SCTBY - Securitas AB (publ) (SCTBF) Q2 2023 Earnings Call Transcript
2023-07-28 15:46:10 ET
Securitas AB (publ) (SCTBF)
Q2 2023 Earnings Conference Call
July 28, 2023 08:30 AM ET
Company Participants
Magnus Ahlqvist - President and CEO
Andreas Lindback - CFO
Conference Call Participants
Suhasini Varanasi - Goldman Sachs
Anvesh Agrawal - Morgan Stanley
Neil Tyler - Redburn
Stefan Knutsson - ABG
Viktor Lindeberg - Carnegie
Raymond Ke - Nordea
Alan Wells - Jefferies
Andy Grobler - BNPP Exane
Karl-Johan Bonnevier - DNB Markets
Presentation
Operator
Magnus Ahlqvist
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 improve 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're on par in terms of price wage in the first half of the year, and in light of the lower inflation levels that we are seeing now, we are expecting some normalization of wage increases during the coming six 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 pipe line 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 announce the extension and expansion of a multi-year 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 a 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 will limit the opportunity to execute our long-term strategy with the healthy financial performance are 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 the 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-continent 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 gent momentum with 7% organic sales growth.
While pricing increases, playing an important role, we have had good commercial activity with strong new sales that contribute to these 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 this 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, 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 already had a plan in North America, and this is also generated a positive impact in terms of cost synergies 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. 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 and 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 six or nine 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 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 three, six and 12 months accelerating the STANLEY integration. We have implemented strong cost measures, but there is still more work to be done here in Europe.
And moving then to Ibero-America, we have 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 investment that we have announced of Argentina the growth numbers will be normalized going forward without that type of inflationary 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 solution 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 management. An 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, turning over to you Andreas for more details on the financials.
Andreas Lindback
Thank you Magnus, and good afternoon everyone. We start as always with the income statement where the double digit organic growth continued in the second quarter and we saw an 0.8 percentage point margin improvement compared to last year.
Driven by a strong mixed change into technology and solutions through the STANLEY acquisition and the 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 SEK157 million in the quarter, stabilizing of the last quarters after the STANLEY acquisition which is also explaining the difference to last year.
Items affecting comparability was a bit more than SEK300 million. SEK170 million of this is related to the STANLEY acquisition and SEK141 million is related to the ongoing European and Ibero-American transformation program. And as usual I will come back with more details related to this shortly.
The financial net is coming in at SEK541 million, which is materially higher than last year where the main reason is the financing related to the STANLEY acquisition where we had SEK402 million of cost in the second quarter.
We had SEK26 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 SEK2 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 the 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 two 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 rollouts at a 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 IEC spend related to the program to be between SEK6 million to SEK700 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 SEK150 million IEC and SEK100 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 SEK150 million higher than the original plan of SEK1.65 billion, while the CapEx spend is a bit more than SEK200 million less than the SEK850 million budget.
So, on its totality, we are still within our cost budget and this is also despite a weakening Swedish krona that should be said as well. Moving on then to the IEC related to the STANLEY transaction and here as you know we announced total cost of approximately US$135 million at the start of the program.
The integration continues to progress well where we are ahead of plans with our synergy
take out in North America and ramping up for further synergies in Europe. In the first six months we had SEK285 million of cost in this program and since the announcement up until Q2 we have invested SEK800 million in IEC and we estimate the full year 2023 spend to be around SEK600 million. In other words a bit more than SEK300 million for the second half of this year.
So to summarize, we estimate the full year 2023 IAC to be around SEK1.25 to SEK1.3 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 SEK3.5 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 the last 12 months was 2.5 billion krona 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 de-leverage our balance sheet after the STANLEY transaction. The second quarter is coming in at SEK1.2 billion operating cash flow, which is an improvement of a bit less than SEK300 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 SEK1.1 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 continued 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 euro bond 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 700 million in 2022.
All-in-all, a decent first six 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 SEK3.2 billion since the beginning of the year. In the second quarter we paid the dividend of SEK1 billion and we also saw material negative FX impacts which year to-date is impacting the net debt negatively SEK1.5 billion.
The positive Q2 free cash flow is leaving us at the free cash flow of 85 million year to-date -- minus SEK85 million year to-date and the IAC spend was SEK680 million, all together explaining the SEK3.2 billion increase in the net debt.
