Okay. Good afternoon, everyone, and a warm welcome to the Q1 results presentation. I am Magnus Ahlqvist, President and CEO of the company since 1st of March this year. Before that, I've been heading up the European division since August 2015. I am here today together with Bart Adam, our CFO, and we will do these calls together as we go forward. Maybe handing over to you, Bart, just for a brief introduction.
Yes. Hello, everyone. Many of you have met me before, and now together with Magnus, happy to be here today, and we will run you through our quarter presentation. Thank you.
Good. We have a strong foundation as a company, and I usually try to spend quite a lot of time with our team members in the countries and areas. Since I started in March, I've also spent a lot of time in the other regions together with our customers. I just wanted to start by saying that the customers value the work that we do, and they buy into our strategy. This is encouraging, and I see a lot of opportunity for us to grow and develop the business in the coming years. It's clear for me that the opportunity is there, but I also see that we have an opportunity to speed up the transformation with the strategy that we currently have. Let us look at some of the highlights from the first quarter.
It is a quarter with strong growth, and our team in North America are leading the way. We also have good recovery in Europe in the first quarter in terms of the growth. We achieved organic sales growth of 6%, and it's good to see that we have solid growth rates across all the different business segments. Our price increases have been on par with the wage increases. In this quarter, we see an operating margin of 4.7% and 13% real change in our earnings per share. Before we look at the performance by division, let us just take a brief look also at the progress in the strategically important security solutions and electronic security business. Here we achieved organic growth of 16% in the quarter and real sales growth of 20%. We are also ramping up some larger security solutions in this quarter.
Just to mention one example, with an automotive manufacturer in Germany, where we are providing a full range of protective services in one integrated solution. We also have a number of solutions and new solutions that we have won and that we are implementing with more mid-sized customers. We also announced a number of acquisitions in this quarter, and we come back to that later in the call when I will talk a little bit about the importance of some of those. Let us now look at the performance in the different segments, and we start with North America. We had a very good start of the year with good new sales and very strong organic sales growth of 8% in the quarter. The customer retention is good, and as previously reported, we are ramping up a few larger contracts that we started towards the end of Q4.
The sales of security solutions and electronic security represented 16% of the total sales in the quarter. All in all, from a growth perspective, solid performance by our North America team. You turn to the next page, we are looking then at the margin. We had a stable margin in the quarter at 5.5%, and this operating profit margin was supported by higher organic sales growth, but hampered by the lower margin on some of the new large guarding contracts. We then turn to Europe, we are now growing at a higher pace in organic sales growth terms than what we did before. We had the increases on the refugee-related business that we started to ramp up in the second half of 2015. We did have good growth in almost all the countries and organic sales growth of 4% in the quarter.
The reduction of the refugee-related business continued in Q1, and this reduction represents approximately 1% negative impact on the organic sales growth. Also positive to see client retention is significantly improved, and we also then had sales of security solutions, electronic security representing 21% of the sales. While we had good growth in Europe in the first quarter, I am, and we are not happy with the operating profit margin. There are a few factors behind the weaker operating profit margin in the first quarter. One was a weak start in the electronic security business in Turkey. This business, I should emphasize, is more volatile due to the timing of the projects. It is a temporary impact. We have a positive outlook for the remainder of the year. The second factor is relating to unusually high sickness rates that then generated higher than normal costs.
This was in a number of countries in Europe, but particularly in Belgium and in Germany. The last part, as previously mentioned, we did have a reduction of the refugee-related business in the quarter, which also then contributed to a slightly lower margin. We then turn to Iberoamerica, we had a good quarter in our Iberoamerica division with organic sales growth of 9%. If you are looking at the 9% in comparison to what we had last year, this is primarily driven by a reduction in Argentina, and part of that is inflation-related. The other part is related to some of the changes in the portfolio. We had solid organic sales growth in Spain, where the team is doing a very good job and driving growth on security solutions and electronic security.
On divisional level, solutions and electronic security represented 25% of the sales in the division in the first quarter. We had good development in terms of profitability in Iberoamerica, improving OPM to 4.4%. This positive development was driven by Spain with a very good development of high-margin solutions and electronic security business. I would also like to mention that some of the solutions contracts in Spain are short-term contracts. Argentina burdened the margin due to startup costs and some turnover in the contract portfolio. With that, I would like to hand over to Bart for more details on the financials.
