Hello, everyone. Very welcome. I would like to present our full year report for Securitas 2016. We are proud of the year. We think we had a good year in 2016, and we are delivering on our strategy. We're growing faster than the security market in average, which we have kind of committed ourselves to try to do by the strategy that we have, and so we did in 2016. Coming back to the divisions in a minute. We improved our operating margin 0.1%, we've changed 9% dividend increase compared to last year, which was an increase compared to many years before that. And maybe one of the most important factors is that we have a very good growth on our security solution, electronic security sales.
56% growth, including acquisitions, of course, contributing quite a lot to that, but still, without acquisitions, completely without acquisitions, we are have an organic growth of 22%. So it's now 16% of total sales in the group, which is up from 11.5% the year before, so we are moving definitely in the right direction. And then when the 16%, you have to remember that we also had a very good growth in extra sales and the manned guarding side of our business as well. So that we are pleased with.
Good, and we will think we can continue to work on to grow along that path in the coming years as well, to continue to increase the relative share of electronic security and security solutions, so which is really the key fundamental of our strategy, where we are very pleased with that development. Here, you see the numbers for the full year. Again, basically the same numbers, so I guess we will come back to those in a minute. Then North America, solid situation, good situation, good momentum, good energy, good leadership and driving our strategy in a very consistent way. We have good growth, good momentum in the growth.
We have had very good new sales this year, record high new sales, and also we have record high client retention, which I think are good proofs of our strategy, that we keep our clients and that we have good new sales. So a very positive portfolio development, and we are coming into 2017 with a good speed. We have spent quite a lot of resources, including management, in integrating the acquisition of the Diebold Electronic Security, nowadays, SES, Securitas Electronic Security, in our North American operation. And there has been quite a lot of work in the back office, in the integration, in the preparation to get the leverage from that acquisition.
The business has performed according to our expectations during 2016, and now we think we can start to get more leverage from that in 2017. All that preparation work has been done, and also hopefully now management will be a little bit more freed up from the integration process and the back office integration work that has been performed in 2016. So, we think that we are well positioned now to take good advantage of that acquisition in the North American operation. Oops, wrong way. The margins consistently improving year-over-year. We improved last year compared to 2014. Now, again, we improve with 0.3% 30 basis points up in the full year.
So, and, and that is, a combination of different things, good growth, good leverage from that, many small things that adds up, when you have a stable, good performing organization. And also, of course, the inclusion of SES now in the business that supports the margin. So those three together, they are representing the key cornerstones of that very positive trend in North America. In Europe, we have had a good growth throughout the year, which you know already, you follow us very closely. But of course, now we, as we already said in Q3, we would see a lower growth and meeting tougher comparatives. We lost a few contracts and so forth, all well-known facts.
And we were actually expecting a little bit lower growth in Q4 than it actually became. So the 2% that we had in Q4 was slightly better than we were expecting. So that's the good news. Still, we now will get the full effect in the coming quarters of the contracts that we lost. February 1st, the Arlanda contract stopped, and the refugee-related extra sales are coming down. That trend remains. So we will have a couple of difficult quarters ahead of us, and then we hopefully will start to recover in the second half of 2017 in Europe. On the margin side, the margin in the last quarter was lower than last year, due to a couple of things.
But for the full year, and I think that's the important part to look at, we actually improved the operating margin by 10 basis points, 0.1 percentage points. So, and that has been supported by the extra sales and also the volumes in security solution and electronic security, which is growing in all our divisions, including the European one. But in the quarter, we had some issues. We had some one-offs that we took to adapt to the volume that we're now facing right now, and in coming quarters, we took some restructuring measures in a few countries in order to adapt ourselves to the situation where we're in and try to improve also going forward our margins.
So we had a couple of one-offs there in the quarter. The Turkish electronic security business, it's burdening us a little bit compared to the year before, and also a little bit lower extra, less extra sales with high margin. Those three, to anticipate the probably question on that, they are kind of one-third each, to make it simple, of the deviation between the 6.2% and 5.8%. Ibero-America, very good growth, especially happy to see the growth in Portugal and Spain. Latin America continues, of course, to deliver on very high growth numbers, even if some countries have more difficulties than others. We have a very strong growth and trend in Colombia, while we have more tougher times still in Peru.
But the really good news in the quarter was, in the last quarter, was very good growth. We saw growth in Portugal and Spain in the range of 5%-7%, which we haven't seen for a very long time, organic growth. And we are employing people now in Spain and Portugal, which we haven't done for a very long time. So that was encouraging and more positive view on the market, but also we were successful winning contracts. And one of the reasons is that some competitors of ours are having big difficulties.
One filed for Chapter 11 in the last quarter, for example, one major player, and then we can be more aggressive in picking up business from the weaker ones in the marketplace. So that was encouraging to see and supported why we came to the 16% in the quarter. Yeah, and the rest I think is self-explanatory. When it comes to the margin, it's pretty much flat on a year-on-year basis. And we have a technicality with the Argentine peso, which we have has a negative effect, but if you exclude that one, then it's basically a flat trend in Iberia, Ibero-America.
