clients increasingly recognize Securitas unique ability to leverage AI, automation and actionable risk intelligence to deliver greater value and we're already beginning to see other signs of a shift in buying behavior towards intelligence debt security. And as I said before, I'm expecting more change during the coming years in our industry compared to the last 25 million and we are encouraged by the positive feedback and expectations on the partnership from a number of leading companies around the world. And to ensure that we deliver highest possible value to our clients and to our shareholders, we are also doubling down on strengthening our ability to win together with the clients, simplified and enhanced incentive systems, how we're enhancing the coordination and the account management and also then leveraging the full range of capabilities that we have externally and together with our clients. So we're clearly on the right path to achieve our wanted position as the trusted partner in intelligence-led security and to deliver on our targets. So with that, let us open up the Q&A session.

[Operator Instructions] The next question comes from Zach Alcaro from Morgan Stanley.

I have 3 questions, please. So firstly, just digging a little bit deeper on the margins, given it was down year-over-year when excluding CIS, you called out use was driven by aviation. Do you expect a similar impact from that business on the group margin development in Q4? Or should it be less of a drag given the tougher comp you called out last year? And then just kind of as a follow-up to that one, you noted you're taking some actions to improve the performance there. So could you please share some further details on that? And then secondly, you called out some impacts from active portfolio management. My understanding was the vast majority of that completed by now. Is there any further impact expected over the remainder of the year or perhaps into next year? And then third question, just more broadly, when we look at the group organic growth profile. So it still remains a little bit below the 4% to 6% medium-term ambition. Could you help us better understand just the bridge to get to that guidance and what needs to improve from here to accelerate towards that range? I know you called out better T&S momentum that you're seeing, but are there any more positive signals maybe in the mind guarding business that can help or in some of your data center exposure

Thank you, Zack. So on the 3 questions, the impact for the entire group was 0.2 on the margin from Aviation and it's essentially related to 2 countries in Europe, as I highlighted, our team is they are taking actions my view is that we're going to see improvement during the coming quarters. But some of the operational issues and the challenges that we have, we're also not solving overnight. So very high attention but taking actions to ensure that we are driving steady improvements. But over the coming quarters, as I stated, if you look at the active portfolio management, this was more of a strategic program for us that we were driving over a number of years to ensure that all the portfolio is in good shape across the company, we will, obviously, with our business, we will continuously be evaluating and assessing all contracts that is just good leadership and good management, but if you're looking at the impact and the reason that I say that there is an impact now and also in the coming quarters is that while we finalized that work looking at Europe and Iberia numbers will be in the comparatives from Q2 for 12 months essentially. So that's why we're highlighting that there is some impact. And the important thing that we need to do there, of course, is that we're also then taking out costs that we are not suffering, if you will, from negative cost leverage in that type of a process. And then on the growth, I mean, we remain fully committed and also believe that we're going to be able to grow at 4% to 6% organically. If you're looking at the different parts, Technology & Solutions, as I highlighted, 6%. So that is a good sequential improvement the last couple of quarters. Order book as order entry and also backlog on the technology side, especially North America and the Ibero-America, very strong, continued very strong, and that is obviously important when we're looking at the next couple of quarters. And I'm also very glad about that because we invested a lot in technology. We have done great work in terms of building capabilities. And there, I'm also seeing that we're really building good traction. So I think that's the main part on the technology side and broader technology and solutions. On Solutions and specifically, I mean, there, it's more a matter of also leveraging the different capabilities that we have. And we had very good growth in North America, continued very strong growth in Ibero-America when you're looking at the third quarter. And there, we have PAUSE a very strong offering stronger than anyone else in the market because we have the capability to combine. And like I said as well, and Matteo and I also shared that during the Capital Markets Day were also enhancing incentive systems and things like that to ensure that we are really aligning with what is good for the client is also good for Securitas and our shareholders. And if you then look at the guarding part of the business. Here, we have been suffering for quite a number of years from the active portfolio management on the top line. But we've done that based on a conviction that it's good for us to build a quality portfolio. There will, like I said, be some impact. in the next couple of quarters. But the idea here is obviously that we are stabilizing this part of the business so that we are winning and retaining a very healthy part of the business so that we can also then get back to positive volume development, but always then with very clear profitability thresholds to ensure that it's sustainable business. But there, we had some good development, like I highlighted in North America. I mean, there was some portfolio volume growth also driving the improvement in North America. And that's obviously the ambition more broadly speaking, across the group. So I think those are the main points. I hope that is helpful to your question in terms of how we also then improving the growth rate because right now, it feels like we're a bit in the transition between the last period, which was very much about operating profit margin improvement, which was the right thing to do and now then shifting focus towards profitable growth.