The adjusted net debt-to-EBITDA came in at 3.7 times, which is then 0.1 higher than in the first quarter impacted mainly by the dividend paid out in May and by the translation impacts from the depreciating Swedish krona.
And if we further adjust for the items affecting comparability the net debt-to-EBITDA is 3.3 times, which continues to give a good indication of the de-leverage effect after the IAC programs are being finalized next year.
We expect to see good solid de-leverage 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 one further 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 SEK5.5 billion.
We also have our RCF of more than €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 four-year euro bond of 600 million in the beginning of April.
By the end of the second quarter now, the bridge facility still to be refinanced was $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 parts of the Term Loan or 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 also continue 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.
Magnus Ahlqvist
Many thanks Andreas. So before we open up the 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 reflect 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 four main areas.
Taking the lead with technology, quality guarding services with good profitability, establishing clear leadership as a solution partner to our client 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 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 guardian presence.
And while we still have important integration, systems integration work to be done related to STANLEY over the coming six 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.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Suhasini Varanasi from Goldman Sachs. Please go ahead.
Suhasini Varanasi
Hi, good afternoon. Thank you for taking my questions. 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 the 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 the static acquisition why the improvement cannot continue?
Magnus Ahlqvist
I can start with the first question when it comes to the hyperinflation there. If you're looking on a group level, Argentina and Turkey represents approximately one-third of our organic growth and in Europe it's actually the same estimate as well around one-third, maybe around one-third as well. And for Argentina I think we're like you say, we have already gone through that. So I hope that brings clarity on that one.
Looking at the other two 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 we look at our ambition in terms of what we want to take the company in terms of our ambition of 8% towards end of 2025. So we'd 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. So more integrated offerings for 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 looked at 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 we're going to do more standalone 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 it looked at the European business.
In terms of your question if I understood it correctly, yes, we have levered STANLEY, but partly also in line with the expectation, because it was a higher margin profile all that business that we acquired. So there has been significant positive impact on 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 and 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 six 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 six to 12 months also in Europe. So I hope that addresses your question in a decent way.
Suhasini Varanasi
Yes. Thank you. I just had one quick follow-up. Just if you could give your thoughts around Q3 expectations? Anything to watch also? Thank you.
Magnus Ahlqvist
Yes. So we never provide guidance. But I think when we'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 we had 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 ongoing basis.
More and more of existing and also non-existing or non-current clients are really starting to see the difference that securitizes versus any other player in the technology space or with more traditional guarding routes. 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.
Suhasini Varanasi
Thank you very much.
Operator
The next question comes from Anvesh Agrawal from Morgan Stanley. Please go ahead
Anvesh Agrawal
I got question. First, Magnus, you talked about the extension of a contract with last tech player. I just wondering how should you think about the impact? Does it generally come with an organic growth benefit like it did happen when you extend the contract in healthcare I think earlier in the year and it did prove to be sort of a cater to your 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 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 funding about the cash,
And then, what would sort of improve for your conversion to get to that 72%, 80% for the full year? And then finally just technical portion of Argentina again. Andreas 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 our model?
Andreas Lindback
Thank you Anvesh. 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 gross impact, the immediate gross 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 to financial net cash flow versus P&L, I don't see any reason for an immediate differences, but of course you need to take into consideration IAS 29 when you make in that calculation as I have been providing as well. Otherwise I don't see any reason where there'll 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 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 down from Magnus and myself down to all the leaders on in account as well to really drive through a strong cash flow the second half year. And we have taken quite a lot of initiative here as well ensuring that we are having the right incentive in place related to cash flow this year that we have implemented. We have also implemented actions in terms of our accounts payable.
We are also of course looking into inventory and how we can trim sort of CapEx and then we are following up much and much tighter this year also on our general cash flow for costing and our account receivable aging 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 when we have that kind of seasonality in the business as well where the second half year is stronger than the first half of the year. Again remembering, when you looking at the comparable, so the SEK700 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 investment? The answer is no. And it will be limited cash flow impact, and that is also how it is been. In the end the valuation of the business is the future cash flows. And due to the hyperinflation situation its very difficult to have a strong operating cash flow in that business and that is reflected in the valuation of it as well.
