All right. Good afternoon, everyone, and welcome to our Q2 call. I'm glad, as usual, to be here with our Chief Financial Officer, Bart Adam. Let us turn to the view on the Q2 results. We had healthy growth of 5% during the quarter, and we grew faster than the market. The operating margin in the quarter of 5% was stable compared with last year, and we had very strong support from North America, while Europe and Ibero-America had weaker performance in the quarter. In Europe, we had a slightly negative price wage balance in two countries, and we will come back to this in more detail later on. From a cash flow perspective, we see an operating cash flow of SEK 950 million , which is an improvement versus last year, and all in all, a stronger first half in terms of cash collection and operating cash flow.
During the quarter, we also announced some leadership changes and the creation of three expertise units. I will talk more about this after the review of the financials. Let us now turn to security solutions and electronic security. Delivering solutions and strengthening our electronic security capability is one of our most important priorities. We had 15% growth of solutions and electronic security in the first half. During the quarter, we have started the integration of two acquisitions, Staysafe and Allcooper. Those two are in Australia and in the U.K., respectively. We're also happy to say that the integration of Kratos in the U.S. has been progressing very well under the leadership of our North America electronic security team. That integration is now concluded.
As in previous quarters, we always want to share a customer reference case, and we wanted to do the same today as well. This time, it's not a global case, rather focusing on a smaller contract. This case is from Belgium, where we have implemented our RVS Go concept for Inter Beton, which is part of the Heidelberg Cement Group. Let us play the video, please.
[Presentation].
I should make a comment here that this is obviously in French audio, but if you're following us through the web conference, you will be able to also then see the subtitles, which are then translated into English, of course. When you look at this reference case, this is a relatively small but standardized solution, where we have addressed the client security needs with our standardized RVS Go concept.
Here we are combining the latest technology with our mobile guarding and our ability to respond. Really a good example of a solution that we're rolling out across a number of similar sites. We're combining people and technology into a complete solution. Let us now look at the performance in the different divisions. Starting with North America, we had a very good performance with 5% organic sales growth on strong comparatives. Our five guarding regions and the business unit Securitas Critical Infrastructure Services were the main drivers of the growth. Security solutions and Securitas Electronic Security accounted for 18% of the sales in the quarter. We continued the very positive trend from the previous quarters, and the operating margin was 6.3%, and this is a solid improvement of 0.2% versus last year. Securitas Electronic Security contributed to the positive margin improvement, as did our five guarding regions.
To conclude, we have very good momentum across all parts of the business in North America. Looking at Europe, we had more of a mixed picture in terms of top-line growth. We had good performance in a number of countries such as Germany, Belgium, the Nordics, and the guarding business in Turkey. The overall growth was negatively impacted by contract losses in France and the U.K. As we have previously announced, the loss of an aviation contract in France also had a negative impact, but we also then had a few other guarding contract losses in France and also in the U.K. that hurt the growth on the division level. Looking then at the margin development, we had an operating margin which was below our expectations for Europe during the second quarter, and this was related to three main factors.
One was the negative results development in France, where the contract terminations mentioned earlier, in combination with the impact from regulatory changes, resulted in a negative development in France compared to last year. A second factor is that we continue to work in tight labor markets across Europe, and we're not able to fully offset the wage increase with price increases in France and the Netherlands. Obviously the previously announced loss of a profitable contract in Sweden from the end of last year had a negative impact. If we look at the cost savings program that we announced at a similar time last year, this is running according to plan, but the impact from the cost-saving program was then offset by some of these negative factors.
To conclude on Europe, we have a number of areas that are performing well, but we are now working to regain the momentum in a few of the key markets. With that, we turn to Ibero-America, we had good growth in the Ibero-America division in the quarter. Similar to previous quarter, this was driven by very strong performance in Spain. In Spain, we are winning quite a lot of business, strong organic sales growth, and also thanks to really driving the strategy and success with solutions for our customers, driving significant improvement. Price increases in Argentina obviously also contributed to the organic sales growth in the quarter. If you look at the client retention, slightly lower compared to the same period last year. Security Solutions and Electronic Security accounted for 28% of our total sales in the division in the quarter.
If we look at the margin perspective, operating margin in Ibero-America was driven by the strong performance that I mentioned in Spain. Very much thanks to the positive development of Security Solutions from top-line perspective and also profitability. We have burden from Argentina. The overall margin came in at 4.6%. We expect continued challenges in our business in Argentina also as we enter the third quarter, and this is due to a combination of two different factors: challenging macroeconomic environment, but also the internal changes that we are implementing in the market. With that, I will now hand over to you, Bart, for an update on the financials.
Very good. Thank you so much, Magnus. Let's turn to some further financial information to the quarter, and as usual, we start with the income statement. As of Q1, as you know, we have adopted IFRS 16, and that is the standard that deals with leasing contracts, in essence meaning that as of 2019, all equipment and all premises that we lease or rent is considered then as an asset for accounting reasons. As mentioned also at the Q1, we have implemented this standard without any restatement of comparatives. What we then see is that there is a quite substantial negative effect from IFRS 16 on our net income with a very similar magnitude, you could say, in the first quarter and in the second quarter.