The next question comes from Andy Grobler from BNPP.

Three from me as well, if I may. Firstly, just on the cash flow payables were weaker in the period. Could you just talk through the drivers of that and whether you expect it to reverse? Secondly, around France and some of the issues that are going on in the country, have you seen any impact on your pretty large business in that country and what are your expectations through the rest of this year? And then thirdly, Magnus, you talked about some clients pushing harder on price and the impact that was having on margins and growth, especially in Europe. Can you just kind of give a bit more depth to that commentary? What's changed? How are you dealing with it? Do you think that, that is going to persist through the coming quarters?

So maybe I can start, Magnus. Andy, about the cash flow and the payables related question. If you look a bit the quarter, yes, it's impacted by the change negatively in operating payables. This is mainly related to between the 2 quarters, quarter 2 and quarter 3. As you can see in the first 9 months, our position on operating payable is still very positive and very good. There is also maybe another point to raise, and this is related to the SCS closedown as well. was negatively impacted by -- on the operating payables because of the acceleration that we are having in quarter 3. And as Magnus said, positive news is that we are almost at the end of this. And we are -- we see that by the end of October that we are going to transfer the lost contracts. So these are the 2 main issues. So the timing issue between quarter 2 and quarter 3 and the SEIS acceleration close down.

Andy, on the last 2 questions on France, we have a fairly significant business in France. But I would say it's a marginal impact from this really unfortunate rigs and the situation that we have seen. What I would highlight, though, is that if we kind of lift the perspective a little bit from my view point, there's more focus on security. There's more focus on risk more broadly speaking, in society. So I think that the security is higher up on the agenda. And -- but that's not driving immediate demand. But 1 area where I see this is also what we are creating with the third area of our business, security risk management, is that there is also an increasing appetite and demand to really better understand and manage risk in a more structured but also more dynamic way. But to the question about France, I would say, marginal impact from a revenue perspective. And then on the last question, we did highlight that. And I think also, we've had that discussion with some of you in the last 6 months as well. I mean we have continuously said that we're very well positioned in a number of segments that are growing, such as a lot of the tech companies, a lot of data center business same thing in defense, pharmaceuticals, et cetera. And that's obviously what I see is that it's a bit of a diverging picture in terms of the type of dialogue that we see. And part of it, you can explain kind of see patterns between different kind of vertical segments, but then it's also partly how progressive or conservative some of the clients are in the purchasing approach. I think where we have the best traction is typically where security and quality security is really emphasized and prioritized -- we also have the best traction with clients who are seeing that the future of security is a combination of people and technology and how you leverage data and intelligence. While in procurement-led processes where it's just kind of we want to buy x number of hours, there -- when it just becomes kind of lowest price at any cost there, we obviously then not as successful. And I think that's just the pattern that we have seen for a couple of years now. But my interpretation to your question is that in some of the European markets like in Germany, for example, it feels like there is quite a lot of uncertainty in the general economic environment and some of the clients and companies are struggling, short-term priority, you just think about how do we tactically kind of reduce costs while my belief is that when we engage in a really good way with any client, given that we have a very strong leg in our garden capabilities with the presence that we have on site. Same thing with the technology and also security risk management. We can actually help clients and build better security equation, but in many cases, also at the lower cost, which means that the value for money is improving. But the kind of the view here between more progressive and somewhat more traditional, that is -- there, we're seeing some differences. But there, it's obviously extremely important that our teams are really on top of these trends. And I feel good and confident because we are getting so good feedback on the strategy and how we're thinking about the next phase. And I think everyone is also recognizing that Securitas is standing out is quite unique given that all the competitors are either in the kind of the systems integration space or more in the traditional gardening space. So I hope that gives some flavor, Andy, to the question.

It does. Can I just ask one quick follow-up? Does -- is there a risk there that some of those more traditional clients, particularly in some of the struggling industries in Germany and across Europe become the next leg of portfolio management if you are not able to shift them to your strategy and vision that margins just get eroded and we see that pressure continue on organic growth in the guarding business.

Yes. I mean we have -- we have seen these patterns like I said in the last couple of years. And when we communicate to the financial targets, Matthew and myself, we do those based on genuine belief that we're going to be able to grow at that type of a pace organically. And that obviously means that when you look at the total picture that we are able to manage in a good way because we're also seeing underlying growth in some of the other segments where we are really successful, which is also quite strong. So that should obviously then help and also compensate. So I think in the long term, it's always the best value proposition and the best value for money that will win. And there, I feel that we are very well positioned to manage the totality in a good way.

The next question comes from Harshita Botter from Goldman Sachs.