Hello everyone, very welcome to our nine-month report from Securitas, and I will lead you through that shortly, and then we allow for questions as usual. Another good quarter, in summary, with a good, good organic sales growth in the quarter and stable margins and cash flow in line with what you would expect in Q3. We are a little bit more positive to the growth in North America. The market we said a quarter ago was growing in the range of 4% this year and 4% next year.
We are more 4%+, so a little bit more positive, strong outlook in North America, especially U.S. then, of course, this year and next year. And we still grow, at up to the first nine months faster than the market and have a good momentum and high client retention. also in Europe, good growth in the quarter, continued good growth in the quarter, half and half roughly from the refugee terror-related business, and the other one is the portfolio. Market outlook this year 2%-3%, same next year, but of course we are now facing tougher comparatives, and also a few losses.
I come back to that in a minute. In Europe, which means that the coming quarters will be a little bit tough. And then also good continued growth in the Ibero-America, especially Portugal and Spain was good in the quarter. Okay, it was a lot of extra sales, but everything counts. So we had 6%-7% organic growth in Spain and Portugal in the quarter, which was much better than we have had for a long time, and we're now employing people again in quite high numbers in Spain and Portugal, which we haven't done for many, very many years.
So good, good, good development in those countries in the quarter as well. And as you see also in the summary slide here, the security solution, electronic security sales continue at the pace that we expect. So a good development there, and in the next quarter we will then, of course, disclose where we are in the numbers and as a share of the total sales. Here you see the P&L. I think you all have had a look at that. We can come back to that later on, but good growth in the quarter and stable margins, and good real change on earnings per share, as you can see on the nine month numbers here of 13%.
North America, we are growing well. The market is strong, good economy, lower and lower unemployment in North America. We have good new sales, very good team, very strong position. Competition is. Some of our competitors are in mergers or cost-cutting activities, which supports us a bit as well. And we have very good client retention, historically very high client retention. So when you sell a lot and lose almost nothing, then, of course, that supports your growth. So a good, good, good stable development in a stronger and stronger market in the U.S. So that looks very good.
The Diebold acquisition, nowadays we call it Securitas SES, Securitas Electronic Security, is being integrated as planned. So, margins are as expected, sales growth as expected, integration as expected, and we now look for preparing ourselves to see more of commercial synergies in the year to come in the integration of the SES with our guarding activities. And all those mechanisms are now put in place in a very correct and systematic way. On the margin side, good leverage from the growth, and a support of SES, basically the same picture you saw for the first six months.
So that continues in that respect. So a good 0.3 improvement of the operating margin in North America. The European situation is a little bit more complicated in the sense that the market is growing 2%-3%, and we think that's going to happen also in the year to come. So the market is pretty healthy, I would say. But we have, as you might remember, I hope you remember, is that we had a tremendous increase of security needs, primarily related to the refugee crisis in Europe, and also to some extent the terror, but that's the minor part, especially during the fourth quarter last year.
The ramp-up was starting slowly in September, but then gradually throughout the fourth quarter was increasing and then stayed on high levels throughout the first half of this year. We did a very good job. We were very well prepared for that. We are a strong organization to ramp up, and we did a great job to support the society in accommodating all those needs that were tremendous during a very short period of time. And our organization did really a tremendous effort to manage that in a very good way. Now those numbers are in our comparatives going forward.
We, I mean, the quarter was good, 5% organic growth, half and half, refugee and terror-related, mainly refugee, and the rest is the part, the ordinary portfolio. But we will now face the historical comparatives. We will also have lost the Arlanda contract, as we have disclosed before. And we have also lost a major retail contract in the U.K. , which is a low-margin contract. It hits our top line, but basically not the bottom line at all.
But from a top-line point of view, it has an effect going forward. So that we lose as of November this year. That's SEK 400 million on an annual basis. That contract was actually already reduced in Q3, but then it's now lost completely during Q4. And then, finally, the situation in one of our activities in Turkey is affected, in the aftermath of a coup attempt, meaning that the project-related business of ours in Turkey, their project, installation projects, technology projects are postponed or canceled. And that has quite a significant effect on the top line for that part of our Turkish activity.
The guarding activity in Turkey continues to develop very well. We continue to grow, and margins are as they are expected to be and improving. So that all in all, that means that the positive trend will reverse in coming quarters, meaning that it will be less than market growth. So it means less than 2%-3%. And then we think we'll be back to market growth in the second half of 2017. Margins stable in the quarter, same as last year, and year-to-date up 0.2, where we get leverage from the cost base, but the Turkish situation is hampering us a little bit in the quarter.