When you look here at the H1 numbers in the table here to the upper right of the slide, you notice there is a positive effect of SEK +34 million on the operating result. There is an even larger negative effect on financial items of SEK -73 million. All in all, that leaves then a net of SEK -39 million on income before tax. That is IFRS 16. Moving to the line items affecting comparability. We accounted in this quarter for SEK 46 million as items affecting comparability in the quarter, that is then adding up to SEK -66 million in the first half year. These items affecting comparability relate entirely to the two transformation programs we have in place, as we announced also at the reporting of Q4 2018.
As per our planning and in line with what we said at the first quarter, we expect to recognize around SEK 200 million of items affecting comparability for 2019. Here everything depends a bit on how fast we can implement certain matters and when exactly we'll incur what cost. What I can also add is that the earlier referred total of SEK 650 million that shall be accounted for during 2019, 2020, and potentially as a part in 2021, is still the relevant amount to consider and calculate with. As to the financial income and expenses, that is SEK -150 million in the quarter, and SEK -289 million in the year to date for the first half year. As said, this number is negatively impacted through the adoption of IFRS 16 for SEK 37 million in the quarter.
The additional difference then compared to Q2 2018 comes from increased net debt, increased U.S. dollar interest rates, and also a part from U.S. dollar foreign exchange rate development. Turning to the tax line. Our current tax estimate is that the full year group tax rate in 2019 will be around 27.6%. We estimated 27.8% in the previous quarter. That is still an increase, of course, compared to 2018, mainly due to reversed effects then from the U.S. tax reform, related to the introduction of tax on foreign payments, the so-called BEAT. I should also add that the BEAT makes the group effective tax rate a bit more difficult to forecast, as it is more sensitive to certain elements in the income statement and in the calculation.
In the bottom then, you notice there a small difference between EPS and EPS before items affecting comparability, of course, entirely relating to the earlier mentioned items affecting comparability for the two transformation programs. Turning to the next slide. We then look at the effects from the different currencies, and the numbers here to the right, as always, are the foreign exchange and rates in Swedish kroner measured at quarter end. We can say that the U.S. dollar has been moving around $9.30, $9.40 in the quarter, and was at some point even up at $9.60 to the krona, but then ended the quarter at $9.27, and that is some 3% stronger than the same quarter 2018.
The Euro during the quarter was around EUR 10.60, even with a peak also up to EUR 10.80, and ended then the quarter at EUR 10.55, and that is a bit more than 1% over last year. Starts to be more stable also on the Euro. The Argentina peso then starts to come closer to the weak rates from the second half of last year, but still a negative 33% compared to the Kroner 12 months ago. The drop in the Argentina peso especially happened during May, September 2018, and since then, the Argentina peso has been a bit more stable, one can say. As a summary then, due to especially the effect from the U.S. dollar, our quarterly consolidated income statement was positively affected when comparing to last year. Our nominal numbers got some tailwind from the currency in the quarter.
The total change was 11% and a real change of 8%, there was a 3% tailwind as seen from the difference. On operating result level, the total change was 12% for a real change of 7%, a little bit larger difference here being 5%. In real terms, apples- to- apples, our operating result improved with 7% in the first half year over 2018. One sees that for EPS, before items affecting comparability, there was a total change of 5% and a real change of - 2. When we then compare the real change between operating income on the one hand, and EPS before items affecting comparability on the other hand, we see there is a deleverage happening in between the two.
The difference is, of course, entirely due to the higher financial items, mostly as a result of IFRS 16, and then also due to the higher tax rate. We turn to the next page, and we take a look at the cash flow and the balance sheet. As commented before by Magnus, we have a healthier cash flow this year than last year. It shall be noted that the net cash flow is not impacted from IFRS 16 leases. However, it shall also be noted while the net amount is not impacted, some of the individual lines are impacted, especially the investments and so to say, the reversal of depreciation. We see here in the year to date net investments of SEK -187 million, and that results from investments of close to SEK 1.5 billion and a reversal of depreciation of SEK 1.3 billion.
It shall be understood that these numbers that I just mentioned include the amounts related to IFRS 16, and that is the investments are increased with SEK 456 million, it also impacted the reversal of depreciation with SEK 422 million. With IFRS 16, our CapEx gets inflated, and that is from around the usual SEK 2 billion, which we commented before, 2% of sales to an amount of SEK 2.9 billion just by the fact that we have implemented IFRS 16. There is always a seasonality in our operating cash flows. We see a substantial cash flow improvement compared to the first half of last year. This year it was almost SEK 900 million during the first half year, while last year it was SEK -124 million. A good improvement. We have worked more with the issue and we'll continue to do so.
Normally also the second half year is a much more operating cash flow in a rich half year compared to the first half year. We turn into the next slide, we take a look at the net debt. The net debt now stands at SEK 20.4 billion, up from SEK 14.5 billion at the end of last year. The main difference then relates to, of course, the implementation of IFRS 16, which has hit impacted with almost SEK 3.5 billion. Of course we have the acquisitions we paid for during the first half year, and that is SEK 382 million. The dividend of SEK 1.6 billion that was paid out. The net debt was also impacted by some foreign exchange translation, as you can see here with SEK 456 million in the first half year.