Anvesh Agrawal
That is very clear. Thank you.
Operator
The next question comes from Neil Tyler from Redburn. Please go ahead.
Neil Tyler
Thank you. Good afternoon. Three questions please. Quick one first of all, but sticking with the topic of Argentina. Any pro forma impact if we like of that disposal on the other revenue or margin targets? Second question, returning to the renegotiation on the contract situation in Europe that you mentioned in your prepared remarks. And do the contracts falling within this group within the material percentage of the European business, i.e., those that you still keeping an eye on. And have these contracts being problematic for some time? Or they're recently become more challenging due to operational cost pressures? And then finally to come back to the finance cost. Thank you for giving us the full year guide. Can you just sort of help us understand what you assume for your future U.S. Europe Central Bank rates moves over the second half within that figure? Thank you.
Magnus Ahlqvist
Thank you, Neil. So I can start with a second question then Andreas I'll hand over the other to you. When you look at and 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. But 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 a integrated solution or leverage our technology capability, then we humbly but firmly then terminate that business. And that 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 it also in a geographic dimension to make sure that we have 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 margin on a group level at 8%.
Andreas Lindback
On your first question related to Argentina, I mean, we provide in the last 12 months basically top line of SEK2.5 billion, right, and then also that the Argentina business have a lower margin than Ibero-America average with some guidance also on the organic sales growth impact something. 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.
Neil Tyler
No, no, that's helpful. Sorry I hadn't bothered that information
Andreas Lindback
Okay, clear. So just to be clear, the last 12 months SEK2.5 billion sales, lower than average more than compared to Ibero-America average. And then if you look in the second quarter, Argentina represent the 20% of Ibero-America's 24% organic sales growth. So I hope that helps. And then, we also set around 2% of the groups 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 as 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. So that's to give you that input. But it's also more complex than that when we are doing the financial forecasting given the capital structure that we are having in place.
Neil Tyler
Yes. I'm sure. I'm sure it is. Thank you. And Magnus just to come back to the first question. First of all, I was really trying to trying to get a sense of was -- you clearly, the active portfolio management is ongoing and necessary and operable. I suppose I'm trying to get a sense of is, whether there's a sort of greater proportion of the European business moving within that scope or whether that's a broadly consistent versus a year ago, two years ago and so on. And I know a lot of it started with the aviation business. 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?
Magnus Ahlqvist
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 principle about the value and defending the value that we bring. And there my confidence and our confidence is very high in terms of the strength of our offering. And when we're talking about 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.
Neil Tyler
Okay. But it is slightly dragging on growth at the moment in terms of organic growth, which suggests that you're probably within this two categories you're terminating more than you're renegotiating?
Magnus Ahlqvist
I think it's quite neutral when you look from a volume perspective. And when you look at that pure guarding services. 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 of the overall business.
Andreas Lindback
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 well as Magnus says here, it's more neutral on the volume side.
Neil Tyler
Okay. That's really helpful. Thank you very much.
Magnus Ahlqvist
Thank you.
Operator
The next question comes from Stefan Knutsson from ABG. Please go ahead.
Stefan Knutsson
Good afternoon Magnus and Andreas. Just a question regarding Argentina and the below average operating margin that you comment on, given that you 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 break-even basis or is it after Ibero-America profitability or what should we expect there really?
Magnus Ahlqvist
So thank you, Stefan. Yes. We are not breaking out that number. But I think Andreas commented it's well below the average Ibero-America margin today.
Stefan Knutsson
Okay, perfect. And then also follow-up on the items affecting comparability from the STANLEY acquisition. Were the total scope still SEK1.5 billion? I didn't get that number.
Magnus Ahlqvist
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, alright. 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, while 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 it's 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.
Stefan Knutsson
Okay, perfect. Thank you very much for the clarification and congratulations on the operational improvement.
Operator
The next question comes from Victor from Carnegie. Please go ahead.
Viktor Lindeberg
Good Afternoon. Thanks for taking my questions. I have three or maybe four. 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 driver down. Is this a new level or is there artificially low cost in light of less focus on maybe M&A or and what's not, just to understand that level.
Second, you mentioned cost of risk mitigating the margin performance slightly in North America. Is this related to bad debt provisioning and maybe your view of macro going forward and just be curious to see and hear 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 one-third of the expected $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 runway trajectory here starting off on those three? Thanks.
