Securitas AB (publ) (OTCPK:SCTBF) Q3 2022 Earnings Conference Call November 8, 2022 8:30 AM ET
Company Participants
Magnus Ahlqvist – President & Chief Executive Officer
Andreas Lindback – Chief Financial Officer
Conference Call Participants
Anvesh Agrawal – Morgan Stanley
Katherine Carpenter – Bank Of America
Raymond Ke – Nordea Markets
Allen Wells – Jefferies
Sylvia Barker – JPMorgan
Viktor Lindeberg – Carnegie Investment Bank
Karl-Johan Bonnevier – DNB Markets
Johan Eliason – Kepler Cheuvreux
Magnus Ahlqvist
Good afternoon, everyone, and a warm welcome to our Q3 Conference Call. We have just closed the third quarter, which has been quite an eventful quarter with good momentum in the business. We have closed the acquisition of Stanley Security, and we’re progressing well with the integration process. So a lot of good activity and happy to present the results here together with our CFO, Andreas Lindback, and then we will open up for the Q&A. So we continue to increase the business momentum in the third quarter. The organic sales growth was 7%, and we have strong momentum in North America, where we returned to growth as previously expected and what we have previously also communicated. But the important thing, we now deliver positive 3% organic sales growth.
And we’re looking at the group level, commercial momentum is continuously strong, and we recently renewed one large global contract with an expanded services scope. And we are really proud to count some of the world’s leading brands as major clients and partners of Securitas. If we’re looking at the underlying business of the business before, we welcomed Stanley. The organic growth in Solutions and Technology was strong in the quarter with double-digit growth and the acquired Stanley business had good momentum with mid-single-digit growth. And Technology Solutions now represent 30% of our total sales. The operating margin increased to 6.5% and North America and Ibero-America are the main contributors, and we also had a material contribution from Stanley. And the Stanley Security business improved as a result of pricing recovery, cost control and leverage and also some impact from initial execution on the value creation plan.
But if we look at the external environment, labor scarcity and inflation continue to be important factors, but we are managing well and have a positive price-wage balance. Cash flow in the quarter was strong with an operating cash flow of SEK 2.8 billion or 122% and of the operating results. And given the increased debt level after the Stanley acquisition, cash flow is an important focus area going forward. So all in all, it’s a solid quarter. But I would also like to highlight that with the acquisition of Stanley Security, we are now accelerating building the future securitas. And we shared the strategy and the new financial targets at an investor update in August, and I will come back and talk a little bit more about this before we open up for the Q&A. We also had a successful rights issue, which was well received and oversubscribed. And I would just like to take the opportunity to thank all shareholders for your trust and participation.
And we have good momentum with the integration and value creation plan with Stanley and progressing according to plan. But with that, let us turn the attention now to the performance in the different segments, and we start with North America. And here, as I highlighted, we returned to positive growth in the quarter. We have high price increases that are an important driver. But as commented earlier, commercial activity is strong, and we’re achieving 3% growth despite then one large previously announced low-margin contract that is still affecting the comparatives until the end of this year. The installation business improved in Q3, and we now have a record level backlog, but we’re still facing some challenges related to component shortages and labor shortage. And when you look at the overall revenue and margin mix now in North America, Technology Solutions now represents 30% of our sales in North America, and this has a positive impact as well on our profitability.
And here, we achieved a record level, I should say, operating margin of 7.8% in the quarter. The improvement was driven by technology, by improvements in our garden business and strong contribution from our Pinkerton business. And Stanley Security contributed significantly. And when looking at the Guardian business, disciplined pricing and portfolio management are contributing to the improvement, and we continue to realize value with the transformation program investments. On the negative side, lower extra sales and margin pressure from labor shortages had a negative impact on the margin in our guarding business. But all in all, it’s very good to see continued improvements in North America. And if we switching then to Europe, where we generated 7% organic sales growth with strong price increases being a major factor as is the impact from the inflationary environment in Turkey.
We see continued postpandemic recovery in Europe and especially in the airport security business, where activity and growth was high in the quarter. And double-digit growth in Technology & Solutions is another important contributor to the growth and also the profitability. And the margin improved to 6.6% in the quarter and Stanley Security was an important contributor to this margin improvement. And when I look at the external environment, we faced continued challenges related to sickness and labor shortages. This did have a negative impact on the profitability. But our team is driving really good progress with active portfolio management, and this is even more important now in light of the labor scarcity that we are still seeing in most markets. And with a better offer than ever, we’re actively promoting technology and integrated solutions to our clients and as I highlighted, with good momentum.
If we move then to Ibero-America, where we also have continuously good momentum with 16% organic sales growth in the quarter. And all markets in Latin America had positive organic sales growth, but Argentina was the primary driver. If you look at Spain, which is a very important market for us, we continued at a good pace with 6% organic sales growth. And shifting to the profitability where we recorded an operating margin of 6.1%. And I believe this is also a record in modern time where you can also see that the execution of the strategy is delivering margins now that are on a significantly higher level compared to a few years ago. And we have solid performance in Spain and Portugal, and that is really the main driver behind the margin improvement. We had more of a mixed picture in Latin America and the operating conditions when looking at Argentina remain challenging. But all in all, if you’re looking at the segments, we have strong performance in the third quarter, continue to execute on the strategy, and this is generating results with improving margins. So with that, Andreas, I’ll hand over to you for some more details regarding the financials.
Andreas Lindback
Thank you, Magnus, and hello, everyone. We start, as always here to — by looking at the income statement. We continue to see high organic growth of 7% in the third quarter with good momentum in our Technology & Solutions business and strong price increases in light of the inflationary environment we’re seeing. The operating margin is coming in strong at 6.5%, where we continue to see good margin development in our securitas legacy business and positive margin impact from consolidating Stanley. A few words here related to the Stanley consolidation. We have consolidated Stanley into our books as of July 22. And in other words, it’s not the full quarter of Stanley that you see in the result yet. And you should be aware that some key ratios are impacted as Stanley has not been with us for a full year.