Most of that actually happened in the first quarter of the year, the translation difference. When you move to the graph to the right of the slide, the net debt in relation to EBITDA is on SEK 2.9 million, and that is again measured after IFRS 16. As mentioned, IFRS 16 had quite substantial impact because the net debt now fully includes the entire effect from leased assets and rented premises. On the other hand, our 12-month rolling EBITDA only includes now two quarters with the effect from IFRS 16. That makes that our net debt after IFRS 16 is a bit inflated from that, and it will go down by itself as we add more quarters with EBITDA including IFRS 16. That should also normally go down with the further healthier cash flow during the second half of the year.
Without so to say, any further main acquisitions or anything like that, we should then end up normally around SEK 2.3 million as well as we have ended last year, before IFRS 16 of course. I think that is largely it from my side. We can go to the next slide where we have tried to summarize all these effects from IFRS 16. I will refrain from a lot of comments. I think you understand that now. All of that is available in our report as well in note two to the report where we provide all these different KPIs and where you can compare. As mentioned before, the rating agencies to a large extent followed already this same reasoning from IFRS 16 in their evaluations and in their ratings.
During then April, Securitas has been moved up from Standard & Poor's from BB B with a stable outlook to BB B with a positive outlook. With this, I'm handing back to Magnus.
All right. Thank you very much, Bart. Before we open up for the Q&A, I would like to provide a brief update regarding near-term priorities as well as the progress of some of the strategic transformation programs. First of all, this is a simple outline of our presence today around the world. We do have a strong position. For those of you who follow us closely, you also know that we see a future which is more knowledge and data-based. We will continue the work to leverage our position to invest in our protective services capability, to leverage the data that we're generating, combining that with other data to then enhance knowledge and how we handle risk and provide better security and solutions to our local and global clients.
While we're investing in shaping the strategy beyond 2020, our priorities that we are working on a lot at this point in time is first of all, the client engagement. That is how we are not only winning, but also engaging and developing our relationships and the value of clients over time. Driving down specialization of our protective services, to ensure that we strengthen and further our protective services leadership. Also driving the modernization of our business, including quite a lot of focus on cost efficiency. When you look at the first two points on this slide, we made a few important leadership announcements as I commented on at the beginning of the call. Created three new units that are really focused on addressing a few of these key objectives.
First two units, the ambition is to strengthen the specialization of our guarding, first of all, and second, electronic security capability. The third one is to strengthen our engagement with an offering to our global clients. We have appointed very experienced and capable leaders for these three units. This work is starting just a few weeks ago, but with high expectations in terms of the impact that we will generate in the mid and the long term in these three areas. As announced earlier this year, our two major transformation programs, first one to address and strengthen our global IS/IT foundation and capability, and the second one the business transformation program in North America.
Both of these programs are running according to plan, but I would like to emphasize that they are extensive and long-term programs, but they will greatly enhance our capability to deliver and also efficiency across the company over time. When you're looking at the journey that we are on and our focus areas, I always show this picture because it is important to put things a little bit in perspective in terms of where we're coming from, but also where we are heading. We do have quite a lot of emphasis in the lower part of this slide, and that is obviously roughly 80% of our business today focused on guarding. Looking at how can we continuously strengthen our foundation, which is really our guarding part of the business.
Second one, of course, is that we are on a journey since the formulation of our Vision 2020 strategy to establish clear leadership in protective services, and this work continues in terms of strengthening guarding, electronic security, mobile monitoring, et cetera. Also in integrating solutions to our clients. As we're looking more beyond 2020, to ensure that we're establishing ourselves as the leader in intelligent security. To sum this up, when you're looking at the first half, we've had a bit of a mix of a slower Q2 in terms of growth. Organic sales growth of 6%, operating income real change in the first half of 7%, and continue to grow in terms of solutions, electronic security, they're now accounting for 21% of our group sales.
Apart then from the focus on managing the results in the near term, we are driving quite a lot of work and related then to the modernization activities that we are undertaking with the projects I just mentioned, to make sure that we can deliver a very strong offering to our clients in years to come, and that we continue to lead the development of the industry. With that, Bart and I are now happy to open up for Q&A, and then handing over to the moderator.
Thank you. Our first question comes from the line of Bilal Aziz of UBS. Please go ahead, your line is open.
Good afternoon everyone Just a few from my side, please. Firstly, can you give a bit more detail around the wage issues you flagged in Netherlands and France? Are these related to more mature contracts or the wage prices of matching more or relatively more recent ones? I know competitively you flagged some issues last year. What sort of action plans do you have here? Secondly, you've stated the two transformation programs are going on track, you also suggested other options in Europe. Can you update us where you're on the European plan, so where we can expect an update on that? Thank you.
Yeah. Magnus here, the line is not entirely good or clear. If I understood correctly, the first question was related to the contracts in France and the U.K. Please feel free to. Okay, was it wage? Sorry. I didn't hear that properly. Yeah.
