Hello, everyone. Very welcome to this webcast, and I will shortly present the first half year for the Securitas Group. You see on the first slide that we have had a first good six months in the year. We are pleased with the growth. We have a good organic growth, and we are improving in all our business segments. Good growth in North America, driven by a market which is growing in the range of 3%-4%, we think, this year, and we are pretty much in line with that, and high activity level and a lot of things happening in the North American market. In Europe as well, it's also growing well, 3%. We are ahead of market growth.
We think European market is more like 1% growth, while we are growing 3%, and we're taking market share in Europe because of our strategy. Also Ibero-America, mainly driven by a good swing in the Spanish business, which was negative last year and is now growing a few percent in the first six months this year. So and still continue with a good growth in Latin America. So we are pleased with organic growth of 5% in the first six months. The operating margin is improving 0.1 compared to the same period last year. Plus in North America, minus in Europe. I'll get back to that in a minute. We price wages on par, earnings per share 10% real change improvement, which is according to our target, so that's doing well.
Free cash flow, basically, in line with what we expect. We're usually fairly weak in Q1, Q2, so we are on our leverage target on the net debt ratio to EBIT to free cash flow to net debt. So we'll pick up as we usually do in the second half of the year. And then our technology and solution development, we think that we will be able to reach at least 20%, 28% growth for that business segment, let's say, or that part of our business compared to last year. So all in all, a good first six months.
Here you see the numbers on this slide, and I will just move on right away to North America, where we, as I said, good growth, primarily driven by the five guarding regions. I mean, we see good tender activity, a lot of activity in the market with new bids, and a good macroeconomic climate in the U.S. So, in North America, U.S., high activity level. We have also made some changes two years ago to our sales organization, and that we start to... Well, we have seen it before, but we continue to see a good development because of those actions taken.
The only caveat I would just like to still mention is that we are facing some little bit more challenging comparatives in Q3, Q4, as growth was picking up very, very well in the second half last year. And make no more speculation about that, but at least it should be noted that we have a little bit tougher comparatives in the second half of the year than we had in the first half of the year. On the margin, very positive development in North America. It's driven by a number of things. We get the leverage from a good growth, so that's good, and as expected. We also have the lower payroll taxes.
We have not really seen a stress on. I mean, unemployment levels are coming down in the U.S., but we still haven't seen it pushing a lot of wage pressure, but it could be around the corner. But we are pretty good at managing that. I mean, that is our, in our DNA to take care of that. And it's of course not gonna happen in every state or every city or every customer at the same time. But there will be probably around the corner in certain cities or areas or segments of our business a little bit more difficulties to recruit, which means that you will normally see some wage inflation, but that will mean that we also need to increase prices accordingly, and that we are normally fairly good at managing, so I'm not concerned about that.
I'd just like to mention it. But anyhow, the lower employment rates, the good news about that is the SUTA rates are coming down, and we can enjoy that. We also see, even if it's small, but still it's varies. At least it's on the radar screen, so we can now see that we have some positive effects from, from a very good pace in the technology and solution development in U.S. It's really moving on extremely well in the last six months, and, and it's, it's to the extent that we start to see it in, in the, we can count it and see it when it comes to the margin improvement in the U.S. So very good development in the quarter in the North American business segment. Oops, wrong way.
Then in Europe, also, encouraging good growth, mainly because of our strategy. We are doing well in a number of countries, which, Turkey, we've been used to growing well, but Germany is growing well, Sweden is growing, and that at good rates. And that is mainly because we have a better story to tell. Either the customer, they convert to a solution contract, and we win contracts because of that in our new sales, or we are just taking over it, winning it as a traditional guarding contract with a plan or even the commitment to switch it to a solution contract down the road within six, 12 months. So we have a good story. We are stronger than many of our competitors in this field, and it pays off in the top line.
So that's very good in the European scene, which is macroeconomically still a little bit more optimistic, but I mean, no big swing and compared to a quarter ago. When we look at the margins, a bit disappointing in the quarter. We have a few reasons for that. Not at the level that we expected ourselves, a little bit too low. We have had some matters in Sweden. We have the well-known higher social costs. Still, didn't have much of an impact in the quarter. It will have more of an impact in coming months. But we have some training costs in Sweden, because it's hard to find high quality people in certain areas in Sweden.
According to the collective bargaining agreement, we would not have to pay wages during that training week when we hire people for summer, summer temporary, vacation people who come in and replace the traditional ordinary guards. But in order to get the right people, we had to pay that training wages during that training week, and that when we recruit and train all the people for the summer months that we do in Q2, so that hit the Q2, this year, and, which was not the case last year. Then we have had some tricky, market conditions in the Netherlands. It has been a negative organic growth in the Netherlands in the first six months.
We have taken quite some actions there on the cost side, and also how we can improve the technology content in the country. So hopefully, it's gonna improve in the second half. But from the first half, we have had some negative development that we suffer from in the margin in the quarter, primarily. And on the growth side in the Netherlands, we hope that's gonna swing around to positive in the second half because we have got quite a successful extension and increase on our Schiphol aviation contract that started in the first half of June this year, and we will now enjoy, I'd say, during the second half of the year.
