Good afternoon, everyone, and welcome to our Q3 call. I am here today with our CFO, Andreas Lindback, to share some of the highlights of the business in the third quarter. We continue to execute on our strategy, and this is generating results. The work we have been undertaking during the last 18 months to sharpen the business together with firm execution of the transformation programs is resulting in a stronger business. We're now delivering an operating margin which is well above pre-COVID levels. The organic sales growth in the quarter was 4%. We are winning more business at stable or improved margins versus last year, and the improving sales have helped offset the reduction in corona-related extra sales.
The operating margin improved to 5.9%, and this means another quarter with substantial improvement, not only versus 2020, but also in the same period of 2019. The operating margin was supported by strong performance improvement in all business segments. We are on par in terms of price wage, despite the more challenging environment. We continue with strong focus on portfolio management to ensure a healthier portfolio across all geographies. Growth in solutions and electronic security was 7% in real terms, and we're actively working to rebuild momentum as the situation normalizes and face-to-face client engagement is possible again. We also had good cash management, and we generated SEK 1.2 billion operating cash flow in the quarter. Turning then to the performance in the different divisions, and as is customary, we start with North America.
The organic sales growth in North America was 1% in the quarter, and this is the result of some positive developments and some factors that negatively impact the growth. Looking at the guarding part of the business, Q3 and Q4, 2020 were the peak periods in terms of COVID extra sales. Towards the end of the third quarter this year, we are now back at pre-COVID levels in terms of extra sales, and this has a temporary negative impact on the current growth in guarding. Having said that, the underlying portfolio development is very healthy, and this despite the earlier communicated termination of an aviation contract that burdened the quarter. Looking at the other parts of the business, we see gradual recovery in electronic security despite some supply chain issues and solid growth in corporate risk management.
Also as outlined in the report, a $150 million US dollar contract in the U.S. will be terminated in December. This contract has below average profitability, but as commented, we have good new sales activity in guarding. Given the size of the contract, this termination will have an impact on the top line in the coming quarters. Turning then to profitability in North America, we are very glad to report the second consecutive quarter with operating margins above 7% in North America. Strong performance in our corporate risk management business and electronic security were important contributors to the positive development. We had stable margins in guarding despite lower extra sales, but positively impacted by the recovery in the permanent portfolio. In summary, continued solid development in terms of profitability in North America.
Switching then to Europe, where we had very good momentum in the third quarter with strong growth in many countries. Commercial activity is healthy, and we're winning business with good margins. Aviation demand improved significantly, but we continue the work where we are reviewing all the contracts to ensure a healthier aviation portfolio as the market is improving. We're seeing some negative impact on installations related to component shortages, but commercial activity and sales of security solutions and ES improved during the quarter. Looking then at profitability in Europe, Q3 was a strong quarter with 6.4% operating margin and a clear improvement also when comparing to pre-COVID years. An improved business mix, the cost out programs that we have initiated last year, COVID extra sales, and improved profitability in aviation contributed to the positive development.
All in all, very strong performance by our European team. Shifting then to Ibero-America, we continued on a positive curve, and the growth of 10% was primarily driven by Spain and improvements in Latin America and growth in Argentina. Among the divisions, Ibero-America is also now leading the way with security solutions and electronic security that now represent almost a third of the sales in this division. The Techco acquisition that we finished in Spain at the beginning of last year has strengthened our offering and momentum in the market. Looking at the margins, we have made a step change in terms of profitability in the division during the first three quarters of this year. The operating margin of 5.9% is one of the highest recorded, and we are achieving that in challenging market conditions.
In previous quarters, Spain is the main driver of the positive development, thanks to a leading offering and solid work by our team. Also very good to report significant profitability improvements in Latin America, and I would highlight, on this occasion, specifically Peru, where we have taken actions to refine the portfolio and reduce costs under new leadership in the last eighteen months and now clearly moving in a positive direction. All in all, another solid quarter by our Ibero-America team with significant margin improvements. Now glad to hand over to you, Andreas, for a few more details regarding the financials.
Thank you, Magnus. First of all, it's very good to meet all of you here for the first time, of course. Just a short background before we get into the numbers related to myself. I've been with Securitas for 10 years now in different financial, M&A, and leadership positions. Most recently, I was based out of Singapore to lead our AMEA business over in Asia, Africa, and Middle East. I'm obviously very excited to start a new role here and actively drive the transformation journey that we are on together with Magnus and all the Securitas teams. At the same time, of course, also, to manage our financial development and position and last but not least here, obviously, reporting well out to all of you here as well. Going into Q3.