Stanley is coming in with approximately SEK 3.4 billion of sales for the period, and they are growing mid-single digit in the quarter with continued strong backlog. Approximately 65% of the total Stanley sales is related to North America, where the smaller health care and product businesses are also reported and the remaining 35% of the sales you find in Europe. From a profitability point of view, Stanley supported the margin positively in both segments, while the North American business had higher margins than in Europe. All in all, and overall, a strong contribution to the group margin from the Stanley business. If we then move on and look below operating results. Here, amortization of acquisition-related intangibles was SEK 137 million in the quarter, a bit more than double compared to last year, and this is fully explained by the amortization of intangibles related to the Stanley transaction of SEK 72 million in the quarter.
We have allocated approximately SEK 5.5 billion to intangibles in the Stanley PPA. The majority of that is related to customer portfolio amortized over 15 years. And we expect to have an annual amortization rate of around SEK 375 million per year going forward. This is also in line with the U.S. dollar numbers we have communicated to you earlier. Looking then at the acquisition-related costs. Here, we have very limited amounts. We have post acquisitions to focus on the Stanley integration and to deleverage our balance sheet. There may be 1 or 2 smaller exceptions to this, but there will be nothing major in the coming quarters. So we expect small numbers here also going forward. Remember, though, that the acquisition cost related to Stanley is reported under items affecting comparability. If we then go to exactly that, the items affecting comparability. Here, we had SEK 414 million of cost in the quarter. SEK 226 million of this is related to the Stanley acquisition program and 188 million is related to the ongoing European and Ibero-America transformation programs.
And I will come back with some more details related to items affecting comparability here shortly. If we then move to the financial net. Here, the net cost was SEK 266 million in the third quarter. And the main reason for the material increase compared to last year is the financing of the Stanley acquisition where we have had SEK 170 million of cost in Q3 related to the bridge financing in place. Of the SEK 170 million, approximately SEK 50 million is related to the bridge to equity. And this bridge was fully repaid in the fourth quarter after the finalization of the rights issue. We will have an additional cost of approximately SEK 25 million more in the fourth quarter, and then there are no more costs coming related to the bridge to equity. The remaining SEK 120 million related to Stanley is then the cost for the bridge to debt. This cost will be ongoing until we take the bridge out, and it will then be replaced with new long-term financing. Important to remember that the SEK 120 million in the quarter is not for a full quarter.
So all else equal here, the cost will be higher in Q4. If we then look at the finance net, excluding Stanley, this was SEK 96 million in the third quarter, basically the same number as in the third quarter last year. However, we see an underlying increase in interest cost, which is compensated by a positive impact of approximately SEK 50 million from IAS 29 hyperinflation in Turkey and Argentina and also some FX gains. If we then look at tax, here, we forecast the tax rate to be 27.2% for the full year of 2022. Stanley is coming in at around 28% in their tax rate and combined with some increases in nondeductible expenses, this explains the increase compared to Q2 when it was 27.0%. Before moving on, I also want to highlight that the number of shares used for calculating earnings per share has been adjusted for the bonus element of the rights issue in line with IAS 33.
The number of shares we have used is now SEK 438 million to be compared to the SEK 365 million used before in previous quarters. Both this year and comparative have been amended, and you find more information here on Page 21 in the report. On the next slide, we then have some more information related to the different programs under items affecting comparability. Here, we closed down 3 programs at the end of last year and the 2 remaining ones are the transformation program in Europe and Ibero- America and the acquisition-related costs related to Stanley. Looking at the European and Liberia America transformation programs. Here, we had SEK 188 million of cost in Q3 and almost SEK 480 million of cost year-to-date. Our estimate for the full year is around SEK 600 million here or possibly a bit north of that. And this includes the impact from the cloud computing accounting regulations that we implemented and communicated to you in the fourth quarter last year.
So all in all, we are coming in here at the upper end of the range that we communicated in Q2. Moving then to the IAC related to the Stanley transaction. Here, we announced total cost of approximately USD 135 million or SEK 1.5 billion in December. The integration program is progressing well with a good start of the value creation and also good start of the synergy takeout. In the third quarter, looking at the cost here, we had SEK 226 million of costs in the third quarter and what is coming in so far is mainly transaction costs and costs related to the synergy takeout. Year-to-date, we have spent almost SEK 300 million, and we expect to take the majority of the SEK 1.5 billion of cost over 2022 and 2023. I mentioned the cost of the bridge to equity here earlier as well. The SEK 51 million here is reported under financial net in the income statement and not underlying items affecting comparability. However, given the nonrecurring nature of the bridge, it is adjusted for when we report our earnings per share, excluding items affecting comparability and should then be seen as an IAC when looking at net income.
So all in all, looking at the year-to-date on the left-hand side, we have a total of around SEK 770 million of items affecting comparability in the operating income from the transformation programs and from Stanley, and then we’re adding on the bridge to equity and then the total items affecting comparability looking at net income is SEK 825 million. We then move on here to the next page. And here, we have an overview of the FX impact on the income statement for the quarter and year-to-date. Here, we had a major positive impact on our income statement, especially from the U.S. dollar that depreciated 29% year-over-year compared to the Swedish krona. The total impact on sales was 13% in the third quarter, mainly then driven by the U.S. dollar development. But I should also say that the U.S. dollar and the euro FX was a bit lower than the end rates throughout the quarter, which is explaining the somewhat lower average impact on our sales compared to the end rates.
Looking at the operating result, the FX impact was a bit higher at 15%, mainly due to the higher profitability levels in our North American business and with a similar impact also when we look at earnings per share. The EPS real change, excluding items affecting comparability was 22% in the quarter. This is derived from the real change on operating income in the quarter being strong at 30%, positively impacted, of course, by the Stanley acquisition. While the increase of amortization of intangibles, the increase in the financial net and also tax impacted negatively leading to the 22% of EPS real change. For the first 9 months, the EPS real change, also excluding items affecting comparability, was 15% with less contribution from Stanley as we consolidated the acquisition in July. We then move on to cash flow. And this is a prioritized area for us due to the increased economic uncertainty and also, of course, as we have a strong focus on deleveraging our balance sheet after the Stanley transaction. We have worked on improving the cash flow by focusing on our collection efforts and our working capital management. We have also strengthened our cash flow incentives across the business, and we have improved our forecasting and follow-up processes.
