Securitas AB

STO:SECU B

Earnings Call Transcript 2018-Q1

[Magnus Ahlqvist]

Okay, good afternoon, everyone. A warm welcome to the Q1 results presentation.And I am Magnus Ahlqvist, President and CEO of the company since 1st of March this year. And before that, I've been heading up the European division since August 2015. I'm here today together with Bart Adam, our CFO. And we will do these calls together as we go forward.Maybe handing over to you, Bart, just for a brief introduction.

[Bart Adam, Chief Financial Officer]

Yes. Hello. I think, many of you, I've met before. I'm, together with Magnus, happy to be here today. And we will run you through our quarter presentation.Thank you.

[Magnus Ahlqvist]

Good. We have a strong foundation as a company. And I usually try to spend quite a lot of time with our team members in the countries and areas, but since I started in March, I've also spent a lot of time in the other regions together with our customers. And I just wanted to start by saying that the customers value the work that we do, and they buy into our strategy. And this is encouraging. And I see a lot of opportunity for us to grow and develop the business in the coming years. But so it's clear for me that the opportunity is there, but I also see that we have an opportunity to speed up the transformation with the strategy that we currently have.So let us look at some of the highlights from the first quarter. It is a quarter with strong growth, and our team in North America are leading the way. We also have good recovery in Europe in the first quarter in terms of the growth. We achieved organic sales growth of 6%, and it's good to see that we have solid growth rates across all the different business segments. And our price increases have been on par with the wage increases. And in this quarter, we achieved an operating margin of 4.7% and 13% real change in our earnings per share.But before we look at the performance by division, let us just take a brief look also at the progress in the strategically important security solutions and electronic security business. Here we achieved growth of -- organic growth of 16% in the quarter and real sales growth of 20%. And we are also ramping up some larger security solutions in the -- in this quarter; and just to mention one example, with a automotive manufacturer in Germany where we are providing a full range of protective services in one integrated solution. And -- but we also have a number of solutions, new solutions, that we have won and that we are implementing with more mid-sized customers. We also announced a number of acquisitions in this quarter. And we'll come back to that later in the call, and I would talk a little bit about the importance of some of those.So let us now look at the performance in the different segments, and we start with North America.We had a very good start to the year with the good new sales and very strong organic sales growth of 8% in the quarter. The customer retention is good, and as previously reported, we are ramping up a few larger contracts that we started towards the end of Q4. And the sales of security solutions and electronic security represented 16% of the total sales in the quarter. So all in all from a growth perspective, solid performance by our North America team. And if you turn to the next page, we're looking then at the margin. We had a stable margin in the quarter at 5.5%. And this operating profit margin was supported by higher organic sales growth but hampered by the lower margin on some of the new large guarding contracts.If we then turn to Europe. We are now growing at a higher pace in organic sales growth terms than what we did before. We had the increases on the refugee-related business that start -- that we started to ramp up in the second half of 2015. And we did have good growth in almost all the countries and organic sales growth of 4% in the quarter. And the reduction of the refugee-related business continued in Q1. And this reduction represents approximately 1% negative impact on the organic sales growth, but also positive to see client retention is significantly improved. And we also then had sales of security solutions, electronic security representing 21% of the sales. But while we had good growth in Europe in the first quarter, I am -- we are not happy with the operating profit margin. And there are a few factors behind the weaker operating profit margin in the first quarter. One was a weak start in the electronic security business in Turkey. And this business, I should emphasize, is more volatile due to the timing of the projects. And it is a temporary impact. We have a positive outlook for the remainder of the year. And the second factor is relating to unusually high sickness rates that then generated higher-than-normal costs. And this was in a number of countries in Europe but particularly in Belgium and in Germany. And then the last part, as previously mentioned, we did have a reduction of the refugee-related business in the quarter, which also then contributed to the slightly lower margin.And if we then turn to Ibero-America. We had a good quarter in our Ibero-America division with organic sales growth of 9%. And if you're looking at the 9% in comparison to what we had last year, this is primarily driven too by a reduction in Argentina. And part of that is inflation rate -- inflation related, and the other part is related to some of the changes in the portfolio. But we had solid organic sales growth in Spain, where the team is doing a very good job and driving growth on security solutions and electronic security. And on divisional level, solutions and electronic security represented 25% of the sales in the division in the first quarter. We had good development in terms of profitability in Ibero-America, improving OPM to 4.4%. And this positive development was driven by Spain with the very good development of high-margin solutions and electronic security business, but I would also like to mention that some of the solutions contracts in Spain are short-term contracts. Argentina burdened the margin due to startup costs and some turnover in the contract portfolio.And with that, I would like to hand over to Bart for more details on the financials.