As Magnus mentioned, we do have a strong quarter, and we are also performing well year to date. This is true when comparing to 2020, but also when comparing to 2019 before COVID-19 started. We have successfully focused on profitability and cash flow throughout the pandemic, and this will continue to be important focus areas for us also going forward. Together, of course, with the execution of our transformation programs and growth of electronic security and solutions. Going into the income statement, the operating margin in the quarter was 5.9%. That is 0.9% better than Q3 in 2020, which was negatively impacted by the COVID-19 situation. It is also 0.3% better than twenty nineteen, confirming here really that we are going in the right direction.
I should mention from the start here that the provisions taken in 2020 were untouched also in the third quarter. The operating income has in the quarter been supported by SEK 100 million of corona-related government measures. These measures partly offset the increased cost levels we have from idle time related to temporary unemployment. It is important to highlight here that we have additional costs partly compensated by the government measures. Comparing to both previous quarter and Q3 last year, we see a decline in the government measures overall. Both in Q3 last year and Q2 this year, the amount here was around SEK 200 million to be compared to the SEK 100 million that we had in this quarter this year.
This is also in line with us having a reduced number of people on temporary unemployment, which now in October is approximately 800 people. That should be compared to 2,000 people that we had on temporary unemployment in July and 4,000 here earlier in the year in January, and 10,000 people at its peak here in April 2020. Moving to the line acquisition related cost. No major movements here. The cost we have for the quarter is related to transaction costs for the announced acquisitions in the quarter and integration cost of acquisitions we have made earlier in the year and previous years. Looking to items affecting comparability. Here we had SEK 100 million of net cost in the quarter.
SEK 35 million of this was related to the C-19 cost saving program, and SEK 199 million was related to our ongoing transformation programs. This totals to SEK 234 million. I will come back here with some more details on this program shortly as well. However, in the quarter, we also received SEK 114 million from the Afa Insurance Company in Sweden. This is a non-recurring repayment of historical premiums related to the AGS Group sickness insurance we have in place. In essence, a non-recurring income. We should also say that these payments have been distributed to all Swedish companies covered under the AGS, not only to Securitas.
This has been accounted for as items affecting comparability, to ensure we have comparable figures in our operating result as it is a larger non-recurring payment that does not really belong to the quarter or to 2021. Looking at the financial net, here the net cost was SEK 96 million in Q3, a reduction compared to SEK 101 million last year in Q3. This is mainly related to lower interest rates and lower exchange rates. For the full year here, we will likely land around SEK 400 million on the financial net. Looking at the tax line, where the full year tax rate is estimated to 27.0% compared to the 27.4% we had for the full year in 2020. Basically no changes here versus previous quarters.
The 27.4% from last year was affected by non-deductible expenses from the exit program that we executed on last year, where we left several countries. As you know, there are also discussions ongoing around an increased federal corporate income tax in the U.S. Here of course, we are monitoring this closely, and we are preparing for different scenarios. Today it is also too early to say what the outcome will be. On the next slide, we have some further details related to the different programs that we are running under items affecting comparability.
For this year, we have accounted for -SEK 629 million in items affecting comparability related to our programs. Then we have the effect in the quarter from the AFA repayment that I mentioned earlier of SEK 114 million, which makes and this basically makes the net cost year to date, minus SEK 515 million. For the full year here, we expect to land at a range between SEK 750 million-SEK 850 million net of the AFA payment that we have received. Somewhere between SEK 235 million-SEK 335 million for the last quarter.
Looking at the first two programs related to IS/IT and North America on the top, here we are on track to finalize both programs this year and move more into optimization focus and really focusing on benefit realization next year. We expect to land within the announced total of the program since the start of SEK 850 million. If we then move to the C-19 program combined with our exit program. This program is moving on well, and as you know, we have kept this program open a bit longer than expected due to the uncertainty around COVID-19.
As temporary unemployment is going down, our ambition is now to close this program end of the fourth quarter, and we expect to land at the higher end of the range of SEK 450 million-SEK 600 million in terms of total cost for the program. Moving to the transformation program related to Europe and Ibero-America. This program is now speeding up in its execution, and Magnus will come back here with the major objectives and deliverables within this program later on. The total program cost is SEK 1.4 billion, and that is equally spread over 2021, 2022, and 2023. This target still remains intact, perhaps a little bit less this year, which would then go into 2022.
In essence here, we are closing all outstanding programs this year with the exception of the business transformation program in Europe and Ibero-America. We plan to have a total cost in 2021 related to items affecting comparability of SEK 750 million-SEK 850 million net of the AFA repayment. If we move into the next page, here we are looking at the currency impact for the quarter. Overall, we still see a negative impact coming from FX, but the negative impact reduced compared to previous quarters for us. In the quarter, sales was impacted -2% from currencies, as you can see here as the difference between the total and the real change. The impact is a bit higher on the operating result at -3% with similar effects also to our earnings per share.