The third quarter is coming in strong at 122% or SEK 2.8 billion operating cash flow, where we had good collections in the quarter after a weaker start of the year, and overall, a stable development without major impacts and now Stanley also contributing, of course. If we look into a bit of more details here and looking at CapEx, we had SEK 968 million in the quarter. That is an increase of SEK 35 million compared to last year. And here, we see a continued increase in our investments into solution contracts, which is also confirming the positive momentum we see in the high-margin solutions business. We also saw continued investments into our existing transformation programs going also according to plan here. The CapEx to sales was 2.7% in the quarter, and we continue here to expect to come in below 3% for the year, now also including Stanley. The accounts receivables is coming in positive at SEK 185 million in the third quarter. And we — as I said before, we are satisfied with the collection effort and the focus from the teams in the third quarter after a weaker start of the year, that was also impacted by the high growth we see in the current environment.
Moving then further down here, we also have positive effects on other operating capital employed, which is mainly coming from increasing employee liabilities in the quarter, which is explained by the growth we see in the business now also in North America. When comparing the operating cash flow in the third quarter this year to last year, we should remember that we last year repaid SEK 600 million of the corona-related timing of relief measures that we benefited from in 2020 in North America. We also had one more payroll in North America last year impacting the Q3 comparative negatively as well. But important relating to the timing here, this payroll timing difference has no impact year-to-date nor for the full year as we in the first quarter this year had one more payroll than Q1 last year. So then moving to the free cash flow, which is also coming in strong at SEK 2.4 billion, thanks to the strong operating cash flow, although we had some additional cash going out compared to last year in the financial items, and those outflows are related to our bridge facilities. Year-to-date, we are at SEK 2.2 billion of free cash flow after a real strong improvement here in the third quarter.
Important to remember going into the fourth quarter is that we still have the final USD 70 million of corona-related time and relief measures in North America still to be paid. All in all, concluding here, we are satisfied with strong cash flow in the third quarter. We will continue to have high cash flow focus going forward to ensure we have a really good end of the year and continue our deleveraged journey here. We then move on and have a look at our net debt. Our net debt has increased materially with SEK 38 billion in the first 9 months of the year, landing at SEK 52 billion at the end of the third quarter. And the main reason here is, of course, the Stanley acquisition, which is impacting the net debt with more than SEK 32 billion. We initially financed the acquisition fully with debt through our bridge facilities and have since then partly refinanced that with equity, as you know, in October. Outside of the acquisition financing, the net debt was also negatively impacted by the annual dividend of SEK 1.6 billion that we paid out in the second quarter, SEK 800 million of spend related to items affecting comparability. A material SEK 4 billion translation impact due to the major currency movements we have seen and approximately SEK 1 billion related to IFRS 16 lease liabilities.
And more or less, the whole increase in lease liabilities here is related to the Stanley acquisition, taking it from GAAP to IFRS. So — and then, of course, we had the positive impact coming from the strong cash flow here in the third quarter and a total of free cash flow of SEK 2.2 billion for the first 9 months. It is important to highlight that we, after the quarter end, successfully have closed our SEK 9.6 billion rights issue, which has materially, of course, reduced our net debt since the end of September. If we then look at the net debt to EBITDA, the reported number was 5.8x here in the quarter. This is not taking into account the rights issue proceeds nor full 12 months EBITDA from Stanley. So more relevant is to look at this on an adjusted basis, taking this into account and then the ratio is 4.0x, which is also in line with what we presented during the recent Investor Day, supported further with the strong free cash flow in the third quarter. And if we further would adjust the net debt to EBITDA with items affecting comparability, the ratio is 3.7x, which gives a good indication of the deleverage effect after the IAC programs are being finalized going forward.
There is also, in the quarter, a negative impact on our net debt-to-EBITDA ratio coming from currency with the balance sheet that is translated to Swedish krona at quarter end rates, while the 12 months EBITDA is translated using average rates. If we then move on to the next slide. And here, we are looking at our financial position and debt maturity short. As you know, we have a solid financial position today, and none of our facilities have any financial covenants. And in the quarter here, we also had a strong liquidity position of SEK 5.7 billion. We also have our RCF still in place with more than EUR 1 billion maturing in 2027, and that facility is still fully undrawn as per the third quarter. As you are aware, we have bridge facilities in place then also related to the Stanley transaction of USD 3.2 billion, and we used these facilities to finance the purchase price in July. Since then, we have successfully completed the rights issue of SEK 9.6 billion, as I mentioned earlier. And we have also fully repaid the bridge to equity of USD 915 million. We remain with the bridge to debt facility of close to USD 2.4 billion. And we are, of course, here preparing for the takeout, but we are also in no rush as this facility is 24 months long from closing and also have attractive terms compared to where the market is today. We are considering different options and different funding options going forward, and we will move ahead with the takeout when the price and the conditions are right.
Moving on to the S&P credit rate and BBB- here. Basically, no change since we reported here last time, they confirmed our rating at BBB- with stable outlook after the closing of the Stanley transaction, which was also in line with our expectation at that point in time. And finally, here, important to reiterate our commitment to remain investment grade. And as I have emphasized earlier, we have a strong focus on cash flow and also to make sure we are deleveraging our balance sheet going forward. With that, I hand over back to you, Magnus.