Very good. Many thanks, Magnus. Let's now turn to some further financial details to the quarter. We start with the income statement. Of course, on this page, the same KPIs as commented by Magnus. We will not repeat that, but would like to mention that the 2017 comparatives for the group have been restated for IFRS 15. This restatement results in a relatively minor change for the year. That is a SEK 20 million increase of the operating income for the full year. The reason behind is that under IFRS 15, we now activate our paid sales commissions, whereas before these sales commissions were just expensed as those were paid. Now under IFRS, we need to treat that differently. That is to activate and depreciate. This is in essence only a time difference, and it is being accounted for at the group level.
In the quarterly report, you find under note number 2 quite an extensive overview of the numbers affected from IFRS 15. Turning to the tax rate. The applied tax rate was 25.5% in the quarter. That number, that percentage, is in line with our statement from the end of 2017 that we released just after the U.S. tax reform was announced. We will continue to assess the tax rate as more details and interpretations to the U.S. tax reform become available. This especially related to the so-called BEAT, which is the Base Erosion and Anti-Abuse Tax, which we also need to further understand how that affects certain flows.
You shall remember also that the 2017 group tax rate was 28.4%. This 28.4% then exclude a percentage related to the one of negative effect from the U.S. tax reform related to a revaluation of certain deferred tax assets which happened at the Q4. Turning to the next page, taking a look at the effects from the different currencies. We see here that compared to the same quarter last year, both the U.S. dollar and the Argentine peso have reduced their valuation against the Swedish krona quite a bit, respectively, -6.7% and -29%, whereas the EUR, on the other hand, has strengthened quite a bit as well. The numbers mentioned here are the quarter-end rates. The net effects of this on the different lines in the income statement can be seen from the difference between total change and real change.
You notice that on the sales line, the net effect, that is the difference between total change and real change, is 3%, meaning that the real change is actually 3% higher than the total change. The negative effect from mainly the U.S. dollar and the Argentine peso outweighs the positive effect from the euro. You can see a bit of the same development, more or less in line with the sales development for operating income and earnings per share. Ending up then in the real change of earnings per share at 13%. I move to the next slide. Yes, we return to the cash flow and the balance sheet. First of all, it shall be noted also that related to IFRS restatement, the cash flow basically remains unchanged, but that now we have some SEK 400 million extra net assets compared to before IFRS 15.
These are activated historical paid sales commissions to the extent those have not been amortized yet. We had a weak cash flow during the quarter. The first quarter is always a relatively weak cash flow because of seasonality. This first quarter was worse compared to other first quarters. We used some cash, of course, to fund the organic growth. That is normal, especially in the U.S., with the 8% organic sales growth level there. The main reasons of the weak operating cash flow is largely due to a negative impact from Easter, and such mainly in Europe. To put it simple there, some of our customers did not pay our invoices ahead of month-end due to Easter Friday. At the same time, because of the timing of Easter Monday, we had to pay certain employee-related accruals and VAT, for instance, just before the weekend.
The two effects together then, the late payments coming in from our customers and the early payments because of these employee-related payments and VAT, then meant a quite considerable negative cash flow at the end of the quarter. Important to mention, though, is that in the early days of April, we had a very good cash flow and that has been confirmed now throughout also the ending of the month of April. Just want to flag out also, just to set a bit your expectation, that the Q2 closing and the Q3 closing is also quite unfavorable for the cash flow because of weekend timing in relation to the quarter end. Whereas always when the last day or the two last days of the month, of the quarter are ending in a weekend, that always puts some stress on when the exact payments come in, mainly from our customers.
As talked about before, the net investments include also the CapEx for customer solution contracts. That is for the equipment that we put up at customer sites when we build and provide the security solution. Going forward, the total capital expenditure, including this equipment for solution contracts, will be approximately 2% of group sales in total on an annual basis. I move to the next slide. Of course, you see the effect from the cash flow on the net debt, which has increased to SEK 14.4, and that is the result from the free cash flow. Of course, as a result from the operating cash flow in combination then also with certain acquisitions made. As we have announced during the quarter, we have made and closed certain acquisitions, and Magnus will come back a little bit on the nature of those acquisitions later on.
You also see here on the slide the relationship between net debt and EBITDA throughout the years, now also the first quarter is put there as well. You could see that at a leverage of 2.4, we are still very well in line with our own objectives here and with the recent development in the past. Turning to slide number 17. Yes, we have strong financing in place. This chart shows the maturity of our financing that we have in place, we issued now in March a new EUR 300 million bond in replacement of a bond that matured also during the month. The coupon for the new bond was 1.25%. We have no other important facility maturing for the period 2018, 2019, and 2020. The first maturity now of importance is 2021. By this, I think I hand back to Magnus. Thank you.