Magnus Ahlqvist
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 SEK25 million to SEK30 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 of non-recurring nature.
Andreas Lindback
And then, Victor, on the other two 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 operation is something that we are managing. But number two, 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 a third of the SEK50 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 six to 12 months.
Viktor Lindeberg
Okay. That's helpful. Thanks both. Maybe final adjacent question I guess to synergy realization, but the transformation and integration programs in Europe, Ibero-America you now commented on 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 else equal margin impact expectations being about 50 bps on that program for Europe as a standalone. So anything you could help us out on guiding or helping us understand this better?
Andreas Lindback
Yes. So, I mean, what we have said in 2024, it is really 2024 as a year. We are not more granular than that. And as we commented before, I mean, we've also had very good progress in terms of building up solutions organization, harmonizing that, that disorder generating benefit. We did deliberately also pause some of the system integration of 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, Victor that, that work 2024 is needed. But it's also important that we put a stop. So that we also know that, okay, this is when we're ending the transformation program. Because it is really 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 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 the more efficient and digitalized business. That is also something that will generate really good value over time.
Viktor Lindeberg
All right, understood. Thanks.
Andreas Lindback
Thank you.
Operator
The next question comes from Raymond Ke from Nordea. Please go ahead.
Raymond Ke
Hi Magnus and Andreas. 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 Argentinean markets?
Magnus Ahlqvist
Thank you Raymond. 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 you 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 determines more the client relationship, 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 and 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 all indicators will probably say that it's going to be a softer labor market. I think it's a fair guess over the coming quarters based on current trends. If you look in 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. The simple message is clearly no. I don't see a lot of similarities. Yes it's more of a inflationary environment. But if you look at Turkey, we have very strong position in the market. 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.
Raymond Ke
Great. Thank you very much. I'll get back in line.
Operator
The next question comes from Alan Wells from Jefferies. Please go ahead.
Alan Wells
Hey, good afternoon gentlemen. 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?
Magnus Ahlqvist
It's difficult to break that out. If you look at active portfolio management, like I said, when you're looking at Europe, looking at the Ibero-America, some extent in North America, there is a negative impact in terms of volume. But we do that for good reasons. And it's also the kind of the last resort as well. I mean, first of all we always look at the fundamentals in terms of value for money price and quality equation from a client perspective. Second one, we try then to make sure that we are converting and leveraging technology for solutions. And if that doesn't work that is typically when we are then taking a more active role in terms of terminating.
Alan Wells
Great. Thank you. And then, under some of the new disclosures that the risk management services and central costs, which I think fell quite significantly in 2Q to about SEK45 million. And can you just talk about what's driving that improvement? I think you maybe mentioned that there was SEK25 million to SEK30 million one-off costs. So I assume that's in Q1 that wasn't in Q2. But any additional commentary now I'm interested if it's a cost-based improvement or if the
risk management services side has changed in terms of profitability?
Magnus Ahlqvist
Now, the main difference there to be clear is around, I mean, we have a good cost control generally speaking. That's a good trend we have. But also the one-off that I mentioned before with around SEK25 million to SEK30 million. Otherwise I would say, it's fairly business as usual on that role.
Alan Wells
And sorry to be clear. The one-off was in Q1. I think it was a one-off cost rather than a one-off benefit in Q2.
Magnus Ahlqvist
No, there was a one-off benefit in Q2.
Alan Wells
Okay. So Q1 is more of the normal run rate a bit lower than Q1 in the normal run rate.
Magnus Ahlqvist
I would say Q2 is on a normal run rate excluding the one-off costs mentioned here so to say.
Alan Wells
Okay, that's helpful. And then, my line dropped earlier I think when you were talking about a pair of remarks around the interest cost guidance, which I think Neil mentioned. Could you maybe just repeat what the interest cost guidance are, the net financial charging guidance is for the full year if I missed that? Sorry about that.
Magnus Ahlqvist
No worries. The guidance is will be slightly above SEK2 billion for the full year.
Alan Wells
Perfect. Thank you. And then very final question. You called out good aviation growth in the second quarter. Am I right in thinking that's from a low base still? And maybe if you can comment where you are in terms of your aviation revenues versus the pre-COVID levels, that'd be really helpful? Thank you.