On the wage situation, it's important to say that we had with wage cost increase, which we could not manage on the market price, on the market, so we have a negative gap between wages and price increases in Spain, and we suffered a bit from that in the second half of 2016. We do not expect any CBAs and any cost increases in of any significance, at least in Spain in 2017. There has been quite, in comparison to inflation and wage inflation in Spain, we have had quite some increases during 2016, so we are not expecting anything of that in 2017. But we will continue to try to push through that wage cost increase we had mid-2016 now in 2017.
And we're still working on that, and we had a, have a big price campaign going on in Spain, trying to compensate for that gap, and hopefully we can recover some of that gap or, or another piece of that gap in 2017. So that work is still going on. Cash flow was a disappointment in the quarter. We should have delivered better, which we normally do in the last quarter. But primarily, there are a number of different explanations, and it's fairly well explained in more detail in our quarterly report and also on the right-hand side of this slide, as you see. But still, the main explanation is the growth and the accounts receivable that we did not collect as expected in the last quarter.
So we fell short on our targets and our expectation of the free cash flow. The money is, of course, not lost. We just need to shake it out of our balance sheet. We have taken some measures, which is led by our CFO, Bart Adam, and the North American team in North America, where we think we have some potential to really improve our accounts receivable and our DSO. And that project started now in Q4, and hopefully gradually, we will start to see some results from that project.
But also, we are tightening the controls, and we will focus more as a management in all levels in the company on the cash flow to recover the gap that we should have collected in the last quarter. A small information is that the cash flow in January was better than it normally is in January, so it looks like some of that money that should have come in Q4 came in January instead. But not all of it, but some of it, at least. So we will have to recover where we fell short in 2016. So in our report, I think that's our disappointment, and that we need to fix in 2017.
On the net debt, no real important comments to make. Acquisitions, of course, the big one in U.S., the main one, that affects that one. And I already commented on the electronic security piece, which is now 16% of total sales. A good trend, and it continues like that. And we are certain that we really continue to make that a substantial piece of our total business, and that definitely drives the margin. And this slide that we have shown for years now, with the 4%, 6%, 8%, 10% improvement path, that works. It still works very well. It's still the truth, and as we move contracts, we certainly improve on margin. So all in all, we are proud of 2016.
It's the best year in Securitas history from a financial point of view. We have a good momentum in the group. We are coming into 2016 full of energy and a good momentum, and into 2017, very good momentum and full of energy. We really are convinced that we have a strategy that will help us to grow faster than the market and continue to improve our margins. Having said that, see if there are any questions. Please ask your questions. You're welcome.
Thank you. So ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now. Our first question comes from Srinivasan Sankaran of HSBC. Please go ahead. Your line is open.
Thank you. Hi, Srini from HSBC. Couple of quick questions on yours, please. First, with the possible immigration restrictions in the U.S., and depending on whose estimates one believes, between 7%-15% of the workforce being immigrants, would you share with us whether you have had or anticipate any supply shortage of labor? And also, can you reduce the staff turnover in the U.S. now that Obamacare seems to be likely to be withdrawn?
Well, we don't see much of a shortage of labor. In a certain place we've had some difficulties from time to time, depending on the time of year, to find people, recruiting people who are qualified, who know the language, who will be passing the tests, who will pass our own tests, who will be approved by the government to be authorized to work as a guard. It's. We cannot take people just coming with very short notice from a different country and put them into our workforce. That doesn't work simply for many different reasons. But the shortage of labor, we have not had much difficulties with that in our business.
But of course, if unemployment goes really low, then of course, that will be an issue for us. If it and that normally results in a little bit more wage inflation. And but that is not a major deal for us, because if we have a – if it doesn't go very, very high or you have very big swings in that, but if it's just kind of normal inflation, a little bit more and a little bit less, then we manage that by our price increases, because that's so to say, the – that's how this business works, and that is not a concern, if that is a controlled, so to say, transition process.
Okay.
When it comes to turnover of staff in U.S. or any other part of our business, that is, that's relatively high, of course. We've seen those numbers before, pre-2000, pre the Lehman Brothers crisis. We were in 2007 and 2008 on the same kind of level, and we are used to manage that. It's not something we like, but that's the way we are, we are geared for managing this turnover of staff. And to reduce the staff turnover, the cost of doing that is much higher than the benefit.
So, if the industry is not willing to pay and the customer base and so forth is willing to pay on a different level of salaries, then it's impossible for us to do that ourselves, because that will not make us competitive.
Okay, I understand. Just one follow-up question on the wage inflation. If you look at the market data in November and December, and particularly in the security services segment, wage inflation was a lower double digit range. Do you see that on the grounds, actually?
If we see what?
Double-digit wage inflation?