Magnus Ahlqvist
Many thanks, Andreas. That’s probably one of the longest update we’ve had, but it’s warranted also given the circumstances and a number of moving parts that we also want to provide as much transparency on as we can. So thanks a lot, Andreas. Just a few words from my side in terms of us building the new Securitas. So towards the end of August, we shared our new financial targets, and we’re putting all the emphasis here on achieving 8% to 10% annual sales growth in Technology & Solutions and to achieve an operating margin of 8% by the end of 2025, but also the long-term ambition to achieve a 10% operating margin. And if you look at the activities we’re driving and the performance in the first half of this year and in Q3, we are confident that we are on the right path to see these targets towards the end of 2025. And looking over time, this is obviously a very significant shift in terms of the revenue and margin profile of Securitas to make sure that we enhance the value to our clients and also to Securitas.
And with the contribution from Stanley, Technology & Solutions sales now account for a little less than 1/3 of our sales and 50% of the contribution to our operating result is now coming from technology and solutions. And based on our enhanced capabilities and strength in our client offering, our ambition is to drive the shift in revenue profile in the coming years to then be in a situation where we’re targeting around 2/3 of the operating result to come from technology and solutions in the next 4 to 5 years. And to achieve that, we’re focusing on 4 main areas: the first one, taking the lead with technology. And when joining forces with Stanley, we have an outstanding position in the industry and a platform to offer the best technology solutions to our clients. And the second focus area is that we continue to develop the highest quality guarding services with a clear focus on profitability. And in this area, the investments that we have been making with our transformation programs and are making in Europe and Ibero-America are critically important as is the pricing and profitability discipline.
And the third focus area is to accelerate our integrated solution sales. We drive this market, and we’re leveraging here our leading presence with people, technology and other specialized protective services such as corporate risk management. And last but not least, when we’re building this platform now with a modern platform and with scale, we are tremendously well positioned to drive innovation that is meaningful to our clients and that innovation we can drive internally, but I also believe we’ll be coming significantly more attractive also to our partners. And building on that strong platform, we’re also accelerating our sustainability agenda. And together with our clients and internally, we are now driving the sustainability in the entire security services industry. And I’m really proud of the fact that we are the first global security services company to commit to the science-based target initiative.
And as we’ve outlined in this slide as well, beyond the environmental focus, there are a number of important areas where we make a significant positive difference, not only to our clients but to our people and society at large. And these are the main areas where we are focusing our sustainability efforts in the years to come. So with that, I think we are ready to wrap up the results presentation. Just a few final words here. We are executing on our strategy. It is generating results, with an improvement of the operating margin to 6.5% on a group level. And as I highlighted before, the highest margin to date, I believe, in North America and Iberia America. We have good momentum and growth with Technology & Solutions, maintaining a positive price wage balance in tight labor markets. And we have completed the most transformative acquisition in the history of Securitas when joining forces with Stanley Security. So this means that we are further differentiating ourselves with a leading client offering and positioning ourselves for significant margin enhancement in the coming years. So with that, operator, we are happy to open up for the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Anvesh Agrawal from Morgan Stanley. Please go ahead.
Anvesh Agrawal
Hi. Good afternoon. I’ve got three questions, really. First, just referencing back to the numbers you reported for July and August while doing the rights issue. And it seems like there is an acceleration in organic growth in September. If you could just comment what has led to that specifically in September? And then again, just going back to that, you saw your margins of 6.5% are consistent with what you reported for July and August with 1 additional month of Stanley in, which should be higher margin than the group average. And also, if you just look at the numbers, it looks like the technology had a really strong organic growth. So just wanted to check what’s happening with the underlying margins? Are there any areas of softness there that is limiting the margin progression? And then finally, just on the leverage. And clearly, you got about 35-36 billion of debt up for refinancing. I mean you got the favorable terms on the bridge. But does it get more expensive, the longer you keep it or the rates are fixed on the bridge until 2024? Just trying to think about how should we think about the interest cost for next year, really.
Magnus Ahlqvist
Thanks, Anvesh. So if you’re looking at the first question in terms of the growth, yes, we have a good — I mean, we have really good momentum in the overall business. If you’re looking at what has improved significantly in Q3 over Q2 is that we are returning to positive growth in North America. So that by itself is a very important factor. We’re also continuing to drive price increases. And I think that’s a massive strength as well that we are able to balance and in some cases, also create some positive balance. And that is also a testament to the strength of the offering that we have. So I would really highlight those two as the main points. Margin, as you highlighted, 6.5%. That’s also in line with what we had in the trading update, similar picture in the month of September. So nothing dramatic there. What is important is that the Stanley business is continuously improving as we had anticipated and also communicated expectation of at the investor update that we had at the end of August, but it’s continued good development. And then I think you asked about the underlying business. I mean, if you look at the improvement here from 5.9% in margin last year to 6.5% this year, there is a solid improvement in the underlying Securitas business, and then there is also significant contribution from Stanley, which is kind of the bridge between the 5.9 up to the 6.5.
Andreas Lindback
Related to the question around the bridge here overall. What we can say, we have said before, we are not going into the commercial details of the bridge facility. It is attractive terms on the bridge facility we have in place compared to the market today. And you can also say the attractive terms remains throughout the period also when you’re comparing to the external market and the prices you see in the external markets today there as well?
Anvesh Agrawal
Yes, that’s clear. Just to be clear, Magnus, on the margin point, the point I was trying to make in July and August was 6.5% with about 1 month of Stanley and for Q3, obviously, you got September with Stanley and that is — should be a higher margin than the group average. And then the technology business is growing very, very fast. So why your margins aren’t better than 6.5% that you reported for July and August? I mean September theoretically should have a higher margin than 6.5%.
Magnus Ahlqvist
Yes. I mean there is nothing to kind of draw in terms of conclusions between the individual months. We look at the 6.5% as a solid 6.5% very similar overall picture in the month of September as in July and August.
Operator
The next question comes from Kate Carpenter from Bank of America. Please go ahead.
Katherine Carpenter
Hi everyone. Thanks for taking my question. On Stanley, it looks like the mid-single-digit organic growth was relatively steady throughout the quarter just based on today’s announcement and the trading update. So could you confirm though whether there is any shift in momentum at the end of the quarter and heading into the fourth quarter? And then also on the cost synergies, can you quantify how much of the USD 50 million of synergies have been realized at this point? And how we should think about the realization of those going forward into the next few quarters? Thanks.
