Hello, everyone. Very welcome to Securitas' full- year report for 2014. I will move on, as usual, fairly quickly, and then allow for the questions, as we always do. We are pleased with the quarter. We had a good fourth quarter. We are very pleased with the growth. Very good growth in the quarter, 5% for the group, but in all the divisions, good growth. Good growth in North America. We had a very weak quarter, we should remember that, in Q4 2013, but anyhow, all goals count. So we had a good 6% in the fourth quarter of 2014 in North America. Good growth in North America, but also good growth in Europe and in Ibero-America. So we are entering 2015 with a good speed.
So that, that's good news. The market in North America has been growing in the range of about, probably in the range of about 3% in 2014. We expect it to be in the same range for security market in 2015, 3%-4%. If we look in Europe, Spain will be flat, zero. That means that the market will be on the same level in 2015 as it has been in 2014. It will not decline. It will not increase. It will be the same level, so I'd say the zero increase of the security market. France, the same, probably U.K., was in a similar way. So Europe has been probably in the range of 1%. It's very difficult to estimate Europe.
It's so fragmented, but probably in the range of 1% growth in 2014, and it's probably gonna be in the same range in 2015, the security market. Then what happens to us is a different story. So good growth in the quarter, good speed entering 2015. That's good news. The Security and Solution Technology, we have a run rate of 10%. We have reworded or changed that. We will probably not reach the 18% target run rate by the end of 2015. So we have, and for two main reasons. One reason is that the outcome of the ACA, the healthcare reform in the U.S., was not as we expected when it comes to the technology content or the use of technology as a way to mitigate costs.
So that's one key factor that we already warned for in Q3 and have been talking about throughout the process. The other factor, which we can live with, we like a lot, is that the guarding contracts, we have a good growth in the guarding contracts, so then the relative share of a small piece, which is still the solution and technology, will be relatively smaller in relation to total sales, where we have good growth in the guarding piece of it. So we have changed that now, and we will now follow it in a different way, saying what, how much is it in absolute numbers in security solutions and technology, and how much is that growing?
We grew that 28% in 2014, and we think we can continue to grow that at least in the same pace in 2015. The margins are okay. Good margins in the quarter, better than last year in North America and Europe, and if we adjust for the restructuring in Ibero-America, it was actually slightly better than the Q4 2013. We have been able to mitigate the cost increases. We are compliant with the healthcare reform, the ACA, in the U.S., and we have mitigated the cost increases in... It's a long story, a million different ways, but the bottom line is that we are good. We have been able to cover the cost increase.
8% increase in earnings per share, a good cash flow in the fourth quarter as well as in the third quarter. So, yeah, we're happy with that, and we reached what we were expecting to reach when it come to the cash flow in for the full- year. Then you have to remember that we also are investing in technology and solutions as a part, which is eating a part of the free cash flow. Dividend on the same level proposed by the board, and we have reworded, I should stress reworded, we have not changed, but we have reworded the dividend policy to make life simpler for everyone and relate it to net income instead of free cash flow, because using free cash flow will, to some extent, confuse.
We have to explain how much we are investing in CapEx, in technology and solutions, et cetera, et cetera, et cetera. So we think it's easier to relate it to net income than relate it to free cash flow. So we have not changed it. We have reworded it, and as you see, the dividend is proposed to be on the same level. Also important to say, I usually jump this slide very quickly, but now I will stop here for a second and highlight for you that we have reassessed the tax rate for the full- year. We have been using for previous years 2013, and also throughout the first three quarters of 2014, 29.8% as the tax rate.
But because of some good outcome in a few old tax cases that have been there for a while, we have reassessed the tax rate and adjusted that in Q4, so of course, it drops quite dramatically in Q4, isolated in the quarter, but for the full- year, from 29.8 to 28.8, which is also the level that we expect for 2015, so an improvement on the tax rate by 1%. North America, I already commented, but very good growth in the quarter. Very pleased with that. Good development in all areas, especially the five guarding regions, which are driving the guarding contracts very well right now.
The net impact of the ACA for 2015, we still expect, as we said in Q3, to be in the range of about 1%, including all the ways that we have to handle the last 20% during the fourth quarter. So yeah, we are good and ready for an exciting 2015. On the margins, also strong in the fourth quarter. Good development and improved compared to last year, and I think I've commented the rest already on the initial slide. In Europe, we had a good growth, 3%. We grew 2% for the full-year, which is probably slightly better than the market.
I mean, I was saying that about 1% growth in the market, so we probably took some market share. We have had a good development in France, grew 3% in the fourth quarter. Norway, very good, winning some good contracts, very good development in Norway, and Turkey continues to be very strong, has been for a long time. So good organic growth in those countries. But it's also an effect. It's not only that we are lucky or successful on a few cases, I also strongly believe that our strategy is working.