We also like you to note the social cost impact for the full year will be around SEK 20 million and next year, SEK 50 million. We do not think that we can increase prices because we never decrease prices when those social costs, when we got those social cost benefits. So this is something we will need to deal with in a longer perspective, but in the short-term perspective, it's something we need to compensate for by other things. In Ibero-America, good growth. Latin America continued to grow. We're a bit more gloomy when it comes to the macroeconomic situation in Latin America because of the lower metal prices and oil prices and so forth. That would impact...
You would think that that would impact also indirectly the other segments of the industry, but we haven't seen it yet in our sector. We're still happy to see a good pace in the growth and no signs of slowdown. So 25%, of course, a lot of that is inflation in high inflation countries, but still there is also real growth. And we can speculate a lot about if it's gonna have an impact or not. On one hand side, it would normally be the case, but on the other hand side, crime rates are high, and the need for security is very high. So it's not absolutely sure that companies will cut back on security. So we will have to see.
It's just a little bit of a darker cloud on the sky, but whether that's gonna rain over us or not, it's still too early to tell. Good news is that Spain is recovering, well, macroeconomically, and that we will, of course, enjoy. We think the Spanish market this year is fairly flat compared to last year, but in 2016, Spain will grow as a security market. But we are doing well. We grow a few percent this year. We will have a little bit of a drawback now with an airport contract that we have lost as of July first. We didn't make any money on it, so from a margin point of view, it's good news, but from a growth point of view, of course, it's negative.
But we think we have a good chance to compensate for that by other things as there is a good activity level in Spain. Plus, that there is also the fact that quite a number of companies have gone bankrupt in Spain in the last six-nine months. And it could be that others are—well, we know that there are a few others which are in very difficult conditions and circumstances, and that could be that even more of companies would go bankrupt, one or two or three in the coming six months. Let's see.
In any case, we are talking about sizable companies with between 1,500 and up to 4,000 guards, so quite sizable businesses, and those portfolio, all of a sudden, then come in play, and where competition and us can pick up the pieces of those portfolio which are attractive, while others could be then, you can attack in a different way, so to say, by offering a solution and try to find a better way to make money on the contracts that competition or those companies actually didn't.
So, that is, well, it's bad for those companies who go bankrupt, but it's good news for us because we can pick up pieces of those portfolios, and that allows us to, say, gain market share in a way, in a market which is, where people have, have, have some-- are, are coming to the end of a road because of they are just standing on one foot and, don't manage the cash flow. So good development also in technology area, and we are moving along very according to our strategy. Margins are fairly flat compared to, to the same period last year, improving in Spain a little bit, lower in Portugal and Peru, but all in all, on the same level.
Good news is also that the CBA has been agreed in Spain earlier than ever, I will say. I mean, usually it was okay last year, and the years before it was not okay. But now this year, it has already been agreed in July, which gives us plenty of time to manage that wage increase of about 1.5% as of January 1st, 2016. Cash flow is always weak, but still in line with last year for the first six months, and we should, as always, pick up during the second half. Net debt is a consequence of that. Less translation and revaluation. The big change of that came already before. So, the big money out is the dividend paid in May, of course, to the shareholders.
And other than that, no drama really on the net debt development. So that's in short and high speed the first six months. And if you have any questions, please follow instructions, and we'll be happy to try to answer those.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. So it's zero one to ask a question. The first question comes from Mr. Staffan Norberg at Handelsbanken Capital Markets. Please go ahead.
Well, hi, everybody. Given that technology is becoming a more important part of your business and your already established network of mobile security guards, what is the main reason for you not to more forcefully move into the household security and home alarm market again?
I mean, that—it's a bit—we are in the business-to-business structure, so to say, and to move into business-to-consumer is a whole different ballgame. It requires a total different way of operating and running the business than it is in the business-to-business relationship. So to do that, one has to have a huge respect for that business model. It's completely different, and we don't think that that is a viable solution for us to do that. So we, we're not going down that route. What we are investigating, if we can do business-to-business to consumer structures, meaning that we can supply a platform, so to say, and of course, our monitoring and mobile services to somebody who then is has a consumer relationship.
I mean, a telecom company, a utility company, or anybody like that, meaning that they would do the consumer relationship through the channels, from expertise, from the call centers, from the infrastructure, from everything that they have. But we do it in a—we do our piece of something that they will offer to the homeowners, where we can do the piece of the monitoring of those alarms, and we can do the call-out when something happens. So that is more attractive for us than going into a completely new ballgame, which is full of players already. So it's already a very busy area with a lot of people moving into the smart home consumer relationship. So we do not think that is a good idea.
It's just gonna cost a lot of money, and it's probably not gonna generate a lot.
Okay. Thank you. Then when it comes to potential acquisitions within technology, what are you looking for when scanning the markets for targets? And is there any specific area that you feel you're particularly weak in right now and, that you would like to strengthen up?
Well, we're looking for system integrators. We're looking for technology suppliers, not manufacturers. We don't want to manufacture or develop products. So we look for the brains who can put the things together in a good way, who hopefully also have a portfolio of existing customer base, video surveillance, video analytics, video systems, monitoring of that, and good system integrators. And then we cannot be too picky because then we won't buy anything. So sometimes we find pieces which are not exactly what we want, but they still, the main part of that company is still attractive for us. So that is the definition.