Yeah. It was on wage. Yeah.
Okay. Yeah, sorry, I didn't hear you properly. Transformation program in Europe.
Yeah, that one I picked up. Yeah. Okay. To the first question, when you're looking at France, there have been a number of regulatory changes, and the most significant one is the CICE related subsidy scheme that was changed towards the end of 2018. That has had quite an impact in the short term on our price wage balance. That is the main reason that we are behind in France when you're looking at the first six months and the current situation in France. We're looking at the Netherlands, there we had and basically been driving our price increase related activities together with the clients, and that is something that we planned in the second half of 2018. There was a collective labor agreement that came in at a higher level than anticipated. Also timing not fully anticipated.
That means that we're essentially behind the curve in the Netherlands. What then happens is that there are customers and contracts who will have price indexation clauses, et cetera, which means that it does take some time until we're then able to recover. I think one follow-up question that you asked was then also what are the kind of the actions? Obviously this is very high focus for us within these countries. It is high focus in terms of what we're doing in the near term. While in some of the cases, there is also certain lag impact, which means that order now, then obviously we need to look at how we're also recovering and also reestablishing balance as we go into 2020.
That is the same in France as it is in the Netherlands. If I can comment on the second question that you had as well, and that was related to the transformation programs. Yes, we mentioned when we announced the transformation programs on a global level related to IT and also then North America Business Transformation Program, that we are looking at Europe, and we have promised to come back in the second half. What we have concluded so far is that a very similar program to what we do in North America did not make any sense from a return on investment perspective. Everything that we do has to generate a solid return mid- and long-term. The reason behind that is that the starting position is quite different.
When looking at Europe, we have a presence in 28 different countries, and we have also less of a shared service set up in Europe between the countries and within the division compared to what we have in North America. The starting point is quite different. We continue with this. Under the leadership of our new leader for the European division since the beginning of this year, this is high priority, and we will come back with updates once we have come further with that work. Also then to be able to communicate what these longer-term structured improvements are going to look like.
Okay. Our next question comes from the line of Edward Stanley at Morgan Stanley. Please go ahead, your line is open.
Absolutely. Thank you. Following up on one of Bilal's questions. On the wage inflation point, if we think beyond France and Netherlands, are there any other countries globally where price negotiations are upcoming or ongoing, where you're now incrementally a bit more cautious? Secondly, on the IT spend, SEK 60 million or so outflow. When we think about the phasing of those, it doesn't sound like there's any change to the overall amount of the projects, I'm just wondering on the phasing or timing of the exceptional items. Thirdly, on the Ibero-America outlook or in the statement, you talk about improper behavior by management. Are you able to elaborate on what exactly that means?
Yeah, I can start with the third question. Maybe Bart, you can handle number one and number two. When you look at this situation, from a Securitas perspective, our values, our code of conduct is always of the highest priority. From the comments that we have made, we have also shared that we are conducting an investigation. For that reason, we are not able to enter in more detail at this point in time. I think that that's something which is important. I should also highlight that even though Argentina is not a very big country, representing around 2% of our global sales, significantly less than that of the profitability, our values are important, and we always then investigate anything which is escalated as well to our intention. This is something that we will have to come back and inform when the proper time.
Also then, if we take actions, obviously then we will assess what are the relevant actions to initiate. Bart, if you want to handle the first one.
As to the wage inflation, as Magnus pointed out, this is an issue that was affecting Netherlands and France for specific reasons. Netherlands, they were a bit surprised, you could say, by the magnitude of the wage increase after, so to say, they had already initiated the price increases. That was, from a timing perspective, not very good. In France, it's more related to the CICE matter. In other countries, as you know, most of our price wage increases happen in Q1 and Q2 each year. The majority of that work is now after ourselves, and we can say that on the other countries, we have a balance there. That is clear as well now. That is, I think, the answer to your question.
On the IT spend, when we announced these two programs, we mentioned there that we would make these CapEx and that we would, so to say, along the line also take these items affecting comparability. As to the savings and the benefits from that will mostly kick in as from 2022, actually, where we then expect the benefits coming in. We are spending the money now, and it's quite substantial programs, of course, and a substantial project that we are running there, both on the global IT side and on the North American Business Transformation. The benefits will only kick in mostly then as of 2022.
Thank you. Just on the first point you made on the investigation, I appreciate you can't necessarily say, well, what's happened, but would there be any financial liability further down the line that we should or need to be aware of?
Yeah. I think from my perspective, it's like I highlighted, we investigate anything that is being escalated through whistleblowers, et cetera. Difficult to comment on the investigation per se. When you're looking at the financial impact, this is obviously a critical question that we have been looking at as well. You just have to think or put things in perspective there to look, like I said, at the size of the business Argentina. It represents around 2% of our sales and significantly less than that of the operating profit. I think that is as much as we can comment upon at this point in time.
Okay. Thank you. Appreciate that.
Thank you. Our next question comes from the line of Chirag Vadhia of HSBC. Please go ahead. Your line is open.