Okay. Thank you very much, Bart. Before we open up for questions, I just would like to spend a few minutes to talk a little bit about our strategy. We talk quite a lot about security solutions and electronic security. I felt that to provide some context, it would be good to share just one case today with an example of a solution that we have implemented in Germany. This is going to be a video, we're going to start streaming it now.
We are one of the biggest scrap and metal recycler in Germany. Our business is to produce and collect scrap for the secondary industry of steel mills and for the production of new steel. We have two aspects in security. People come into our yard, steal the metals, and the second one is prevention of fire. This is what I expect from the security side.
We have a new product which is called RVS for the metal dealing and recycling industry. Our solution depends on a camera system with day and night cameras, thermal cameras with analytics and so on. When somebody goes into the site, our analytics, our computers are sending an alarm to our SOC, we manage everything, we come to the site with our guards. But we have a second one. We solve the problem of the fires with our thermal cameras. We have the thermal cameras which are spotted on the metal heaps. When the metal heaps gets very hot, it reaches a certain degree, and after that, we get an alarm. We call the fire department, or we call the customer here at the site when they are here so they can watch it and measure the whole situation.
Before we had a human control system, also based on a video part, in the time when we are not on the yard, there was a security person. Yeah, this is how we did it
The customer's really happy with it. We now implemented it in more than 10 customer sites over the whole of Germany.
We are very satisfied with the system. It's running well, of course, there are minor adjustments we have to do with Securitas, the system runs, and we are satisfied.
It's a good Securitas solution, because we combine everything: people, technology, and the SOC together, that's the new face of security.
Good. I think this is a good case for a couple of different reasons. One is that we developed this solution after conducting a risk analysis to really fully understand the customer's needs. We integrated a number of different protective services into one integrated solution. I also like, and I think also from a customer perspective, this is also something that we have been able to replicate a similar solution for the same customer across a number of different locations as well. If we turn then to just a few comments about the acquisitions, we have announced and/or closed a few important acquisitions during the last few months. Just wanted to make a few comments, starting with Kratos Public Safety and Security. This is one of the top 10 systems integrators in the U.S.
With the Kratos acquisition, we are able to build on the strong foundation that we have put in place in electronic security after the acquisition of Diebold in 2016. If you ask the question, what will then Kratos really add? Well, it is a good team, but it will also give us a footprint and proximity to the customer through the regional branch network across the United States. Another acquisition that we have closed is Automatic Alarm. This is one of the leading electronic security companies in France. Strong team, operation, and a nationwide network. I think that this acquisition will mean a little bit to France what the Diebold acquisition meant to our presence in electronic security and capability in North America. It will also help to further strengthen our leadership position in the French market. Next one I would like to cover is Alphatron.
This is also a leading system integrator in the Dutch market that will also help us to really reinforce our position as a leader in the market, but also then significantly enhancing our electronic security capability. We also made one regional acquisition in the southwestern part of Germany, Süddeutsche Bewachung, which is a company with a combination of guarding mobile monitoring. Also Johnson and Thompson in Hong Kong, which is helping us and strengthen our electronic security capability in that market as well. If we continue, I think this is a picture that you have seen before about the journey that we are making from standalone services to integrated security solutions. We continue to drive this development towards integrated solutions.
We see that as when we are going towards the right in the picture towards more integrated solutions, we are not only making or creating better customer satisfaction and loyalty, but also significantly higher margin on this business as well, thanks to adding more value to the customer. If you look at what does security solutions and electronic security look like in terms of total figures, then from 2014 onwards, we have had a good development. Here, obviously, you see that we had 18% of group sales in the full last year of security solutions and electronic security sales. Before we wrap up, as I mentioned at the beginning, we have a solid foundation, and a very exciting journey, and opportunities ahead.
Since I started on 1st of March, it has been a reason to also reflect a little bit about the different stages and phases that we have gone through as a company, where we are right now, but also where we are going tomorrow as we write the next chapter in the history of Securitas. I think when you look at this picture, we have had a clear ambition to be a leader in security services from the 1990s onwards, something that we have also realized that ambition on a local level and also on a regional and global level. A number of years ago, we launched our Vision 2020 strategy with a clear ambition of being a leader in protective services. This has then been a lot more about solutions, about electronic security, fire and safety, and corporate risk management. That work continues.
I would still argue that we are in the early stages, this is work that we have to continue to drive for the next 5, 10, 15 years in the market. Obviously when we're looking ahead, we have the exciting opportunities in terms of intelligent security. This is all about how do we leverage information to work smarter, to provide better security for our customers, to work more efficiently internally. Obviously the higher that we go in this picture, we add higher value to our customers and also to our shareholders. I think that there is, in terms of strategy, this is just to give a little bit of a perspective on where we are and where we are going. I am very optimistic about the opportunities that we have in the long term.