We're looking in Europe, primarily, including Spain and Portugal, and we're looking in, in Latin America to some extent, and, and in North America, in the U.S. in particular. So that's, that's—these, these are the area where we are primarily looking for these kind of companies. We, we have a number of those which are on the radar screen. Some are not for sale at this point in time, others are too expensive, and, and others do not fit our definition, really. It's too far away. But some are interesting, and those are the ones we are looking at. And, and to be more specific at than that at this point in time would be not possible. I mean, that is really what we... We spend a lot of time and efforts on that, but it's not that easy.
There are not plenty of those companies, and the ones who are attractive are not always available. But we need to keep going and be patient and nurture those relationships and try to accomplish that going forward.
Okay, noted. Finally, if we look at the security market and the competitive landscape in, in Spain now and compare it to before the crisis, what would you say the main differences are besides the bankruptcies, that you've already mentioned?
... I mean, the market has shrunk dramatically. I mean, you can make a guess, but I would think probably 25%-30% since the crisis. I mean, you go back four-five years in time, that's probably what we're looking at, and more or less what happened to us as well. I mean, we have laid off almost 6,000 people in the four-year period in Spain. So it's so the market and I don't think it's gonna come back. I mean, that's not gonna come back to the 30% that disappeared will not all of a sudden re-appear. But there will be a rebalance. There will be a growth in the Spanish market in 2016. I think that is pretty clear.
There's a very strong macroeconomic recovery and a strong development in Spain. So there will be a positive development in years to come. We are coming out of the crisis stronger than we went into the crisis. We were basically a manned guarding company at the time, and today we are a strong security company with a very relatively high content of security solution and technology competence in the company.
We are taking advantage of that right now, and we will be able to take advantage of it even more now when some companies who have been struggling for years and barely survived for the last few years are now coming to the end of the road, and they simply go bankrupt. There might be others to come, as I mentioned before. And that gives us - allows us to pick up the pieces of those portfolios, and some of them portfolios are impossible to pick up because that's the reason why they went bankrupt.
But at least we can use the strong competence we have today to convert those clients, those contracts into a different kind of a contract, and by that, being able to meet the demand on what the customer can spend, but we can still make money on the contract. So we are in good shape in Spain, and we are really ready to enjoy the remaining part of this year and next year in Spain. We are seeing growth in Spain. We are seeing margins improving in Spain, and I am quite positive about the remaining part of this year and next year in Spain.
Okay, thank you.
Next question comes from Mr. Rob Plant at JP Morgan. Please go ahead.
Good afternoon, Alf. Two questions, please. First of all, in North America, growth moderated from 5%-4% Q1, Q2, but the comp was 1% last year, 3% in Q1, 3% in Q2. So given your positive comments on North America, is the moderation simply down to the tough comp? And my second question is, last week, Prosegur mentioned a 2.5% increase in salaries from the collective agreement. Securitas is talking about 1.5%. Is the difference due to the, the different business mix of the two companies? Thank you.
I mean, I'm not sure 100% I understand your first question, so correct me if I'm wrong. But I mean, we had a good growth in the second half last year, so we meet a little bit tougher comparatives, of course. Yeah, that's what I mentioned with my comment before. I cannot comment how Prosegur is calculating. I mean, 1.5% is what is written in the agreement, and if there is anything else missing, and that they have a different mix or structure or impact on them, they have a cash handling business, we don't. They are in some minor extent in the home alarm business, we are not.
I don't know if it's, for whatever reason, what could it be? I don't know. At 1.5% is what is written in the CBA.
Just to clarify, Alf, thanks for that. My first question was, in Q1 last year, you had 1% growth, then 3% in Q2. This year, you had 5% and then 4%. Is the moderation this year simply because of the tough comp? Because your comments seem quite positive. Do you really-
Yeah, yeah, yeah, of course, of course. You meet tougher comparatives.
Yeah.
Yes, exactly.
Yeah. Thanks, Alf.
Thank you.
But I should also say, I mean, that has to be remembered. That's why I'm mentioning it, to give you some, I mean, to give you all the cards on the table, so to say. But at the same time, there's a high activity level in the U.S., and you win and you lose, and one or two contracts can make all the difference, compared to... And that can have quite an impact on what is the organic growth going forward. But I'm not going to speculate in the next two quarters. But anyway, having said that, I think it's important to mention that the comparatives are what they are. All right?
Next question comes from Ms. Sylvia Foteva at Deutsche Bank. Please go ahead.
Hi, good afternoon, everyone. Three questions, please. First, on, the U.S., could you please clarify how big the impact from ACA was in this quarter and whether this should accelerate at all, at all going forward in terms of the positive impact on the margin? And just relating to that, could you please comment on the pressures on hiring in the U.S., which regions, whether you're seeing pressures in any particular end markets as well? Then secondly, could you please comment on the situation in France? It used to be one of the markets which you were kind of pointing out as a country that is growing quite well, but there was no comment in the press release today. Could you please comment on the revenue growth and the profitability in France, please?
And then finally, on your acquisitions, and CapEx, I can see that you're probably spending a bit more on CapEx than I expected, and obviously, you're flagging acquisitions as well. Could you talk about how you allocate capital to each of these and kind of how big the acquisitions might be? Thank you.
