Hello, everyone. Very welcome to our Call for the First Quarter of 2016. I will quickly go through the slides, and then we allow for questions as we usually do. We have AGM here in Stockholm in not too long from now, so we'll might be that we will have to shorten the call, but we will do our best to try to answer all questions. We had a good start to the year, a very good organic sales growth, 8% very much driven, of course, by all the divisions. And I'll come back to that in a minute, but a very good start to the year.
Roughly speaking, you can say that about 2% of the 8% comes from the specific situation related to the European refugee and terror situation, and the remaining 6% is, I'll say, the ordinary course of business. Where we are actually winning market share in many of our markets, and most of our markets, because we simply have a better story to tell with integrating technology and other services with our guarding services. Operating margin also on the right side compared to last year, up at point one, supported primarily by North America and by Europe. Price, wage on par. EPS real change 14%. Cash flow weak in the first quarter, which is not unusual, and we see we have no fear for the full year.
So as we usually do, we normally recover in the second half of the year. So those, hopefully, targets will be restored as the year progress. We also have a good development, continue to have a good development without quantifying that in the electronic security side, and continue to have a good pace in winning new contracts, in starting up new contracts, in transferring guarding contracts to solution technology contracts. And then, of course, on top of that, we had the Diebold acquisition for two months in the first quarter, and also actually other acquisitions as we closed one yesterday in Germany for a smaller electronic security company.
But that also supports our margins and supports our transformation of us as a company to be a much higher relative share in security solution and technology. As you see in the numbers, here, the total change is different from real change, which means that the currency are working against us right now. Primarily it's the peso devaluation in Argentina that has a major impact. We'll come back to that a bit later on when we come to the Americas. But still a healthy real and total change in the beginning of the year, first quarter, and the margins you have seen, and also earnings per share, 14% real change for the first quarter.
In North America, we think that the market is growing in the range of 3%, similar to last year. We are doing well. We have a little bit of a benefit from the leap year in the first quarter, so that's why it's not four, but 5% in the first quarter. But we are slightly ahead of the market growth. We think that is our feeling. A lot of turbulence in North America. We made the moves among our competitors, and I'm not gonna speculate on that, but we'll see what, where that's how that will develop, but exciting times in North America.
And we also have strong new sales and a good development and according to our plan for the Diebold business , Securitas Electronic Security being integrated into Securitas. So the North American scene, the North American market seems to be progressing as we would expect. I mean, growing around 3%, strong development, seems solid. I would think we see no signs of any slowdowns in any way. So it should be. We expect the market growth roughly to be in that range for also 2016. Operating margin was, of course, supported by the Securitas Electronic Security integration, and that is basically the improvement of the margin compared to the first quarter last year. In Europe, as we had in Q4, also a healthy growth in Q1.
About half of that comes from, of the 8%, comes from the refugee, and the terror-related, services that we provide, and the terror part is very small. The main piece is definitely the refugee situation, and that where we do protection and, and, security services for, for, all the, the places where the refugees are being hosted. Of course, obviously, the countries affected primarily are France, Belgium, Germany, and the Nordics. But it's not only, the exceptional situation with the refugee centers, that supports the growth, it's also that we do well, all in all. And, the European market, we think, is, growing in the, in the 2%-3% range this year. We have said 2% before.
We are more likely to maybe increase that to in the range of three, because it's but it's very difficult to predict and quantify the effect of the refugee terror matters, but, and speculate to that, but it's probably rather three than two, I would think. But anyhow, even without that, we are still at 4% in the first quarter, so we are doing well. We have a good story to tell our clients with the ability to combine, security solutions and, and technology. We have written in the report, we, we are have some contracts that comes to an end. There's the airport contract, large contract in Stockholm, February first next year. So we'd just like to remind about that, but, we have that contract for the full year, for this year in place.
Margin, we took quite some investment and may be surprised to one or two in the fourth quarter last year by having a lower margin than we had in the equivalent quarter in Q4, 2014. That was very much, and we explained that because we had to take quite heavy investments in recruiting and training and finding people, in order to meet the tremendous needs that we had to mobilize during the fourth quarter last year. Now, we still have many of those services also running into the first quarter of this year. So many of those costs have been taken, so we can then leverage the leverage for growth, basically, by many of the costs already been taken.