No.
If you look at the market data.
No, no. No, no, no, no. No, no, we don't see that. We don't see double-digit wage inflation. We, I mean, wage inflation is relatively low. Unemployment, from a category of, let's say, more low-educated segment of the market where we are recruiting, we don't see a lot of pressure, and then consequently, not much of a wage inflation.
Okay. Okay, thank you.
Thank you. Our next question comes from Rob Plant of JP Morgan. Please go ahead, your line is open.
Good afternoon, Alf. On the cash flow, it sounds like you're already getting some of it in, but do you think there's been any structural change, perhaps the shift to electronic or the working capital of acquisitions? And how much of that SEK 250 million delta in receivables do you think you'll get, while I accept revenue did increase, so that is a nice issue to have? Thank you.
We are-- There's nothing structural in the sense that we are running the business in a different way. We have a few things. We paid some more money into the pension funds. We had some more taxes paid and less deferred. We made some major investments in the U.S. because we moved to a new head office in the U.S. and refurbished a big building completely. So those are things which are... well, let's call it kind of occasional one-offs or not something which is repetitive in any way. So, I mean, but the major matter where we fell short is collecting the DSOs.
We also had quite a lot of accrued sales in the end of the year, which we normally would not have because we had some transition matters in one area of our business where we were not ready to send the invoices as expected. And then we accrued the sales, which is correct, of course, but then if you don't send an invoice, you don't get the cash. So we send the invoice when the system is up and running, and then you will have a little bit more accrued sales over year-end. So those money are related to that, that's nothing structural. It's temporary, and it's a matter of just putting pressure, incentivize the organization in the right way and the right focus.
And then, the major part of that, where we fell short, we will, we will recover. And a piece of that, actually, we already. Looks like we did already in January. We should not be too jumping the gun too much about that, but still, it's important to say that we, we had a quite a much better cash flow in January than we normally have in January. So I, I, I feel confident that we do not have to take any drastic measures, but we need to be, we need to be observant on this. We need to be alert and vigilant on this matter and put the focus there, and then recover in 2017, where we fell short in 2016. That's, that's...
I think that is- that's how I see it. It's not, it's not a concern, it's just a disappointment, I would say.
Okay, that's clear. Thanks, Alf.
Thank you. Our next question comes from Michael Holm of Danske Bank. Please go ahead, your line is open.
Yes. I have the first question on the margin development in Europe. Last year, you mentioned costs relating to extra sales for margins declining, and this year, you're mentioning less of high margin extra sales being a negative in the year-on-year comparison. Could you give some more color on that, how it could have been negative last year and negative this year as well?
Yeah. No, I think yes, that's a relevant question. A good question. In Q4 last year, in well, 2015, we had very good, very high extra sales, and then we were well, we were asked, or even criticized, for why that did not generate higher margin than it did in Q4 2015. And the reason was that we had a lot of extra costs, we had a lot of training, a lot of overtime to manage that tremendous ramp-up of refugee and terror-related sales that we got in a very, very short notice, October, November, December 2015.
So which meant that we and we were not taking—we were not abusing that situation either to ask for prices which were too high, so to say, and abusing our position to be able to solve a big societal problem, issue. So we had kind of an average margin on the extra sales in Q4 2015. Now, then, during Q1, Q2, Q3, gradually, we have then, of course, taken a lot of that cost initially. We have been able to keep the same people. We did not have to do... And so we have been able to grow the margin on this piece of business and other extra sales that we have got. We have a good development in extra sales in general.
So, margins have been gradually, as usual in this business, creeping up, and we have improved. So, step by step, that has been better and better. And now we are losing some of that volume, which has been improved over the past three quarters in Q4. And that decline is getting a little bit more sharper now, which means that that hits our margin. That's how it- that's how you should. That's how- that's, that's the short version.
Okay, thanks for that. And just, just to follow up, I guess that implies that we should not be too optimistic on the coming quarters then, as I guess you will face these comparisons in the coming quarters then?
Well, without making too much of a forecast, but the pattern we've seen in Q4 will, of course, remain in the coming quarters, in that respect, yes. Well, then, but I mean, we don't—I mean, then at the same time, I mean, we, you lose something, you have to win something else. So hopefully we will get something else to... But we will have tough times on the top line in the coming two quarters. That we have already said a quarter ago, and that still remains as fact.
Okay, thank you.
Thank you. Our next question comes from Andrew Fennell of Morgan Stanley. Please go ahead, your line is open.
Hi, guys. Just if you could just add on, the client retention in the U.S. market, can you just talk about what you think has been driving that?
I think that we are doing it. As I said initially, we're doing a really good job. I mean, we deliver well. We have a very good team with strong organization, very stable, very mature, very consistent. I think we're simply doing a good job. We also have more to offer our customers. We have a better story to tell. We have more excitement going forward. So I think many customers, at least that's my perception, feels that we are the best partner for the coming years as well, who can really create value for the client in the coming years by adding technology, trying to do things in a different way, try to make it more efficient....