... Okay, we'll give it a try. SUTA rates, I won't specify it has an impact, so that's why we're mentioning it, but I will not—I do not intend to split the difference in the margin in Q2 in the U.S. of the 0.4 better than last year, how much is one or the other. But if we mention something as an explanation, it means that it normally is 0.1 or more. But otherwise, we will not use it as an explanation or as a reason. So the SUTA rates have an impact, and that's why we're highlighting that. The employment pressure, we haven't seen it yet. I mean, we feel that it's gonna happen. It's very well around the corner.
Of course, it's different in different regions, cities, et cetera. It's more a general comment. It's around the corner, probably because unemployment is coming down. We haven't seen it yet. We have no wage pressure yet in the U.S., but it's probably gonna happen. And it will, of course, be in areas where the unemployment rates are very low, where it's hard to find qualified people, et cetera. And we are prepared for that. I mean, I'm just saying it. It's not a warning, it's not a red flag, it's not a yellow flag, it's just a fact.
And the good news is the SUTA rates comes down if that happens, and we are usually pretty good in managing these situations, and it's not gonna happen all over the place at the same time anyway. France is flat the first six months on the organic sales growth, and it was actually negative a couple of percent in Q2, so a bit negative in France. But margins are right, I would say, generally speaking, in France, and we are doing well in the French business, managing our and protecting our margins. Of course, it's up and down month to month, but basically, roughly speaking, margins are okay in France, but the top line is not developing very well in France in Q2. No, that's a fact.
CapEx, we are spending quite a money in CapEx, in the sense that we are investing in our customers with solutions, and we are very happy about that. We love to spend this money. This is happy, happy, happy CapEx. And it's good news that that number is relatively high, because it means high activity, and we spend the money upfront, as you understand. I mean, when we have to invest in the equipment, and then we start generating the revenues in the three-five years to come. So when that number is increasing, it's a sign that things are moving in the right direction for our solution and sales, where we basically double the operating margin compared to in the traditional guarding.
Was that your questions to us? Did I miss something?
Yeah, thank you very much for that. It's very clear. I was just asking, kind of, how you're going to allocate capital between the CapEx and the M&A spend?
Specifically, we make an acquisition of any size, we will—we usually disclose the enterprise value. So then you will have that information, and in the report, there is also a section about acquisitions, where you'll find more details about those. So right now, it's very little about acquisition. It's basically just the normal organic CapEx that we are spending in the usual stops, I'd say, and in the growth of the solution and technology contracts.
Thank you-
There are a lot of details on one page in the report as well, where you find some more details on acquisitions. If you have any more specific, more detailed question on that, then please email Micaela, and she will try to help you out and to be more specific, as far as if there are anything that you would like to know a little bit more in detail.
Okay. I was just asking more, kind of, going forward, how big the acquisitions in the pipeline might be?
Yeah, that we don't know. That we don't know.
Okay, fine. No worry.
We will be happy to see that it will. We have, I mean, we have a strong balance sheet. We have a lot of ammunition power in case we would like to use it. We have no covenants. We have in our financing, we have plenty of financing. So if we find a good target, then we have the power to make those acquisitions. What it will be, you never know. I mean, something can materialize, and it cannot, and we are not in a hurry. We will take our time. We will do the right things and protect our values.
I cannot make you a forecast, and even if I wanted to, I could not make it, because we don't know how that's going to develop, so I cannot give you a number going forward.
Great. Thank you very much for that.
Next question comes from Nicholas de la Grense at Bank of America Merrill Lynch. Please go ahead.
Afternoon, guys. Thanks very much. Three questions, please. The first one, just in terms of technology adoption and rollout in the U.S., I think in previous quarters, you said that was a bit slower than you'd hoped, but it sounds like you're being a bit more positive now. I was just wondering if you could say kind of what's changed, and what level of growth you're seeing in that, in the U.S. versus the rest of the business, just relatively? The second question is, just in terms of the Spanish wage agreement, I was just wondering, does...
Is that kind of a sign of what you would expect to see across the rest of Europe, or is Spain a very kind of a different case, and there's just generally more wage pressure there? And then the last point, on the loss of the aviation contract in Spain, I was wondering if you could help, kind of quantify what the impact of that might be, as we go into Q3. Thank you.
... The contract in Spain is the airport in Madrid, and it's in the range of EUR 15 million-EUR 20 million annual sales, negative margin, operating margin, so bad for top line, good for the bottom line. That's it. The Spanish CBA, 1.5%, is what we expected. We think it's a good agreement. It's manageable, we think. And what the wage, there's not a lot of wage pressure, really, with a few exceptions. But generally speaking, it's hard to predict what the wage average wage level will be in Europe, but probably I would guess 1.5%-2% to give to make a very rough guess, but very hard to predict.
In the U.S., yes, good speed. I mean, if you'll put it in perspective, we spent an awful lot of time in the past two years to really manage the ACA, the healthcare reform, and put a lot of our management resources in order to manage that cost problem that we had nightmares about from time to time, and big worries about. But that took a lot of time for management, and to spend the time on the technology and the solution drive at with the same effort and the same energy was not as easy. So now we have the ACA. We have managed that. It's now done and managed in a very good way. And now we are really speeding up the efforts into the technology and solution side.