Magnus Ahlqvist
Thank you, Kate. Well, if you look at this, I mean the business, we shouldn’t interpret too much between the different months typically within the quarter because there could always be some natural variation. What I would say is the overall kind of growth and also overall performance improvement that we saw in July and August has continued in the month of September. So it is just a solid improvement compared to the first half when we didn’t own the business. So I think that is number one. If you look then at the cost synergies of SEK 50 million, that is the target that we have. We are progressing really well in terms of this. So we are saying that we are firmly on plan in terms of achieving those. We did have some benefits from the fact that the closing the transaction took 2, 3 months longer than what we had anticipated. So I would say we’re coming out, and the team is doing a really good job here with the combined teams now with the new security technology team starting to execute on the value creation plan. The vast majority of the impact here will come in ’23 and then also some in 2024. And that’s as much as we can say at this point. But we feel really confident the team is doing a really good job, and we are, like I said, firmly on plan in terms of the synergy realization.
Katherine Carpenter
Understood. And just a quick follow-up on that. Are the synergies pretty well balanced between Europe and the U.S.? Or should we think of them as being more geared towards the U.S. in terms of thinking about FX implications?
Magnus Ahlqvist
Fairly well balanced. But I think where you’re looking at a timing, I think it will be overall a bit faster in the U.S. than in Europe in terms of execution.
Katherine Carpenter
Perfect. Thank you.
Operator
Please state your name and company. Please go ahead.
Raymond Ke
Raymond Ke, Nordea. Can hear me?
Magnus Ahlqvist
Yes, we can hear you Raymond
Raymond Ke
Okay. Sorry. So two questions for me. First one regarding bridge loan refinancing. You said that you would continue to refinance when the conditions were right. Could you help us understand a bit how you’re reasoning here?
Magnus Ahlqvist
Yes. From our perspective right now, obviously, if you take a step back, of course, the markets are much more challenging today compared to when we did the transaction here in December, but we are now also looking into what kind of financing we want to have in place, where there are different types of options for us. Do you have the bond market, you have bank loans and you also have other options out there as well. And the pricing, of course, a difference between those different options. So that is also what I referred to here, we will only execute on the takeout if we find the sort of terms being relatively also then attractive to us as well. So I think it is from that perspective, you should see it.
Raymond Ke
Okay. So is there a reason to perhaps even think that you might look into a different way of financing such as right second rights issue potentially.
Magnus Ahlqvist
Absolutely no. This is looking at the — this is comparing, for example, the bond market to the term loan market and other types of debt financing. There is no more — there’s no additional rights issue. Just to be very clear about that.
Raymond Ke
Perfect. And in terms of time line, then there could you perhaps give any details there? Is it like 2023 or?
Magnus Ahlqvist
The bridge is 24 months alone. So it will definitely be within that. And then, of course, we don’t want to wait here to the very end neither. But as I said also, we have good attractive terms here today, which also benefits from — there is also a benefit then for us to wait and just make sure that we have good timing of the execution. So we will find the balance in between those 2 that I mentioned there as well. But — and then we will come back to you, of course, when we do the takeout as well, but we don’t have an exact time in mind today.
Raymond Ke
Got it. And if you were to delay the refinancing, will you be incurring any additional fees other than the interest costs for our understanding?
Magnus Ahlqvist
You mean related to the existing bridge facilities today, Raymond?
Raymond Ke
Yes, exactly. If there are other costs associated if you push the time line?
Magnus Ahlqvist
No, I mean, it’s normal commercial terms here in the bridge facilities. And then as I said before, we’re not going into that from that perspective. So but nothing that stands out as any major fees or so that would not be ordinary course of business in this type of rich facilities?
Raymond Ke
Perfect. I’ll get back in line. Thank you very much.
Operator
The next question comes from Allen Wells from Jefferies. Please go ahead.
Allen Wells
Good afternoon guys. A couple for me, please. Firstly, I just wanted to follow up on Anvesh’s question for Stanley. I think I’m kind of struggling with the same thing. If I do my kind of my own assumptions around what I think the margin accretion is from Stanley plus your pre 10 bps from FX as well. There isn’t a massive underlying performance for the core group, it seems to me. And going back to, again, Anvesh’s point about technology, it looks like kind of 20-plus percent growth from the tech side of the business as well. So maybe just to ask a question in a slightly different way. Is there things like mobilization costs on the tech side? Or are there some headwinds in the guarding business that are offsetting what we would expect to see stronger underlying margin improvement? That’s my first question. I’ll ask the other ones after if that’s okay.
Magnus Ahlqvist
Yes. Thanks, Allen. When you look at the business, I mean, between individual weeks and between individual months in a quarter, there will always be some variation. It is a portfolio business. But then if you look at the technology business, that’s more of a project business as well. And I mean that could also — there will always be a variation or some fluctuation in terms of when projects are completed, et cetera. So there is nothing to read into those numbers. We look at it as just solid continuation of the performance that we had in July and August. So I wouldn’t really read anything into it. You can almost look at that like when it’s only really relevant to look at the full quarter for more of a complete picture.
Allen Wells
Okay. Okay. And then just going back to the growth question as well, obviously, if you look at that acceleration in growth to 7% from the 6, that basically implies a near 9% growth number for September, just simple math averaging out. How should we think about that and the exit rate as — can we extrapolate that for the fourth quarter? Or just trying to make sure my assumptions for the fourth quarter are correct? And then my final question was just around — we see a bit of a narrative coming out of certain parts of Europe, and this isn’t security specific. This is just a general comment that some of the wages that we’re seeing may be lagging CPI, maybe due to some of the collective bargain agreements in place. So there’s potential for a bit of lag headwind for some businesses as pricing is maybe ahead of some of that. Would you agree with that narrative? Or would you go against that? Just trying to understand from someone who’s obviously dealing with it right on the front line it’d be really interested to get your views there.