To wrap up Q1, it is the quarter with strong organic sales growth, 6%, earnings per share improvement of 13%, and we continue to deliver on our strategy in terms of security solutions and electronic security. Now then accounting for 19% of our total sales in the quarter. I think with that, Bart and myself now happy to open up for questions.
Thank you. Ladies and gentlemen, if you have a question, please dial zero one on your telephone keypad now to enter the queue. Once your name's announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question, or zero two if you need to cancel. Our first question comes from the line of Bilal Aziz of UBS. Please go ahead. Your line is open.
Good afternoon, everyone. Just three quick questions from me, please. Can you perhaps break out the contribution from the large contracts in North America within the quarter? I appreciate margins start lower, but is there an expectation to bring these contracts to the U.S. average, or are these likely to be dilutive going forward as well? Second question on wage price. Can you perhaps give us an indication of what level you're currently seeing in the U.S. and how that perhaps differs by some of the more larger states you are present in? Tied to that, can you give us an update on your staff turnover in the U.S. as well, and how that's tracking versus the fourth quarter? Very finally, in Europe, can you perhaps help us with where exposure now stands to the total refugee-related contract?
How do you see that evolving with respect to what you see as purely one-off and likely to fade away further this year? Thank you.
Okay, thank you. I think I can start in terms of the first question with the new contracts. Correct. The initial margin is lower, but our ambition with these contracts is that we improve the margin up to normal levels over time. I think in terms of the price, Bart, do you want to comment on.
Yes, I think your question related to the price was in the U.S., correct?
Exactly. Relates to wage inflation, yes.
Yes. There are some statistics floating around which shows very high increases in wages, but we don't see those percentages. We have never seen those percentages over the last 10 years, and we don't see them right now either. Those statistics, if you look at them just month by month, they can fluctuate a bit, but the longer trend in those statistics is probably right. However, now trying to answer your question, we do see wage increases which are a bit over 2% right now, between two and three, and the price increase in the U.S. is on par with that wage increase. Of course, you do see quite some fluctuations and differences between different states.
In some states, it can go up to 5%, 6%, and in some other states, it's zero. It's the mixture of all the different states where you are in and where you have the business then dictates the average.
Yeah. There was also a question about the staff turnover as well.
The staff turnover in the U.S. has been something in the past, and we deliberately took away the reporting on that because we believe there was an over-focus on that number. There are many important KPIs in our business to follow. Staff turnover is one of them. We decided then to take away the staff turnover. The development as such has been more or less in line with previous quarters. Nothing remarkable either that we want to hide or walk away from. It's just that we feel it's not that relevant in view of many other KPIs that we track internally.
I think the last question was related to the refugee-related situation in Europe. I think to give some context to that, we saw very strong increases in the second half of 2015. I just want to mention before anything else that we have been able to fulfill many of these services, and that's something that we are also proud of. If you then look at the growth rates, it peaked in 2016, and then we had a decline in 2017. If you look at the run rate, Q1 sales are around SEK 200 million, so around SEK 800 million on an annual basis. This is something that we are expecting to decline over time, but it's difficult to say exactly how quickly. It depends on a number of different factors.
Some of them are not really within our control, SEK 800 million annual run rate.
Brilliant. Thank you very much.
Thank you. Our next question comes from the line of Srinivasa Srikonda of HSBC. Please go ahead. Your line is open.
Yeah. Hi, good afternoon. A couple of questions for me, please. First, on cash flow. We understand Q1 has a seasonality impact, but a SEK 1.6 billion cash outflow in other operational capital employed looks too high compared to any of the quarters we have seen in the last couple of years. Could you give us some color, like what's happening there? Where did the cash go into? Also on the staff churn thing. I understand you believe that it's not an important KPI, but just trying to understand if your staff churn goes up, isn't it your staff recruitment costs and training costs go up and how will that impact your margins? Are there any measures you're taking to control that?
Okay.
Yep.
Bart here. Maybe to start with the cash flow question. As you rightfully said, we always have some seasonality, especially in Q1 or change in other operating capital employed is never very good. You can also witness that from last year's and from other quarters before. That is coming from the fact that, for instance, we pay out certain employee-related accruals that are there in the balance sheet at year-end, for instance, related to incentives, which are then paid out during the Q1. We also pay typically during the Q1 some insurances, which are then valid for the full year, and then they are paid in the Q1. That is part of the normal seasonality. On top of that, what we had this year is because of the timing of Easter was just there right in the split between March and April.