And also, so that supports our margin by 0.2. And we all have a better quarter this year than we had last year. Ibero-America, the numbers are good growth in Latin America, even there is some concern about the macroeconomic situation. We still don't see it in our business. We are doing well in many of the countries. The pace of devaluation heavily, and that, of course, has an impact when we convert the pesos to Swedish kronor. And most, when you look on the numbers, and you can see in the report, and you compare the real change to the total change, it's quite a gap. It's almost 20%, and most of that gap is explained on the top line by the pace of devaluation.
It also impacts the margin, actually, in the Ibero-American division. When we look on the margin, if it wasn't for the technicality of that devaluation and Argentine business weighing the weight of the Argentine business, which has a higher margin of 4.6. So when that piece is shrinking, that automatically and mathematically drags down the margin, so the margin is, in fact, apples to apples, it's not lower than last year. It's at least on the same level as last year, but optically, of course, and correctly accounted for, it is 4.6 versus 4.7. But it's more technicality than when converting pesos to Swedish kronor than anything else.
No concern here, but still it has to be explained, of course. Cash flow weak, usually is first quarter. We are growing well, so of course we needed a little bit more working capital, so that is an important part of that. But also we have a payroll effect of the timing in the U.S., and that is basically timing matter. Basically, the whole difference between Q1 this year and Q1 last year on other operating capital employed is explained by that. But we will recover as the year goes by, and we don't expect any issues with the free cash flow for the full year.
Net debt, of course, obviously, heavily impacted by the, by the payment for the, the Diebold acquisition, which, closed on February first. So that is really the main difference of a net debt, goes up. The dollar is, strengthening, or sorry, weakening, means that we have a positive translation difference. We haven't had that for quite a while, but now it supports the net debt, actually. But no major impact all in all. The main part is, of course, the acquisition of the Diebold, business. Here you see the numbers on, from last year, we continue— We don't publish these numbers for this year, and, but we think that we can continue to develop it in a high pace.
We have no reason to change that opinion and that statement after the first quarter is progressing as we expect, in a good pace. And then on top of that, you have the acquisitions, Diebold primarily, but also others, the German one, for example, now, that will come as of May, and potentially other that we might do during the course of this year. So there is no change in this. You will hear this for many years to go, to come, but we are executing our strategy, no slowdown. Things are moving on as we plan and expect to do. And of course, you also have seen this before. We will have a Capital Market Day, so we make a commercial, short commercial for that right now, in June, in Malmö, in Sweden.
But then we will speak more about this, and our strategy and the pieces of it, and go a little bit more in depth on that. But of course, we keep working on this, trying to extend our services, not only doing the guarding part and Electronic Security, but also looking for opportunities in Fire and Safety and Corporate Risk Management, which will add very, very a lot of value for our clients. But we can also do those services and use the people we have on site in order to perform those services and make it more competitive in front of the client. Final slide.
We'll speak a lot more about this in Malmö, at the Capital Market Today, but basically step by step, creating more value for our clients. Of course, by the first step, electronic security, mobile and remote guarding, and so forth, and protective services, adding the fire and Safety Corporate Risk Management is another way to use the cost base in order to be able to do more services, and by that, creating more value for the client. The next chapter that we are now working on as a very important part of our Vision 2020 strategy is to also be more predictive in the security.
Using big data, digitize our business, and all incidents, report all data in data warehousing, let's say, and use that data in a clever, intelligent way in order to predict what potentially could happen, and where it would happen, and when it would happen, and by that, optimize the services and create more value for the clients. We are testing that in the U.K. quite successfully right now with in the retail sector, and gaining a lot of knowledge from that. The intention is over the years to come, to roll that out for the full group in all our countries. That will be an area that we will dwell a little bit more on, and explain more in detail when whoever will meet us in Malmö.
All right, so that was the short version, and please, if you have any questions, we will try to answer those. Go ahead.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Hit zero one to ask a question. The first question comes from Niklas de la Grense at Bank of America Merrill Lynch. Please go ahead.
Afternoon, guys. Two from me, please. The first one, very good performance on the European margins. In Q4, you'd mentioned that there were very high mobilization costs related to the spot businesses, but because the demand was constantly shifting, you might not be able to leverage that, and that the margins might continue to be kind of disappointing. Are you now seeing more stability in, in that, in where there's demand related to the migrant crisis? And should we expect the spot business to be margin accretive as a result of that? And then the second question, just a simple one. In North America, you mentioned the 1% boost from the leap day.
Should we assume that there was a kind of similar boost in other regions, or did you just call out that because of the way that you count the business differently? Thanks.