Magnus Ahlqvist
Yes. So we have, Allen, to the question here, it’s definitely the correct observation that we had stronger growth in the month of September. Like I mentioned, North America is a big and important driver because there we were returning to growth in the quarter, and we’ve had really good commercial momentum there. So that is one. But I should also highlight when you’re looking at the general growth going into the fourth quarter, we are doing really well in terms of balancing price wage balance overall. And we do that with what we call kind of more of a dynamic approach in terms of not doing a regular or annual cycle, but rather doing price increases whenever they are required. And I would say we have strong commercial momentum across the board. I mean it’s not only North America. We have healthy new sales with good margins in the other divisions as well, looking at the third quarter.
So we feel quite good about where we are. We are really disciplined because labor scarcity is a real challenge for us in terms of availability and our ability to find people — so even more important that we are disciplined in terms of the portfolio management that I have referred to quite a lot over the last year, 1.5 years, that we are driving and actively executing across the board. Coming a little bit to the last question then, what you said in terms of do you make the right assumption. I mean when we are doing price increases, we always try to time those so that they coincide with the underlying wage increases. That is the general rule and methodology. What I could say, and this is nothing new because I’ve highlighted this in previous calls. Looking at Germany, for example, there is a very significant increase in terms of minimum wage across the markets. And that is obviously very relevant for us that we make sure that we cover that completely with price increases. If you’re going into the new year, Netherlands is another market where there is also strong double-digit increases expected. So there is a number of those factors as well in this type of environment, that will have an impact, but we typically always try to time those quite — the price increase with the wage increase.
Worse thing that can happen to us is that we fall behind. But this is kind of DNA and a core focus of Securitas for many, many years, and we have a strong track record, and it’s really serving us well. And the clients are receptive to the price increases. And I think that is important. And that is probably because they know there’s generally very good awareness in the market about the inflationary environment. It’s about our ability to maintain and to continue to develop the quality that the clients are willing to pay for. And this is something that we are working. And obviously, when we’re strengthening our offering with more technology capability, more solutions, options, et cetera, we have a really strong offering also to manage in a more complicated environment. And I think that’s what we’ve done in the first 9 months of this year, and that is also our ambition as we are going forward.
Operator
The next question comes from Sylvia Barker from JPM. Please go ahead.
Sylvia Barker
Hi. Good afternoon everyone. Thanks for taking the questions. First of all, on the standard margin, you talked about 9% EBITDA in the first half, and you said in the trading update and today that sequentially, that is better. Could you give us an idea of where that margin stands in Q3 and what you expect for the second half?
Magnus Ahlqvist
Yes. So if we look at this in general terms, we were somewhat concerned in the first half when we looked at the performance. Stanley took a number of decisions. One, which was very important was price increases. And that is now starting to flow through, and that is a clear important driver behind the improved margin. Another one is also executing on some decisions that I think they also held off in terms of executing, anticipating the close, which was a prudent thing to do. But now our joint team is executing with clarity. So I think that, that is another factor. So when you’re looking at this, we don’t break out the exact number, Sylvia, but it is a clear improvement, and we feel that we are on the right path.
Sylvia Barker
That will be somewhere between the 9 and the 12 that you’ve talked about before for the first half of this year and the full year last year, respectively, or?
Magnus Ahlqvist
Just to be clear, on the 12 there Sylvia, is that — I mean, the close to 12 that we communicated in December was an EBITDA number, which I think is important to remember here, so we are comparing apples to apples. So it would have been lower.
Sylvia Barker
And so the 9% is EBIDAT is not EBITDA?
Magnus Ahlqvist
That was EBITDA that we did there as well. So that’s an important difference there.
Sylvia Barker
Okay. Clear. Thank you. And then just– okay. I was getting some echo. And then just going back to this point then on the European margin. So it sounds like you have already implemented price increases in Germany, let’s say, and you’re currently implementing them in the Netherlands, can you just give us an idea of how progressed that is? Because obviously, the German medium wage increase happened on the 1st of October. And just thinking about your Q3 margin in Europe, that was flattish externally. So just some concern whether that would still be flat or any worse in Q4? Kind of where are you on the timing of these price increases?
Magnus Ahlqvist
Yes. So generally speaking, reiterating a few key points. We are driving this hard. If you’re looking at the German market, I mean, we are typically not at minimum wage, we would typically be above minimum wage, and that’s also more the kind of the quality and the premium positioning that we have in the security services industry and also the expectation from our clients. So it’s not kind of a direct impact. We don’t comment on the progress beyond the third quarter, but like I said before, and I hope that you feel that as well. I mean we have really stronger offering than we’ve ever had. We have a very high focus on this throughout the organization, and that is the same in the German business where I spent a couple of days last week. And so we can just reiterate those key points and the clients are generally receptive as well. And I think that’s the most important thing. So we continue with high focus, strong offering — and then obviously, with the ambition of making sure that we are successful in balancing also in the next couple of quarters and years in the same way that we have been, if you’re looking in recent history over the last couple of years.
Operator
The next question comes from Viktor Lindeberg from Carnegie. Please go ahead.
Viktor Lindeberg
Victor Lindeberg from Carnegie I Hope you can hear me. A few just questions on cash flows and also the financing, starting on our working capital seasonality. Now you have a bigger project business. And just to understand the development here in the coming quarters. Is there anything we should be mindful of going in now to Q4, Q1 and so forth that is sort of tilting it to alter history? Second, looking at your multicurrency bridge financing that you now have in place, what is the mix here from euros and U.S. dollars. Is it fairly matched with your revenue split? Or can you sort of give any guidance on how to think about that given the moving landscape on FX relative to the Swedish krona.