If we look at the earnings per share, the EPS adjusted for FX improved 28% in the quarter, and the EPS adjusted for both FX and items affecting comparability improved 26%. Looking at the year to date numbers, we see a stronger impact from the currency where sales was impacted -7% and between -9% to -10%, further down in the income statement as well. We move to cash flow. Q3 was good from a cash flow perspective for us. The cash flow from operating activities was 1.2 billion SEK in the quarter or 75% of the operating result.
This is a good cash flow considering also that in Q3 we paid approximately 600 million SEK of the COVID-19 government relief measures that impacted us positively in 2020 related to payroll tax and VAT payments that was deferred during 2020. Here, we will also pay another 600 million, which is the final payment during 2022 at the end of the year. We had a slightly negative impact from accounts receivable in Q3. Collections were good. DSO was stable, but obviously we also had 4% growth in the quarter here that is impacting the cash flow related to receivables negatively.
Comparing to Q3 last year, we should remember that we have very strong comparables here, where organic sales growth was flat last year, and we had approximately SEK 400 million in positive timing impact from the government measures in North America and Europe that I referred to earlier. We also were negatively impacted this quarter by by payroll timing in North America, which more or less explains the remaining difference that you can see here between the quarters in other operating capital employed. The payroll timing in North America, I should say, has no effect year to date nor for the full year. This is more related to the individual quarter of Q3. Looking at the year to date cash flow, our cash flow from operating activities was SEK 3.4 billion or 79% of the operating result.
Here the comparable number for 2020 was impacted SEK 1.3 billion positively from the government support measures related to C-19, as I mentioned earlier. The CapEx was close to SEK 2 billion year to date and is trending a bit lower than 3% of group annual sales for 2021. That CapEx number is also including the leases for IFRS 16. Lower financial net paid year to date due to lower interest rates and higher current taxes paid due to the increased profitability leaves the free cash flow at approximately SEK 2.2 billion for the first nine months. We go to the slide on net debt.
The net debt ended up at SEK 15.6 billion, which is up SEK 1.3 billion from the opening balance, but also unchanged compared to the previous quarter in Q2. We had a positive free cash flow, as I mentioned, of SEK 2.2 billion. Then we have made acquisition payments of SEK 1.1 billion, which is mainly related to the acquisitions of Protection One in Germany and Tepe in Turkey that we have announced during the quarter, and also related to Brandteknik acquisitions earlier in the year in Denmark. We paid SEK 568 million in items affecting comparability so far this year. In Q2, we paid the annual dividend of close to SEK 1.5 billion.
All in all, these combined effects increased the net debt with SEK 756 million, and then there is a further negative effect from revaluation and translation, ending the net debt of SEK 15.6 billion. The net debt in relation to EBITDA is on 2.1, which is really putting us in a strong financial position overall to continue our investments in our strategy, both organically and via acquisitions. Moving on to the next slide and looking a bit at our financial position and debt maturity short. First of all, our rating was confirmed earlier in the year to BBB with a stable outlook. We have good liquidity in the quarter with SEK 4 billion in liquid funds.
We have earlier said, we have also renewed the RCF, which is our facility with 10 core banks, for a total of SEK 9.6 billion. Originally, this facility was for five years. We have extended with one year to 2026, with the option to extend for another year. I should say here also that the RCF is fully undrawn at this point in time. As you know, since earlier, we have no financial covenants in any of our facilities, and nothing has changed there in the quarter neither.
As I said, based on a strong balance sheet, net debt to EBITDA of 2.1, and with our solid financing in place here as well, we believe we are in a really strong position here for the future, and also in a very strong position to continue investing into our strategy and accelerate the transformation. With that, I can hand over to you again, Magnus.
Very good. Many thanks, Andreas. We feel confident about the work we're doing across the company, and the actions we have taken are becoming visible in improving profitability. Before we open up to Q&A, I would like to provide just a brief update, as Andreas referenced, related to the transformation programs. This is an overview of the transformation programs. As is visible in this picture, we have been, and we still are in a period of extensive transformation and modernization. A few important messages here today. One is that we are progressing according to plan with the different programs. The second message is that we will finish the first three programs as outlined in this picture at the end of this year.
That's the global IT program, North America business transformation, and then the COVID-19 and market exit initiatives or decisions that we took last year. Those we will finish at the end of this year. With the programs in Europe and Ibero-America, we are completing the modernization and transformation journey that we initiated across the company two years ago. We are at an earlier stage with these programs, but the work is progressing according to plan. With that, we can sum up the quarter. We continue to execute on our strategy and have delivered a strong performance. We're sharpening the business, we're managing the remaining effects of COVID, and we're seeing positive development in our solutions electronic security business, but this remains a clear focus area to further accelerate momentum.