So we have picked up very, very well, especially in the last six months. We have also put more people in this organization, very good people, very good team, supporting the regions in a better way than we did before, and that starts to pay off. So, really good speed, and we are—I mean, we were, it was almost nothing in the U.S. a few years ago in technology and solution, and now we are in a range of up to 3% of sales, and with a good increasing pace.
So it's not a lot yet, but still, it's for us zero compared to 3% is a big number in the U.S., and it starts to pay off on the margin in the U.S., where we also see a better operating margin on those contracts that we convert or win with the solution speed. So full focus from management, a game changer in a way, in front of the clients, and a good pace and a good self-confidence that we are able to start to see some good success in that area. And that has been really changing in the last six months.
Thank you very much, It's very clear.
Next question is from Mr. Rajesh Kumar at HSBC. Please go ahead.
Hi, good afternoon. It's Rajesh Kumar from HSBC. A few questions, if I may. First is, when we look at the technology growth, a couple of details might help us model it better. First, is the contract billing any different from standard security contracts in terms of invoice periods or whether you include the product price in the bill, et cetera? Second, obviously, you did a lot of such contracts historically with Niscayah, now Stanley Black & Decker, as a subcontractor. How much of that have been moved to in-house, and what is the impact of that on numbers? And finally, 64% churn in North America, should we worry about that number?
Okay, sorry, what was your last question?
The staff churn in North America. I mean, do you worry about that? Do we need to worry about that number?
Okay. Well, a quick answer, no. But there's always a however to any question. But, I mean, generally speaking, not, and we are used to managing these numbers, and it's not something which is extraordinary. It's increasing, and it's also maybe a sign of the reasons I've explained before. But we are good in this. We are able to manage that well-equipped. It's very much the way our machine is structured. So, yeah, to make it simple for you, no, don't worry about it. On the contract billing question, I mean, basically, I mean, it's not much different from... I mean, it's basically not different from a normal guarding contract in the sense that it's a flat fee per month normally.
It's the same billing cycle, the same payment terms, et cetera. The difference is, of course, that we need to invest in the equipment upfront and then amortize that throughout the contract length. What is the good news is normally that those contracts are much longer than our normal contracts. I mean, many times we would have a one-year contract on a guarding contract. Even if we keep it for many years, the contract length is shorter. Now we would have a three- or five-year contract, so it gives more stability, and it, in the long term, it would also improve our retention, hopefully. So the billing cycle, pretty much the same. Niscayah, it wasn't that much business after all that was outsourced to Niscayah.
We have insourced quite a bit of that, and that's a part of our growth, but it doesn't make much of an impact to our numbers. And we still outsource to the former Niscayah actually, in a few countries where they still support us, especially on the maintenance portfolio, where we have a good tradition of doing that. So when you look upon it from the subcontrating external world, and on aggregate level, it's small number, relatively small numbers, which are negligible, let's say. But yeah.
Just because-
Read the answer to the question.
That really helps. We understand it clear, more clearly now. In terms of the Niscayah bit, if we just have some guesstimate numbers on what proportion was with Niscayah and how much you've moved in? So when Niscayah was doing a subcontracting thing, obviously your margins were smaller. And you were, were you booking it on agency basis, or were you doing it at a growth basis?
I prefer not to guess on that. I don't have that number.
Okay.
We don't follow it in this way, so it will be-
Understood.
I mean, we can have a look a little bit more in detail. I cannot from the top of mind, and I prefer not to guess.
No.
straight out of the blue. So let’s give us a few, a day or so to have a look, and then the call and we can see if we can give you some more guidance. I doubt it, because we don’t follow it in this way. So we don’t report on it, we don’t measure it, we just we know that we insourced a bit.
Mm-hmm.
We still use them as subcontractor. The numbers are productive, relatively small.
Mm-hmm.
So I don't think it will give you much of a guidance, but we'll have a look, and maybe we can give you some more, and if we can't, we can't.
Thank you very much. I'll follow up later.
Next question comes from Mr. Michael Holm at Danske Bank. Please go ahead.
Yeah, given the strong growth you're still showing on the technology side, is this a margin driver in the European business, or are margin not yet where you want them to be in that part of the business due to startup costs? And my thinking-
Yeah. Okay, go ahead.
Could I take a second one directly? It's just related to the pension one-off in Sweden last year, if you could quantify how large that was.
It is a margin driver. The problem is that we have erosion on... I mean, in Europe, I mean, as a group, we have stopped giving that proportion, but I mean, roughly speaking, 10%-15% of our total sales are in that range, is in technology and solutions, but 85%-90% is still in the guarding business. And you have a continuous margin erosion in the guarding. And then on top of that, a few mishaps, let's call in Sweden and in Netherlands. So even if it is a margin driver, it's still too small to compensate for the margin erosion in the European business as such. So yes and no is the answer to the question.
Okay, but on the margins when-
The one-off in Sweden, I prefer not to quantify those, if you don't mind. Well, for the same reason as I mentioned before, we mention it because it has an impact on more than point one or more, but prefer not to quantify that. We took that, we got those money back last year, and we got, we accounted for a piece of it in Q2, and a piece of it in Q4, last year, but prefer not to give you exact number.