The latter one is just an accounting matter for U.S., so it doesn't have the same impact in the other regions. So no, not in the other divisions, no. So that was a U.S. matter. On the first, because of the accounting principle we use there, the European question of the stability and money, I mean, it's very hard to predict this, so I'm afraid I cannot give you a very crystal clear answer to this question. But we mobilized thousands of guards during the fourth quarter. That cost a lot of money and the recruitment and training cost and, et cetera, et cetera.
Then we were not certain how long that's gonna last, but and in the terror-related matters, it didn't last as we expected, and it started to fade away after the aftermath of the Paris attack already in January in Q1 gradually in January and February. Normally the cycle, two months, more or less, we have that as a rule of thumb. Basically, extra services related to terror attacks kind of goes back to normal. On the other hand, the refugee matter seems to continue, and many of the costs that we took in Q4, those contracts, they were short-term, temporary, extra sales, assignments, but they continued in Q1.
So luckily for us, in that sense, because we had already taken all those costs, or many of those, one-off costs in Q4, and now we can continue with the same people at the same sites, with the same service, also in Q1. How that will develop is impossible to speculate it. I prefer not to do that because it's impossible. It depends on, well, as we all know, following this development, it's impossible to have any kind of predictability of how it will develop and what it will look like during the course of this year. It will, of course, continue to some extent, and I would expect that, but to what extent, I cannot tell, for the coming quarters.
Thank you. That's very clear. Just one very quick follow-on. You mentioned the fading impact of the Paris terror attacks, but obviously, you had the unfortunate events in Belgium towards the end of Q1. Have you seen a similar boost post those terror attacks?
Well, the terror attacks in France, we mobilized 1,100 guards in the three days in Paris, the Paris attack in November. After Belgium, the Brussels attack, a couple of hundred, probably in that range, but not the same size, not at all, in Brussels. So we have employed extra people now after the attack. They will probably last for a while, and then things go back to normal, hopefully. That, we should not over quantify the terror-related business. It's very one-off, it's very short term. It's dramatic at the time when we need to recruit all these people, but what really had the major impact is the refugee situation.
That is really what drives that volume and that business, of course.
Thank you very much.
Next question comes from Robert Plant at JP Morgan. Please go ahead.
Hi, Alf. Two questions on Iberoamerica. You've mentioned Latin America business has held up well despite the macro. Security is quite late cycle. Do you think there could come a moderation in organic revenue? And then switching to Spain, you mentioned that Q4, that business was back to growth at 1%. How do you see that Spanish business progressing through the year? Thank you.
On the Latin America, we haven't seen any impact of that concern yet. So, I mean, it continues to be good in Latin America, and of course, the necessity for security remains high. So, how it will continue, I don't know. But I mean, we just have to be alert and vigilant to how it's gonna develop, but I mean, we have a portfolio business, so and we haven't seen, so to say, any signs of terminations or reductions yet. But we are just cautiously alerting everybody that the macroeconomic climate is different.
But so far, so good, and no signs of slowdown on our side, I would say, at this point in time, but it could, of course, eventually change. And then on the Spanish side, in the first quarter, we had, as I think, a small growth. I'm just double-checking here. We were, what was it? Yeah, 1%. 1% organic growth in the first quarter, so no big difference compared to last year. But still, we had some growth, and then we have to remember that we have in the comparatives, we have airport in the comparatives, which were the contract that we lost in summer last year. So we are. It's good. Spain is okay.
I think it's the growth is 1% in spite of that loss of that contract, which is in the comparatives. And secondly, the margin has improved also in Spain, so had a good operating margin improvement in Spain in Q1 as well, compared to last year.
Thanks, Alf. On Spain and the airport contract in Madrid, how much did that take off growth?
I can't tell, but the contract was for the range of EUR 15-20 million on an annual basis, so divide by four, so EUR 5 million, probably in that range, euro. And then you, you do the math. You can estimate the math. I can't tell you a percentage share, but it, it didn't have a big impact on some. It's probably, 1%-2% or something like that, I would guess.
Great. Thanks, Alf.
Thank you.
Next, we have Sylvia Barker at Deutsche Bank. Please go ahead.
Hi, good afternoon. Sylvia Barker from Deutsche Bank. I've got two questions relating to the refugee situation and one on technology, please. First, on the European refugee situation, one, you're saying that all of your contracts are still short term. Is that correct?
Yeah.
Are there any discussions that you have, perhaps more on the public side, to maybe go into a longer-term contract?