Hi there? Thank you for taking my questions. Just on the margin contribution from the cost savings program initiated in 2018, could you give us how many EBIT that was in Europe? Secondly, on M&A activity in the U.S. with [Toffees] entering the market, do you have any kind of view or take on how this would affect the U.S. market? Thank you.
You can take number one?
As to the cost-saving programs in Europe, we announced that there would be a bit of a two-year return on the investment there, on the costs that we incur in that program. That would be a little bit more than SEK 130 million-SEK 140 million on an annual basis once everything is implemented. The majority of those measures have been implemented. We have also said that there would be a little bit of investment as well into new people, the net of that we estimate to be a bit more than SEK 100 million on an annual basis. That has also been what we have mostly then been hit on a half year of basis, of course, in 2019, now a bit less than SEK 50 million.
To your second question about North American acquisitions. When you look at our business and our capabilities, we have a very strong team. We have strong guarding capability with significant scale. We have a strong electronic security capability. This was obviously very much boosted by the Diebold integration back in 2016. We have further strengthened our capability and ability to deliver on a national but also local level with the successful integration of Kratos. We have strong also corporate risk management and a number of other capabilities. When I look at North America and Securitas, I dare say that there is no one that has anything similar in terms of strength of offering to the clients, and that is the most important for us. Having said that, we are continuously looking at other opportunities to further strengthen, then we are happy to invest in further strength.
This is really our basic view when I look at the North American situation.
Thank you.
Build up a sizable platform now over almost 20 years. Of course, we welcome any other professional people as well into the market. It's a big market. There's still a lot of space as well.
Thank you.
Thank you. Our next question comes from the line of Sylvia Barker at JP Morgan. Please go ahead. Your line is open.
Yes, hi. Good afternoon everyone? Two questions, please. First of all, could you just tell us what the volume growth was overall for the group in Q2? In Ibero-America, would you be able to split out the Spanish growth and the Argentinian growth if possible? Finally, on the margins in Europe, I guess the cost savings were probably about 10 basis points, based on your comments. IFRS 16 was probably another 5 basis points- 10 basis points. Clearly the margins went backwards kind of organically. You've given comments around it, but could I just check one point? When you say in the statement that in other, you've got investments for Vision 2020, is that the data scientist teams who obviously work in Europe, and I have presumed that the cost base would actually be within the European cost base, but that's shown in the other segment?
Could you just clarify where those costs sit or indeed what the Vision 2020 related costs are if that's not them? I'll stop here. Thank you very much.
What was your first part of the question, Sylvia?
First question was just volume growth for the group, if you can give that for Q2?
Yes. In general, overall, we have commented before that we see normally price increases around 2% across the cycle. If times are better now, we see it more between two and three. We have commented before that now we are even a little bit ahead of the 3% for the totality of the group. That is where we are in price, and anything remaining of this, of course, the volume change compared to last year, which is consisting of both portfolio changes and potentially extra sales changes. When it comes to Spain, Ibero-America, we do see very good growth in Spain, and that has been double-digit growth that we have seen. I think that answers your question. About the other costs. Europe is Europe, and what is going on in Europe there with the saving program that affects Europe.
The costs we are incurring at the group level have basically not so much to do with Europe. Those are really investments that we are making, mostly in people then, that are working with the further strategy implementation for the entire group. I don't know, Magnus, if you want to comment anything to that.
Like Bart said, it's actually strengthening in two areas, and one of those is in global IT, and the second one is in intelligent services or intelligent products.
Thank you. The team tailored that to actually sit in other as a cost item rather than in Europe, just to be clear?
Yes.
Yes. Okay. The IFRS 16 for Europe, that is about 5 basis points-10 basis points in line with the group. Is that fair?
Correct.
Yeah. Okay. Thank you very much.
Thank you. Our next question comes from the line of Henrik Mawby of Nordea. Please go ahead, your line is open.
Thank you. Can you hear me?
Yes, we can. Hi, Henrik.
Hi. Is it reasonable to expect that sorry, the weak net portfolio development in Europe explaining the step down in organic growth? In your view, are there any structural changes to the competitive environment, or what do you think explains that you're suddenly running into a tougher portfolio development in Europe?
Yeah. When we look at the contracts that we have lost, essentially guarding contracts, so standalone guarding. It's difficult to conclude, or I wouldn't really conclude and say that it's more competitive now. We always have to deliver good quality and value for money. Some periods you win more, and some you lose more. We kind of had a few then significant contract losses coinciding at the same point in time. What's obviously important then from my perspective and for the team is that we are looking into as well and analyzing why have we lost them. It's always easy to say we just lose them because of price. There, I think it's customer by customer to really understand that situation, and the specifics. I think I would also comment that these contract losses then obviously we had announced two significant ones.
One was the Swedish one end of last year, and then a French aviation contract. All of those obviously now have full impact in the quarter as well. It's primarily related as well to France and the U.K. It's not something that we're seeing as an issue all over Europe. It's really focused on those two key markets and guarding contracts.