And then in Ibero-America, continue with a very good growth, actually a little bit higher than it has been in previous quarters, and very good development in Portugal and Spain with 6%-7% organic growth in the quarter, a lot of extra sales, but still good growth in Spain, and we are employing now, as I said before. When we convert to Swedish kronor, the Argentine pesos has an effect. It also dilutes the margin. I will come to that on the next slide, but that also has an effect on the margin. But still all in all good, good growth in the Ibero-America.
And then, on the margin, we have the dilution of the Argentine peso, which has mathematically a negative effect on the margin. And then the collective bargaining agreement with a 1.7% increase that came as of July 1st, which has an impact in Spain now in Q3. And that we will not be able to recover that this year, but we have started a big project now to try to recover it during the coming year, that wage increase and a lot of activities and working groups in order to find the best possible way, in a smart way, to recover that CBA increase during 2017.
So it's still unknown how to do that, but a lot of efforts being spent in Spain in order to find a way of doing it. Cash flow basically expected. It's always a decent cash flow in Q3, and now we expect a very good cash flow in the fourth quarter, and it should be okay on a full-year basis. Net, net is pure mathematics, so not much to comment there. FX, relatively small impact, while the, of course, the Diebold acquisition and the dividend are the major factors. But that should now reduce, because we should have a good cash flow in the fourth quarter.
Then you have the FX going the other way depending on what happens with the Swedish krona, which is weakening quite, quite a lot for the time being. We continue with our security solution, electronic security, strategy, so that develops well, and we will update these numbers on a full-year basis in the next quarter. So no breaking news here, really. On the acquisition side, we made, we completed the Norwegian acquisition this summer. We made a minor one in Chile here recently, and we still continue to look for acquisitions in the field of technology.
We have a few that we're working on and also in the fire and safety arena, where we're also looking for minor or midsize acquisitions. So that work is going on as usual. Hopefully, maybe something could materialize already this year, but definitely we have a lot of things on the radar screen that we are working on. Okay, so that is, in short, a very rapid way, a short summary of the quarter. Let's see if anyone has any questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, could you please press zero and then one on your phone keypad now in order to enter the queue? And then after I announce, you simply ask that question. And if you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. And there'll be a brief pause while questions are being registered. Our first question is from the line of Mikael Holm at Danske Bank. Please go ahead. Your line is open.
Hi. Two questions. The first is on the margins in Europe. 5% organic growth, decent, but no margin leverage. Is this just related to Turkey? Do you see leverage in other countries given that technology and solution is growing, or are there other factors here as well?
Well, the development is moving. We're doing the right things. I mean, the security solution part is supporting us. So, basically, what happens is that the Turkish business is hampering that. So it's improving as expected in the area, and we get the leverage. But the Turkish situation had quite an impact in the quarter.
So, the margins did increase in other countries, excluding Turkey, and in Europe?
We also have a million things going in different directions. But all in all, the big picture is that the security solutions agenda, with improving margin as we increase that relative share, is going in the right way, and some leverage effect. Then, of course, the Turkish situation goes the other way. So otherwise, if we hadn't had the Turkish situation, the margin would have improved in Europe in the quarter.
I also have a question on the market growth, your outlook for market growth. I mean, back in the capital markets day in 2013, you said that the security market would most likely go in line with GDP looking forward. But now we see that the security market is growing stronger than GDP in both Europe and USA. Do you think that's something that has changed in your long-term outlook for growth?
I think long-term, I think that we still will still reiterate what we said before, that flat to GDP. But of course, given the situation with a specific situation, primarily in Europe, but I mean, also globally with the terror and the increased threat levels and concerns and the perception about the big picture of in the world right now, which hopefully will not last forever, that impacts the situation. And then, of course, you have an immediate crisis of the refugee situation in Europe, which I would think temporarily is supporting the security market, but long-term, it's not going to be feasible to continue in that way.
Okay. Thank you.
Thank you.
Next question is over the line of Henrik Knutsson at Pareto Securities. Please do go ahead.