Okay, if I could do a follow-up on the margin erosion on the manned guarding side. I think you said on the capital markets day two years ago that roughly 20 basis points-30 basis points annually was the trend for traditional manned guarding. Is that still the case?
Yep. Yeah, that's still the case. That's still the case. And then, from time to time, we have had a very difficult situation in the Netherlands, which we have dealt with, and it's gonna be improved in the second half, both from a top line and from a margin point of view, by the actions we've taken. We did some cost cut, cost reductions. We have made some reorganization. We had a small business that we have sold. We have acquired another small technology business to support our business there. Still relatively small, but still, actions taken. So a whole bunch of actions taken in the Netherlands that will improve and correct the situation in the first place.
There are always some mishaps in the business, and unfortunately, that dragged the margin down, so we are a bit disappointed ourselves on the margin in Europe in the second quarter.
Okay, thank you.
Next question comes from Mr. Henrik Nilsson at Nordea. Please go ahead.
Thank you. Afternoon, guys. A couple of questions, please. Firstly, coming back to the investment level, are you seeing a step up in the pace of installations, or should we look at this as a temporary step up?
We see, we're seeing increased activity, absolutely. We do that in North America, in Ibero-America, in Europe, things are moving along well. We have a good pace. Some contracts are quite heavy. We have won a few contracts, which are really big ones, and where we are investing a lot of money, and they are unusually heavy in CapEx, actually. But we think it makes a lot of sense as a reference, as a strategic, very interesting contract where we can develop that for... And it's a multi-year contract. I mean, some of the contracts we win are up to seven, eight years contracts.
Then, of course, we have to amortize it at a relatively low, and they are long because it's a big CapEx investment, so to make the annual cost more reasonable for the customer. So, it is a good pace in the technology side, and a sign of that is the CapEx, yes.
... So you think it's fair to expect the same level of investment going forward or?
Predict that, it depends on the mix, but, so I prefer not to do that. But I, I mean, we are, we are doing well. We are moving on with the solution technology strategy. It will drag cash, and what it will be for the next two quarters, I prefer not to put a number on that.
Okay. Secondly, if I remember correctly, you mentioned on the CMD that the CapEx to sales in the solutions and technology contract is roughly 15%. Would is that still a correct assumption to use, you think?
20%. 15%-20%, yes.
15%-20%. Okay, and lastly, if I may, the 30 basis point margin decline in Europe corresponds to roughly SEK 25 million higher costs on, on my calculations here. How much of that relates to the training you mentioned and social costs and Netherlands, respectively?
Same, same answer. I'm sorry, my friend, but I will, I will, I'll be a bit stubborn and stick to my answer. We don't, we don't chop it up into pieces. We, we, when we use an explanation, it's usually point one or more as the reason for the margin, otherwise it will be too small to talk about. So, you have these reasons given here, the training, social cost, you have the Netherlands, you have a refund of pension, and but I prefer not to give you exactly what is the specific number for one, for each one of those. But, I mean, yeah, you can, you can guess based on what I just said, I think.
Okay, and another last question, if I may. The higher training costs in Sweden, is that something you think we should expect to reverse next year, or is it temporary?
I don't know. We know it depends on, I mean, depends on the situation. The Swedish economy is doing fairly well, and it's hard to get good quality people. You can get bad quality people, but we don't want those. And in certain areas, Stockholm being one, if we don't pay for the training to fill all the temporary vacancies during summer, we will get bad quality people, and that is. I don't think the customer will appreciate that. So the only way to get the right quality is to pay for those, and that happens only in Q2, because that is when we train the temporary people that we use for filling summer vacancies.
So it's not a quarter-by-quarter thing, but what will happen next year depends a little bit on the availability of people, and the Swedish economy and, and what it looks like a year from now. But, if it sticks to the way it is right now, it's probably going to be similar next year. I would think so.
Okay. Thank you.
Next question comes from Miss Daria Fomina at Goldman Sachs. Please go ahead.
Yes, hello. I have a question on technology segment as well. A bit on the competitive dynamics there. As you are moving clients to a new, new technologies, do you have a feeling that that market is, as well, actually is a bit more aggressive? In U.S., for example, we have Verizon, Time Warner, Comcast, pretty much all the telcos offering technology-driven solutions supported by local response force. Do you think that while initially you don't feel that competition, it will come through and, add additional pressure on your profitability from that contract?
Also, on your comment that you said that you're not interested in going to B2C, but interested in looking at becoming a platform or providing a platform for B2C companies, do you have an understanding of where your software platform stands compared to the likes of Alarm.com or iConnect that are doing that at the moment and are aggressively investing into the market? And my second question would be on CapEx for technology segment. Just trying to understand what kind of investments are required for you to move to this technology solution for the client. If you assume, let's look at just the two or three first years of this contract before you amortize the entire equipment, what percentage of the revenue from initial contract you need to invest?
You said that in some contracts, you have to make them seven-year loan to make it affordable for the client. If you can give us, some number, I know, like, around 10 years ago, in your mobile and monitoring, you had 6% CapEx to sales. I know it's a very different, time and very somewhat different business, but nevertheless, is there some number that, we can, we can think about?