[Bart Adam, Chief Financial Officer]

Very good. Many thanks, Magnus.So let's now turn to some further financial details to the quarter, and we start with the income statement.Of course, on this page, the same KPIs as commented by Magnus, so we'll not repeat that, but would like to mention that the 2017 comparatives for the group have been restated for IFRS 15. And this restatement results in a relatively minor change for the year. That is a SEK 20 million increase of the operating income for the full year. The reason behind is that under IFRS 15 we now activate or paid sales commissions, whereas before the sales commissions were just expensed as those were paid but now under IFRS we need to treat that differently. That this to activate and depreciate it. So this is in essence only a time difference and is being accounted for at the group level. In the quarterly report you find under Note #2 quite an extensive overview of the numbers affected from IFRS 15.Turning to the tax rate then. The applied tax rate was 25.5% in the quarter. And that number, that percentage, is in line with our statement from the end of 2017 that we released just after the U.S. tax reform was announced. We will continue to assess the tax rate as more details and interpretations to the U.S. tax reform become available. This especially related to the so-called BEAT, which is the base erosion abuse tax (sic) [ Base Erosion and Anti-Abuse Tax ], which we also need to further understand how that affects certain flows. You shall remember also that the 2017 group tax rate was 28.4%, and this 28.4% then exclude a percentage related to the one-off negative effect from the U.S. tax reform related to revaluation of certain deferred tax assets which happened at the Q4.Turning to the next page, 10, and taking a look at the effects from the different currencies, we see here that, compared to the same quarter last year, both the U.S. dollar and the Argentina peso have reduced their valuation against the Swedish kronor quite a bit, respectively, minus 6.7% and minus 29%, whereas the euro on the other hand has strengthened quite a bit as well. And the numbers mentioned here are the quarter-end rates. The net effects of this on the different lines in the income statement can then be seen from the difference between total change and real change. And you'll notice that on the sales line the net effect, that is the difference between total change and real change, is 3%, meaning that the real change is actually 3% higher than the total change, so the negative effect from mainly the U.S. dollar and the Argentina peso outweighs the positive effects from the euro. And then you can see a bit of the same development more and more -- more or less in line with the sales development for operating income and earnings per share. So ending up then in a real change of earnings per share at 13%.I move to the next slide. Yes, we had -- we turn to the cash flow and the balance sheet. And first of all, it shall be noted also that, related to IFRS restatement, the cash flow basically remains unchanged but that now we have some SEK 400 million extra net assets compared to IFRS -- to before IFRS 15. And these are activated historical-based sales commissions to the extents those have not been amortized yet.We had a weak cash flow during the quarter. And the quarter -- the first quarter is always a relatively weak cash flow because of seasonality, but this first quarter was worse compared to other first quarters. We used some cash, of course, to fund the organic growth. That is normal, especially in the U.S. with the 8% organic sales growth level there, but then the main reasons of the weak operating cash flow is largely due to a negative impact from Easter and such mainly in Europe. To put it simple there: Some of our customers did not pay or invoiced us ahead of month end due to Easter Friday. And at the same time, because of the timing of Easter Monday, we had to pay certain employee-related accruals and VAT, for instance, just before the weekend. So the 2 effects together then -- the late payments coming in from our customers and the early payments because of these employee-related payments and VAT, then meant a quite considerable negative cash flow at the end of the quarter. Important to mention, though, is that in the early days of April we had a very good cash flow. And that has been confirmed now throughout also the ending of the month of April.Just want to flag out also, just to set a bit your expectation, that the Q2 closing and the Q3 closing is also quite unfavorable for the cash flow because of weekend timing in relation to the quarter end. Where there's always when the last day or the 2 last days of the month -- of the quarter are ending in a weekend, that always puts some stress on when the exact payments come in mainly from our customers.As talked about before, the net investments include also the CapEx for customer solution contracts. That is for the equipment that we put up at customer sites when we build and provide the security solution. And then going forward, the total capital expenditure including these, yes, equipment for solution contracts will be approximately 2% of group sales in total on an annual basis.I move to the next slide. And then, of course, you see the effects from the cash flow on the net debt, which has increased to SEK 14.4 billion. And that is the result from the free cash flow; of course, as a result from the operating cash flow, in combination then also with certain acquisitions made. As we have announced, during the quarter, we have made and closed certain acquisitions. And Magnus will come back a little bit on the nature of those acquisitions later on. You also see here on the slide the relationship between net debt and EBITDA throughout the years. And now also the first quarter is put there as well. And you could see that at a leverage of 2.4 we are still very well in line with our own objectives here and with the recent developments in -- with development in the past.Turning then to Slide #17. Yes, we have strong financing in place. This chart shows the maturity of our financing that we have in place. And we issued now in March a 300 -- a new EUR 300 million bond in replacement of a bond that matured also during the month. The coupon for the new bond was 1.25%. And we have no other important facility maturing for the period 2018, '19 and '20. The first maturity now of importance is 2021.And by this, I think I hand back to Magnus. Thank you.