Improving the security without increasing the cost, I think we are the best equipped in the market to do that today and globally. And that, I think many customers appreciate, and then they keep the contract, they extend the contract, and then we can continue to work with improvements we can offer. So I think there are many things, but in general, I think we have a good strategy, and that is what hopefully I would imagine supports the client retention in the U.S., where we have come very far also, and then in all these respects now.
Okay, fine. And just on the wage bargaining point, I think you've mentioned that Spain, you expect to recover some of that in 2017. But is there any other markets where you're seeing any wage inflation that's difficult to recover, or where you'd expect it to come through in 2017?
No, not really. I mean, unemployment is still relatively high, and as I said before, in that category or that segment of the market, where normally relatively lower educated staff, so it's not too difficult to find people. We have some issues somewhere. We have some minimum wage increases. We have some more legislation in a few places. But then, I mean, when that is the case, then we have also an argument to go to the customer and ask for a price increase. So no, I do not. I can, at this point in time, I do not foresee any... It's not a concern, I would say. It's not. I do not foresee any major issues on managing the price and wage balance in 2017.
Okay, fine. And just finally then, on the, the receivables point, I mean, could you just give us a bit of better color around, where this was? I mean, was there any particular region that was impacted? And from what you're saying, it sounds like it was mostly driven by inefficiency on your part, rather than from the client, from the client perspective. Is that the right way to think about it?
Yeah. I mean, when it comes to... Yes, in, I would say so. We did not do a good job enough to collect the receivables, the piece which is accrued sales. It's a transition process which you need to do sometimes, in order to move from one system to another. Where we fell behind primarily was in North America, and that's where we have initiated a quite big project led by, as I said, the management and our CFO, Bart Adam. We started already now in Q4, and that continues now in Q1.
To try to change the way we operate, I mean, you can how we send the invoice, if we can send the invoice before, do more electronic invoicing, put more focus on the cash management, consider if we can incentivize in different ways. Many different things, and we have a project team working on that now in North America. We had in Q4 and continue in Q1, and we invest quite some money to do that, to improve that. So there is a really kind of a task force project going on in North America to shake the money out of the balance sheet and get back to the DSOs where we normally would be, and even better than that, hopefully.
Okay.
We also fell short slightly in Europe, but in Ibero-America, but not as much, but still not good enough. So there we also need to do the same things in different ways in the different countries.
Okay, so just one more then. And it's nothing to do with the mix of the business changing-
No.
It's nothing to do with that?
No. There is one part which we call, which is called, I mean, it's called the net investments. And there, of course, you have one piece, which is in the CapEx, in where we invest in our customer solutions, but and also in the premises, uh, that was a piece of that was the U.S. part. But I mean, this is, this is we, this we like a lot, because that is our strategy is to invest that. But, okay, so that was negative deviation, and more money invested compared to 2015. But still, the big reason to why we fell short and why we were disappointed was not that, because this we knew.
This is a part of our business. We knew what we were doing, and we knew we were investing in these matters. Where we were disappointed were on the accounts receivable and also that we had a relatively high accrued sales over the year-end, and that we just need to recover in the coming 2017.
Okay, that's great.
Thank you. Our next question comes from Edward Steele of Citi. Please go ahead, your line is open.
Thank you, and afternoon, all. Just two follow-up questions. I know, Alf, you talked about the wage price balance generally. Just specifically on the U.K., what sort of shape do you feel you're in for the minimum wage hike in a couple of months' time? And then secondly, please, could what percentage of revenue was contributed by the refugee situation still in Europe, which I know decelerated, but was still a contribution in the quarter, please?
Well, I mean, the U.K., we had a minimum wage increase already in 2016, and that we, we compensated fully by price increases. Coming if, whatever price increase or if anything similar, when we have that in the U.K., we will do the same. And I, I think all, I would expect that the market in general will, will reason the same, that when you have changes in legislation on the wage side and our CBAs, you just need to follow that and then pass that on to the market. More, not more, not less, and that we did already in 2016, and, and whatever comes in the future, we'll do the same. So I, that's, I think, is not a major concern. Sorry, what was your other question?
The other question was about refugee one-off revenue, particularly in Sweden. I was wondering, while I know it's decelerated as a contribution to the group revenue line, but what is the rough percentage at this point in the quarter, please?
The refugee sales and total sales in what, in Europe, or what do you mean?
Yeah, but what was the percentage contribution to group sales or European sales, whatever you choose?
That number we have not disclosed. I mean, still, I mean, the total refugee and terror-related sales is a relatively small part, of course, of the total division segment sales. But it's a relatively large part of the extra sales. But of the total, it's a very minor part. I'm just gonna give you, just to give you a flavor of that, if we look on extra sales for the European division. I mean, extra sales in the European division as a total is in the range of about 20% of total sales in the European division.