Hi, Alf. This is Henrik from Pareto Securities. Thanks for taking my questions. I got two, please. The first one, could you actually explain the situation in Turkey in a bit more detail, what actually happened here, and why are the projects, either canceled or delayed? And would you expect this to be a drag on margins, in Q4 and going forward as well, or is this one of that would be my first question.
Then my second question is related to the security solution sales and the increase you see here. You mentioned that, the increase in sales is going according to plan. And I mean, where we have now seen the acquisition of Diebold as well as Draht+Schutz in Germany, the Infratek in Norway, now the latest one in Chile.
If we look at the total growth year-to-date in security solution, could you please help us to understand if the majority of the growth is now coming from acquisitions, or is the majority still coming from kind of, pure organic or conversion of existing guarding contracts? Thank you.
On the Turkish situation, that will continue in the fourth quarter. That situation will prevail in Q4, yes. And what is happening is that this is the business of ours where we have large project-related businesses, where installation, technology, and commissioning of systems, of installations, and those are simply either canceled or postponed, and hopefully primarily postponed. But it's uncertain to know when they will start again. Many of them will start again.
For example, there are some big projects being planned now. The big, for example, the new Istanbul airport will be a dramatically big project, which we are fighting for right now and which is in the tender phase. And so there is a lot of things, I think, that will happen. But right now, short term, it has an effect, and it affected Q3, and it will affect Q4. But it's still a good business. I mean, the business had a very good year last year, I should also say that. And it's still profitable. I mean, our company that I'm talking about, the technology part, is still a profitable company and has a strong position.
The guarding piece is developing as planned, so there is nothing in the portfolio business that continues. But, I mean, the company is not bleeding in that sense, but of course, in comparison to last year, it has had a dramatic effect. When it comes to the security solution piece, we have good growth from acquisitions. That's easy for everyone to understand.
Of course, with the Diebold acquisition and the other minor ones in Germany and Norway, for example, Chile, that will support the numbers, by all means. But we in addition to that, we also have good organic growth without the acquisitions. It can still continue to be high numbers, double-digit growth in the transition of projects or winning new contracts, transition of guarding contracts or winning new contracts in security solutions. So that is developing well. So both those two work streams, I'd say, are moving as we expect.
Okay. Thank you very much.
We are now over to the line of Andrew Farnell at Morgan Stanley. Please do go ahead.
Hi there. I just wondered if you could talk about what some of the drivers would be that would turn growth negative in Europe. If you've got probably underlying growth of 2.5% if you exclude the extra sales, I just wonder what some of the moving parts are that would take that below 2.5%.
I mean, what has an impact is, of course, when we in the comparatives when we compare, we compare quarter to quarter. So when we now coming into Q4, we're going to have high comparatives on the refugee-related business. And in the rest of it, you have is those, the contract loss in the UK and the postponement in Turkey. But of course, you have to calculate the net of all those. The refugee-related business, which will be substantially less in Q4 than it was last year.
Okay. So.
So that will, of course, be negative, that piece of it. That half of the growth will be, of course, negative in Q4. And then how that will play out against the other one means that it will mean that we will be below market growth for sure. And it could be negative in Q4, but it could also be break-even or slightly positive, but it's certainly going to be below 2%, that's for sure.
Okay. And other than the U.K. and what's going on in Turkey, there, are there any other areas where you're seeing project delays or cancellations and contract losses?
Not really. I mean, other than that, it's business as usual. Then you have the aviation contract hitting us as of February next year, and then the Turkish postponements or cancellation that will remain in Q4. Hopefully, that recovers next year, but that's still unknown.
Are you able to say who you lost the UK retail contract to?
All right. Was that any other question from you?
Yeah. Sorry. I just said, are you able to say who you lost the UK retail?
No.
Contract to?
No, no, no. I prefer not to do that. It's not my, I would not, it's I prefer not to do that.
Okay. All right. That's great. Thank you.
I can say it's one of the larger players, at least, in the U.K. , but I prefer not to do that.
We're now over to the line of Stefan Andersson at Handelsbanken. Please go ahead. Your line is open.
Thank you, Anne. Hello. Looking at the organic growth in Europe, to really understand. I know this question has been asked, but really understand this, what you're really saying here. For example, if we look at Q1 2017, how much would it surprise you if the organic growth is negative in Europe, then?