Commercial activity is improving, together with new sales, but uncertainty is still remaining related to the corona pandemic, and we also have labor shortage and wage pressures that we have to manage. Having said that, we have a strong financial position working with clear priorities as we are entering 2022. With that, I'm glad to open up the Q&A session.
Thank you. Our first question comes from Viktor Lindeberg with Carnegie. Please go ahead.
Yes, thanks for taking my questions here. I have a few actually. Maybe starting on the price wage mix. I was just curious to see in your discussions with your customers, I mean, it's not a Securitas phenomenon only that we see inflation trends right now. It would be interesting to see how receptive are the clients, the customers today in light of what is going on from a macro perspective. Is it maybe easier to get this through now, or is it always the same grinding as normally? Second, looking at your electronic security pipeline from an organic perspective, can you comment a bit on how you see this trending now and what we can maybe expect in the coming quarters?
Is there a gradual pickup, or is it still a bit lukewarm in the wake of the COVID-19? Maybe starting on those two. Thanks.
Thanks a lot, Viktor. On price/wage, yeah, this is an important moment because we obviously see similar message that you referenced in terms of inflation, but there is also labor shortage in a number of key markets. I would say that in general, I believe that the awareness and the understanding is high. When we are discussing this internally and also taking that discussion that I'm part of with some of our larger clients, I would say that they are quite receptive. It's always a situation where we're working client by client by client.
To be clear, I believe that with the kind of the context that we have, this is an area where we have to be really aggressive in terms of the position that we take going into 2022. In light of the environment, we wanna pay our people well, we stand for quality, and that also means that we want to be competitive, both in terms of recruiting, but also of retaining our good people. Generally speaking, I would say fairly good in terms of being receptive to the environment that we face ourselves in. There are differences when I look at the markets in North America, usually more of a dynamic environment where we would then be confronting situations if we see that we are not competitive.
We would address that depending on what region we are and also in each individual client discussion. That work we are doing continuously, and I would say that the rate recovery there has been good. In Europe, obviously more of an annual cycle. You have collective labor agreements, et cetera, that would also influence quite a lot. Also with our European team, they are also fully focused, and they also see the picture that we have now, and we believe this is a extremely high priority going into 2022. We have a good track record in terms of how we manage. Most important for us is that we have good quality in terms of each and every contract.
That also means that we're taking quite a forward-leaning stance in terms of really driving rate recovery and price increases so that we can continue in a positive way in terms of recruitment and also retaining people. Looking at the second point, electronic security in the pipeline, I would say that we are seeing a gradual recovery of the demand. It is not a fast recovery. It's still a little bit tentative after COVID, b ut that's something that I would expect should continuously improve. We have fairly healthy metrics in terms of key metrics that we are tracking with order entry and backlog in this part of the business. So here, obviously looking at continued recovery in the quarters to come.
One point that I've highlighted in the report as well is that there is also some impact from some of the component shortages. I think that is something which is affecting everything that has any type of technology dependence. That is also something that we are working through internally together with the clients, but also given that we have quite significant scale as well also with key partners or suppliers to make sure that we can mitigate that as well as we possibly can. I would say tentatively positive in terms of continued recovery when I look at the broader picture.
Okay. Thanks. Maybe relating to that, you mentioned on the component shortage, and I suspect—I mean, you have your 2023 targets of reaching, hopefully SEK 40 billion of revenue by cocktail of organic and acquired growth, bu t now, in the midst of this component shortage, is this more difficult, would you say, to have M&A discussions given the landscape and uncertainty on, you know, forecasting, et cetera? So is that potentially something that hamper your discussions as to where you are now?
No, not in terms of M&A activity. I mean, we are working with a structured target list in terms of ideal acquisitions that we would like to make. We continue that work, and there is quite a lot of activity, I would say, in general in the market. The acquisition side, I think there is more a matter of us being able to find the right targets and also then a willingness obviously for some owners to also sell. I think that's something we work in a structured way. It is a very important part in terms of achieving the 2023 ambition.
Super. That's all from my side. Thank you.
Thanks, Viktor.
As a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. Our next question comes from Kate Somerville with UBS. Please go ahead.
My first question is on North America. Given that you've delivered a margin above 7% in two quarters this year, would you ever revise up your target for 2022? Secondly, in terms of your own employee turnover, how has that trended over the course of last year and this year, please? Thanks.
Thank you, Kate. Well, in terms of 2022, and the target, we set that target back in 2018, beginning of 2019, in terms of the margin improvement that we would like to achieve also then, to further strengthen the case as well for the transformation program. We are on a good path, in terms of the progress there. We don't give guidance. I mean, for us, it's most important, number one, that we deliver on what we said, and then preferably a little bit more, of course. That would always be the preference. We will not stop. I should also say that in our business, there is also a bit of seasonality as well.