Well, I mean, most of it... Let me answer quickly. The, I mean, we have a base contract with immigration authorities. The two main countries are, when it comes to refugees, are Sweden and Germany. And when in Sweden, we have a base contract with a refugee migration immigration authority. But, I mean, that base contract is relatively small compared to all the extras that we have, that they have ordered based on the needs, but surprisingly became much higher during the latter part of last year. So in that sense, it, a small part is recurrent, so to say, or is a contract base. And the extra sales, you never, I mean, you don't know for, I mean, it's very short notice. Similar situation in Germany.
In Sweden, the contract with immigration authorities is being on tender right now, and that expires, that will then the new contract will come in place, probably Q4, end of Q3, Q4 this year. So that is being now tendered, and we participate, of course, and hope that we will be successful. So, yes, I mean, the answer to you, to make it simple, most of that business is very, very short term, and it can change quite dramatically, quite quickly.
Okay, thank you. And how many—or sorry, the tender is not open yet, or will we-
The tender is ongoing. In Sweden, the tender is ongoing. It's ongoing in Sweden. The tender is ongoing in Sweden. We're bidding on it right now.
Yeah, okay. And how many competitors do you have bidding on it or?
I don't know, but at least a handful of competitors, I would expect.
Okay, sure. And then secondly, just thinking about the longevity of this, so obviously if, you know, there continue to be refugees coming into Europe, what could mean that, you know, growth for you slows down? Is there anything politically that you think might be changing in terms of the situation in Sweden and Germany in the future, which will be affecting you, kind of from a more political standpoint?
No, I think on the contrary, in that respect, actually, because, I mean, this takes a lot of resources from society in general, and including the police. So there are discussions in some countries where the police are considering to at least thinking about how they can use the private security industry to offload themselves. But it all depends on how much strain there will be on the resources, and it's impossible to guess. I mean, we don't know what's happening in the next three months and how that will develop, so it's very difficult to speculate about that. But of course, I mean, there is a need.
I mean, you have all the refugee camps and the housing and the areas where they are staying and living and being hosted, and those needs to be protected. And that needs to continue, I'm sure, for quite a while. But whether we will be able to continue to do that, it's being now tendered in Sweden and in other countries. It's normally short-term contracts. And then how that will develop in six months from now, it's impossible to know. We hope we can continue, but we don't know. So I'm sorry, I need to perhaps not make any predictions on this matter, because it's very, very difficult simply.
Let me also remind you that, I mean, that we will then start in—when we come to Q4 this year—we will start to hit tough comparatives. We had a tremendous growth in Q4 last year, so that should also be taken into consideration when everybody tries to make some estimates for growth for this full year. But we have problems ourselves to make that estimate. But in the meantime, we are well organized for that. It supports our growth. We leverage the cost that we have invested. If it continues in Q2, we should continue to also see good leverage and support from that business in the quantity it will continue in Q2, which we simply don't know exactly yet.
Okay, thank you. And then finally, if I can finish on technology. Obviously, it's been a few years now since you started to implement some of these combined contracts. So just on the kind of return on capital point, obviously, it was always the expectation that so you depreciate the equipment probably a bit faster than the length of the actual contract. So the return should be a bit towards the end of the contract. What are you seeing in that respect? Are you having to invest in new equipment, or is that really the case?
Yes, we continue to do that. As we grow that, grow that business and the relative share, we continue to invest in CapEx at the customer sites, and that will continue throughout, just like this last year, it will continue this year.
But if I take one contract that you signed in 2012, out of issue, depreciate your, your equipment over 3 years, do you need to then invest in a new camera or-
No. Well, that depends. Normally, most of it, yes, because the customer would normally... I mean, there are different options. So this is a complicated matter, but, I mean, one matter could be that the company, that, that the customer, buys out the equipment, at the residual value agreed in the contract. The other one is that we extend the contract, we use some of the equipment, and then we will reinvest in other equipment, and we extend the contract for another three or five years. And then we can use some of that equipment. And normally, you can use some of that equipment. That would be the normal case, and it will be quite unusual that you replace everything.
So that gives us, of course, an advantage in that we, at that renegotiation point, in order to try to use that position, so to say, and also to give the customer a good solution, modernize it, but also at the same time, get a little bit margin from that on, from our, for ourselves.
Okay, great. Very clear. Thank you very much.
Next question comes from Paul Jackson at Morgan Stanley. Please go ahead.
Hi. Afternoon, everyone. I've got three questions as well, please, Alf. The first is also related to the refugee situation. I think previously you let us know that you are satisfying some of that work by subcontracting to other security forces. Is that still the case? And what sort of proportion, if so, is being delivered by your own people? And if I think about the refugee work, now, as it settles into this current phase, do you expect it to be at better margins than your more regular work? And then the second question relates to Latin America, following on from Rob's question. Can you give us any sort of steer on the split between volume growth and wage inflation there?