We had to pay certain employee-related payables, which are normal payables for the normal payroll, on a certain day, the first day of the month they need to be paid. As that was Easter Monday, we had to make those payments before the weekend. The same on VAT. Some deadlines that you have to respect in relation to these payments, because of the timing of Easter Monday, we had to bring those payments over to March instead of paying it out the first day of April. That is basically what happened in the other operating capital employed largely. As to your second question, staff churn. Well, it is an important KPI, of course, but it's one important KPI probably out of 10 others that we follow as well, which are as important.
That is why by only giving this KPI to you, we feel that distorts a bit the total picture. Measures taken, of course, measures taken. Maybe to mention as well, if you talk to our operational people in U.S., they would say more important than staff turnover is staff retention. By staff retention, we mean, okay, I had so many people employed a year ago. How many people of those are still with me? That number has basically not changed too much over the last quarters. That number has been pretty stable on an acceptable normal level. It is the people that stay for a short time with us that churn faster. That is basically the thing. That does not have a too big impact on our quality of the services, because that is, of course, a key element.
The people that are there a long time in place, they just stay in place. It's them who are delivering the basic quality of the service. The measures we take, of course, is to increase wages. That is one of the measures in connection to our customers. In connection to that, of course, if the wage is too high, so to say, for the customer, we can always offer a solution as well, which is a second way of handling it in a commercial way with the customer and helps then also to drive the strategy on electronic security and solutions. Don't know if that answered your question. We'll see.
Yeah. Thank you. A follow-up on the cash flow thing. You have mentioned that even Q2 and Q3 has quarter endings falling on a weekend. Given that the Q1 had that impact reversal of this cash in the first weeks of April means that your Q2 will be normal despite of weekends falling, I mean, the quarter end falling on a weekend?
Yeah. Normal in the sense that we have recovered from the Q1 effect, the ending of Q1, but we will face the same effect at the end of Q2. From that sense, we will not recover during Q2. If it end well, take Q2 as such. You could expect to see more recovery in Q2, but it will be pretty much a normal Q2. That is what I want to say.
Okay. Got it. On the wage inflation thing, I understand you're saying you were able to pass through the wage inflation thing. Your electronics sales has been increasing, which is a pretty high margin. Still, why would the margin stable year-on-year? I understand the new contracts have come at a low margin, but that should be very less part of your overall revenue. Just trying to understand the equation there, how much those contracts had impact on your margins and how much your electronic sales has improved on the margin?
Well, we have basically seen a normal development, a normal contribution from the electronic security and solutions. Nothing new there. Yes, the two large contracts that we started in Q4. In Q4, we were hampered a bit from the startup cost, but we also commented then that these contracts, as they are so sizable, they will impact the margin a bit negatively as well. They are below average margin. As those contracts will run, we will then improve the margins along the contract duration. Basically, it means that we become better at planning, less overtime, less idle time. Also, the training cost will reduce over time. Typically, they are higher at the start of the contract. That is why over time, these contracts should improve their margins. I cannot give a specific timing on that.
I understand. Yeah, okay. Thank you. Thanks a lot.
Thank you. Our next question comes from the line of Mikkel Lund of DekaBank. Please go ahead, your line is open. Apologies, sorry. Mikkel Lund is the question after. The next question actually comes from Sylvia Barker of Deutsche Bank. Please go ahead. Your line is open.
Hi, good afternoon. I've got three areas of questions, please. Firstly, starting with the organic growth in North America in Q1. Just to understand the sequential movement from six to eight. You had one extra month from the large contracts. You said that you had some extra sales in Q4, which they haven't necessarily repeated. Have those kind of extended further? Then maybe the final bucket in terms of the price, what has happened to price in Q1 versus Q4? I'll take the other ones after. Thank you.
Yeah, I can start, Magnus here, make a few comments. We do have, all in all, a strong activity overall, across all the different areas of our North America business. That is in the guarding side, it is in the different areas of business. It is a very strong quarter from a general perspective. I think, Bart, maybe do you want to comment on some of the sequential change, or we're able to-
Yeah
give some more granularity?
Yes. As commented in Q4, was held by some extra sales in U.S. coming from the hurricanes, if I remember well, and there were no hurricanes now in Q1, so no effect from that. The two large contracts were ramping up during Q4, so we did not have a full impact during Q4. Now they had a full impact during Q1. I think that is on that. On the price, yes, we commented that the price increase at this point in time, is around a bit more than 2%, between two and three. That is also, of course, included in the organic growth. Yes.