[Magnus Ahlqvist]

Okay, thank you very much, Bart.And before we open up for questions, I just want -- I'd like to spend a few minutes to talk a little bit about our strategy. And we talk quite a lot about security solutions and electronic security. And I felt that, to provide some context, it will be good to share just one case today with an example of a solution that we have implemented in Germany. So this is going to be a video, and we're going to start streaming it now.[Presentation]

[Magnus Ahlqvist]

Good. I think this is a good case for a couple of different reasons. One is that we developed this solution after conducting a risk analysis to really fully understand the customer's needs. And then we integrated a number of different protective services into one integrated solution. What I also like and, I think, also from a customer perspective is that this is also something that we have been able to replicate a similar solution for the same customer across a number of different locations as well.But if we turn then to just a few comments about the acquisitions. We have announced and/or closed a few important acquisitions during the last few months. And just wanted to make a few comments, starting with Kratos public safety and security. And this is 1 of the top 10 systems integrators in the U.S. And with the Kratos acquisition, we're able to build on the strong foundation that we have put in place in electronic security after the acquisition of Diebold in 2016. And then if you ask the question, "What will then Kratos really add?" well, it's a good team, but it will also give us a footprint and proximity to the customer through the regional branch network across the United States.Another acquisition is -- that we have closed is Automatic Alarm. And this is one of the leading electronic security companies in France, a strong team operation and a nationwide network, so I think that this acquisition will mean a little bit to France what the Diebold acquisition meant to our presence in electronic security and capability in North America. It will also help to further strengthen our leadership position in the French market. Next one I would like to cover is Alphatron. And this is also a leading system integrator in the Dutch market that will also help us to really reinforce our position as a leader in the market but also then significantly enhancing our electronic security capability. We also made one regional acquisition in the southwestern part of Germany, Süddeutsche Bewachung, which is a company with a combination of guarding, mobile, monitoring; and then also Johnson & Thompson in Hong Kong, which is helping us and strengthen our electronic security capability in that market as well.And so if we continue. I think this is a picture that you have seen before about the journey that we are making from stand-alone services to integrated security solutions. And we continue to drive these developments towards integrated solutions. And we see that, as we are going towards the right in the picture, towards more integrated solutions, we are not only making or creating better customer satisfaction and loyalty but also significantly higher margin on this business as well, thanks to adding more value to the customer. And if you look then at what does security solutions and electronic security look like in terms of total figures then from 2014 onwards, we have had a good development. And here obviously you see that we had 18% of group sales in the full last year of security solutions and electronic security sales.And before we wrap up. As I mentioned at the beginning, we have a solid foundation and a very exciting journey and opportunities ahead. And since I started on 1st of March, it has been a reason to also reflect a little bit about the different stages and phases that we have gone through as a company, where we are right now but also where we are going tomorrow as we write the next chapter in the history of Securitas. And I think the -- when you look at this picture, we have had a clear ambition to be a leader in security services from the 1990s onwards; something that we have also realized, that ambition, on a local level and also on a regional and global level. And then a number of years ago, we launched our Vision 2020 strategy and with a clear ambition of being a leader in protective services. And this has then been a lot more about solutions, about electronic security, fire and safety and corporate risk management. And that work continues. I would still argue that we are in the early stages, so this is work that we have to continue to drive for the next 5, 10, 15 years in the market.And then obviously when we're looking ahead, we have the exciting opportunities in terms of intelligent security. And this is all about how do we leverage information to work smarter and to provide better security for our customers, to work more efficiently internally. And obviously, the higher that we go in this picture, we add higher value to our customers and also to our shareholders. And so I think that there is -- in terms of strategy, this is just to give a little bit of a perspective on where we are and where we are going, but I am very optimistic about the opportunities that we have in the long term.And so to wrap up Q1. It is a quarter with strong organic sales growth, 6%; earnings per share improvement of 13%. And we continued to deliver on our strategy in terms of security solutions and electronic security, now then accounting for 19% of our total sales in the quarter.So I think, with that, Bart and myself, now happy to open up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Bilal Aziz of UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

Just 3 quick questions from me, please. Can you perhaps break out the contribution from the large contracts in North America within the quarter? And I appreciate margins [ start to develop ], but is there expectation to bring these contracts to the U.S. [ average ]? Or are these likely to be dilutive going forward as well? Second question, on wage-price. Can you perhaps give us an indication on what level you're currently seeing in the U.S. and how that's perhaps differ by some of the more larger states you are present in. Tied to that, can you give us an update on your staff turnover in the U.S. as well and how's that tracking versus the fourth quarter? And very finally, in your -- can you perhaps help us with the where your exposure now stands to the total refugee-related contracts? And how do you see that evolving with respect to what you see as purely one-off and why they fade away further this year?

[Magnus Ahlqvist]

Okay, thank you. I think I can start. In terms of the first question, with the new contracts, correct. The margin is -- so the initial margin is lower, but our ambition with these contracts is that we improve the margin up to normal levels over time. I think, in terms of the price, Bart, do you want to comment on...