Well, I mean, the first half next year will be less than 2%. That's what we're saying. Wherever it will be, it could be negative. It could be, it could be break-even. It could be slightly positive. I mean, it depends on many different other things as well, how it will be in the first half next year. So I will not. We usually never give any guidance going forward. And this time, we did it. It was the first time in 10 years that we gave a little bit more of guidance going forward. But we did that because the effect is substantial, and that's why we did it, to give you and the markets some more guidance.
But we're not going to be more specific than that and put any numbers into the report because it's a moving target, and it's still a forecast. But it gives you a guidance of where what it's going to look like in the next three quarters.
Well, we appreciate every guidance we can get. A follow-up on the impact of lower extra sales in Europe. What do you think will happen with European margin as these extra sales decline? Have the extra sales business been above group profitability, and have it resulted in a substantially higher cost base that will be difficult to scale down?
I mean, we had you remember, in Q4 last year, we were criticized for with a good growth that we showed in Q4 last year, but the margin didn't follow. The reason was that we had a lot of startup costs and a lot of efforts and overtime in order to manage this huge ramp-up. And then gradually, that supported a little bit the margin in the first half of this year. But in the Q4 last year, it has been kind of ordinary margins, I would say, in these extra sales. But I will not make a forecast of what the margin will be in Q1 next year. No, I prefer not to do that.
But likely, this has meant a higher cost base for you, and as the demand will come down, are you stuck with higher costs and?
No. I mean, we don't have any. We don't expect any restructuring costs for any of those contracts. No, they're not for Ireland and not for U.K. , not for refugee adaptation. We are pretty good in that. We use our value of a high employee turnover to manage that. So it will not have any one-off cost or restructuring cost to adapt our structure in Europe to the situation of lower organic sales growth.
And as I repeat what I said before, the margins in Q4 in the extra sales was not exceptionally high in any way, and rather, we actually had quite a lot of startup costs and extra overtime in order to manage this huge ramp-up last year.
Okay. A final question from me. What measures are you taking in Spain to be able to offset the wage increases? Will you look at reduced staff, or are you mainly looking at price increases?
No, we cannot reduce. We are very. We are not reducing staff. It's price increases and find a way of how we can improve that, and push that cost increase onto the market in one way or the other. So it's price increases and activities related to price increases only.
Thank you. That's very helpful.
We are now over to the line of Ritesh Kumar at HSBC. Please do go ahead.
Hi. Good morning. A couple of questions, if I may. So the Spanish collective labor agreement will be renewed fairly soon. Do we have any sense of what sort of increases are you looking for in 2017 and 2018? I believe the last negotiation was two years old. That's coming to an end, so the new one is likely to come. Second one is on the technology solutions CapEx. That seems to be rising a lot along with your strategy of investing in tech kind of security activities.
Now, obviously, based on our past discussions, you mentioned that a part of the installation costs will also capitalized. So when you get project delays in technology solutions, do we expect some of the asset write-down, especially the installation costs, or is that likely to happen once the decision to close it completely is done? And sorry.
As an analyst, obviously, I can't count. The third one is in the U.K., a lot of people who run businesses at your wage band are struggling because of training costs, because of labor cost increases and things like that, minimum wage impact. Anything we need to think on that issue?
On the CBA in Spain, I mean, there has been quite substantial wage increases over the past 1-2 years in Spain in different instances in the CBA, and certainly higher than inflation, and also higher than what we have been able to push to the market. And we, as well as everybody else, are suffering from that, I would expect. So I don't expect any cost increases in Spain, at least certainly not during the first half year and hopefully not during the year at all.
But that will, of course, be a debate, and not everyone will agree with that. But that is our my view is that there is no room for any increases at all during 2017. That's our starting point. On the CapEx in question that you had, the delays in Turkey are in the project and installation related business. Those are projects which we don't sit in our balance sheet. It's things that we sell, so to say. We sell, and we get paid for it. So the delays in Turkey has no impact on that. So the guidance we're given there in many occasions by me and Bart remains.
So the delays there has no impact to that need for CapEx in project-related businesses. In the U.K., the National Living Wage has been passed on to the market. We have done that. It has been made, and we were successful doing that. So no worries from our side in the U.K.
Perfect. Thanks for those answers. On the Spain bit, so on your side, you're saying you will go for no wage increase, and obviously, unions will come back with a figure, and you'll negotiate. So when do you think we'll have more clarity on the timelines?
I think that will take some time now. That will take some time. I think it's hard to say, but I mean there is no discussion right now going on to start with. So I think very before there's any kind of clarity on that matter, we are way into the first half of next year.