And it fluctuates around that number, to give you a give-and-take number. And then out of that number, it's an important part, but it's definitely a relatively small part of the total division sales. But of course, when you have a decline in that, it has an impact, especially as you have been building margins throughout the year.
Thank you, and going back a couple of years ago, the extra sales in Europe was, what, what was it, as a, that rough percentage?
Oh, I mean, it's been, if you go back in, in... I mean, it's fluctuating in the range of 18%-20% over the years. That's where it is. And, on a group level, I think we have talked about those as well. I can give you a little bit more, on that respect as well. I mean, that number, that fluctuates between kind of 13%-15%, 16%. Now we are in a relatively high range. We were in the range of 15% in, on a group basis of total sales for extra sales in 2016, and which was, of course, higher than in 2015.
Thank you very much, Alf.
Thank you. Our next question comes from Sylvia Barker of Deutsche Bank. Please go ahead. Your line is open.
Hi, good afternoon. Three areas of questions, please. Firstly, on the European run rate, just to clarify, was, were the extra sales from refugees coming down during the quarter? So was the run rate in, December, for example, nearly flat as an organic growth rate for that division? And then should we think about H1 2017 as being somewhere between flat and 2%, essentially?
Well, we don't -- we just gave, we're not going to give a forecast exactly what the organic growth is gonna be in the next two quarters, but it will be tough. We will have tough comparatives, and we also lost one big contract in the retail in the end. We terminated that in the latter part of November, so we get the full effect now in Q1, the same in the Arlanda contract in Sweden, which was February 1st, that ended. So we will have some tough quarters, but we don't live from crying. We can explain that, but we have to win something else. And of course, we have hundreds of thousands, 100,000 people in Europe who like to win something else.
So they will fight and try to compensate that by other contracts. But it will be tough in the short period of time, but hopefully we'll recover well in the second half of 2017. The run rate on the extra sales, and especially the refugee-related sales, has gradually shrunk in the quarter. So it was less in November than October and less in December than November.
Okay, great. Thank you. And then on the margins, you did say, kind of talked about Q4 2015, and Q4 2016, but obviously, if a third of the drag on the margins was from the extra sales, and that's in a quarter when in Q4 2015, you had a lot of extra costs, then the run rate in the margin potentially from that third of an impact could be much worse in Q1 2017, just ignoring the restructuring and the Turkish momentum. Is that the right way to think about it?
No, but it was as I explained before. I mean, we some of that sales, we have had a good margin on that margin that's been gradually improving throughout the year. And now we're losing some of that margin, which is not only the refugee-related extra sales, but also some other extra sales which had good margin that we lost or we shrunk, I should say, in Q4. And then, of course, that has some impact on the margin. I mean, still, we are talking 10, 15 basis points if we split the 0.4 in three pieces. So, I mean, we should not over-exaggerate that. And still, remember, for the full year, we did improve the margin in the European division, actually.
Okay, thank you. On restructuring, would you be able to mention which countries that involves?
... No, it was some of it, it was, no, preferably not. I mean, there's, it's no major deals. It's a little bit in many different countries where we took some actions. Of course, it is, it is to some extent related to the countries where we see a shortfall in the volumes in, for various reasons. We lose contracts or we have lower refugee sales, and Sweden is of course one sticking out where we lose a big contract at the same time as we have the lower refugee sales. So, Sweden would be one of them, is one of them.
Okay, great, thank you. And then finally, on North America, in Q3, you said that the AlliedBarton Universal combination was perhaps benefiting you a little bit around the fringes. Could you update us on that in the short term? And then if we think more about structurally about the market, where would you say that your market share or your combined market share of the top two players is now, if we look at the marketplace as guarding plus solutions where you compete?
Well, I think, I mean, our market share in North America, we usually say it's around 17%- 18%, and they are basically the same size as we are. Now we are comparing a little bit apples and pears, but generally speaking, so I guess the two together would represent in the range of a third of a market or something like that. We should not exaggerate benefiting from when other competitors are merging or restructuring themselves for different reasons or putting different companies together. But I think that we see that, and we are optimistic in that respect, that we have a good strategy. We have our ducks in the right order, and we are really well equipped to take advantage of any customer opportunity.
We have compared to any of our competitors, I will say, in North America, we have a competence in the electronic security field that no one can really compare with today, because we have a very, very strong position when we now combining the competence and the capacity we have within the guarding division regions, at the same time using the competence from the SES business in North America. So we are well equipped to take advantage of that. We see the same situation in Spain, where competitors are going out of business or getting into financial difficulties. We have a very strong offer, and then we can really, we can take advantage of that in a good way and support that we can grow faster than the market in average.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from Paul Checketts at Barclays Capital. Please go ahead. Your line is open.