[Bart Adam, Chief Financial Officer]

Yes. I think your question related to the prices in the U.S., correct?

[Bilal Aziz, Associate Director and Equity Research Analyst]

Exactly, relating to wage inflation, yes.

[Bart Adam, Chief Financial Officer]

Yes. So I mean there are some statistics floating around which shows very high increases in wages, but we don't see those percentages. We have never seen those percentages over the last 10 years. And we don't see them right now either. I mean, those statistics, if you look at them just month by month, they can fluctuate a bit, but the longer trend in those statistics is probably right. However, now commenting, trying to answer your question, we do see wage increases which are a bit over 2% right now, between 2% and 3%. And the price increase in U.S. is on par with that wage increase. And that is what we see right now going on in our business in U.S. Then of course, you do see quite some fluctuations and differences between different states. In some states, it can go up to 5%, 6%. And then in some other states, it's 0. And it's the mixture of all the different states where you are in and where you have the business then dictates the average.

[Magnus Ahlqvist]

And there was also a question about the staff turnover as well.

[Bart Adam, Chief Financial Officer]

Yes. I mean the staff turnover in U.S. has been something in the past. And we deliberately took away the reporting on that because we believe there was an overfocus on that number. I mean there are many important KPIs in our business to follow. Staff turnover is one of them and -- but we decided then to take away the staff turnover. And the development as such has been more or less in line with previous quarters, nothing remarkably either that we want to hide or walk away from. It's just that we feel it's not that relevant in view of many other KPIs that you could -- that we track internally.

[Magnus Ahlqvist]

And then I think the last question was related to the refugee-related situation in Europe. I think, to give some context to that: We saw very strong increases in the second half of 2015. And I just want to mention before anything else that we have been able to fulfill many of these services. And that's something that we're also proud of, but if you then look at the growth rates, it peaked in 2016. And then we had a decline in 2017. And if you look at the run rates: Q1 sales are around SEK 200 million, so around SEK 800 million on an annual basis. And this is something that we are expecting to decline over time, but it's difficult to say exactly how quickly. It depends on a number of different factors. Some of them are not really within our control. But SEK 800 million annual run rate.

[Operator]

And our next question comes from the line of Srinivasa Sarikonda of HSBC.

[Srinivasa Raju Sarikonda, Analyst]

A couple of questions from me, please. First, on cash flow, we understand Q1 has a seasonality impact, but a SEK 1.6 billion cash outflow and other operational capital employed looks too high compared to any of the quarters we have seen in the last couple of years. So could you give us some color? Like, what's happening there? Where did the cash go into? And also, on the staff churn theme, I understand you believe that it's not an important KPI. But just trying to understand. If your staff churn goes up, isn't it your staff recruitment costs and training costs go up? And how will that impact your margins? And are there any measures you're taking to control that?

[Bart Adam, Chief Financial Officer]

Okay, Bart here. Maybe to start with the cash flow question. As you rightfully said, we already have some seasonality, especially in Q1. Or change in other operating capital employed is never very good. You can also witness that from last year's and from other quarters before. And the difference -- and that is coming from the fact that, for instance, we pay out certain employee-related accruals that are there in the balance sheet at year-end, for instance, related to incentives which are then paid out during the Q1. We also pay typically during the Q1 some insurances, which are then valid for the full year and then they are paid in the Q1. So that is part of the normal seasonality. On top of that, what we had this year is, because of the timing of Easter, and Easter was just right in the split between March and April, we had to pay certain employee-related payables which are normal payables for the normal payroll on a certain day, the first day of the month, they need to be paid. And as that was then Easter Monday, then we had to pay that, make those payments before the weekend. The same on VAT, some deadlines that you have to respect in relation to these payments. Because of the timing of Easter Monday, we had to bring those payments over to March instead of paying in -- at the first day of April. So that is basically what happened in the other operating capital employed largely. As to your second question, staff churn, well, it is an important KPI, of course, but is 1 important KPI probably out of 10 others that we follow as well which are as important. And that is why, by only giving this KPI to you, we feel that distorts a bit the total picture. Measures taken, of course, measures taken. Maybe to mention as well, if you talk to our operational people in U.S., they will say more important than staff turnover is staff retention. And by staff retention, we mean, "Okay, I had so many people employed a year ago. How many people of those are still with me?" And that number has basically not changed too much over the last quarters. That number has been pretty stable on an acceptable normal level. And so it is the people that stay for a short time which is that churned faster. That is basically the theme. That does not have a too big impact on our quality of the services because that is of course a key element and because, the people that are there a long time in place, they just stay in place. And it's them who are delivering the basic quality of the service. And the measures we take, of course, is to increase wages. That is one of the measures in connection to our customers. Also, to -- in connection to that, of course, if the price-wage is too high, so to say, for the customer, we can always offer a solution as well, which is a second way of handling it in a commercial way with the customer and helps then also to drive the strategy on electronic security and solutions. Don't know if that answered your question. It's [indiscernible]. Thank you.