Understood. And on the technology, it was a more general question than just Turkey. I know in Turkey, it's a retail kind of contract, so a delay there does not impact. But let's say your CapEx is definitely running at a high level, and you see a few project delays. What's the accounting policy on the expenses on installation?
Well, I mean, what we do is that when we, I'm not sure I fully understand your question, but.
Capitalize the project when we have it. Otherwise, I mean, we don't have the expense for the material or the.
No.
CapEx if it's a subcontractor.
Did you hear that?
No, I didn't. Sorry.
Okay. It's my support team here. Jan, Jan, you can answer it. Please.
Well, I mean, normally, we use a subcont if we use a subcontractor, we don't have the expense if we don't have the project, and we don't have the material expense. If we have a project, we have the expense, and we capitalize that.
Exactly.
Together with the subcontractor, so.
Exactly. So we capitalize the installation.
Okay. So a part of that CapEx is basically capitalized labor cost?
Yeah. But usually, it's subcontractor, but it could be our own staff, of course.
Yes, yes. But that's a minor part. That's a minor part. It's the equipment, which is a major part.
Understood. Thank you very much.
We now go to the line of Sylvia Barker at Deutsche Bank. Please go ahead. Your line is open.
Hi. Morning. Three areas of questions, please. First of all, in North America—sorry, last quarter, you grew at 7%. You said that 2% of that was one-off sales. Now, you grew at 6%. Does that mean that you're still having kind of some one-off project sales in Q3, or is it generally an underlying kind of pickup? And just relating to that, obviously, you kind of alluded to the merger of Allied Barton and Universal.
You know, it sounds like maybe you're benefiting a little bit from them, you know, just being focused on cost-cutting. Is that fair, and which areas do you think might, you know, become a little bit more competitive once they're done with the integration Q1 next year? Then secondly, just if I can ask, on the UK retail contract, again, was it due for renewal, or, you know, was it lost, for whatever other reason? And then finally, what was the organic growth in Spain in Q3? Thank you.
6% on Spain in Q3 organic. We in the U.K., the contract was reduced with this retail customer already in the end of Q2, which had an impact for us in Q3 in the European division. And then the customer decided that it wanted, they wanted to reduce the cost even further. And this, we don't make any margin on this contract. And then the customer came to us and said, "You need to reduce your price dramatically." And we said, "I mean, from where? I mean, we have almost no margin.
It's negligible margin on that contract." So we refused, and then they canceled the contract. And we were fine with that. I mean, it's a pity from a top-line point of view, but from a bottom-line, basically, it doesn't have any impact. So it actually was diluting our margin in the U.K. and even in the U.K. and also, of course, on a European basis. So it's always a pity to lose a contract, but we're not crying too much. But of course, it has an impact on the top line. So it was the decision of a customer to do that or, well, it's kind of mutual.
We refused to reduce the price to levels that we cannot make money on. In the U.S., in the second quarter, we had a good amount of extra sales in Q3. It was kind of normal levels. So it was a strong quarter. I think that's the answer to the question. What? You can – you're using your phrase of pickup, but whatever.
But it was a strong quarter, not fueled to the same extent as Q2 with extra sales. So it was a good, good pickup and strong quarter on the ordinary, so to say, portfolio business. And then, of course, on the merger situation with between some of our competitors, I mean, we should not overdramatize that. But of course, when that is happening, there are very it is creating some opportunities. There is some turbulence in their portfolios.
And of course, we have a good, strong position now in the U.S. with stability in our team, a very good, strong position in the market, plus the fact that we can offer the clients a very attractive solution with a combination of our guarding services, and our ability with the Diebold acquisition to make an integrated solution where we combine with technology and really create value for the customer. So that we are well-positioned, I would say, to take advantage of that situation to the extent it's possible.
Okay. Great. That's very helpful. Thank you. And in terms of the integrated entity of your competitors, where do you think their strategic kind of strength will lie?
Well, I mean, we are unique, totally unique in the US market. And I spent a few weeks very recently in September, for example, at the big trade show. And it's quite obvious that we are really the only guarding company, if you call it like that, traditionally the guarding company, who is now looking different in the sense that we are able to combine the electronic security with guarding services.
And we present that, and it's shown very obviously, for example, at the ASIS trade show in Orlando in September where we stick out in a totally different way with a totally new look, with a totally new content than some of our competitors do. And, hopefully, the customers will see the value of that and appreciate that going forward.