If you're looking within a year and the four different quarters that they operate. I think that is also something which has an impact in terms of operating margin patterns over time. Generally speaking, we are on a good path in terms of the margin development when you're comparing Q1, Q2, and Q3 in 2021 versus also then 2019 and 2018, so pre-COVID years in North America, and on a positive path. If you're looking at the turnover, the turnover is actually fairly stable compared to last year. But quite a number of different factors obviously affecting the overall labor market. I think what has helped us in 2020 but also in 2021 in North America is that we usually pay above the market rate.
We usually have a handshake as well, and part of our offering to the clients is better quality, better offering, and also ability to offer a better team of better people, essentially, to the clients. I think that is something that has also helped us, even though there has been quite a lot of turbulence in the market in 2020, but also in 2021. The simple answer is fairly stable when you look year-on-year.
Excellent. Thanks so much. Our next question comes from Rahul Chopra with HSBC. Please go ahead.
Hello. Thank you. I have three questions, if I may. First, can you just talk about the incremental gross margin you have from some of the renegotiated contracts which you're doing, gaining good commercial momentum? That's the first question. Second, could you just quantify, given you're focusing more on pricing than volumes, are there any other contracts at risk we should be aware of due to your termination going forward as well, please? My final question is in terms of your labor scarcity in North America, which you referred to earlier. With some of the special programs coming to an end, how are you seeing, basically, talent applicant pool in North America developing as we speak? Thank you.
Thank you, Rahul. I did not capture the first question on the gross margin. I heard you mention gross margin and the contracts. Can you just repeat that quickly, please?
Yes. Basically just wanted to understand the increment gross margin on your renegotiated contracts. Basically, what kind of dynamics are you looking at given increased focus on pricing you're seeing there?
Understood. Yeah. When I made the reference a couple of times earlier today that we are winning more business and also then at improved margins, that essentially means that the business that we are bringing in this year, it's more volume compared to last year, but it's also higher CD1, what we call CD1, so our gross margin metric. I think that is a very important question that you bring up, and that's something that we are looking at in each individual contract as well to make sure that we are consistently working with diligence and real discipline in terms of essentially creating a higher quality portfolio over time. We don't go into details, but this is obviously one driver behind improving profitability that you see across the board.
We're working very actively with portfolio management of existing contracts, but also very focused in terms of what is the quality of the contracts that we are bringing in, to make sure that there is incremental improvement in those as well. I think the short answer is yes, there is improvement also in terms of the gross margin of those. To the second question about, and that is also related to portfolio management, and we are focusing 100% correct. First priority for us is quality of the portfolio, and that means good or decent or very good profitability. We are investing quite a lot in the business.
We are also then expecting with the transformation program investments that we are making, that we become more efficient in terms of how we run the operations, but also enhancing the offering to our clients. There we are taking a very disciplined approach, and I think it's also the only really sensible thing to do in this type of environment. We talk about labor shortages, and we talk about wage inflation. We wanna pay our people well to be attractive, to be the most attractive company in the industry. The clients, most of the clients also get that and understand that.
I think the clients who don't, well, there we need to have a tougher discussion to say either we renegotiate or we convert it to more of an integrated service contract in terms of solutions, and if that doesn't work, then we would terminate. But I think one thing that I would highlight is that the contracts that we are looking at now in North America, this is not the norm. The aviation contract was a very sizable one, the one that we are announcing that will terminate in December. That is probably the largest local contract that we have anywhere around the world, but a below average margin contract.
Yes, a little bit painful in terms of growth in the short term, but fully in line as well in terms of of improving margins and value creation over time. And then I think the last question that you mentioned was about the labor scarcity and the talent pool. We have seen some improvement, and I know we discussed that also in the last quarter after the federal subsidies were discontinued in September this year. But we're still seeing a market where there you know the we have some open positions, and this is something that we need to work very actively with. I foresee that that will be the case as well in the months to come. To say, some improvement, but active work required.
That again reinforces as well, the comment that I made earlier in terms of also making sure that we are also working actively to ensure strong price increases so that we can also remain very competitive in the market.
Understood so much. Thank you.
Thanks.
O ur next question comes from Kean Marden with Jefferies. Please go ahead.
Good afternoon. Thanks so much. I have three questions related to the U.S., just overlapping on some of those points earlier. Just to be clear on the healthcare contract that you're shedding from the beginning of December—what was that loss due to KPIs or retender, or did that price wage discussion become a factor in that dialogue? Secondly, in the U.S., are you seeing a change in the competitive behavior of Allied as it integrates the G4S acquisition?
Thirdly, I'm wondering if you might share your latest staff churn percentage in the U.S., whether you're seeing that move up in line with some of the other labor market statistics that we're seeing for blue-collar employees in the U.S. Thank you.