I mean, when we have a story to tell, and it's not always that we sell a technologies or a security solution, even if we are trying to do that, but still the fact that we can talk about it and have a story to tell to our clients, gives us credibility and interest from the customers, even if it turns out to be a continuation of a guarding contract. In the end of the day, we're still happy with that, and then maybe later on, we can convert it to a security solution. So, our strategy is working. We have a good story to tell. We are working very efficiently in that. We are improving the speed. We get more and more people on board.
It's simply a good strategy that will continue, hopefully, to allow us to take market share and grow faster than the market, but that remains to be seen. But at least that's our philosophy. Oops, sorry, I went the wrong way here. The margin was also good in the fourth quarter. Fourth quarters are always a bit rocky, but anyhow, all goals count. So, we did have a good quarter in Q4, 6.4 versus 6.1. So it improved in the last quarter. Ibero-America continued to be good growth, very much fueled, of course, by Latin America, which is still over 20%.
Good development, especially in Argentina, which is, to a large extent, inflationary, but still, real growth also in Chile, and Peru, and Uruguay. In Spain, it's still a minus, but if you allow me to say so, it's not as bad minus as it has been. I mean, we have a positive trend, and step by step, getting closer to zero. And again, I repeat that I expect the Spanish security market to be zero growth or flat compared to 2014 in the coming year. We have also made an agreement with a collective bargain agreement, which is important, already announced in Q3, of 0.5% wage increase on bottom of this page.
Which is very good news, because first, it's a reasonable number, a responsible number, but it also allow us to work with the pricing on the market with good, good. Allow us to be, so to say, more ahead of the game than we usually are when we get an agreement in March or April, which has been the case for quite some years. So that is a good thing for, in preparation for 2015. We did the restructuring. It's done. The costs are taken. There is no tail on that. Everything is done in Q4, and now a new organization is in place and operating, so nothing else to do that. We do not expect any further restructuring measures to be needed in Spain.
Well, the rest are basically facts that you are well aware of since before. Cash flow was good in the quarter, as well as in Q3, is the usual pattern. Free cash flow, SEK 1.85 billion . And then you have to remember, if you look a little bit further up this slide, that we increased the CapEx on the investments, mainly in security solutions with SEK 288 million. So that is, yeah, in the- That is also to be remembered when you look on the free cash flow line, compared to last year. So good, good cash flow for the full-year and in the fourth quarter. And I should also mention, actually, that when you look on free cash flow to net debt, it says 0.18.
We have a target of 0.20, but as you know, the Swedish krona has weakened quite dramatically in the last part of 2014. So if we use the same FX, both on the balance sheet and the P&L, we will be basically on 0.20, actually. So but because we have different FX in the equation, then that becomes 0.18. So we are okay compared to our target, I would say. Net debt, we had a real reduction of the net debt, but because of the weakening of the krona, especially in the end of 2014, it increased mainly because of the translation and revaluation of the currencies to the dollar and the euro.
All right, so I think those were the main items. Good fourth quarter, we are pleased with that, and good growth and decent speed when we are entering 2015. So we'll see if there is anyone who has any questions.
Ladies and gentlemen, if you have a question for the speakers, please press zero-one on your telephone keypad. Our first question comes from Sylvia Foteva from Deutsche Bank. Please go ahead.
Hi, good morning. Thank you for taking the question. I have three, actually. First of all, I was wondering if you could just talk a little bit about the dividend, the change in wording on the dividend policy. Is that 50%-60% of reported net income? And how do you kind of cross-check that versus your net- debt- to- EBITDA and your free cash flow to net debt targets as well? And then secondly, could you talk a little bit about the French market? You've grown it 4% organically and 3% organically in the last two quarters, and we're seeing staffing companies and the staffing market still decline quite significantly.
So I was just wondering if you're just winning a lot of market share from small players, and really, is that driven by particularly large contracts, or is that due to just overall strength in market share gains? And thirdly, another slightly technical question, we have seen the net debt increase by SEK 1.1 billion in this year, and obviously, this from, from FX. And we know that the FX rates have moved significantly, which presumably will be a strong benefit to your top line, but how much can we expect that net debt to increase again in 2015? Do you have any hedging against that, or is the impact just going to flow straight through? Thank you very much.