[Srinivasa Raju Sarikonda, Analyst]

Yes, yes. A follow-up on the cash flow theme. You have mentioned that even Q1 and Q3 have quarter endings falling on a weekend. So given that the Q1 had that impact, the reversal of this some -- of this cash in the first weeks of April means that your Q2 will be normal despite of weekends falling -- I mean, quarter end falling on a weekend.

[Bart Adam, Chief Financial Officer]

Yes, normal in the sense that we have recovered from the Q1 effects the ending of Q1, but we will have faced the same effect at the end of Q2. So from that sense, we will not recover during Q2. We did then will -- take you to a surge. We will not -- you could expect to see more recovery in Q2, but it will be pretty much a normal Q2. That is what I want to say.

[Srinivasa Raju Sarikonda, Analyst]

Okay, okay, got it. And on the wage inflation thing, I understand you're saying you were able to pass-through the wage inflations thing, but your electronics sales has, well, increasing which is pretty high margin. But still, why would the margin stable year-on-year? I understand the new contracts have come at a low margin, but that should be now very less part of your overall revenue. I mean just trying to understand the equation there, like how much those contracts had impact on your margins and how much your electronics sales has improved on the margins.

[Bart Adam, Chief Financial Officer]

Well, we have basically seen a normal development, a normal contribution from the electronic security and solutions. So nothing new there. Yes, the 2 -- or the couple of -- we took basically 2 large contracts that we started in Q4. In Q4, we were hampered a bit from the startup costs, but we also commented then that, these contracts, as they are so sizeable, they will impact the margin a bit negatively as well. So they are below average margin. The reason -- so then as that -- as those contracts will run, we will then improve the margins along the contract duration. Basically it means that become better at planning, less overtime, less idle time. Also the training costs will reduce over time. Typically they are higher at the start of the contract. So that is why over time these contracts should improve their margins. I cannot give a specific timing on that.

[Operator]

And our next question comes from the line of Mikael Holm of Danske Bank -- apologies. Sorry. Mikael Holm is the question after. And the next question actually comes from Sylvia Barker of Deutsche Bank.

[Sylvia Pavlova Barker, Research Analyst]

I've got 3 areas of questions, please. Firstly, starting with the organic growth in North America in Q1, so just to understand the sequential movement from 6% to 8%. So you have 1 extra month from the large contracts. You said that you had some extra sales in Q4, which they haven't necessarily repeated. So have those kind of extended further? And then maybe the final bucket, in terms of the price, what has happened to price in Q1 versus Q4? Then I will take the other one faster.

[Magnus Ahlqvist]

Yes. I can start, Magnus here, and make a few comments. So we do have all in all a strong activity overall across all the different areas over our North America business. And so that is in the guarding side. It is in the different areas of business, and so it is a very strong quarter from a general perspective. I think, Bart, maybe do you want to comment on some of the sequential change? Are we able to give some more granularity?

[Bart Adam, Chief Financial Officer]

Yes, yes. As commented, in Q4 was held by some extra sales in U.S. coming from the hurricanes, if I remember well. And there were no hurricanes now in Q1, so no effect from that. Then the 2 large contracts were ramping up during Q4, so we did not have a full impact during Q4, but now they had a full impact during Q1. I think that is on that. And then on the price, yes, we commented that the price increase at this point in time is around -- be more than 2%, between 2% and 3%. And that is also, of course, included in the organic growth. So yes.

[Sylvia Pavlova Barker, Research Analyst]

Okay, great. And on the price increases, do you feel that, as you are kind of coming through, just because the comments on the front page in terms of that being a focus again for Q2, are you just -- do you have -- have you increased prices for more than 1/4 of the clients that you want to increase basically? Or is it the same proportion as we go through the year? Or have you disproportionately already managed to increase prices as early on in Q1? Or is it going to get easy or more difficult as we go through the year?

[Magnus Ahlqvist]

So one comment is that we are quite happy with the way that we have been able to balance price and wage in the first quarter. And I think we also have a strong track record overall of making that happen. And the ambition, of course, is that we continue to do that as we go forward as well, but then there are always differences between different regions and also between countries in terms of the timing. And so some of this work will continue in the coming quarters, and then in some specific cases there could also be other factors that would trigger a need to look at price increases. And those could also be regulatory changes et cetera as well. So I think that is the high-level context in terms of where we are with the important price-wage balance.

[Sylvia Pavlova Barker, Research Analyst]

Very good, And just a follow-up on that. So by region, broad region, where are you matched? And where are you not matched or running ahead?

[Magnus Ahlqvist]

No, I don't think we comment on any specifics, but the -- in general we are in good shape. We have done a good job in Q1.