Okay, great. Thank you. On the price increases, do you feel that as you are kind of coming through, just because the comments on the front page in terms of that being a focus again for Q2, have you increased prices for more than one quarter of the clients that you wanted to increase, basically? Or is it the same proportion as we go through the year, or have you disproportionately already managed to increase prices kind of early on in Q1? Is it going to get easier or more difficult as we go through the year?
One comment is that we are quite happy with the way that we have been able to balance price and wage in the first quarter. I think we also have a strong track record overall of making that happen. The ambition, of course, is that we continue to do that as we go forward as well. There are always differences between different regions and also between countries in terms of the timing. Some of this work will continue in the coming quarters, and then in some specific cases, there could also be other factors that would trigger a need to look at price increases, and those could also be regulatory changes, et cetera, as well. I think that is the high level context in terms of where we are with the important price wage balance.
Just a very quick follow-up on that. By region, broad region, where are you matched and where are you not matched or running ahead?
No, I don't think we comment on any specifics.
Okay
We are in good shape. We have done a good job in Q1.
Great, thank you.
Yeah.
Just two very quick ones. In Europe, excluding sick pay, which seems to be the only kind of one-off item, perhaps in the quarter, would you have had a flat margin in Europe? What do you expect for the rest of the year? Lastly, just on the electronic solutions, should we assume that you've got 10% on that piece that you've shown, through that implying that the rest is around 4% now as we see the split today? Is that the right way to think about it? Thank you.
The reason that we called out the higher than average cost related to the sickness rates is that they were unusually high in the quarter. There is, when we're looking into some of those details, there is a certain seasonality as well, depending on the time of the year. In Europe as well, one of the other impacts, of course, was a weaker start in the electronic security business in Turkey. I think the third one that we have commented earlier as well is then this refugee related decline, where it is approximately SEK 100 million less compared to Q1 last year in the first quarter.
Those three reasons are about equal in size, you could say. If we mention a reason, normally it has to be around 0.1 before we mention it.
Yeah.
Okay, great. Thank you.
Thank you. Our next question now comes from the line of Mikkel Lund of Danske Bank. Please go ahead. Your line is open.
Yes. Hello. Two questions. First of all, on the European margins, you're mentioning the overcapacity or the loss of refugee related sales and the higher sick leave and Turkey. If you look at this from a longer perspective, the worst margin in seven years, and you've managed to increase the share of security solution and electronic security. Is the main thing here still price pressure on the traditional man guarding? Is that the main if you look at this from a longer perspective?
Yeah. First of all, we have continuously invested quite a lot in the strategy, and we continue to do that in Europe as well. That is one. When you look at the growth of solutions and electronic security, that is growing at a healthy pace, and it is also adding margin as we have shown on a gross margin, operating margin basis. I think that it is a combination of all factors. Having said that, I mentioned earlier as well, Q1 it is a weaker quarter. We are not happy with that operating margin, and that's obviously something we're working to also recover as we go forward.
Okay. Just to follow up on the earlier question regarding the price and wage balance. Is it fair to assume that the majority of employees get their salary increase in the beginning of the year, so the toughest quarters in terms of this equation is the first one?
Yes, that is correct. The first quarter is the toughest one. The second quarter is also still on a reasonably high level. By mid-year, normally we get a good view on the total year. That is how it works. The larger part is Q1, and then also quite sizable part Q2. Just adding one comment to your previous question, what you should also consider and what we have missed out a bit maybe on the outset also the strategy is actually that the guarding is growing very fast as well. We do see good growth in electronic security and solutions, yes, absolutely. In nominal terms, the guarding is growing faster, if not more.
If you look at the longer term perspective there on one of the slides, we have grown the electronic security solutions with SEK 10.6 billion from SEK 6.5-SEK 16.7, the guarding over the same period has grown from SEK 64-SEK 76. In nominal terms, that has even grown faster. That is also sitting behind the whole equation on the margin question.
Okay. Yeah. Thank you.
Thank you. Our next question comes from the line of Stefan Andersson of SEB. Please go ahead. Your line is open.
Thank you. Two questions from me. Sorry about being on this thing with the wage increase here. Coming back to the U.S., I guess the European side, you have labor agreements for most of it. Looking at the U.S., you're saying 2%-3% wage increase at the moment. What is your ability to actually go back to your clients during the year if this ends up being higher as we move along into 2018? Let's say it moves up to 4%-5%, you have very high employee turnover as well. Just what is your opportunity there? Do you have a possibility to push that if that were to happen? Is that something we have to be aware of if it happens?