Thank you. Is it reasonable to expect that these, you mentioned a few contracts have sort of been stopped in the beginning of the quarter, where the impact was through the quarter then. Is it reasonable to expect that the negative impact on EBIT is larger in Q2 than what we should expect in the coming quarters as sort of the initial ramp down cost is higher?
I mean, the fact is that we have highlighted that the terminations took place at the beginning of the quarter to give an understanding of what is the impact. I think you know the nature of our business as well. We're working with fairly long contracts and extensive contracts and longer cycles as well. I think that's all we can comment on in terms of these losses.
In these specific cases, there were not very much important termination costs, so to say. The ramp down costs were not very high, not very relevant.
Thank you. A couple of more questions from me, if I may. How should we think about your ability now to raise prices in France and Netherlands going forward? I mean, should we expect that you've done what you can and that this will be a headwind to expect in the second half as well? Are there more contracts where you still have windows to raise prices?
Yeah. If I generalize, that we have a lot of emphasis on the price increase related activities in the beginning of each year. Now we're obviously end of July. That means that in some of these cases, like I indicated earlier, the next major opportunity when you look at achieving a balance is then really with the next kind of annual cycle. That is typically the way that it is working with a number of the clients and in the majority of the countries as well.
Thank you. Last one from me. Coming back to the costs on a group level that you mentioned, it sounds like it's reasonable to expect that these costs are a structural cost increase to expect going forward as well.
Yes, they are.
Thank you very much.
Thank you. Our next question comes from the line of Paul Checketts at Barclays Capital. Please go ahead. Your line is open.
Afternoon, everyone. I've got three, I believe. I just want to follow up on the contract losses comments you just made. You said you'd like to go through them and understand why you lost them. What was the outcome from that, if you've had got it yet? The second is, are you able to quantify the collective revenue of the lost contracts? The last one, can you give us the level of wage inflation you're seeing in the Netherlands and France, please? Thanks.
On the contract losses, I think I got the question related to the French aviation contract in the previous quarter announcement. That's essentially a contract where we have been delivering good service, and also all indications that I have received and also experienced myself have been positive in terms of delivery. That was then very much price driven. When you look at some of the others, we haven't gone through all of those because this is an activity we take quite seriously to also get feedback when we are not winning from the customers. Another one was a retail related contract where price was a very significant factor. From us, obviously, we're investing in quality. We are investing in delivering for the long term. Sometimes it does happen that we are losing out to price, but this is something that we continue that work.
I'm working quite actively with the team as well to get a better understanding internally, but also directly from the customers.
As to quantifying the collective revenue of the lost contracts, our organic sales growth has dropped from Q1 around, what was it, 4% to now 1% in a quarter. Yeah, a little bit less than 3% of our total revenue in Europe, you could say, if you add up all these lost contracts, that is what it relates to. What was your specific question on wage inflation?
I just wanted to know what actual level of wage inflation you are experiencing in France and the Netherlands at the minute.
In Netherlands, it's quite well ahead of the 3% we mentioned before. That is more on the 4.5%- 5% level. In France, I don't know exactly. France is more average. The issue is more related to the CICE subsidies, which have disappeared. That is more the issue there, or part of the CICE subsidies which have disappeared, which are difficult to compensate for in the price increases.
Okay. Thank you.
Thank you. Our next question comes from the line of James Vancleef in Jefferies. Please go ahead, your line's open.
Hi, thanks, guys. I apologize if I missed this and you already touched on it, just curious if you could give a bit more color on the timing of the cash impact of the transformation programs at a bit higher end this year, because I believe there's flagged about SEK 150 million from European restructuring programs still to come in terms of cash cost in 2019, plus any cash impact from, obviously, the transformation programs. Wondering if you could give a bit more color on how much cash impact you expect in the second half from those items affecting comparability. Secondly, just based on growth, I think people were expecting a bit of deceleration based on some of the things you flagged, some lost contracts, some tougher comparables.
Into the second half of the year, current expectations are about sort of flat relative to the first half of the year. Is that consistent with the way you guys are seeing current trading and the way you expect the second half, as of right now, to unfold?
As to the items affecting comparability, yes, the cash flow impact is a bit higher. Mainly they're coming from the European transformation program, which is hitting cash wise now, in 2019. All of that is, of course, also explained in note eight of our statement. We expect around the same amount give and take for Europe, then all the costs that we should have in relation to the transformation programs, most of that will be actually cash flow. The second question?
He said the deceleration of growth and view on the second half. Is that right?
Yeah. Just it looks like current sort of median expectations are for sort of H2 to look similar in terms of growth to H1. I'm wondering if you can comment if that's reasonable to expect and how you're currently seeing current trading.
We typically don't guide on the forward-looking periods. If you look at some of these contract losses, when you look at Europe, it's I think like I mentioned earlier as well, we're working with fairly long cycles. Obviously, this is the situation as we have it at this point in time, when we look at the growth numbers.
I think it's important to understand, of course, that we achieved now 5% in the second quarter on quite high comparatives from last year. That is to remember. Of course, also important to understand is that in Europe, most of this effect hit the full quarter. I think those are two important elements at least to take into consideration in judging the future growth.