Okay. Great. Thanks very much.
We're now over to the line of Robert Plant at JP Morgan. Please go ahead.
Morning, Alf. Aside from the terrorist impact, how is France doing, please, on a fundamental basis?
France, I cannot split out what the terror piece is affecting, but of course, we do still see the increased threat level and the perception and the concerns in France has an impact, unfortunately, I would say, on a positive impact on our business in France. So France has been growing in the quarter and year to date, with about 4% organically this year.
Okay. Thanks.
We're now over to Paul Checketts at Barclays Capital. Please go ahead.
Morning. I've got three quick questions, please. The first relates to the refugee-related work. Would you be able to give us, Alf, the relative importance of Sweden and Germany within that? That's number one. Second, you extended your contract with Canadian airports. Was there a change in pricing or how you expect the margins to evolve on that? And then the last question is, are there any other notable contract rebids or large new pieces of work in the coming months that you would highlight? Thanks.
On the last question, no, not really. Nothing major up for renewal in the short period of time. No, no concerns there. Canada was renewed on the similar conditions that we have or basically the same condition. The contract was in the first place, they had an extension clause which was executed by the customer. So it continues basically on the same terms as it has been for the past five years, I would think it was. So that, that was good news for us, and, and it continues for, for quite some years now, with on the same basis. Refugee business, I would say Germany and Sweden would represent 70%-80% of those, those volumes.
As in Sweden and Germany together or about.
Yeah. No, together. Together, together. Sweden, Germany together.
Is there a big bias towards Sweden over Germany?
No. No, Germany's larger.
The reason I ask is that the asylum data for Germany is actually still quite strong at the minute and up year on year.
Well, the volumes are less than half right now. The forecast for next year compared to 2015, but I mean, the total number of people but still high numbers. I mean, still relatively high numbers. And that is the process in Germany is different from Sweden because what happens in Germany is that there is a lot of local tenders for security work, while in Sweden, it's Migrationsverket, the authority, which is the kind of the governmental body managing 100%. And they manage everything, and they control the tender process for everything in Sweden, while in Germany, it's a lot of local contracts with different regions or municipalities.
Okay.
But the German part has been the larger of the two. But they are the two together, of course, represent 70%-80% of the total refugee-related volume.
Do you expect there will still be some work next year? It's just a matter that you're coming up there.
No, it's not disappearing. It's not disappearing. I mean, it will continue next year. It's just that the volumes are substantially lower as of Q4 and going forward, given the situation last year, the crisis last year. But I mean, it will continue because even I mean, you have two parts in the refugee-related business. One is the border control-related and, so to say, the immediate taking care of people coming to the reception, so to say, or the asylum camps or areas. And that is more of an immediate need but when coming into the country.
And then you have the housing and the places where the refugees are staying, waiting for—I mean, some cases, more than a year—waiting for the decision if they will get asylum or not. And those have to still to be protected and the security maintained, for the many different reasons. And that, of course, will continue to last also in 2017. So the volumes are certainly not disappearing. It's just that they are reducing because the inflow is substantially lower in Sweden and Germany than it was a year ago.
And also, some of the people in those camps or in those housing areas, they are now getting a decision that either they have to leave the country or they have a right to stay. And then they move out of those areas and into, so to say, society or have to be going back to where they came from.
Is it easy to say what a sort of base and volume-related split would be, in other words?
Sorry. I didn't understand that question.
Is it easy? Is there a sort of sense that a certain proportion of the work is related to the volume of flows, and there's another.
No. Most of the work is related to the areas where people live, waiting during the period when they are waiting for the asylum decision. That's where most of the work is related to the refugee camps, let's call it.
Okay. All right. Thank you.
We're now over to the line of George Gregory at Exane BNP Paribas. Please go ahead.
Morning, everyone. Just two, please. Alf, just on the loss of the UK commercial retail contract. You talk about pricing on that. Do you think there is anything that the competitor that won the work might have been able to do to re-engineer the contract to make.
I don't know.
Money on that?
I wish I think they hope they have because otherwise, they won't make any money on it. So that's but I cannot answer that. I don't have no insight into that.
Okay.
But we couldn't find. We have been the incumbent supplier for a long time, and but we couldn't find any solution. But maybe somebody else could, and but we couldn't, so it was no point continuing.