Yeah. The dynamics are a bit different, like you highlight, Stefan, in the U.S. It is a more dynamic and a more flexible market in that sense. When we do see that there is, for example, a trigger of employee turnover increasing there will always be a discussion also then opportunity and a need together with the customers to also then do adjustments. I think that the capability to your question, if wage increases at the higher pace is pretty good for us in terms of then also being able to balance that.
Okay. Thank you. My second question comes back to, I think lots of people touched on it on the technology side. You show on your slide there that you've gone from 9% to 18%, or you said 19% even of group sales. That's a 10% increase, you said the margin is roughly 6% each point higher. Over these years, I guess your margin on the group level should have increased roughly half a percent, and it's actually flat in that period. Where do we actually see that this is materializing? When do you think we will see it on your accounting and not only you internally?
Yeah. I think I can make a few comments and also for Bart later on. It is also important to recognize the fact that we are winning quite a lot of business also thanks to the strategy and the direction that we have. I think that is one important aspect in terms of us believing that we are growing faster than the market. We're also investing, and we continuously invest also in advancing our positions to make sure that we're able to lead the development in this market. Because we see not only that the margins will come up in the long term, but we also have customers that are more satisfied and also a lot of data points that indicate that the customers are also, thanks to being more satisfied, also staying significantly longer with Securitas as well. I think that those are the major points.
Bart, do you want to make any other comments on this question?
I think it's also valid to comment that if you look at the U.S. where things are just more scalable from an implementation perspective, that there we have seen the margin expansion, and then there are million other reasons, of course, also explaining the margin. In U.S., in North America, we have seen the margin expansion. In Europe, we have been a bit distracted also by the whole refugee situation-
Yeah
which has also cost and burned a lot of management time and resources. We are recovering from that as well. As well, in Europe, the implementation is a little bit less scalable compared to U.S. In U.S., I think I have commented before, you make one major big acquisition, and now we add a second one, and you really have a sizable platform. In Europe, we need to go country by country to find those targets, just as an example. Doing a small acquisition or a larger acquisition just takes the same amount of time almost and resources. That's a bit sitting behind your question. Then, of course, we have seen that the guarding has been growing as well. Yes, there is some margin pressure on the traditional business. Yes, we should see that as well.
Yeah.
Thank you. Yeah. What you're saying is we most likely will see some positive effects on the margin from this as we go forward now.
Well, you know that we don't guide you for the future. You have to make up your own conclusions here.
Okay, thank you.
Thank you.
Thank you. Our next question comes from the line of Allen Wells of Exane. Please go ahead. Your line is open.
Hey, good morning, guys. Just a couple of, I guess, just like clarification questions from me. Sorry to go back on the point about the migrant work in Europe. I just want to understand this correctly, because if I remember back in 1Q 2017, you had this work declining margins in Europe. I think margins were falling about 10 basis points. It sounded like listening to the transcripts second half of last year, that there was a bit of overcapacity. This was basically being addressed, and ultimately you were happy with where that was, sorry. I guess with those overcapacity issues, it feels like largely addressed. I'm surprised there's still quite a material drag here. Could you maybe just sort of provide a little bit about where we are in terms of what is actually dragging?
Is it the fact you've still got overcapacity that you're happy to run with? That's a management decision, and how we should think about timing of that being removed. Secondly, just again, a quick clarification question. You mentioned, I think, in your comments around Spain, you had some sort of tech solutions contracts that were shorter term in nature. I just wondered what the background is for flagging that. Are you highlighting the fact that there was some short-term growth and margin uplift from these that may drop away this year? Just any background there would be helpful, just to make sure we capture this in our modeling moving forward.
When you look at the refugee business, like I said, we peaked in 2016 in terms of activity where we have been doing a lot in many different countries across Europe. When you come into 2017, there was a significant reduction as the situation somewhat normalized. We have still kept quite a significant activity in a number of countries. That run rate that we mention now, SEK 200 million in the first quarter. That obviously indicates around SEK 800 million on an annual basis. That we do expect will decline over time. To your question about the overcapacity, this is something that we always have to watch country by country and situation by situation as well. In a sense, it's easier to ramp business up.
If you look at Europe in general, I would say that we are taking specific actions in specific countries where we feel that this is needed. We also have a number of countries that are in good shape and now normalized, in a sense, when you look at the impact of the ramp-up and also the ramp down of the refugee-related situation.
Is it right to expect that this overcapacity issue in relation to the migrant numbers will continue through the next two to three quarters of this year?
Well, you know that we normally don't guide on the margin, this gets close to that. It's not on the same extent as it was last year.
Yeah.
Last year we commented on the overcapacity. Also the drop was more heavy than this year. This year it's more part of, okay, it's 1% for the total division, which is important, but it's not on the same level as it was last year. It will not help the margin in Q2 either from that perspective. It's not comparable to last year, no.