Magnus Ahlqvist
So, I mean, the base was decent last year. We did see significant recovery after the pandemic in 2021 and 2022. We also saw significant improvement in terms of extensive work in terms of active portfolio management on that front as I commented earlier. Today I believe aviation accounts for around 6% of our sales globally. If I go back a number of years to pre-COVID, I think we were at 7% or 8% or something like that. So yes, it's a slightly smaller share of the overall business. But I would say that the growth is very much now coming from new contracts that we initiated at the beginning of this year.
Alan Wells
Great. That's really helpful. Sorry one quick follow-up I forgot to ask on the interest side. Are you able to provide us that the split between fixed and floating rate as we think about the interest rate environment currently?
Magnus Ahlqvist
Yes. To repeat a bit of what I said there in the first quarter. When it comes to the refinancing of the STANLEY bridge that we have kept floating generally speaking. And then when it comes to the legacy pre-STANLEY depth, it's basically mixed between fixed and floating.
Alan Wells
But not a percentage overall. You can't provide just fixed versus floating of the overall depth?
Magnus Ahlqvist
No, that we have not provided before.
Alan Wells
Okay, no worries. Thank you very much.
Magnus Ahlqvist
Thank you.
Operator
The next question comes from Andy Grobler from BNPP Exane. Please go ahead.
Andy Grobler
Hi, good afternoon. Three from me as well. Two very quick ones. Firstly, just on the going back to the SEK25 million to SEK30 million of one-off gains in central charges. Why didn't you put those below the line and net them off against the other IACs if they are one-off gains? That would be my first question. Secondly, just so I'm sure, the Argentinean business, is that sold and closed now as of the 25th of July, so out of your accounts post that date.
And then thirdly, and slightly broader one. A lot of your the discussion and all of your targets are based around margin, and margins have gone up over the last few years, which has been good. But at the same time asset terms have come down pretty sharply. So return on assets has actually come down. How do you reverse that that trend over the next couple of years? Thanks very much.
Magnus Ahlqvist
On the first question the simple answer, it's just a normal course of business. Sometimes you have up and down so to say. Sometimes you as an example you have a consultancy cost coming in one quarter or and this quarter we basically have an operational positive impact. So it's not IAC. I mean, we've been transparent with the upsides we had in IAC before when it's really sort of non-recurring, non-operational. We will continue to be that But this is just ordinary course of business. It was a bit lower this quarter simply put from that perspective. Then on the second question, could you please repeat that one, Andy, sorry for that.
Andy Grobler
Just on Argentina it was sold on 25th of July. Just to check that, is that closed now so out of your accounts as of the 25th of July?
Magnus Ahlqvist
Correct. It was signed and closed at the same time. So correct.
Andy Grobler
Okay. Right, thank you.
Magnus Ahlqvist
And then, Andy, could you please repeat the third one as well?
Operator
The next question comes from Karl-Johan Bonnevier from DNB Markets. Please go ahead.
Karl-Johan Bonnevier
Yes, good afternoon Magnus and Andreas. I need to come back to active portfolio management once more, sorry for that. But I remember and Magnus when you formulated the financial targets that one reason that you stipulated for not say having a group revenue target was slightly uncertain impact of what active portfolio management would mean so at the end of the day. But maybe that you would come back then towards the end of 2023 with an also a group revenue target. Do you feel that you are getting closer to doing that?
Magnus Ahlqvist
Thank you Karl-Johan. I don't think I have given a specific timeline in terms of when we're going to give a revenue. But what we have said is that, that the most important is that the business that we have it's good healthy business. And that work we're still continuing to drive. And there is still more work that needs to be done internally, more work that needs to be done with our clients as well. And I think that that's essentially where we are. It is a very important part when you look at the size also of our services and guarding business that we also then drive significant improvement on that one as well to be able to hit our financial ambition in terms of reshaping as well the profile of the business. So this is this work is ongoing.
Karl-Johan Bonnevier
And I guess sitting on the outside that active portfolio management might mean that you are say, having the low hanging fruits on that part, say at the early parts of it where you have the big red list of contracts that you want to renegotiate and then focus on. And should we see the sign of that say now client retention rates are improving again that you are past that kind of -- that the most risky part of the active portfolio management?