We changed the dividend policy for the reason I explained before, and we think this makes sense. This is quite the usual practice, that you relate the dividend to the net income. I think many companies do it in that way. We have been a little bit odd in our way of putting it in relation to free cash flow. I mean, having—and that, I mean, of course, we will always look on the free cash flow and how we are doing on the cash flow side, and we have a target of 0.20 free cash flow to net debt, and we keep that target. So that gives us the limits, let's say, on the leveraging of our balance sheet.
So, and then we also put a range to not be too exact. We had an exact number before, which we never follow. It was always a few percentages different. It's just so we think it's more relevant to have a range. It's a rewording. It's not changing or increasing or decreasing the dividend policy in any way. It's just more practical way of wording our dividend policy. That's how we have looked upon that. We still think that we need capital in order to invest in our strategy. And we think we have good opportunities to do that. We also have possibilities to make acquisition of technology companies. So all of those things will be taken into the equation, let's say.
So it's more, it's not any change, so it's more a rewording to make it simpler to follow our dividend policy. In France, we have 3% organic growth in the fourth quarter. We are taking market share. We have done that in 2014. I cannot pinpoint any specific large contract. We have won some medium-sized contracts which have helped us, but we have also, we're also doing fine with small, medium-sized enterprises. We are selling in a still low pace, but at least an increasing pace of solutions, video solutions, to the small, medium-sized enterprises in our mobile business in France. So that is moving on in the right direction. I would say, I mean, sometimes we're lucky, sometimes we are not.
We should not over-dramatize this, but we have overall been—we are strong in the French market, we have a strong team, and we have a good story to tell, I would say. So I think it's... Anything? No. So, I mean, generally speaking, we have a, we have done well. We have a, we have been—we have an overall strength, using your words, in the French market. I don't expect France to, as a security market, to be growing. It has not been growing in 2014. I don't think it's gonna grow in 2015 either. It's gonna remain on the same level. So we'll see if we can continue to be successful or not in 2015.
On the net debt, very correctly, I mean, it has increased because of a revaluation. I mean, we look on our debt. The way we hedge is basically we hedge equity to, to debt. We try to keep the debt in the same proportions as we have equity. That's basically the hedge we have, to balance, let's say, our, yeah, our equity, with how we, how we-- in what currency we have our debt. Anything else from that, we do not do. I mean, depending on how currencies will fluctuate, the P&L will catch up with, with the balance sheet, FX rates. But, yeah, I mean, that's the hedging is, that is the way we do it, and we think we have a, we have a net debt which is reasonable. We have a leverage which is reasonable.
If you adjust, as I said, the FX in the P&L and the balance sheet, we will be at 0.20, exactly on our target, so we are where we need to be. Going forward, I mean, where we are, where we do need, I will not make a forecast for the net debt, of course, in 2015. But we have some acquisition possibilities, medium-sized, not large, but medium-sized. We're looking at technology, some minor pieces in new markets. And then, of course, we have to continue to invest in CapEx for our technology and solution strategy, and then we have a dividend. So those are the areas and how that will develop in 2015, I will refrain from guessing on that right now.
Thank you very much for the answer. That's very helpful. Could I just go back to the first question, if possible, just on the policy? So I was just looking at SME Direkt consensus, just the reported EPS, got the net income as well. But just looking at the 55% of that EPS would imply a significant increase to the dividend kind of year-on-year. So you're saying, obviously, that the change in dividend doesn't mean an increase in the dividend, but implicitly it does. Is that the correct way of thinking about this? Thank you.
The correct way of thinking about this, that we have reworded the previous policy. There is no intention to change the dividend policy from dividend to higher dividends or to lower dividends. That was not the intention. It was just to reword it and put it in relation to net income instead of free cash flow, for the reasons I mentioned. It's not more dramatic than that.
Okay, brilliant. Thank you very much.
Our next question comes from Mr. Rajesh Kumar from HSBC. Please go ahead.
Hi, good morning. Just trying to understand your commentary about, the ACA thing. Obviously, last quarter, you suggested you had 80% compliance, and you expect 1% organic growth as a result. Now all the customers are compliant, so could we just run through how much of cost increase you've passed through to your customers? What proportion of clients are compliant? And I'm assuming it's 100. And how is it translating to 1% growth? And the second part of that would be when you renegotiated for ACA, from which date does it start impacting your numbers? I mean, from the point you renegotiate with the client, do you start offering insurance from then, or do you start offering it from 2015?
I mean, the last question is very simple, January 1st, 2015 . The cost starts January 1st , 2015 , and all the agreements that we have made with our clients become effective January 1st, 2015 . So that's the same date. On the one percent, how that equation works is, it's a mix of different things. I mean, we said in Q3 that this was our estimate, and we keep that estimate of 1% net impact on the organic growth for us in 2015. That's a mix of different things, it's the price increases of the 4 %-5% that we've been talking about. Some clients have been semi-compliant, and then the rate has been a little bit lower and some...