Okay, thank you. On the Spanish tech solution question.
Yes. We had some short-term contracts there. Contracts which were short-term in nature. They were not so much behind the growth. They are included in the growth, but these are very small contracts, I said, but quite profitable contracts as well. Those are short-term in nature, the moment that those short-term contracts would reduce, of course, that could affect a bit the margin. It's like alerting that the improvement that we see in this quarter could be hampered when those short-term contracts fall away. Some of them.
Is there any way you could quantify that just in terms of helping us over the next couple of quarters when they potentially fall away?
Yes. As you say, we alluded that they were short-term in nature, if we do that, it's normally 0.1.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Henrik Nilsson of Nordea Markets. Please go ahead, your line is open.
Good afternoon. Thank you for taking my questions. Firstly, on the solutions business, thank you very much for providing organic growth and details per division there, it's very helpful. Organic growth was 16%. It's fairly flat year-on-year. Is this a level that you're relatively happy with, or what is your ambition for this segment going forward?
Magnus here. This business, we're growing, and we're building this for the long term. We started this journey a number of years ago, but we still have a lot of opportunity left. I think that we don't really specify any specific number in terms of the target and where we want to grow it. If you ask the question, is there a lot of opportunity still out there? Yes, absolutely. We know and we have a lot of validation from the customers and the solutions that we have implemented with customers that this is definitely something which is important today, but will also be very important in the future. I would also say from a customer perspective, the adoption curve differs quite a lot as well based on what the customers, how they look at the world.
Some people are saying, "Yeah, this is the future, but we are not really ready yet," while some others are really driving the development together with us. I think that that's also normal adoption behavior over time as well. We do see that there is significant opportunities for us here in the mid and the long term.
Okay. On that subject also, do I understand it correctly that the margin accretion you achieve from the higher contract margin in this solutions business is basically being reinvested to add the amount of initiatives and add further growth to that segment? Is that a fair way of looking at it? Is it possible then to talk about a point in time where you see these investments, if that is the correct way to view it, where you see these investments sort of leveling out?
Yes, it's a fair point that we continue to invest in the execution of the strategy as we walk on. We will continue to invest as well in even, as Magnus also said, into the next part of our strategy and to what shall happen beyond 2020. We are here for the long term. It is a right conclusion that you're making there. I don't think we want to make a reflection on the point in time on what should happen when exactly. Of course, at the end of the day, the goal is there to expand the margin.
Okay. Two more questions from me, please. In Europe, did these sickness-related issues also negatively impact your ability to deliver services and thus hurt the revenue in the quarter, or was it only cost-related?
It was primarily cost-related.
Thank you. One last on the U.S. organic growth. Did you have a step up in the startup of contracts in Q1 compared to, say, the first three quarters in 2017? Or is the growth accelerating primarily related to the large contract started in Q4?
The acceleration is coming from these larger contracts. We do have a very good activity and baseline of good growth in the U.S.
Okay. Thank you very much.
Thank you. We have time for about one more question, so we'll hand to Andrew Grobler of Credit Suisse. Please go ahead, your line is open.
Hi. Just one quick question from me, if I may. You talked about the impact of currency on revenues and EBIT during the quarter. The Swedish krona has been very weak relatively of late. If you mark to market with current or recent rates, what would the impact for the full year be, please?
I haven't really calculated, or We have calculated it, but I have not had the numbers with me right now. As you said, the effect ramped a bit up, and then both the U.S. dollar and the Argentine peso and the euro moved quite a lot during the quarter, actually. Based on that, you could say it then depends on how they will level out, actually, between the two, between the U.S. dollar and the euro, as they are moving in opposite directions right now. That is extremely difficult to forecast. I think from my guidance, the best guidance right now is what we have seen in Q1. Everything else is more or less speculation on what the foreign exchange rates will develop.
If you assumed that the rates were just going to stay where they currently are, so no kind of forecasting in that, what would be the impact, do you think, on those metrics?
Yeah. Where they currently are, we haven't made the mathematics. On the exact day here today, we haven't made the mathematics. Yeah, so many moving pieces in there. As I said, they are outweighing each other a bit, and the net will really be what the difference is between the two, US dollar versus EUR.
Okay. Thank you.
Yeah.
I think.
That was going to be the last question. We have time for also. I'll hand back to our speakers.
Yeah. Thanks a lot everyone for participating. We have to wrap up. We have an annual general meeting which is starting shortly. Thanks a lot to all of you.
Thank you very much.
Thank you. Bye.