Magnus Ahlqvist
I think I wouldn't make a specific projection there. But it's important to highlight. When you look at North America, I mean, there we had two very sizable. One was $150 million contract. That is not so common in our business. And that was also very low margins. I mean, that was more of an extraordinary event from my perspective, most normal business is significantly or contract significantly lower than that one.
Andreas Lindback
I think we worked through part of the portfolio, but we are also not through the complete portfolio neither from that perspective to just give another lens there.
Magnus Ahlqvist
Andreas? Yes. It's work is still ongoing, correct?
Karl-Johan Bonnevier
Good. And just one final thing as well. I think you mentioned in the previous quarterly call that the tight labor market and in particularly Europe had restricted you from taking on these kind of extra volumes that might be something that intra-quarter drive profitability. Are you now back in a situation where you feel that you can take on the extra volume that you find logical or is that still a limitation?
Magnus Ahlqvist
I think as a percentage of the sales, it's fairly stable, now compared to same period last year. So you can see that the situation has stabilized. And we have also had a certain recovery in a number of events and things like that we are helping with security. So, I think that has been positive. But I would still say that when you look at the labor market, a lot of the unemployment figures when you're looking at most of the markets in Europe are still at historic lows. And some indications of an improvement or some softening as I commented before. But that's then in the big numbers if you're looking at specific economic regions around major cities and things like that or economic clusters do you know that there could still be a fairly tight labor market. So I wouldn't say that that situation has completely normalized. But the situation from our perspective has stabilized and from that perspective I think we're managing quite well now.
Karl-Johan Bonnevier
And during your prepared comments talked about the higher subcontracting cost that affected Europe. Is that also something that we could hope normalized then in the second half of this year?
Magnus Ahlqvist
Yes. That one I definitely hope will normalize. That is something that we have to improve as well, because it is burdening some of the profitability especially in aviation.
Karl-Johan Bonnevier
Excellent. Thank you very much and all the best out there.
Magnus Ahlqvist
Thank you. Same to you.
Operator
The next question comes from Andy Grobler from BNPP Exane. Please go ahead.
Andy Grobler
Hi. I just wanted to see if I could come back on my the last question from the previous time, I think I got cut off when you asked me again about Argentina. So just to repeat. The targets are all about margins, but group asset terms have come down over the years and so returns have come down. How do you reverse that trend over the next couple of years?
Magnus Ahlqvist
Hi, Andy, sorry first of all to cut you off there. That was not intent obviously just to be clear.
Andy Grobler
Okay.
Magnus Ahlqvist
So now you're speaking in terms of return on capital employed, Andy, are you?
Andy Grobler
Yes, return on asset is where we're looking at it.
Magnus Ahlqvist
No. I mean that is very much about driving a more profitable business obviously with the investments that we're doing. And we have invested quite a lot over the last couple of years both with the STANLEY transaction, but of course also through our transformation programs as well. So, and that is why when we are doing these investments we need to make sure we are delivering good value to our clients, but also that we are making sure we are getting paid and having stronger margins as well. And if we drive that development you will also see a positive development on the return on capital employed.
Then it is like this generally speaking as well. I mean, if we have really strong margins in our different business lines, I mean, we don't mind growth from that perspective. Focus in the guarding business is about margins first to just be very clear. But if we have really attractive margins coming in our new sales, we are not saying no to that neither. So as we are shifting that mix like in North America you also see that we can drive both growth and good margin development in that business as well. And that will of course also then support our return on the investments that we have done.
So yes, you're right that we have now gone to a margin target, previously we had an EPS target, but we are also measuring ourselves on the return on capital employed internally as well. I mean that's -- so that is also important there for sure.
Andy Grobler
Okay. Thank you.
Magnus Ahlqvist
Thank you, and again apologies.
Operator
There are no more questions at this time. So I hand the conference back to Magnus Ahlqvist, President and CEO for any closing comments.
Magnus Ahlqvist
Many thanks everyone for your engagement and all good questions as always. We are on a good path in terms of the development and maybe on a more personal note, anyone who's taking vacation wishing you a good time over the holiday period in August. Thanks a lot everyone.
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Securitas AB (publ) (SCTBF) Q2 2023 Earnings Call Transcript