Okay. And you mentioned that in Q4 of last year, the European business was obviously hampered by the startup costs relating to the refugee work. I think there was also some impact relating to social cost in Sweden. Just wondering how we should think about the comparative effect in Q4 of this year as we unwind the sort of startup cost and to what extent that sort of reverses this year.
I think I don't want to be too rude on that on my answer, but I think I cannot say much more without giving any numbers. So I prefer not to go any further out into that territory. It's a little bit. It's not. It's not. I mean, we do, of course, our internal estimates, but I prefer not to give much more guidance than what I've given so far. So, yeah. Well, it will be too specific if I do because and then we run into difficulties.
Sure.
Of releasing that information.
Understood. Maybe to ask the question another way. What was the impact in Q4 of 2015 of the startup cost?
It's the same answer. I'm sorry. Same answer. I mean, basically, the same answer. We had good organic sales, but we didn't get the leverage of it as was discussed in Q4 last year because of the overtime, because of all the efforts, because of the training cost, and etc., etc. And sorry. I mean, the only way to answer that question even more specifically is to give a number, and I cannot do that.
Okay. Understood. Thanks.
We are now over to the line of Bilal Aziz at UBS. Please go ahead. Your line is open.
Good morning, everyone. Just two questions from me, please. Just to quickly expand on Spain. On the margin front, in the entire division of the 50 basis points, which it was down year over year, can you perhaps break out the impact purely from Spain? How much of the 1% wage increase were you able to pass through, and how should we perhaps think about this in the first half of next year? Secondly, in the U.S. ex the Diebold business, the margin, I believe, was up very slightly.
Can you comment on some of the developments there going forward given wage inflation and high turnover? And finally, on Diebold, you suggested still strong growth in the business. When do you think you'll be able to communicate some synergies around that, and tie to that? Is there expectation to bring back, the Diebold margin to the group technology average? Thank you.
Well, on the Spanish situation, I mean, we basically did not recover anything in Q3 from that increase. Very minor parts, I mean, some minor parts in Spain that we have been able to recover. So, of course, the Spanish situation has an impact then on the effect in the total division. Yeah. And we will have to try to recover that during the coming year. I mean, the piece that we did recover in Q3, and hopefully, we recover a little bit more in Q4, but still, we are behind the 1.7.
So we need to continue to work with that and find ways of how we can recover that during the coming year. Of course, we don't want another CBA increase on top of that until we recover the first one. That's related to my statement earlier. In the U.S., I'm not 100% sure I understood the second question, but I'll try to answer the way I understood it. If you think there was a gap between wage and price increases and there is not, we are able to manage with that balance in the US, including the Diebold acquisition activities.
And in the Diebold business, SES business, we have prepared during this year a structure in a very systematic way of how we optimize the synergies between the two. So we will be able to find those commercial synergies during 2017. But it will be gradual, and step by step that we can find contracts where we can combine the services between the traditional guarding and the Diebold SES activities. Margins are basically in line with what we expected the Diebold to be for this year. So, I'm not sure that you had any other information.
At least, that is, we have not said anything differently. So margins are consistent with what we expected and it supports the total margin as it's higher than the average in the U.S. So it supports the total margin, and that's one of the reasons for, one of the reasons for the improvement of the margin in the North American business.
Thank you.
We now are over to Henrik Nielsen at Nordea Markets. Please go ahead. Your line is open.
Thank you. Good morning, everyone. You mentioned 6% organic growth in Spain in the quarter. Do I interpret you correct here on, on your answers to the last question that that is mainly volume and not, not price increases?
No, that's mainly volume. Yes.
Okay.
Volume and extra sales. Extra sales was an important part of that. So we don't want to make too many conclusions, but still, going forward with that. But it was good news, and good news. Extra sales normally kind of is a signal of a little bit more activity in the markets, and could be a pre-stage before you start to see more, so to say, systematic organic growth in the traditional way. So it's. We highlight it because it's good news, and showing the way, hopefully, in Spain. And we are now employing in Spain. So it's volume-related in extra sales and portfolio. Yes.
Okay. Thank you. And coming back to the impact from Turkey on the margins in Europe, I think you've stated historically that, that there's normally around 10 basis points impact on the margin if you mention effects in the quarter. Did these delays and cancellations have, have a 10 basis points negative effect, or was it more?