Thank you, Kean. When you look at this contract in the first question, well, it is like you said, it's very much overlapping in terms of the previous question, because our main focus is to make sure that we are working actively with our portfolio in improving the portfolio over time. We never go into any specifics of any clients, as you can understand, in terms of client relationship. I just wanted to emphasize that this contract was below average margin. In a way, if there is not a way over time to then improve that, well, this would be the outcome at some point in time.
It was also a contract, or it is a contract where I think there is quite limited opportunity also in terms of improving the overall service mix. So I think that is another important determination factor as well, because we have quite a number of guarding contracts that we are converting into integrated solutions on a regular basis, and that is always the preference. Most often as well, the preference from the clients, which based on the retention rates that we have and also customer satisfaction, wanna maintain and also develop the relationship with Securitas over time. In terms of the second question, Allied. Well, it does obviously mean that, you know, of three main competitors in the top, there is now two.
I think that is a clear kind of a conclusion when you look at the larger size of the business and maybe more of the national side. We feel very good in terms of our portfolio development, the business that we are winning, and we're definitely not winning based on price. We are rather going up, like I mentioned earlier, in terms of margins, selling on quality and also the innovation agenda that we can drive over time. That is something that I feel really good about when I look at the market dynamics as well over the last six, nine months, and together then with the U.S. team.
Because this is obviously something that we're watching, but also something that, you know, from time to time is also coming up in the client discussions. When you look at staff churn. The staff churn is fairly stable when you're looking at this period year-to-date. If you're looking at this period also in the quarter compared to previous year. We don't break out the figures specifically because we had a number of measurement interpretations of those numbers. We decided not to do that, but they are very stable within 1%, essentially, on a year-to-date basis.
Excellent. Thank you very much for that. That's very helpful.
Our next question comes from Anvesh Agrawal with Morgan Stanley. Please go ahead.
Anvesh, I don't know if you might be on mute. If you can please try again.
We move on to our next question. That is with Andy Grobler with Credit Suisse. Please go ahead.
Hi, good afternoon. Just three from me as well. First, just on the U.S. transformation program as that comes to an end. Can you quantify the benefits you've from a margin or absolute krona basis that you have generated from that program? I know there's lots of moving parts within the U.S., it would be good to know on that score. Second, central costs in Q3 were up quite significantly. Could you talk us through why that is? Lastly, just to go back to wage growth in North America. You talked about kind of price and wage being imbalanced. Could you just say what level of wage increase you are seeing through Q3? Thank you very much.
Thank you, Andy. When you're looking at the U.S. transformation program, I mean, we've said that we're essentially finishing the program towards the end of the year, and now over the last 3-6 months and throughout 2022, we are shifting towards benefit realization. That is due to the nature of the program where we have done significant upgrades from 15- and 20-year-old systems and applications and manual ways of working. We have upgraded to much more automated and fully modern systems and applications to really help and support the business in the strongest possible way. I would say that there is some positive benefit in the numbers now. We had stable margins in guarding even though the growth was not there in the quarter.
That is obviously one indication, but we're also expecting now with increased emphasis on benefit realization, quite a lot of improvement over the next 12 months, essentially. If you're looking then at the central costs, we have essentially two main components here, Andreas. I think one is one non-recurring item, which is a cost that we had, which was more significant. We have also made some bonus top-ups as well in terms of accruals related to current year performance. I think those are the two main factors, Andy, when you're looking at the central cost in the third quarter. Wage growth in North America, do you wanna comment, Andreas, on that?
I can tell you if we look at this, for this year, I mean, as you know, in a normal year, we would have somewhere around 2% of our wage increases, you know, a more soft year, 1%. If it's more heated labor market, it could go up to sort of 3% overall. Here, if you're looking now for the whole group, we are rather at that high end, here so far this year, around the 3%, and you can add a little bit more in North America. It's a bit more than 3% that we are seeing overall in the North American markets this year.
I hope that answers your questions, Andy.
It does. Can I just go back to a very quick one on the non-recurring item? Why was that not split out into items affecting comparability? Can you quantify how big it was? I know it's a small topic, but be good to know.
No, this was more related to a strategic project cost that we've been running in the business here, Andy. It falls naturally to be at the group cost levels from that perspective. We will not quantify that individually.
More kind of normal operating expenditure, but significantly higher than in a normal quarter for that specific project.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Tony Tamata with KLD Capital. Please go ahead.
Hi, this is Tony Tamata from KLD Capital. Just considering the strong operational performance with, I think the return on capital employed now over 13%, which is well above your WACC. You have a strong balance sheet, and you have underlying growth in the market, and the pricing of the company is at very low or, I would say, very attractive level. Is the company not considering any share buyback, buybacks at all? It looks to me that you have the mandate. Thank you.