So that has, that is one part of it. Some contracts we simply had to cancel. Other contracts, not a large part, but some, then, the major way for us to, and we had solutions in some, but that was not a lot, unfortunately. But, but the major way to manage this has been to reduce the scope, simply. To try to, we protected our margin to cover the cost increase, but we reduced the number of hours or the number of guards by 4%, if the cost increase was 4%.
So for the invoice to the customer became the same number, but we managed to find a new way to organize things, and then we reduced the scope, so it will be less top-line effect. So you have all those things together, where most of them, so to say, reduce organic growth, while the price increase increase the ones who accepted the price increase, and then a large number of customers did that in Q1 to Q2 and Q3. So the net effect of all that is 1%. Our estimate is 1%, so it's a mix of different things.
Okay, so, I mean, you have very strong growth in Q4 in North America, and in terms of continuing that momentum, do you see that to continue at a similar run rate? I mean, could we get some color on how much of that was pricing versus volume, the North America?
Most of that, most of that is volume, and we have been winning contracts. You should remember we had a weak Q4 2013, so keep that in mind to start with. It was -2% in Q3 2013. So the comparatives are... But I mean, still, it counts. I mean, and that's, we lost some major contracts in the end of 2013, in the last quarter of 2013. But anyhow, I mean, we have a good speed when we enter the 2015, and we have been successful winning volume, winning contracts. So the pricing piece of that is a minor part, but the major part of that 6% is actually won contracts in a good market.
Would it be fair to assume that all the new contracts you've won, are you already stipulated ACA within that?
Yes, of course. Yes, of course.
Thank you.
Our next question comes from Mr. Allen Wells from Morgan Stanley. Please go ahead.
Hey, good morning, Allen Wells from Morgan Stanley. A couple of questions from me. Firstly, just looking at the technology and the technology platform, obviously, you flagged the need to invest in technology as you roll that out. Obviously, versus where we were looking basically a year ago, you were targeting a year ago, that seems like obviously your penetration's been a little bit weaker. Is there any potential changes to the sort of absolute amount or,
... runway in terms of CapEx spend on technology over the next couple of years that you're now expecting?
Yeah, that's a relevant question. I should have said that from the beginning. I mean, we have said that we have to invest SEK 350- SEK 400 million increase in CapEx per year to reach the 18% target. As we do not think we reach that 18% target, that number, as I've already shown, was SEK 280 million in 2014, and it will probably be lower than the SEK 350-SEK 400 that we estimated before, because we are not gonna come to that 18%. So it will not be dramatically different, but that is our best estimate today. It will be slightly less. That's logic, that's logic.
Will you expect it to be, will you expect it to be similar levels to what we saw in 2014 then?
I don't know. I mean, that's fine-tuning. You never know. Depends on what kind of contracts we win and how that mix looks like that, and how heavy do we need to invest, what is the length of the contract, et cetera. So you never know that. But, I mean, I mean, you, you see the number for 2014, and, and, and what I'm saying, so I think, I mean, it's, I mean, the rest is fine-tuning.
Okay, thank you. Then, is it possible you can split out the inflationary impact on growth in Argentina in the LatAm number?
It's a big part of that, of course, but I cannot give you the exact number on that.
Okay. And then finally, just sort of following up on the last question on ACA. I think at the 3Q results, you obviously flagged that the sort of remaining 20% that you had to sign up were sort of customers that were less willing to take price increases. Can you confirm? It sounds like from the commentary, most of this was largely offset by just lowering the scope of the contracts for those customers.
Yes, that's correct.
Is there anything else that we should be aware of in there?
No, that's the major solution, yes.
You didn't have any customer retention issues, anyone walking away or?
I mean, there has been some, but it's not, it's not, it's not dramatic. You look on the customer retention in the U.S., it's still quite good.
Yeah.
So in the North American division, so, I mean, we were at 90%. So, yeah. No, I mean, there was, of course, there is always some, but that's kind of normal life. So the main, the main, nothing else, no. The answer to the question, we will use the scope to manage. That's simply the, the main, the, the, the, that was the, the, the, the most used solution.
Great, thank you very much.
Thank you.
Our next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead. It looks like Mikael dropped out of the queue, so the next question comes from Chris Gallagher from J.P. Morgan. Please go ahead.
Good morning. A couple of questions. First is just regarding what you've seen through January in various regions, and the second then around your acquisitions. Do you have any kind of target in terms of areas and acquisition spend for 2015? Thank you.