Afternoon, everyone. I've got three questions on the U.S., please, Alf. The first is, have you worked through the impact of the new tax proposals, if they are enacted, and if we were trying to do something similar, are there elements of your tax structure there that we should bear in mind that would mean the impact is perhaps less than the raw numbers would suggest? That's number one. The second one is, can I return to that, the healthcare question that came up at the start? If we did see an unwind of President Obama's health, various healthcare programs, what do you think the impact would be on the business?
Then the last one is, I guess, Diebold or Securitas Electronic Security will start to be in the organic growth numbers for North America from February onwards. Could you tell us what the level of growth, organic growth, that business is delivering at the minute, please?
So, okay. I'll start from the back. The SES business grew 4.5% in 2016 over 2015. In spite of all the integration work and back office transition from the divorce from the Diebold group. So that we are pleased with. On the ACA, the Affordable Care Act, I mean, we had an increase in cost some years, a couple of years ago. We pushed that through to the marketplace and compensated for that. Now, what's going to happen here is impossible to speculate on that, and what will the impact be and how will we act, depending on... I mean, now we have put the system in place. Will it be taken away? Should we let it be kept?
Will it be modified? It's still a lot of uncertainty, but I mean, I don't see if it would have—if we would have—if it would be less, then nothing happens, so to say. If it would be more, which it doesn't look like right now, then we need to work in the same way as we did a few years ago to push any cost increase onto the marketplace. So I think we can manage, but it's impossible to know what's going to happen with that. There is a lot of things said, but we have not seen anything yet which we can make any decisions or any speculation based on.
On the tax situation, if the corporate tax rate would be lower in the U.S., we will have an... Of course, it will be very beneficial for us because we generate good profitability in the U.S. So, that in coming years, that will have a very positive effect on earnings per share, that's for sure. But year one, we will have a negative effect as well, because we would then have on the tax asset that we have on the balance sheet, which are things like vacation or social cost of pensions and things like that, we will have an impact.
But that tax asset, which is a deferral, so to say, for the year to come, when the tax is actually paid, or declared, then we will have an impact which would be negative. So year one, it will probably be a negative net impact, and then a very positive one, depending on the pace, also, what's gonna happen and in the years to come. So in general, it will of course be positive for Securitas' earnings per share point of view, but you will have the year one likely a negative one-off impact just because of the valuation of the tax assets in the balance sheet.
That's great. Thanks.
Thank you. Our next question comes from Viktor Lindeberg of Carnegie. Please go ahead, your line is open.
Yeah, thank you. Following up on the U.S. theme to begin with, you think on the EPS positive side from lower taxes, and do you think you can benefit actually from lower tax in the U.S., or would this be used to improve your competitive position in the U.S.?
No, no, no, no, that will, that will benefit the earnings per share. Because our business is not run in this way. I mean, we are-- Well, you never know over, over a long period of time, but certainly not in the short, medium per, time. I mean, all the... I think the, I mean, the way we run the business is that everything that happens below operational, operating, profit level, that is managed on, in, on a centralized way, so to say. So the business is run and evaluated in the U.S. based on the operating result.
Okay.
So they will never access whatever if the improvement of the tax rate. That, I mean, from that to be reflected in the pricing of our business, that's not gonna happen in the short or medium term, I wouldn't think so. Then you never know what competition will do and how things will look in the longer period of time, so that caveat has to be there. But I would not foresee that to be given away, so to speak, in any way or form.
Okay. Yeah, because that was my follow-up question, because you could argue that it's sector or industry neutral, and some may use it, and then you had to defend your position.
You never know. I mean, you never know. But, I mean, usually, I would say that my perception is that when you have costs which are kind of operating costs, that normally happens quite automatically or within a year or two, because that is kind of inbuilt into the mechanism of how you price things. When it's social cost or if it's benefits or subsidies or things... I mean, we have seen in many countries in Europe, for example, where government give wage-related subsidies to, depending on unemployment and things like that, then eventually, a year or two later, boom, it's already in the pricing.
Then it's a part of the automatic adjustment of the operations, while taxes is a different ballgame, I think, in at least how we run our company, and I think also many of our competitors would reason, I would expect that they would reason in the same way. It's not as automatic as it would be on an operational expense. Of course, long term, theoretically, you are right, but I think it will take a while.
Mm-hmm. Okay, that's clear. Moving on to the technology mix that you now announce every Q4, and it's definitely increasing now rapidly, we see. But it's not really fully visible in the margins, for some of the reasons that you now have mentioned. But if we look at this more from a top-down perspective here on group level, are you satisfied with margin development in the technology business? Or is it something that is deteriorating faster in the old, call it old-fashioned manned guarding business?
Well, I'm happy with this. That's the bottom line. It's still a relatively small share. It's increasing well. We have an impact in North America. We have written about that. We have an impact in Ibero-America, clearly, because we have two negatives. One is the Argentine peso, technicality of the devaluation. The other one is the wage cost in the second half in Spain. Compensating for that is the increased relative share of electronic security. We also explains why we are growing better than the market now in Q4, in Spain, because we have a good story. We can pick up business. We are strong. So, it also supports us on the top line.