Magnus Ahlqvist
If we’re starting on the currency here when it comes to the bridge, here, we basically have a currency mix matching our capital employed. So if you think about it, you can say, if you’re looking at our sales, as a guidance here, obviously, is the balance sheet that we’re hedging here. But if you take sort of the revenue split in — that we have in U.S. versus euro, you would get a fairly good understanding of the currency mix that we’re having there because we have basically already then hedged our balance sheet in that mix Viktor. Then if you’re looking at cash flow, seasonality-wise, we have strong — normally a stronger second half year in the business overall. And now, of course, with Stanley coming in, I don’t see any reasons why it would be a weak or especially strong Q4 on the Stanley side coming in. Of course, I mean, we have owned now for 2 months. So here, we also need to learn over time, but we have not seen that in the past neither. So it shouldn’t be anything new coming in there. But then, of course, as I said before, we have the USD 70 million that we’re going to pay out related to those COVID-19 relief in North America that we need to pay out in the fourth quarter. So that will impact from that perspective negatively. But otherwise, I do not see anything else specific.
Viktor Lindeberg
Okay. That’s clear. All my other questions were already answered. So, Thank you.
Operator
The next question comes from Karl-Johan Bonnevier from DNB Markets. Please go ahead.
Karl-Johan Bonnevier
Yes, good afternoon Magnus and Andreas. A quick one on asset management or the portfolio management. What’s your early take on the efforts we have put in on that side?
Magnus Ahlqvist
Well, this is something can that we started to drive more actively a few years ago in the Aviation segment part of the business. And it was a little bit triggered by not having had enough discipline or rigor historically in terms of how we manage contract profitability within Aviation. But then after 2020 and the positive experience that we had there, we’ve taken that more broadly across the entire business. It’s a sizable operation that we are driving to change mindsets, it sometimes takes a little bit of time, but I believe it’s serving us well the work that we have done over the last couple of years. And I referenced some market visit last week, for example, and also the discussions with our leaders of the different divisions. This is firmly on the agenda. And it’s not only on a kind of a group or a divisional leadership level, it’s also now in the countries. So my feeling is good. But when we do this, I mean, we always take a measured approach.
We respect the contracts that we have. If something is really problematic, obviously, we’re driving more urgency try to improve that. But it’s also a situation where looking now compared to 6, 7 years ago, I think the general perception among the clients as well is that people really understand the difference between having a really good provider, we’re really good people that are decently or well paid, delivering really good quality in the relationship. And that is the main point here. If we deliver what we believe is really, really good. We also have to charge properly for that. And I think that’s a discussion that we’re having in a very pragmatic manner with the clients. And we are firm about that. I mean we are humble, but firm at the same time. And I think that is the only right way to do it because — if we are fully aligned in terms of how we work, what the expectations are and what we deliver, that is always a better foundation for a really good relationship because then we can focus more on how we develop the relationship and the security equation as opposed to complaining about things that are not working.
So I would say I feel that we are in a good place. We have been driving this more from the top from the beginning, but now it’s really coming through in the countries. And it’s also an important time to do that because everything else equal, when I look at the availability of people, it’s only responsible management from our side as well to make sure that the contracts that we have, they are contracts with healthy profitability. If we don’t have something which is healthy, I mean we always then have a structured review together with our clients, either we are increasing the prices to make sure that it’s sustainable. — or very often preferably as well we convert to solutions, leveraging our technology and greatly increased technology capability. And if the client is not willing to do that, that is the case when we would then — then it’s better that we terminate this relationship.
And what quite often happens in a number of cases there is that the clients all say, okay, I understand that you are serious about this. We want to keep the relationship and continue to working with you and your people. So let’s sit down again and we take that discussion. And that’s really the kind of the — where we are right now. we’ve also been driving quite hard to get full and better financial visibility because here, we’re coming from a legacy situation where it wasn’t that easy across the board. But with the transformation program investments we are making, we’re continuously also enhancing that. And that would be — that work will also continue in the next couple of years. But where North America is first, that’s the division that is the first out and obviously really good value as well from better systems to support this work. So I hope that gives a flavor Karl-Johan. I understand it’s a long answer, but it is a very important aspect of how we execute on our strategy. So I felt better to elaborate a little bit more in the answer as well.
Karl-Johan Bonnevier
Excellent. Excellent. And just to carry on, on the same thing, you mentioned the conversion of guarding contracts into technology. Is that a part of the strong growth you’re currently seeing in the technology segment legacy business, so to say? And then also, do you feel so confident about, say, moving your financial targets to also include guarding by coming through 2023 and hopefully having terminated this portfolio management extra effort that you’re doing for the moment.
Magnus Ahlqvist
Yes. So absolutely. I mean, to the first question, when I look at conversion, yes, it is an important part. We have hundreds of thousands of clients in our portfolio of garden clients. So there is a very large and most loyal client base that we are continuously working with. — conversions is an important opportunity. And I think when you’re getting started on the solutions journey, typically, conversions are more important than new sales. But then as we are enhancing our technology offering, we’re also starting to see more and more clients that are coming to us for the first time, saying, can you help us with your integrated solutions. And there, we are building more and more good reference cases. And I think that is also expanding with a number of different vertical segments where there are now more and more positive reference points. And then obviously, when I look at that in the reverse way, Stanley are also bringing a rich and very good client base.
So when you’re looking at commercial synergies and in terms of added value sales, so we can help and enhance the offering to our clients — that is also something that we will start to put more focus on as well beyond the kind of the immediate integration work that we are doing is also then to take a more structured approach in terms of commercial synergies to help more and more clients with more of their security needs. The guarding question was the second one that you asked. And I mean we’re deliberately putting focus here in terms of the growth in Technology & Solutions because that is where we provide the highest value to our clients and also to Securitas. And — but we have also said that we will — and Andreas and the team are working on that as well during the first half of next year also provide more transparency in terms of the performance in the different parts of the business. So that’s something that we’re going to come back to in 2023.
Karl-Johan Bonnevier
Sounds promising. Thank you very much. And all the best out there.
Magnus Ahlqvist
Thank you.
Operator
The next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.