Are you still seeing very high levels of volume growth, is my, is my question, I suppose. And then my last one follows on from Sylvia's question on the technology-related services you're providing. Do you have a feel for the proportion of those contracts where you own the equipment versus where the customer owns the equipment? Thanks.
Well, on the first, I'll try to answer them. Most, I mean, the work we do for on behalf of the migrant authorities, or municipalities or the state in any way or shape or form, we perform with our own people. I mean, we very rarely subcontract that. We do some subcontracting when we are really in a squeeze and we cannot find the people, but we normally would do it with our own people, for the migration authorities, immigration authorities, or for the municipalities or whoever buys those services. So that is our preference to do it with our own people, and have full control over the training and the recruitment of those people, those persons.
The margin on those services is a correct margin, and we had a lower-than-average margin in Q4, and we have explained that for obvious reasons, because we had to take all the cost for many people ramping up and mobilizing. So we suffer a little bit from that in Q4. But the margin is not a, it's not an exceptionally high margin. It's not a margin that we will extremely high, that we sometimes would have on extra sales or short-term sales. So it's a correct margin, and it's kind of an average margin, I would say. And then we take advantage from the leverage based on the growth, so to say.
Latin America, it's real growth, volume growth. Inflation is a big part in Argentina, but in spite of that, we have a real growth on top of that, and in many of the other countries, we have a really good real growth because inflation is good. So very good growth in Latin America, and it's certainly not just inflation in Argentina. It's real growth in many of our countries. On the equipment, I can't, I, we don't follow that split. I cannot tell how much of our customers' equipment is on or have to provide their own equipment, and how much is ours of that. But, I mean, our preference is, of course, to own the equipment and deliver a complete package, which we think is advantageous for the customer.
But we have no statistics on knowing how much of our customer base have invested in their own equipment and how much is invested by us. But so far, normally, I would, my clear conviction is that the absolute majority is still in the customer's balance sheet. If you take airports and many large customers, they have made huge investments over the years, so it's this is a shift that will gradually come by the suppliers taking over that investment, and also actually looking into buying the equipment from the customer and taking it over and then modernize it, and then so to say, lease it back as a part of a pack, complete package over a 3- or 5-year contract. So that is it.
There is a good opportunity not only to offer that to new clients, but also to find solutions where we can free up CapEx from our clients in order for the client to have his security as a monthly flat fee instead of huge CapEx from time to time.
And do you think your competitors are still really pushing that same proposal, or do you feel like you're one of the only ones at the moment?
I think we've our feeling is that we are the only one in that sense. I don't see them doing the CapEx part. No one... Well, many of them can't afford it. They simply don't have a balance sheet to support that, or they don't want to, or they're not geared for doing that. So, when it comes to financing our customers and doing that on a flat fee basis, on a complete, including all the CapEx and equipment, I would say we are really the only one doing that systematically.
Right. And just on the Latin, are we talking mid-single-digit, that sort of level for volumes, is was yesterday?
I can't say.
I would say.
Sorry.
Okay, thanks.
Next question comes from George Gregory at Exane BNP. Please go ahead.
Good afternoon. Just two questions for me, please. Firstly, just comparing to the European organic growth rate, which was running at the same rate as the fourth quarter. Alf, you mentioned that the terror-related work faded during the first quarter. I'm just wondering what accelerated to offset that decline in Q1? And secondly, also on organic growth, this time in North America, 5%, adjusted 4%, it was against a relatively tough comparative. Just wondered if you could share any further commentary on the backdrop there and the work that you're winning, please.
I mean, we, and the market is growing well in North America. It's, it's in the range of 3%. We are growing, yeah, 4% + 1%, let's say. So we, we do slightly better. It's a high activity, a lot of tenders, a lot of things are going on. New sales is good. We have here, we have, you might remember, we changed some years ago, the, our sales organization, so we have more better efficiency in our sales organization. We've been successful winning a number of contracts. So, I mean, basically good activity, and, and we do slightly better than the market, but also supported by the, the strategy. We have a good story to tell. People get excited about the, the story we tell, that we, we can improve your...
We can create value, we can reduce your cost, we can integrate technology. And we have a number of customers who might not buy that at this moment, but they're excited about the story and the possibility, and then we win the guarding contract, as we usually do, and then maybe down the road, we could then transform that contract into a solution contract. So, but all in all, generally, a good activity level. Sorry, what was your first question?