[Sylvia Pavlova Barker, Research Analyst]

Okay, great. And then just 2 very quick ones. So in Europe, excluding sick pay which seems to be the only kind of one-off item perhaps in the quarter, would you have had a flat margin in Europe? And then what do you expect for the rest of the year? And then lastly, just on the electronic solutions, should we assume that you've got 10% on that piece that you've shown, so implying that the rest is around 4% now as we see the split today? Is that the right way to think about it?

[Magnus Ahlqvist]

Yes, the reason that we called out the higher-than-average costs related to the sickness rates is that they were unusually high in the quarter. And there is -- when we're looking into some of those details, there is the certain seasonalities as well depending on the time of the year. In Europe as well, one of the other impacts, of course, was the weaker start in the electronic security business in Turkey. And then I think that the third one that we have commented earlier as well is then this refugee-related decline, where it is approximately 100 million less compared to Q1 last year, in the first quarter.,

[Bart Adam, Chief Financial Officer]

And those 3 reasons are about equal in size, you could say. And if we mention a reason on it, it has to be around [ 0.1 ] before we mention it.

[Magnus Ahlqvist]

Yes.

[Operator]

And our next question now comes from the line of Mikael Holm of Danske Bank.

[Mikael Holm, Analyst]

Yes. 2 questions. First of all, on the European margins. You're mentioning the loss of refugee-related sales and the higher sick leave and Turkey, but if you look at this from a longer perspective, I mean, the worst margin in 7 years. And you have managed to increase the share of security solutions and electronic security. So is the main -- I mean, is the main thing here still price pressure on the traditional man guarding? Is that the main, if you let -- look at this from a longer prospective?

[Magnus Ahlqvist]

Yes, I think, when we -- I mean, first of all, we have continuously invested quite a lot in the strategy. And we continue to do that in Europe as well. And so that is one. And when you look at the growth of solutions and electronic security, that is at -- growing at a healthy pace. And it is also adding margin, as we have shown, and on a gross margin, operating margin basis. So I think that it is a -- it is a combination of all factors, but having said that, I mentioned earlier as well, Q1, it is weaker quarter. We are not happy with that operating margin, and that's obviously something we're working to also recover as we go forward.

[Mikael Holm, Analyst]

Okay. And just to follow up on the earlier question regarding the price-and-wage balance. Is it fair to assume that the majority of them, the Easter salary increase, in the beginning of the year, so the toughest quarters in terms of this equation is the first one?

[Bart Adam, Chief Financial Officer]

Yes, that is correct. The first quarter is the toughest one. The second quarter is also still on a reasonably high level. So by mid-year, normally we get a good view on the total year. That is how it works, but the larger part is Q1, and then also quite sizeable part Q2. Just adding one comment to your previous question; what you should also consider and what we have missed out a bit maybe on the outset also of the strategy is actually that the guarding is growing very fast as well. And so we do see good growth in electronic security and solutions, yes, absolutely, but in nominal terms the guarding is growing faster, if not more. If you look at a longer-term perspective there on one of the slides, I mean, we have grown the electronic security solutions with SEK 10 billion (sic) [ SEK 10 million ] from SEK 6.5 million to SEK 16.7 million, but the guarding in the -- over them same period has grown from SEK 64 million to 76 million, so in nominal terms that has even grown faster. So that has also led behind the whole -- sitting behind the whole equation on the margin question.

[Operator]

Our next question comes from the line of Stefan Andersson of SEB.

[Stefan E. Andersson, Analyst]

Two questions from me then. Sorry about being on this thing with the wage increase here. But coming back to the U.S., I guess, the European side you have labor agreements for most of it. So looking at the U.S., you're saying 2%, 3% wage increase at the moment. What is your ability to actually go back to your clients during the year if this ends up being higher as we move along into '18? Let's say it moves up to 4%, 5%. You have very high employee turnover as well. So just, yes, what is your opportunity there? Are you -- do you have a possibility to push that if that were to happen? Or is that something we have to be aware of if it happens?

[Magnus Ahlqvist]

Yes. So the dynamics or the different, like you highlight, Stefan, in the U.S., it is a more dynamic and more flexible market in that sense. So when we do see that there is, for example, the trigger of employee turnover increasing, there will always be a discussion and also then an opportunity and a need together with the customers to also then do adjustments. So I think that the capability, to your question, if wage increases at a higher pace is pretty good for us in terms of then also being able to balance that.

[Stefan E. Andersson, Analyst]

Okay. My second question comes back to, I think lots of people touched on it, on the technology side. I mean you show on your slide there that you've gone from 9% to 18%, or you said 19% even, of group sales, but that's a 10% increase. And then you said the margin is roughly 6%-ish points higher. So I mean it -- over these years, I guess, your margin on the group level should have increased roughly 0.5%. And it's actually flat in that period, so where do we actually see that this is materializing? Or when do you think we will see it on your accounting and not only you internally?