Ballpark figure is the 15%-20% of sales, but that is the ballpark figure. So, of a total contract is the piece of the CapEx. That's... Of the total sales of a contract, that would be the CapEx, let's say. That's the rule of thumb that we have used so far. Sometimes we have to go higher than that, and then we will drag. If we go to a higher number, we'll try to extend the contract for more years, let's say. I don't have a better number to give you on that one.
On the competitive situation on the technology side and what's happening there, of course, we will probably face down the road new players coming with different ideas of how we can approach this market. It's not that easy to do that, and we, it's not nothing that we worry about now, it's nothing that we see right now. The competitive landscape is fairly similar, I would say, in North America as it is in Europe. The manufacturing, the equipment suppliers, they, I mean, they will lack the...
I don't think they have interest or at least they will lack the infrastructure to serve a complete security solution to the customers, because it's not only that you have a great technical solution, you also need to have the manpower piece of it, and you have to be able to integrate that and connect it to your monitoring, do the response, do the advice, do the risk analysis, and do the whole complete package of how to optimize the total security solution for the client. That you need to be with your foot on the ground in order to be able to understand that, and you need to have a lot of experience with the clients to be able to be good in that.
I think there we have a strong advantage compared to new players coming into this field. We haven't seen anybody, so to say, subcontract in regarding and trying to put that solution in place. I mean, not in any substance yet. Could come, could happen, but not something that we worry about, for at least not in the medium term. But could, of course, potentially be a threat down the road. When it comes to your question on the B2B and B2B2C situation, I mean, parity, we are in the very early phase, early stage. We are investigating a number of options of how we should approach that in pieces or in a complete package.
We are exploring those options, and it's at this point in time too early to be more specific. We have put some people full time on this subject, and we are spending quite a lot of money and time to exactly understand how will we approach for us to be able to generate what we primarily are interested in, namely the monitoring piece and the mobile piece too, because it's good business, good margin business for us, and where we have a competitive advantage compared to basically any player in this field. Our prime interest is to generate a channel, so to say, a flow of mobile and monitoring businesses.
How far are we gonna go on that road, and what we need to do and not to do, and with whom to cooperate and not to cooperate, I prefer to, to wait to comment to that. We have some ideas. We speculate, we work in different work streams, but nothing to be specific on yet. But definitely it's a possibility for us to go down that route, and in one way or the other, find those volumes. That's gonna come from those, the whole smart home boom, that's gonna happen around, at least in the Western world, in the next five years.
And that's gonna create a lot of need of not only having all kinds of nice things in your home, to monitoring your fridge or monitoring your activity in your home and be able to do a lot of things remotely from your mobile phone. It's also going to require that somebody monitors that when you're not at home, and somebody does something when something happens. And that's the latter part, is what we are interested in, trying to grab a piece of that in a business to business and business to consumer, B2B2C relationship of some kind. Early stage, but interesting, and we are spending money to explore that.
Understood. Thank you.
Next question is from Mr. Karl Green at Credit Suisse. Please go ahead.
Yeah, thanks very much. Just in terms of your technology CapEx, can you indicate how much of your systems and equipment is being sourced from Asia or other low-cost OEM sources? And also just in terms of that, are you seeing any noticeable levels of unit cost deflation on the equipment and systems that you're procuring?
I mean, usually this equipment, it can become cheaper and cheaper and better and better every year. And we source it from the large suppliers in the world. Cameras, our main source is Axis, Swedish Canon, nowadays company. So but we also use the other major camera suppliers. Basically, we are very—I don't know where they are manufactured. I cannot answer that. I guess they are manufactured in some lower cost environment, I would suspect. But, I mean, we're sourcing it from the larger players, and where this is manufactured, I simply don't know.
Okay, but it is fair to say that, you know, for every $100 of CapEx on technology equipment, you're getting effectively more equipment each year, so that CapEx increase actually in volume terms-
The camera becomes better and better and cheaper and cheaper year on year. Yes.
Yeah. Thank you.
Next question is from Mr. Rajesh Kumar at HSBC. Please go ahead.
Hi, sorry, a couple of follow-ups. In the U.K. next year, you've got a big wage push coming through. Have you started having negotiations with your customers about that? Second, just a minor technicality. All these seven-eight-year contracts which you're now signing, do they have break clauses in them?
Well, I mean, usually, I mean, the contracts, if they are three or five or eight years, they will look similar. So it means that, I mean, we usually don't have a right to break the contract, but we never I mean, why would we do that?
Yeah.
The customer, in some cases, could break the contract, and then they have to, they have to buy the equipment at the residual value at that point in time. That would be, I would suspect, the normal. That would be, I guess, the normal, let's say, scenario. But usually I don't see why it would happen. But if that happens, of course, then if they... Then they will have to, we will eliminate the risk of sitting, being stuck with equipment that no one will pay for, for X number of years. U.K., yes, of course, we have to keep an eye on that. This is the same for everyone.
Whatever happened in many countries with minimum wage or other decisions made by the industry or by legislation, we have to deal with that. And again, just like we have already said today, that is our DNA. We are good in that. And it's, of course, it helps when everybody has to play by the same rules and have the same problem to manage. So yes, it's on our agenda. Absolutely.