Well, I'm not—I mean, it has. It had it. It's 0.1 or more. So, I prefer not to say, to be specific. Then we should have written it. But it's certainly had an impact. That's why we mentioned it.
Okay. Thank you. Just a clarification. On the margin in Ibero-America, you mentioned the pressure from the decline in the peso, as one of the impacts here. Is that an effect only of the mix shift, or is it also some kind of margin pressure locally in Argentina?
No, it's a mathematical effect. It's a mixed effect.
Okay. Understood. And one last question here. You mentioned the lost contracts in Sweden and U.K., and a year or so ago, we lost a large contract in Spain. Are you seeing increased pricing pressure in these large type of contracts, or would you argue it's in line with a normal churn?
Yeah. It's kind of normal. I mean, I would say it's normal churn. It's what we are. It's, I mean, it happens. It happened historically. Sometimes, you lose one or two, a few big contracts more or less at the same time, and then, of course, it has an impact on the top line. Otherwise, other times, you win something. Then it's less dramatic, of course.
But I would say, I mean, it doesn't change the pricing, competitiveness or the pricing climate. I mean, we lost it for the reasons I explained in the U.K., and we are under contract. We could not go any further below the level that we had bid, and one of our competitors had a price level that was substantially below that. So then we lost it. It was solely based on price, the tender. Yeah. That's sometimes you win. Sometimes you lose. This time, we lost two.
Okay. Thank you.
We are now over to the line of Srini Sarakonan of HSBC. Please go ahead. Your line is open.
Hi. This is Srini from HSBC. I have quick couple of questions in North America, please. On staff churn in North America, what would you need to bring the staff churn in North America to come down? What else do you need to do? And is there any margin impact on a higher staff churn? And another question, are there any one-off election-related work in the North America sales?
No. On the last question, on the if we ever were any election-related work or cost, work or costs, we're no? Basically, not.
Okay.
No. Not of any significance, at least. So no. On the churn, it's high, but it's back to the levels where we were, actually, 2008. So this is not abnormal. It's very high. And we are man you have pluses and minuses throughout the business cycle on that. On one hand side, you have more training. You have more recruitment cost. On the other hand side, with the SUI rates, the state unemployment insurance rates are coming down because of the low unemployment in the US economy.
So that goes the other way. That is supporting us, for example. So really, no margin impact, I would say, over a business cycle, actually. So that we cannot, we should not dwell more on that. The churn rates are high, absolutely, but not in a historical perspective. They are on the levels where we usually are, and we are able to manage when we have a strong economy in the U.S. with lower unemployment. Probably, we'll see a little bit more. I mean, where there are some increases on minimum wage in a number of places in the U.S. We have the FLSA legislation coming in place in the U.S. on some indirect people.
We will see a little bit more wage inflation going forward, probably. But we are, I think there is also a strong economy, and we are well-equipped to push those cost increases into price increases in the market. And I feel confident that we will be able to do that in the U.S., especially with a good market situation and a good growth situation that we have right now.
Okay. Thank you.
Before we go over to Ed Steele at Citi, if anyone has any further questions, please do use this opportunity and press zero and then one on your phone keypad. Ed, over to you.
Thanks very much. Morning, all. Just one question for me. Have you got an update on North American airport tenders, please? I think in the second-quarter update, you said you were hopeful that perhaps you'll see some larger tenders in the second half. Thank you.
There was, we were bidding on San Francisco, but we didn't win. We were in the race for quite a while. That's a big contract, but it was kept by the incumbent supplier. There is no big tenders right now. I think there is a little bit of a standstill given the election time right now in the U.S. At least, there seems to be very little interest to put the big contracts into tender. There are some smaller bits and pieces at a number of airports with more. It's not screening, passenger screening-related. It's more perimeter, related to parts of airports or to specific areas of airports.
And we are bidding on a number of those, but they are still relatively small. I mean, they are in the range of $10 million, $20 million, $30 million contracts. So it's relatively small, medium-sized contracts, but very few of those that we are bidding on. But the large complete airport contracts like San Francisco, nothing on the radar screen short term. Hopefully, we'll see depending a little bit on what happens now in the U.S., but hopefully, we'll start to see something of that during 2017. But nothing, no tenders available to bid on right now of that size.
Got it. Thanks, Sal.
That was the final question on today's session. Could I please pass it back to you for any closing comments at this stage?
Okay. Thank you very much for, for calling in. Thank you very much. Bye-bye.