Okay. Thank you.
Thank you. Our next question comes from the line of Aymeric Poulain of Kepler Cheuvreux. Please go ahead, your line is open.
Yeah, thank you. Most of my questions have been answered, so I'll be very brief. One question I had left was on the retention rate coming down across the board. I was wondering if you could explain what was behind this, and also remind us what was the retention rate on the electronic security solutions segment, and why you see one security solution going up and retention rate going down. That would be helpful. Thank you.
Yeah. It's a correct reflection. When you look at North America, we had two fairly sizable contracts that we lost at the beginning of this year. That is the main reason related to two specific contracts. Europe, I think we have covered in quite some detail than some of the contract losses that we've had in France and the U.K. specifically. When you look at the other regions, sometimes it's also a timing matter. We're obviously always working with retaining and developing existing relationships just as much as we are on new sales activity, and that could also vary a little bit between the quarters. I think that the second question that you had was then related to solutions. We see very clearly with all customers where we have implemented solutions, we typically have higher customer satisfaction net promoter scores. We also then have higher retention figures as well.
That is typically, it's coming down to a few basic points. One is that we had to find a solution based on their risk and their needs. It's really built for them. Addressing their needs in the best possible way, but also then that we have typically gone into a closer relationship overall, and also then addressing the value for money equation as well. We're able to leverage technology to a greater extent in combination with our people. Long answer to the second question, but the fact is that retention is higher on the solutions customers overall.
I should add that overall, we still see retention rates on the level of 90%- 91% in all of the business segments. We still think that is on a healthy level. It has been very high, actually, 92%, 93% in some of the cases, which is very high. Now it has come down to still, we think, a good level.
Perfect. Thank you very much.
Thank you. Our next question comes from the line of Mehrdad Bahador of Pareto Securities, p lease go ahead. Your line is open.
Thank you. My question is regarding the lost contracts in the European market. Was this mostly because of pricing or the quality of the service? Should we expect more of this going forward in the French and the U.K. market? Thank you.
When you look at this, I think I've commented or given quite some background. Some of those contracts, first of all, we look into this seriously with every individual customer if we're losing, not only when we're winning and keeping customers. This is something, and part of that work is still ongoing. One contract, significant aviation contract, there I know for a fact it was very much down to price because quality of service, et cetera, was very good. Unfortunately, that happens sometimes. We had another one that I referenced earlier as well, which was more of a retail-related customer, where pressure on price was very significant. We also need to decide how do we also protect margins to be able to deliver the value and the quality to the customers in a sustainable way for the mid and the long term.
Sometimes we have to make that decision. Sometimes the customer would make that for us. Like I said, this is now a few of those contracts in France and the U.K. coinciding at a similar point in time. We are continuously working with our customer engagement, not only winning, but like I said, also how do we keep and how do we develop by continuously then offering as well broader range of services and solutions to our clients, and that work continues.
Okay, thank you.
Thank you. Our next question comes from the line of Miguel Medina of JB Capital, p lease go ahead. Your line is open.
Yeah, good afternoon? Just one question from my side. It's on the Ibero America division. I understand that one of the largest security companies in Spain has filed for creditors protection. My understanding is that the vast majority of the contracts are with public administration. I guess they are of no interest to you. My question is whether you think that the fact that you have had another security company which mainly had contracts with public administration going under might trigger eventually a change in how public administrations attend their security contracts in Spain?
My simple comment, I hope you are right because that is one important part. I don't want to comment on specific competitors. There is no secret that there has been a brutal price competition when you look at guarding and on-site guarding in Spain. That's something that we've had to tackle as well. What are we doing? Well, we are focusing and investing more for the last six years, seven years, eight years in terms of strengthening our offering and climbing up the value chain. We do that because with a combination of technology and people, we're able to enhance the value, but also then to able to manage the cost. If cost is one very important aspect from a client perspective, we have to respect that, and then we try to optimize.
It's easy for us, and we can do that with much better impact when we're leveraging our electronic security, and that's our way of working, and that is proving very successful in the Spanish market. To your comment, I agree with you. We are always promoting paying our people well, investing in training and in quality because that will be better for the clients, better for the industry overall, and very importantly, also for the people because there is a terrible impact, of course, on the number of people as well when you have these types of situations that you referenced.
Thank you very much.
Thank you. Just as a reminder to participants, if you do wish to ask a question, please dial 01 on your telephone keypads now. Our next question comes from the line of Karl-Johan Bonnevier of DNB Markets, p lease go ahead. Your line is open.
Yes. Good afternoon? Just a quick question on technology solution. When I look at the geographic mix there, it seems that you have quite a different kind of growth momentum going on in your U.S. business compared to the European business for the moment. Could you elaborate on what's holding back development in Europe and what's driving the one in the U.S.?