Johan Eliason
Hi. This is Johan at Kepler Cheuvreux. I was just wondering a little bit. We have been focusing on the panamic recovery this year and the Stanley acquisition, obviously. But we just heard the Swedish government talking about Sweden turning into a recession next year and then most likely, other countries in Europe will likewise. How prepared are you for a potential downturn into next year? Your debt levels is quite elevated as we speak. Your resilience was fairly good in the great financial recession a decade ago. But — has the Stanley acquisition sort of improved that resilience, you think? Or how do you look at it from a potential preparedness ahead of a downturn?
Magnus Ahlqvist
Thank you, Johan. So a few comments or perspective here. As you highlighted, historically, we have been quite stable also in more challenging times economically. And that is very much down to the fact that we operate a large portfolio business. I think the other factor here as well at a very high level is that the need for security is there and continuously growing. So I think when you’re looking at major trends beyond and outside of Securitas specifically, the need for security is there. if you’re thinking from a client dimension, this is not something that we are seeing any indications that there is a kind of a broad downturn or anything like that or decrease in terms of demand. There will obviously be different sectors and vertical segments are going to be affected in different ways. I think we’re quite well positioned in terms of our portfolio. We’re working. Many of the leading brands of the world are choosing Securitas. And I referenced also on contract that we have that we have just extended as well with positive growth.
So I think from that dimension, if you take that lens, also quite well positioned. But then, obviously, we also have a really strong offer, and the security market itself is large. We are the leading now player, not only in terms of guarding but also in terms of technology and integrated solutions by far, I would say, the strongest offering in the industry. And that helps you in good times. It also helps you in more challenging times. So I think that’s another one. But then we are working as well with contingency plans. And that’s something that we did very diligently in the COVID period because then we entered the period of significant uncertainty if we go to the beginning of 2020 with scenario planning. And the approach that we take, I mean, we do that on a group level, we do it across the different segments and divisions. We do it also on a country level to make sure that we are maximizing our preparedness to stay strong also if times are turning significantly more challenging.
So I think those are the main points. One additional argument just to add some flavor as well, is that — I mean, if you were to categorize us in in a fairly simple way, you can see that we are late cyclical in terms of the general profile of our business. But you need to look at a number of different lenses and perspectives here as well. But preparedness and working with this continuously, I think that we do. But then we have, like I said, also a number of factors that make us strong also in challenging times.
Andreas Lindback
This is, of course, also one of the reasons for the cash flow focus here as well. What we have done in the last couple of months is also making sure we pick up signals from the key countries and the clients there as well when it comes to anything related to the collections. So we don’t have any sort of credit risks in place. But in all honesty here as well, we are not picking up any negative signals so far. It’s very much business as usual, but we’re staying close to that. And then obviously, now with a bigger technology business as well, important for us that we are not building up too much inventory in the business, keeping that really sharp as well. to make sure if there would be a weaker demand that we are in a sharp position there.
Johan Eliason
Okay. Good. Then I have a question about the retention rate. If you look at the different geographies, it looks sort of pretty stable or slightly increasing in Europe and in America, but it has taken a step down in North America. Is that mainly related to this big contract you walked out from? Or is there a change in the North American?
Magnus Ahlqvist
It’s only related to that. If I look at — I mean if we exclude the large health care contract and the aviation contract that we terminated somewhere last year, retention is strong in North America. Our team is doing a really good job. We are going deeper in the relationship even more important now also when we have a stronger offering with Guarding and Technology. So looking at the retention overall, I feel quite good. And that’s the reason that we say that we have a large and also a fairly loyal client base. When you’re looking at contracts that we are renewing business that we’re keeping and developing , yes, we are in a good position.
Johan Eliason
Okay. Excellent.
Magnus Ahlqvist
Thank you.
Operator
[Operator Instructions] Please state your name and company. Please go ahead.
Unidentified Analyst
The Bridge financing with another question, if I may. So if we try to back out the interest based on how much you paid for the interest cost since July 22, would that give us an idea of the annual interest rate you’re paying? Or is that — are we missing something if we try to back it out that way, so to speak?
Magnus Ahlqvist
It would give you an idea of the total cost of the bridge. And so the answer is yes there.
Unidentified Analyst
Perfect. And secondly, if I may, could you provide a split between price and volume for the 7% organic growth you achieved in the quarter?
Magnus Ahlqvist
Yes. So if you’re looking at that, I mean, we do have some volume growth across the board. And I think that is important. There is only one exception, and that’s relating to Johan’s question before as well in terms of the large terminated contracts. But there is quite significant impact when you’re looking at the price increase. I mean that is the vast majority of the 7% in growth. But we feel good about that because it’s also a testament to the fact that our clients, they recognize the quality, they value the relationship and they’re willing to also make sure that we are staying on kind of a healthy basis in terms of the margins. So that is the broad picture.
Unidentified Analyst
Very good. And finally, the stated goal of 8% EBITDA margin by the end of 2025, is it correct to interpret this as your target of 8% EBITDA margin is applicable to perhaps Q4 of 2025 rather than full year 2021?
Magnus Ahlqvist
Yes, that’s correct. So that’s the reason we said end of 2025. I mean, we are all about long-term value creation. Nothing that we are doing is kind of short-term ideas that we just tried to implement, et cetera. I mean everything that we are driving is based on a plan. It’s based on strengthening our offering. It’s based on the transformation programs that we are driving, the digitization investments that we have been making because they also have not only efficiency, positive impact but also on client value. So all of this is really combined. And then obviously, together with Stanley being a very important catalyst, where we’re building a very strong technology offering and business with integration plan where the emphasis in the beginning is more on the cost synergies. Looking at the mid and the long term, and that perspective is more on the commercial synergies and how we unleash more of that opportunity. So when we said end of 2025, it really means towards the end of that year.
Unidentified Analyst
Thank you very much, Magnus and Andreas, I will get back in line. Thank you.
Magnus Ahlqvist
Thank you.
Operator
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Magnus Ahlqvist
Yes. Many thanks, everyone, for joining us today. Like we highlighted at the beginning of the call, it is a solid quarter. We feel really good about the development and looking forward to staying in contact. Thank you.
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