You're expecting what, 8%-10% increase in salaries?
I don't know. I don't, I don't know. I don't, I don't have a number to, to communicate on that.
Okay. Thank you.
Next question comes from Mr. Ed Steele at Citi. Please go ahead.
Afternoon, all. I've got two questions, please. First of all, Alf, you kindly gave us the value of the Madrid airport contract you lost. Could you give us the same number for the expansion of revenue at Schiphol, please? That's the first question. Second question, could you maybe just talk us through what went wrong with the Madrid contract? I know you've had a relationship there since the new terminal was opened a decade ago. So why is it no longer profitable, please? Thanks.
I mean, we basically double our presence at Schiphol, and the extended volume is substantial. It's north of EUR 10 million, but I won't be more specific than that. So I prefer not to give an exact number of that. So but it's north of EUR 10 million per year as of at which we started up in June. Madrid has been a negative because of course, when we started that contract, we had certain expectations on the passenger level, and passenger levels have not been on the level, have not developed in...
Our revenue is partially linked to the number of passengers, which, due to the crisis and less tourists and people flying to Madrid, has been quite much lower than we expected. And maybe we were probably also a bit too optimistic on what we could do and achieve with this contract. So in the end of the day, these factors together made it a non-profitable contract.
Okay. But do you know who won that contract, please?
Yes, I do. But, I don't know if that, if I should comment that, so I prefer not to maybe. But I think if you Google a while, you will probably find it.
Thank you.
Or you will see, next time you're in Madrid, you will see it for certain.
Thanks a lot.
We have a question from Mr. George Gregory at Exane BNP Paribas. Please go ahead.
Hi there. Three questions, if I may. Going back to the margin drag in Europe, wondered whether you could roughly quantify the drag in Q2 from the increased training costs. And on that subject, whether Q2 included any of the increased social costs, please. Secondly, I wondered whether you could elaborate a bit on the increased competition in the Netherlands. And finally, Ibero-America. I just wondered whether you would have expected to see more progression in the margin there, given the restructuring in Spain last year, or rather, whether that is sort of broadly in line with your expectations. Thanks.
The development in Ibero-America is basically in line with our expectations. So we, so that is, that's moving on as we expected it to be. We have had a bit of a decline, which we didn't expect in Peru, but so that mitigated a little bit with the positive in Spain, but basically, Spain is moving according to plan. In our business, things doesn't change very dramatically overnight, so it takes it step by step, year, quarter by quarter, month by month, so but it's moving according to plan. Was held back a little bit by a decline in Portugal and in Peru. And we had some one-offs and some issues in Peru that we need to manage, so...
But anyway, Spain is developing, and that is a big machine, and Spain is 40% of a division in sales. So of course, what happens in Spain will have an impact both on the top and the bottom line in the Ibero-America division. Again, sorry about that, about the training. I won't specify with, you might heard before, but, I prefer not to split that in money. It has an impact, that's why we mention it, and then normally 0.1 or more, as using it as a reason. But social cost impact in Sweden is relatively small in Q2. It will have more of an impact in coming quarters, and we need to find a way to deal with that, on a medium-term basis.
The Netherlands, a tough climate, tough situation in the market. The negative growth will turn into positive growth second half, because that we have been successful, primarily in Schiphol. That helps us very well. But also from a bottom-line point of view, by the actions we have taken in order to have a better situation in the second half, and quite a number of actions that the management has taken in Holland. So I think we're dealing with the situation in a good way, but we have suffered some pain in the first half year, and it's a tough market. What happened in the Netherlands, compared to...
I would say any other market in Europe in the last few years is that first, there has been quite because of severe macroeconomic situation, difficult situation for many industries and companies and office in offices. There has been quite a number of cutbacks on the services, including security. And secondly, the government or the public sector insourced, which is contrary to all other countries. So they started to insource services in a number of sectors in the public sector. And that, of course, the available market for the private security industry shrunk quite dramatically.
We have had some tough times in Holland for a while, and managed very well compared to the situation that some of our competitors have had, where they have lost quite some big contracts from being a big part of the portfolio to being totally insourced by the government. So then, of course, then you have an overcapacity in the market all of a sudden in the private security, and then people start to fill that overcapacity and find jobs for guards by being more aggressive on the price, et cetera, so it becomes a bit of a vicious circle. We have dealt with that. Second half will be much better than the first, but it has an impact when we compare the first half this year and the quarter specifically, compared to the same period last year.
Okay, thanks. Thank you.
We have a question from, Miss Sylvia Foteva at Deutsche Bank. Please go ahead.
Hi, two quick follow-ups, please. I wanted to ask on the French negotiations or the wage negotiations. I think you previously mentioned that was gonna be decided in Q2. And then secondly, apologies if I've missed the outcome, but I also thought that you might update us on the European Commission contract. Thank you.
France, there was no wage increase in Q2. It will be a wage increase in the range of 1% of, as of August first. So that's France. European Commission, no decision yet. We are participating in the tender, answer, decision expected probably in Q3.
Perfect. Thank you.
There are no other questions at this time. Please go ahead, speaker.
Okay. Thank you very much. Thanks for all your questions. Thank you for calling in. Bye-bye. Thank you.