It's not only on the margin side, and I think our growth rates in many other places is a proof point of that. In Europe, less visible, but still it's there. It's improving, but still the margin erosion in the guarding part, not only Europe, but in general, is still there. And there we have to... Until we have really-- Well, the day when we have a much higher share of electronic security on the total sales of the group, then you will also start to see more leverage on the margin, as that balance shifts in the group.
But we and we are on that path, and if you have some patience, you will hopefully be enjoying that, that ride as well. So we think that we are doing the right things. And when we follow this in detail, and we split the pieces out, and we follow it on a monthly basis, what is the delta between the guarding margin and solution margin, it works. It’s there all the time.
Okay. Final, final question for me now, a bit of a nitty-gritty question, but it seems overhead costs are trending up now quite substantially in the quarter. Is there-
... Any one-off in that number or?
We had some extra provisions for a couple of projects that we have one few what we have written off. We have taken some costs for different things. We have some more provisions for different things. So we had some extras there. So it's the last quarter is not a representative quarter, I would say. So we took some costs, but we cleaned out some a few things there in the last quarter.
All right, that's clear. Thank you.
Thank you. Our next question comes from Karl-Johan Bonnevier of DNB Markets. Please go ahead, your line is open.
Yes, good afternoon. If I might take a step back, I remember back at the Capital Markets Day you had in Stockholm quite some time back, you talked about reaching 18% technology penetration by Q4 2015. I guess with getting up to 16% now for the fiscal year of 2016, you must be quite pretty close to that target now, one years after, aren't you?
Yeah. Well, the number was right, the year was wrong.
Excellent. And when you look at-
So we will be at the 18%, of course, we are getting closer to that, but we were too optimistic at the time. But also, you have to remember, you can have a theoretical discussion about that. If we hadn't had the good growth in guarding businesses in 2016, we're probably very close to being 18 already now. But we are happy to enjoy the good growth in the traditional guarding and in the extra sales, just with guarding sales, because we are good in that, and we can also make money on that. So we are well on the way, again, happy with the development on our strategy.
When you look at the market that is driving the 22% organic growth that you saw in technology solution during that, is there anything particular sticking out in either from a geographical point of view or your internal way of driving the growth?
Various countries are more or less successful on this journey. Some countries are doing extremely well, growing very quickly, others are a little bit more slow. But that's not nothing unusual. That's how business works, kind of. I mean, not everyone is aligned all the time, so... But in general, I would say, I mean, there is a good, a very good understanding. We measure this in different ways, and we follow it in many different angles every month. We have competitions internally where people compete of how we can, and are rewarded also, depending on how successful they are on driving this strategy.
So I think we have done what we can do, and I think we are proving by the numbers that we are delivering on our strategy, and we just have to keep going like that for years to come.
I remember when you did a Diebold acquisition, that one of the key short-term parameters of it was to keep the, say, the Diebold growth going, so to say, during this year. Have you been able to do that?
Yeah, we grew 4%-5% in the year, and in spite, as I said before, in spite of having all this integration work, all the management spent on that, getting acquainted with each other, with each other, meeting the new people, setting up the structure to leverage the growth in 2017 and forward, and also transitioning a lot to the back office systems, which taken a lot of frustration and a lot of time for many, very many people to get to disconnect from the Diebold group and set up our own systems.
You feel that you reached the milestone, so to say, during 2016, to really be-
Yes
... looking at the growth opportunities for 2016?
The team has done a great job, tremendous amount of work, tremendous efforts, well managed all the way. Now we are ready to focus on the marketplace.
Excellent. Thank you.
Thank you. Our next question comes from Henrik Nilsson of Nordea. Please go ahead, your line is open.
Hi, good morning, all. On the Arlanda contract, can you comment on how the profitability in that contract compares to the European average?
It's been better than average in the last period of that contract.
Is that substantially better than average or slightly better than average?
Well...
Okay, thank you. And on the loss level in the other segment, there was a couple of questions on that, on that previously. The write-downs and provisions, what is the underlying reason for these?
Which ones? Sorry, which?
In the other segment, you commented on some-
Okay
... write-downs or provisions that-
We had some provisions there. It's nothing underlying. We had some projects which we wrote off. We took some extra provisions for business development-related costs. So we took some extra provisions and wrote a couple of things off, and we also had some more provisions for the incentive system, and some other minor things. So don't make too many conclusions of that. I repeat that this was extraordinary in the last quarter. It's not the level that you should expect going forward.
Okay, thank you. And a follow-up on the compensating for increased wage costs. Why is it that you're able to compensate for wage costs in, let's say, U.K. and the U.S., but you're not able to compensate in Spain? And I think you mentioned also that the increased youth employment tax in Sweden, you've not been able to compensate for. Why is it different between the markets?