[Magnus Ahlqvist]

Yes, I think I can make a few comments, and also for Bart later on. It is also important to recognize the fact that we are winning quite a lot of business also thanks to the strategy and the direction that we have. So I think that is one important aspect in terms of us believing that we are growing faster than the markets. And -- but we are also investing. And we continuously invest also in advancing our positions to make sure that we're able to lead the development in this market because we see not only that margins will come up in the long term but we also have customers that are more satisfied; and also a lot of data points that indicate that the customers are also -- thanks to being more satisfied, also staying significantly longer with Securitas as well. So I think that's also the major, major points. Bart, do you want to make any other comments on this question?

[Bart Adam, Chief Financial Officer]

I think it's also valid to comment that, if you look at the U.S. where things are just more scalable from an implementation perspective, there we have seen the margin expansion. And then there were a million other reasons, of course, also explaining the margin, but in the U.S., in North America, we have seen the margin expansion. In Europe we have been a bit distracted also by the whole refugee situation, which has also costs to them and burned a lot of management time and resources. And we are recovering from that as well. And as well in Europe, I mean, the implementation is a little bit less scalable compared to U.S. In U.S. I think I have commented before. You make one major, big acquisition. And now we add a second one, and you really have a sizeable platform. In Europe we need to go country by country to find those targets, just as an example. And doing a small acquisition or a large acquisition just takes the same amount of time almost and resources. So that's a bit sitting behind your question. And then of course, we have seen that the guarding has been growing as well, and yes, there is some margin pressure on the traditional business. Yes, we should see that as well.

[Magnus Ahlqvist]

Yes.

[Stefan E. Andersson, Analyst]

Yes. So what you're saying is that we most likely will see some positive effects on the margin from this as we go forward now then.

[Bart Adam, Chief Financial Officer]

Well, you know that we don't guide here for the future, so you have to make up your own conclusions here.

[Operator]

And our next question comes from the line of Allen Wells of Exane.

[Allen David Wells, Research Analyst]

Just a couple of sort of clarification questions from me, I mean. Sorry to go back on the point about the migrant work in Europe. I just want to understand this correctly because, if I remember, back in 1Q '17, you had this, well, declining margins in Europe. I think, once, you were falling about a 10 basis points. It sounded like, looking to the -- listening to the transcripts to the sort of second half of last year, there was a bit of overcapacity. This was basically being addressed, and ultimately you were happy with where that were. Well, [indiscernible]. So I guess, with these overcapacity issues, it feels like, largely addressed, I'm surprised there's still quite a material drag here. Could you maybe just sort of provide a little bit about where we are in terms of what is actually dragging it? Is it the fact that you've still got overcapacity, that you're happy to run with that management decision? And how we should think about that being -- timing of that being removed. And then secondly, just again a quick clarification question: You mentioned, I think, in your comments around Spain you had some sort of tech solutions contracts that were shorter term in nature. I just wondered what the background is sort of to flag in there? I mean, are you highlighting the fact that there were some short-term gross margin uplift from these that may drop away this year? Just any background there would be helpful just to make sure we capture this in our modeling moving forward.

[Magnus Ahlqvist]

And so when you look at the refugee business, like I said, we peaked in 2016 in terms of activity and where we have been doing a lot in many different countries across Europe. When you come into 2017, there was a significant reduction as the situation somewhat normalized and -- but we have still kept quite significant activity in a number of countries. And that run rate that we mention now, SEK 200 million in the first quarter, so that obviously then indicates around SEK 800 million on an annual basis. And that, we do expect, will decline over time. To your question about the overcapacity: This is something that we always have to watch country by country and situation by situation as well. It's -- in a sense, it is to ramp business up. And -- but if you look at Europe in general, I will say that we have taken specific actions in specific countries where we feel that this is needed and -- but we also have a number of countries that are in good shape and now normalized in a sense, when you look at the impact of the ramp-up and also then the ramp-down of the refugee-related situation.

[Allen David Wells, Research Analyst]

So is it right, just to make -- is it right to expect that this overcapacity issue in relation to the migrant numbers will continue through to the next 2 to 3 quarters of this year?

[Bart Adam, Chief Financial Officer]

Well, I think, I mean, you know that we normally don't guide on the margin. So this is -- gets close to that. It's not on the same extent as it was last year. I mean, last year, we commented on the overcapacity, then also the drop was more heavy than this year. So this year, it's more part of, okay, it's 1% of -- for the total division, which is important, but it's not on the same level as it was last year. So it will not help the margin in Q2 either from that perspective because it is not comparable to last year, no.

[Allen David Wells, Research Analyst]

Okay. And then on the Spanish tech solution question.

[Bart Adam, Chief Financial Officer]

Yes. And we had some short-term contracts there. I mean contracts which were short term in nature. They were not so much behind the growth. I mean they are included in the new growth, but these are very small contracts, as I said, but quite profitable contracts as well. And those are short term in nature, so the moment that those short-term contracts would produce, then of course that could affect a bit the margin. So it's like alerting that the improvement that we see in this quarter could be hampered when those short-term contracts fall away, some of them.