The European organic growth rate, which continued to run at the same level as Q4, despite the terror-related work fading. I just wondered what-
The terror part, as I said before, is very minimal.
Right.
It doesn't have a major impact. It works, it lasts for a short period of time. I mean, the effect of the Paris attacks basically faded away already in January.
The ramp up.
Yes, and exactly, and the ramp, there was a ramp up, correctly. My friends here in the room will support me. But we had a ramp up of the, also, we had a ramp up of the refugee during the quarter, the fourth quarter. It was, it got higher and higher, so during the quarter. So, but the terror part is usually a very small part of that, so I couldn't say... You cannot take it away from the context. That's why we mentioned it. So it has an impact, but the main part by far is the refugee part. And then, still to remember, even without that, the growth in Europe was around 4%, which is pretty good.
In a market growing 2%-3%. So, it's not only that, but of course, it supports a lot to leverage our result.
Great. Thanks very much. Thank you.
Next question comes from Henrik Nilsson at Nordea. Please go ahead.
Good afternoon, all, and thank you for taking my question, Alf. You mentioned strong new sales in North America. Has the level accelerated sequentially and year on year? And can you elaborate a little bit on that?
No, it's a relatively high level. I mean, we had a very good year last year. Record high new sales in the US last year. It continues on a good level this year. I will say we are still running at more or less the same pace now as we did during the course of last year. So it's a good pace, good activity level, basically. But no, no, no trend in any direction that I would... Not up, not down.
Also, on the market shares, you're saying you're gaining market shares in many markets, US, Europe, many markets in Ibero-America. But it sounds like there are some markets where you're not gaining market share, and so are you losing share, and what would be the explanation for that?
We have had in some countries in Latin America, Peru was last year, we had difficulties on the top line. So that was one example. Portugal has been difficult the last year, very difficult last year, where we lost some contracts to competition. Yeah, those two to mention. We're doing very well in Colombia right now. Argentina is doing well. Chile is doing well. Ecuador, we had troubles. We lost a big contract in Ecuador, so there we were in a negative mode. So yeah, basically, that's in short, the situation.
Yes, it's just temporary sort of contract losses that are driving this and not, not some structural trends or?
No, no, no. It's, it's you win and you lose, win and you lose. In general, we have been successful, but you always win or lose.
Okay. Even with the quite sizable acquisition of Diebold, I think your balance sheet probably allows for more acquisitions and headroom to expand here. Do you think you have the capacity to take on more or larger scale acquisition, if I put it that way, or is Diebold enough to integrate at this point?
Well, for North America, clearly, Diebold is enough. So right now, I mean, we will focus on that and digest that, and get the integration up and running in a good way, and really leverage the commercial effect. So we find the and get in place and get stability in the systematics of how we try to leverage each other, so say, the Diebold part and the Securitas part, and how we manage that in the marketplace. So there is also quite a lot of transition work that needs to be completed as well. So in North America, I think we will be careful for a reasonable period of time. When it comes to Europe, we did one now, we closed yesterday or the day before.
Yesterday, the range of EUR 40 million company in Germany. So that we can manage, and that we can do in other countries, country by country, because there is no really regional player or European player that could be acquired or is available. So that will be country by country. And then, depending on the country, but many other countries, we will be ready to buy mid-sized companies, just like we did in Germany, and then integrate in, in that, in European countries. So that is where we really are looking in Europe to see if we can find players in the mid-size range and integrate in our countries there.
Thank you very much, Alf.
Next question is from Andrew Roberts at Credit Suisse. Please go ahead.
Hi, good afternoon. Just a couple from me, if I may. Firstly, on Argentina, could you just talk a little about how big that is in proportion to, as part of the group? What organic growth was through the quarter? And also whether and also on pricing activity pre and post the devaluation. And then secondly, a bit more broadly, you talked a little around Diebold in North America. Just kind of above and beyond that, how is the technology solutions business and growth in that, in those operations gone over the last three to six months in North America in particular? Thank you.
Well, Diebold has developed well, and they had a good growth year on year for the last years. And that, of course, also makes us feel confident that it's a good acquisition. So, and they continue to it looks good, and it develops according to what we would expect in the plans that we have put in place. But they have had a consecutive growth for 3 or 4 years, and it seems like that continues in a good way. So that is according to our expectations, and we are excited, and we are confident that that should develop in the sense that we expect.