The Spanish market, I mean, you know that it has been in an extreme overcapacity, was really overheated going back in 2000, before 2008, 2009. A huge overheat, hugely overheating market, and then it collapsed completely. Many companies have simply been fighting for survival. Then to survive, when you cannot lay off people without tremendous restructuring costs, because the labor legislation is very difficult in Spain. So then people reasoning that, well, instead of paying two or three years of salary or one year of salary for people, it's better to compensate, cover half of the cost and sell the guard for half the price. And then to compete with that, you kill yourself if you start to go into that race.
So it has been a very price competitive market and basically impossible to increase prices in Spain for quite a while. Now, fortunately, what's happening in Spain, fortunately for us, but not for others, is that many of those companies who have had that strategy, they have either gone bankrupt or are in Chapter 11 now. And there are companies representing more than 10,000 employees who are either in bankruptcy or in Chapter 11. And it will continue like that. So the pricing power will hopefully improve now going forward. And that's why we are driving this price campaign, to ask for what we correctly should be compensated for because of the wage cost we had last year.
So that price campaign we are driving now. So Spain is very special, while in most, in all the other markets, when you have everything in order and you have a wage increase, then you have all, then we automatically ask for a price increase, because that's the only way we can manage the profitability of this level. We're not asking for more, we're just asking to be compensated for the cost increase.
Okay, but that doesn't explain Sweden, where I-
Well, Sweden,
That is doing good.
Sweden was a special case because when we got that subsidy, we never lowered the prices.
Okay. Okay, thank you.
So I think that explains that, because when we got that subsidy, that was, we used that, and it supported us. And when we then had the increasing cost increase, I think it was not fair to go to the market and ask for a price increase when we didn't ask for it, when we didn't reduce the prices, when we got that subsidy some years before that.
Yeah, that's fair. One last question from me, please. There are quite large differences in the share of sales, and I suppose the momentum in sales of the solutions offering, depending on the country. Can you elaborate on why there are such large differences and what you're doing to improve the laggards?
It depends a lot on, mainly it depends on ourselves. We have to look in the mirror if we are slow, and learn from the ones who are good. So it's mainly internal. And then, of course, we need to put the right people with the right attitude, with the right drive, with the right incentive in place to drive our strategy. It's not easy. It's not easy at all, but we have been successful doing that in many places, and where we are not, we just need to support, help, push, put pressure, and help the people to be successful.
This is a big company with 2,500 branches around the world, so it takes a bit of a time to get everybody on a good speed. That is developing well, but there is still a big potential. I mean, in some countries today, we are in the range of 40%-50% of total sales of the country in electronic security and technology solutions. So the potential is there. It takes a while to get there, but the potential is definitely there to continue to increase at a good pace.
Okay. Thank you very much.
Thank you. Our next question comes from Rajesh Kumar of HSBC. Please go ahead, your line is open.
Hi, good afternoon, all. Just trying to understand how much control you have over CapEx budgets, in terms of how much CapEx budget have you committed with the customers already, and you have to spend? And second one is, within that CapEx spend, could you give us a flavor of the split between labor cost capitalized and material?
I mean, we don't commit with customers. We don't make a budget in that sense. I mean, we love to spend as much as possible when it comes to CapEx, in the sense of when we can invest in our customer sites and get that as a piece of a contract. We have given guidance before that we think that we need, so to say, in the range of SEK 350 million-SEK 400 million, I think is what we have said, in addition, so to say, with the growth pace that we are having.
Yeah, there is no reason to have any different view on that than we had before, and we are not restraining anybody from doing that. What we are looking for when we are controlling that and running that is, of course, that we do not invest, over-invest, so we become a leasing company of, or a bank, or a leasing company of equipment for customers. That is not what we want to do. So there has to be the relative share of equipment in a customer contract is still relatively low, because you have all the guarding, and all the other thing, all the other services, the monitoring, the alarm, the response, the fire and safety, whatever else is in there.
So the CapEx in relation to the total contract is relatively small, and we have put some restraints. If somebody has a major contract with a huge CapEx investment, they have to come with approval to me, or if it's a little bit less, to the divisional level. So there we have a lot of control mechanisms in place, so we don't overspend or make the wrong balance or kind of exaggerating, of course, a lot, but not becoming some kind of a leasing company of equipment. That we don't want to be. It has to be a complete security solution contract. So I think that those mechanisms are in place. The control regime is in place, and it works well. It's not being abused, it's not being misused in any way.
The other question was the
Labor and material.
Labor and material.
Depends on the type.
Yeah, it depends, of course, on the type of installation. The labor is a very, very small part. It's basically mostly equipment. I don't have a number, so I cannot give you a number of that, but labor is a very small part.
Thank you.
Thank you. Once again, if there are any final questions, please dial zero one on your telephone keypads now. As there are no further questions coming through, I will hand the call back to our speakers for the closing comments.
Thank you very much, everyone, and we look forward to a good 2017. Thank you for calling in. Thank you and goodbye.