[Allen David Wells, Research Analyst]

And is there any way you could quantify that just in terms of helping us over the next couple of quarters when they potentially fall away?

[Bart Adam, Chief Financial Officer]

Yes. I mean, as we -- as you say, we alluded that they were short term in nature. So if we do that, it's normally [ 0.1 ].

[Operator]

Our next question comes from the line of Henrik Nilsson with Nordea Markets.

[Henrik Nilsson, Senior Analyst of Capital Goods]

Firstly, on the solutions business, organic growth was 16%. It's fairly flat year-on-year. Is this a level that you're relatively happy with? Or what is your ambition for these segments going forward?

[Magnus Ahlqvist]

I think, from -- so Magnus here. I mean, this business, we're growing. And we're building this for the long term. And we started this journey a number of years ago, but we still have a lot of opportunity left. So I think that we don't really specify any specific number in terms of the target and where we want to grow it, but if you ask the question, "Is there a lot of opportunity still out there?" yes. Absolutely. So we know. And we have a lot of validation from the customers and the solutions that we have implemented with customers that this is definitely something which is important today but would also be very important in the future. And then I would also say from a customer perspective the adoption curve differs quite a lot as well based on what the customers -- what they, how they look at the world. Some people are saying, "Yes, this is the future, but we are not really ready yet," while some others are really driving the development together with us. And I think that that's also kind of normal adoption behavior over time as well, but we do see that there is significant opportunities for us here in the mid- and the long term.

[Henrik Nilsson, Senior Analyst of Capital Goods]

Okay. And on that subject also. Do I understand correct that the margin accretion you achieve from the higher contract margin in the solutions business is basically being reinvested to add the amount of initiatives and add further growth to that segment? Is that a fair way of looking at it? And is it possible then to talk about a point in time where you see these investments -- if that is a correct way to view it, where you see these investments sort of leveling out?

[Bart Adam, Chief Financial Officer]

Yes, it's a fair point that we continue to invest in the execution of the strategy as we walk on. And we will continue to invest as well in even, as Magnus also said, into the next part of our strategy and to what shall happen beyond 2020. So we are here for the long term. So it is a right conclusion that you're making there. I don't think we want to make a reflection on the point in time, on what should happen when exactly, but of course, at the end of the day, the goal is to expand the margin.

[Henrik Nilsson, Senior Analyst of Capital Goods]

Okay. And 2 more question from me, please. In Europe did these sickness-related issues also negatively impact your ability to deliver services and thus hurt the revenue in the quarter? Or was it only cost related?

[Magnus Ahlqvist]

It was primarily cost related.

[Henrik Nilsson, Senior Analyst of Capital Goods]

And one last, on the U.S. organic growth, did you have a step-up in the startup of contracts in Q1 compared to, say, the first 3 quarters in 2017? Or is the growth accelerating primarily related to the large contracts started in Q4?

[Bart Adam, Chief Financial Officer]

I mean the acceleration is coming from these larger contracts, but we do have a very good activity and baseline of good growth in the U.S.

[Operator]

And we have time for one more question, so we will hand to Andy Grobler of Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Just one quick question from me, if I may. You talked about the impacts of currency on revenues and EBIT during the quarter. And the Swiss kronor has been very weak relatively of late. If you mark to market with current or recent rates, what would the impact for the full year be, please?

[Bart Adam, Chief Financial Officer]

I haven't really calculated -- or I do not -- we have calculated it, but I have -- don't have the numbers right -- with me right now. But as you said, the effect ramped a bit up. And then the -- both the dollar and the Argentina peso and the euro moved quite a lot during the quarter actually. And so based on that, you could say it then depends on how they will level out actually between the 2, between the U.S. dollar and the euro, as they are moving in opposite directions right now. And that is extremely difficult to forecast. So I think from my guide is the best guidance right now is what we have seen in Q1. Everything else is more or less speculation where the foreign exchange rates will develop.

[Andrew Charles Grobler, Analyst]

But if you assumed that the rates were just going to stay where they currently are, so no kind of forecasting in that, what would be the impacts do you think on those metrics?

[Bart Adam, Chief Financial Officer]

Yes. I mean, where they currently are, we -- I don't have -- we haven't made the mathematics, I mean, on the exact day here today. We haven't made the mathematics, but yes, so many moving pieces in there. So as I said, they are outweighing each other a bit. And the net will really be what the difference is between the 2, U.S. dollar versus euro.

[Magnus Ahlqvist]

So I think...

[Operator]

That was the last question we had time for, so I'll hand back to our speakers.

[Magnus Ahlqvist]

Yes. So thanks a lot, everyone, for participating. And we have to wrap up. We have an Annual General Meeting, which is starting shortly. So thanks a lot to all of you.

[Bart Adam, Chief Financial Officer]

Thank you very much.

[Magnus Ahlqvist]

Thank you. Bye.