In Latin America, I mean, the growth in Argentina is very good, but it's very much driven by inflation. I mean, we are in the range of 30% organic growth in Argentina, which is quite usual that we have. But it is. So that is a good growth. Let's see here, what players in Argentina? And Argentina represent about a quarter of the total sales of the Ibero-American group. So that gives you some indication as well. And then, of course, it had a huge impact with the devaluation.
You see in our quarter report, you have a huge difference between the total change and the real change in Ibero-America. It was total -6 and real +13, so almost 20% difference. The major part of that, the vast majority of that difference is related to the devaluation of the peso.
Okay, thank you. And in terms of pricing in that region, are you still able to push through-
Yes.
Inflation or inflation-beating price increases?
Yes. No, we are able to push through. And the good news with inflation is that everyone is used to it, so it's kind of, in a way, almost easier in a way to push through inflationary increases in some of these countries, because that's part of the system. You come back every three or four or six months on doing that. While it sometimes is more tricky in Europe, where we have basically no inflation, but still we have wage increases of 1% or 2%, that we need to convince the customer to for on a price increase when the customer argues that there is no inflation, so why should I have a cost increase? And so no, I'm not concerned about that in Latin America. That we are good in.
The team is good, and they are well used to that, so no worries on that.
Okay. Thank you very much.
Thank you.
Next question comes from Rajesh Kumar of HSBC. Please go ahead.
Hello, good afternoon. Could I just get some color on what costs have you been capitalizing in the Electronic Security arena? So is it just equipment cost? Is it the equipment cost and the labor cost associated with installing that installation cost? Or is it something else we should be aware of that would be worth understanding? Also, if I could follow up with one question on the U.S. And in the South, churn is now 59%, if I remember correctly, you pointed out that we would expect some wage inflation in the U.S. to come through. What level of wage inflation are we talking about, and how much more staff churn can your business absorb?
In U.S., it varies a lot over the country, and the U.S. organization is very competent and very good in managing wage increases. And of course, you see our churn rate, our retention is quite different. We are on levels that we had back in 2008 before the crisis. So very high turnover of employees in U.S. right now on the guard side, of course. More pressure in some areas than others to find people and to run wage inflation. But that, I mean, the whole system in U.S. is very geared for managing that, and we are good in that. And when we have that, we are able to pass through the wage increases as price increases.
So I'm not concerned about it, but we might see... We haven't seen much of it yet, actually. And we were fearing that going back 2, 3 quarters, that it should be around the corner. But still, still in Q1, still relatively low wage increases in general in U.S. and not much pressure yet. But, of course, it probably will happen if we continue, but we will see more of that if the U.S. economy continues to develop as well as it is. On the CapEx side, what we capitalize in the balance sheet is, of course, the equipment, including the installation work. And then that is the investment that the customer has made at the site.
And then we amortize that and include it in our pricing, and the customer amortizes that over the course of the contract length. And we don't if there is, let's say, if it's a 5-year contract and the customer has no residual value or no commitment to buy out the equipment, then they have to amortize all of it during the course of the contract. So we should never sit with a contract that has expired, and we have equipment which still has a value in our books, and we do not know if we can use it or have a contract to extend it. So it's all amortized during the course of a contract, adjusted for the residual value. That's how we do it.
So we don't end up with a problem down the road that we take advantage of during the first couple of years of the contract and speculate that it has some kind of theoretical value. We don't do that. We amortize it during the course of the contract.
Thank you very much. That's very clear. So it's the installation cost, the equipment cost that you're capitalizing. What sort of churn rate assumptions you have made when you do the amortization calculation? Because if you do get the churn, you get the equipment back, don't you?
No, but you don't. The equipment is, I mean, the equipment in the books is, is worthless at the end, at the end of the contract.
Yeah, but if I get a churn, then I would have to write down the installation cost.
No, it's written off. I mean, it's written off. Because all the installation work - Sorry? Aha. You mean if I, if I terminate the contract before the end of the contract?
Yes.
Okay. Okay, okay. Yeah, but that is... I mean, that is a risk that... I mean, it's regulated in the contract in the sense that if I do that, there is a penalty, let's say, for doing that, and the customer still has to pay for the equipment. If the company goes bankrupt, of course, yes, then we have to sit with the equipment that we have to take back... Well, this is what has, and this is not a problem in reality. So theoretically, yes, but in reality, it's not an issue.
No, no, I understand that, but what if it's a big customer, and they reduce the scope of the contract? You have to capitalize the installation work.
No, but then the customer needs to pay for that. It's part of the contract. So if the customer is not bankrupt, they will have to pay the bill. We can terminate the contract.