Yeah, I can start, Bart, maybe you want to fill in as well. If you're looking at electronic security, because we obviously have electronic security and solutions reporting in one category, there is some degree of seasonality when you look at electronic security. We typically comment when there has been a significant impact then from one of the countries, maybe a few specific projects as well, and that can vary over time. I think that is from an overall sales perspective, a key factor. The other one, which is not a factor, but the focus area for us is we are continuously working to drive deeper and higher penetration of solutions in the total portfolio with our clients. This is a focus we have across all the countries and areas and branches, regardless if we are in North America or in Europe.
I think those would be the main comments. Anything else from your side, Bart?
No, other than it's a correct observation that that growth has slowed down a little bit in Europe.
And the last few years have been-
Now, last year we had a couple of larger solution contracts, really quite sizable. We have been working with the implementation also of those, that have taken some time and effort, and now we are moving on again. There should be no structural reason, so to say, why that should continue.
Looking at Spain, you keep mentioning these, what you call more short-term kind of technology contract. Is there any change in the outlook or should we expect those to remain there also coming after the second half of this year?
Yeah. Very difficult to predict. We have been saying from the beginning that there was short-term nature in these contracts. Of course, as long as the need is there, we will service that to the customer. It's extremely difficult to predict from outside as well. We basically don't know. If we would know more, we would probably tell you, but we don't know ourselves either. They have been there for quite some time now, and it's still, someday they will terminate, but that day has not, so to say, reached us yet.
Excellent. Thank you very much.
You're welcome.
Thank you. Our next question comes from the line of Carina Elmgren of Handelsbanken, p lease go ahead. Your line is open.
Good afternoon? I have two question. One is regarding the margin development in Spain, if you could say something about that. Also, if you see any changes when it comes to wage price balance in North America, changes since Q1 or since last year.
As to the Spain margin development, we do not really provide details around the countries. Obviously, the margin has developed very well over the last two, three years now. At some point in time, it was well ahead of group average, then it was well below group average, and now it has moved up again very good and we're happy with that, compensating and setting off also some of the difficult conditions we have had in Argentina. As to price wage in the U.S., also there, the general rule is still valid. Normally we are around 2% price increases, wage increases. We have also been higher now, more closer to the 3% actually in North America in the year- to- date. That is what we have been seeing. We are trending there around 3% as well, as we see in other places around the world.
Okay. Thank you.
Thank you. Our next question comes from the line of Steven Goulden at Deutsche Bank, p lease go ahead. Your line is open.
Thanks. Just in terms of the higher level macro conditions that we've been seeing. Just in terms of, obviously, you've talked about France and Netherlands being quite challenging, but those seem somewhat idiosyncratic. Can you just give us a bit of color on how you see the wider European market? Also with regard to the U.S., you were just saying there that you're seeing roughly 3% wage inflation. How are you seeing customers in the U.S.? Are you seeing any incremental signs of caution? Are you able to pass prices through? High level macro things would be very interesting there. Then the second question I've got would just be on the security solutions. Slightly slower growth I saw than Q1, and within that, clearly some inorganic. Can you tell us what the organic security solutions growth was for Q2? That's it from me. Thanks.
If you look at the macroeconomic conditions in Europe, now we've had tight labor markets, and we commented on that for a number of years. What then happens is that, obviously retention becomes a challenge, but also then hiring becomes more challenging as well. When we're looking at direct impact, if you ask the question, what does that mean in terms of our numbers for us? There is a negative impact from that in terms of sickness, in terms of overtime, in terms of training. There, we're seeing a number of significant basis point impacts when you combine those across the different markets. Because it is more of an extreme situation now, so in a sense, more structural. What are we then doing about that?
Well, when we are looking at price wage, we are also now elaborating the price wage equation to also include a slightly broader perspective. That is to look at price in relation to production costs. We would have a wider definition than wage costs alone, to be able to also reflect that and to be able to also work that through with our customers. I think those are the main points and the main impact that I would highlight in terms of the macroeconomic situation.
When it comes to the security solutions growth, in general, the real sales growth was around 12%. 4%-5% of that was acquired. Anything remaining then was organically.
Great. Thank you very much.
Thank you. The last question in the queue so far is from the line of Henrik Mawby of Nordea, p lease go ahead. Your line is open.
Thank you for letting me come back with more questions. We rarely discuss this in connection with Securitas, but I think, or I know that in Europe, Northern Europe, there's been a lot of significant calendar effect in this quarter. Some companies up towards 3% on organic growth. I suppose it's less on Securitas, as always has been. Can you comment on how large the calendar effect was in Europe and the U.S. in the quarter? Also, can you comment on the dynamics of this in relation to EBIT? Thank you.
Yes, it's a short answer, Henrik. There is no significant effect neither on the top line nor on the bottom line, other than the same quarter last year, so to say.
Sorry, what do you mean by other than the same quarter last year? There are more working days or less working days this year than last year?
No, what I mean is that we have some seasonality in our operating margins from one quarter to the other. The second half of the year is normally a bit better than the first half of the year. Quarter-on-quarter comparison, there is no effect from the calendar this year, significant effect from the calendar this year compared to last year.
Okay. Very clear. Thank you.
Thank you. As there are no further questions, I'll hand back to our speakers for the closing comment.
Okay. I think with that, we will conclude the call. Thanks to all of you for joining us today.