As you say, here we are in a strong financial position, but we are also obviously driving our transformation plan, and we also have our strategic ambition here to double our electronic security and solution business. We are rather focusing on continuing to investing into our strategy, both from the organic and from the acquisition side. That's mainly our focus right now rather than any share buyback. We are very confident that we are going to drive the margins and the transformation here going forward. We will make use of our balance sheet for that purpose.
Tony, I would just add to that as well. I mean, we are in a period of extensive transformation further to what Andreas is commenting. We are increasingly confident as well in terms of the output and the improvements that we can expect from that modernization work. I think that is also something that our main priority is really to continue to drive this transformation. Now, obviously, it feels good that we are wrapping up three main programs or two main programs, and then the more tactical one, which was C-19 related. Full focus on delivering on the remaining two, because that will also make Securitas fundamentally stronger as a company.
I think that is something also that we are, you know, focused on achieving as well. also acquisitions, like Andreas mentioned, will also be important in the strategy as we go forward to also change the profile of the entire company, our service offering, and value creation.
Okay, thank you.
Okay. From Johan Eliason with Kepler Cheuvreux. Please go ahead.
Yeah. Hi, this is Johan. I hope you can hear me. Hello? Can you hear me?
Yes, we can hear you.
Okay, good. I couldn't hear any replies. Sorry. I was just some tidbits on the cash flow. You mentioned here that you have paid roughly SEK 600 million of the relief measures in North America in the quarter. How much was that in the full year? And then do I understand you correctly that there's nothing more to be paid in the fourth quarter, but rather sort of at the end of next year instead? Thank you.
Payment that we've done in Q3 was SEK 600 million, and that's the only payment that we have done and will do this year related to the deferred taxes and the payroll taxes here. We will pay another SEK 600 million end of next year. Those are the only two sort of payments we will do this year and next year.
Okay. Sounds a bit lower than I thought in my numbers at least. Anyhow, how should I think about the fourth quarter cash flow pattern? Is there any particular seasonality or things that will happen then in the fourth quarter, obviously not including this VAT repayment anymore?
No, I would say I mean, we will have to see what the fourth quarter obviously comes in with here, but overall, there is nothing specific to take into consideration there. Then obviously we will not sort of forecast our cash flow here, but nothing particular compared to previous quarters or the same quarter last year from that perspective.
Okay, excellent. Thank you very much.
Our next question comes from Oscar Val-Mas with J.P. Morgan. Please go ahead.
Yes, good afternoon. Most of my questions have been asked, but there's 2 follow-ups. Traditional questions. The first one is just, could you comment on your exposure to fleet or fuel costs? And if that is significant, can you pass that through to customers? The second question is on government grants. You say you have 800 people in Europe. You had a SEK 100 million benefit in Q3. What's your initial thinking of that benefit in Q4? Do you think that will drop off further? Thank you.
Thank you, Oscar. Yeah, correct. There is obviously some impact. We have tens of thousands of cars, which are then mostly related to our mobile officers and control rounds that we do, but also when we dispatch based on alarms. Any such cost would typically be part of the regular passing on to our clients. W hen that sticks out, and if that becomes a very significant factor, that would also then be part of the ongoing dialogue with the clients in terms of passing on costs. When you're looking at the government grants, the good thing right now is that we are down from around 200 million SEK in Q2, also 200 million SEK in Q3 same period last year, down to 100 million.
Like you highlighted also then going from a few thousand people down to 800 now. What is difficult to estimate, of course, and we're saying this based on experience now with COVID since the beginning of last year, it depends quite a lot also on how COVID is developing. If we were to see, like we're seeing in some countries around the world, you know, further restrictions being reintroduced or further lockdowns, that could have an impact, of course. But to zoom in as well, I think, the majority of the people that we have now remaining on temporary unemployment support are in France and in Germany. I think an important part of that kind of answer lies there when we look at it right now.
We feel good about the general trend compared to where we have been. I should also highlight that when we have received support or subsidies, that has also been obviously offset with increased cost that we've had for idle time, et cetera. Yeah, it I would say that we're more now kind of in a remaining effects of COVID phase as opposed to or compared to six or 12 months ago.
Okay, thank you. Just on provisions releases. You haven't released any today. When do you think you will assess the ability to release your provisions?
We have not released anything in the quarter, correct there. Then obviously we are assessing these provisions on an ongoing basis here as well, but we also need obviously to see how COVID-19 and the whole economy situation post the COVID-19 scenario will play out here as well. This assessment we are doing continuously and will continue to do moving forward as well, but we will have to wait and see here also to look at how the development generally in the economy and in the business is going. What I should say here, though, that we have not seen any increases in bankruptcies or sort of actual realized bad debt so far. We will continue to assess this going forward as well.