Okay, so at least we'll see how that progresses. Thank you.
Next question comes from Karl-Johan Bonnevier at DNB Markets. Please go ahead.
Yes, good afternoon. I just want to get a little bit of granularity on your statement that you continue to see high-paced growth in the security and electronic solution. Should I see that in the context of the growth which you have seen over the last couple of years there, or should I think in the context of your view of the general growth of the security market?
Oh, I mean, in the context of what we have achieved over the past couple of years.
Excellent. Just a small other issue as well. We're obviously coming up to a big event here in Europe during summer with the Euro 2016 football. Are you involved in the security measures around that?
Very, very small part. Marginally. You won't see it in the numbers.
Excellent. Seems to be a high-risk event, if nothing else, so.
Probably. And secondly, not attractive price levels, so we were not very keen on that. And it's these kind of contracts, they are extremely difficult, because you need to ramp up, find a lot of people in a very short period of time, and then four weeks later, you need to get rid of everybody. So it's an enormous effort and strain on the organization, and there has been mistakes in this industry throughout the years, in this area. So we are not that keen on these kind of contracts, actually, so we are quite reluctant and very careful on that.
Excellent. Good luck with the AGM. Thank you.
Thank you very much.
Next question comes from Stefan Knutsson at Handelsbanken Capital Markets. Please go ahead.
Good afternoon. Most of my questions have been asked, but I have a short one for you today. You've previously mentioned that the Diebold acquisition will drive one-off costs of around SEK 60 million, and as I understand, SEK 90 million were recognized in this quarter. Will the rest be evenly split throughout the rest of 2016, or have you reconsidered the associated cost of the acquisition?
The answer is yes to the first statement of yours.
Okay, thank you.
It will be evenly split, yes. Yeah, basically evenly split over the course of the year, yes.
Very clear. Thanks.
As a reminder, it's zero one on your telephone keypad if you have a question, zero one. We have a question from Michael Holm at Danske. Please go ahead.
Hi, Michael Holm at Danske. I have one question on the manned guarding business. You only talked about margin pressure in that business structure. Do you see that easing now with a generally better security market?
No, but you're still... This is still the same. I mean, there is an abundance and excess of guarding companies around the world and in Europe and in America and everywhere, and the same, same, same, same, same, same, always. And it's not gonna change over many years, over years to come. You have a price competitive fighting for the same contracts, using price as the weapon, margin erosion, same, same, same. That is not a nice place to be. You need to be very careful there. And if you go into those contracts with a low margin, you need to have an opportunity to develop that contract into a solution contract. So that those dynamics remain the same. And we...
And you could imagine that it would have changed because of the demand for guards now for this temporary strain on the industry because of the refugee situation, for example, but we haven't seen much of that. That's still very still too much of those dynamics in the industry. So we still have to fight that margin erosion all the time. And then, of course, the way to mitigate that is to build a relatively higher share of technology and solutions. And when that proportion differs, that will drive our margins in a very nice way, we expect so.
So that is why we're moving in this way, and that is going to be, that is the only way, in my opinion, how to develop this business and continue to create good shareholder value.
The magnitude of that, is that still around 20 basis points then?
Yeah, the same, same 0.2 basis point margin erosion every year. Yes.
Okay. Thank you.
Thank you.
We have a question from Allen Wells at Morgan Stanley. Please go ahead.
Hey, good afternoon. Just two quick ones from me, and I'm not sure if I missed it. Did you actually quantify the margin accretive impact in the U.S. from the Diebold acquisition in Q1? That's my first question. And secondly, you mentioned about the Arlanda Airport contract being lost or moving on in 2017. What was the reason behind that? Did you choose not to rebid it, or did someone else bid it at a different level to you? Thank you.
We lost Arlanda because a competitor of ours, this time a security company, which was not the case the other time, which we appealed, but this time a security company in the Nordics, in Scandinavia, they had a lower price, basically. That's why. Our price, for us, that was not an attractive level. We went as far down as we could, and it was not enough, so we lost the contract, and there's not much we can do about that. We just have to bite the bullet and try to win something else to mitigate that.
Then on the Diebold part, the electronic security part in Q1, I mean, basically, you can say that the margin improvement comes from in North America, comes from that consolidating that business for those two months.
And all of that impact was Diebold, as opposed to some of the impact coming from the core or tech business?
Basically, basically.
Thank you.
There are no further questions at this time. If I speak it.
Okay, thank you very much. Very good. We will be in time for the AGM, so we'll run to that one now. Thank you very much for calling in. Thank you. Bye-bye.