Okay. Thank you very much.
As a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. Our next question comes from Neil Tyler with Redburn. Please go ahead.
Yeah, good afternoon. Three left from me, please. First question is around the contract termination again, but more broadly, I wonder whether you can offer your insights into whether there is any meaningful proportion of current revenues that remain below what you would consider your benchmark margin return, and therefore it might be either at risk or up for renegotiation to try to raise that margin. That's the first question. Secondly, shorter term, but thinking about bridging the margin in terms of basis point improvements year-on-year, specifically North America and Europe. I wonder if you can help me understand the year-on-year impact, either in the quarter or year-to-date, of two effects, really.
Firstly, the lower extra work that you've incurred, and secondly, the net effect of government support against idle time costs. A third question related to that second one, really. I understand that that support hasn't completely negated the cost of idle time over the last 18 months or so. Is it fair to say that the level of government support you're receiving is a useful measure just in relative scale of this negative effect, this margin impact? i.e., that negative margin impact is reducing over the course of this year. Thank you.
Yeah. Thank you, Neil. When you're looking at the first question in terms of contract termination, this is work that we are doing on two fronts in terms of portfolio management. One is in terms of the new business that we are bringing in. There we have extremely high focus and discipline in terms of the quality of the business that we do bring in. We have also stepped up efforts quite significantly in terms of portfolio management or the broader portfolio.
Part of that effort is the lessons learned from the aviation situation, because as you remember, when we went into the COVID crisis, we have been working diligently with the top 100 contracts in aviation to make sure that everything is healthy as we're coming out of COVID. We are now, I would say the vast majority of that work is now done, so probably a bit more than two-thirds of that work is now done. That means that two-thirds of the volume or the percentage of sales that we had that was not according to our benchmarks, we have now dealt with.
There is some remaining, and that's out of the nature of some of the contracts also going into 2022. That work we continue, and we drive that with full focus across the entire portfolio. That's something that we have started to do a year ago. Looking at that, there is three different outcomes. One is that we would renegotiate the contract. The other one is that we would convert the contract into more of an integrated solution. Third option would be that we terminate, and that is never the preference. I would say that when you're looking at these two big ones in North America now that I can understand are generating quite some attention, both are below average margin contracts.
They happen to be fairly significant in size. When I look at the general portfolio development in North America and also in Europe, that is very healthy over the first nine months of this year. That is obviously a combination of the volume price increases, but also then what we are gaining in terms of new sales, but also what is being terminated. The portfolio development is a very important metric for us in terms of how is the underlying business developing, and that is positive while we're seeing negative impact, obviously, from some of the extra sales reductions.
I hope that answers the first question, this is something that we are doing with full focus and in an orderly manner together with the different teams in the different markets and with the clients. Looking at bridging the margin impact, I think it's a simple way because there is a number of moving pieces here, is that a little bit more than half of the margin compared to 2020 is coming from more normalized provisions. We did take more of a cautious and prudent approach last year in light of the uncertainty. A little bit more than half of that improvement is coming from that.
The other half is really coming from improvements in portfolio and some of the other impacts that we have referred to in terms of the cost management program. I think also as a broad result of now a lot of the work we've been doing to sharpen the business. I think when you look at that in combination also with aviation, where we have been improving, those have been the main drivers. I think from my perspective, when I look at it, I'm looking more at how we're performing now compared to Q3 2019 and Q3 2018 to really understand then how is really the underlying development. That development we feel good about looking then at the entirety of the business.
You had a third question. Did you capture that, Andreas?
No, I did not catch that one either.
Well, I think I remember now. Neil, you can correct me if I'm wrong, but you said the government support part, is that kind of an indication of also then the type of the cost that you've had? Well, if you generalize-
Yeah.
I think this would kind of balance each other out because we've had some cost obviously related to idle time, et cetera, but it's very difficult to make that a perfect science. Don't know, Andreas, if you have any further flavor you want to add to that.
No, but I agree that and that when it comes to the cost for the temporary unemployment, obviously when we will need. We have to pay for this, and for that we get some compensation here. I would say not, it's not fully compensated, so we have a net cost here. Like you say, Manus, as well, it's close there to also even it's both of them together out, so to say so. Over.
I guess the other part of the question was: Is that net cost now it's pretty minimal in the third quarter because you know using the government support figure as a sort of proxy.
Yeah. It has-
Yeah.
It has reduced in the quarter, in line with the reduction on the grants received and also the number of people on the temporary unemployment. Correct. Yeah.
Yeah. Okay. Thank you very much.
There are no further questions. I hand back over to our speakers.
Okay. Thanks to everyone for joining us for this quarterly call, and looking forward to seeing you in the months ahead. Thank you.