Sorry, I don't want to be impolite, but I prefer not to comment. We usually don't comment January or the beginning of the year or the quarter. So I'll refrain from doing that. I'm sorry about that. On acquisitions, I mean, the main focus of ours is, of course, technology acquisitions. That we have some possibilities that we are studying, but nothing imminent, I will say. But I hope and believe that we can make some, and we did two last year, one minority shareholding in a company in U.S. and then a Belgian company in the fourth quarter, medium-sized acquisitions adding value to us. So we're looking for those kind of companies. They are not easy to find.
There are not a lot around. Some have legacy, some are not the right price, et cetera, so, and the fit is not always perfect. So it's not that easy to find those, but we are looking, and every country has its agenda, it's on its very agenda, and it's in all divisions. It's North America, we are looking in Europe and in the Latin America, those, I mean, the big three divisions, where that's where we're looking for that kind of companies.
Okay, and just one follow-up. That's right. On the acquisition in Belgium, is that something that you could then use, technology in different countries and regions?
Yes, yes. I mean, yes, not initially, initially. Now we are working on integrating that company with our Belgian operation and putting all the pieces together. That's working out fine. It's mainly gonna focus on the Belgian market. It could potentially bring us possibilities to bid on contracts outside Belgium using that competence, but we have to do these things step by step. And secondly, what is also very important is that this company is a little bit, well, let's say, has more services or more developed services than we have been used to traditionally. So it adds a lot of new competence and value to us that we did not have in any country before.
So when we, we will be able to use this company to make due diligence when buying or looking at companies in a similar kind of business in other countries, and now we have this competence in-house, which makes it less risky to invest in this field. So in both ways, that company will support us outside Belgium as well.
Okay, thank you.
Thank you.
We have Mikael back in the queue, so please go ahead.
Sorry, I pushed the wrong button before. I just had a question about the tragedy we did see in France. How has that impacted the overall demand for security services in Europe?
Sorry, I didn't catch your first part of the question.
The tragedy with the shootings in France.
Okay. Okay, the terror attack, okay.
Yeah.
Well, yes, but not substantially. I mean, we have had quite some extra sales, actually in Belgium as well, because of the turbulence there. But both in France and Belgium, we have seen some extra sales because of that, but those are in the total context, it's insignificant, I will say.
Okay, that's good. And my second question is: could you give some kind of indication about your exposure to the oil and gas, oil and gas customers?
Well, I mean, this is one of many, many, many segments. I mean, we have not seen any discussions or any. We have that in Norway, for example. We won, as you know, a big contract in that area during 2014 in Q2 2014, last year. We have enjoyed that growth throughout the year and for one more quarter before it comes into the comparatives. And then, but we have. There has been no discussion, there has been no request to in any way reduce the scope because of the low oil prices.
So the security need remains basically the same in both contracts, and that I will say is the same situation throughout in the countries where we do have an exposure to that segment. So we have not seen any impact from that. Not what I'm aware of, at least.
Okay. Thank you.
Just before the last question, I'd like to remind you, if you have any questions, you need to press zero-one. Our next question comes from Laurent Brunelle, from Exane BNP. Please go ahead.
Yes, good morning. So, three follow-up questions, on my side, please. First, regarding cost inflation. You, you've been discussing about, U.S. and Spain, but can you update us on, the wage price imbalance in other countries? And notably, where are you in the negotiation in France, please? Second, can you give a bit more color regarding this authorization to repurchase shares, so up to 10% of the, of the company? So will it be something, I mean, will you see that as an opportunistic, thing, or could it be different? And lastly, can you update maybe on the, the tax rate to expect from 2018, please?
Tax rate, 28.8%. That's what you should expect 2015, same as full-year 2014. The buyback of shares, we keep the same wording as we have had for the previous year. So that just to give the board the mandate to do that, if they decide to do so. There's nothing else I can say on that. It's just a prolongation, so to say, and should not be interpreted in any other way. It's a prolongation of a mandate that the board already has. On the wage price balance, always, as usual, to keep that in balance, there is not a very high wage pressure, I would say, in Europe. In Spain, we have already agreed. U.S. remains to be seen.
I mean, we haven't seen it yet, but of course, the labor market is improving a lot, so it might be the case, but then we are always good and very used to manage that very quickly in the U.S. organization, but that could be a factor going forward. But of course, we think, and our ambition is, and we are always starting the year with a clear target to manage the price and wage balance, including France. There will probably be some wage increases and in France as well, but that process is ongoing already, and it's too early to comment on that.
In Q1, we will know a lot more exactly where we are, but it's still a little bit of a moving target in France.
Okay. Very clear. Thank you very much.
Okay, we have no further questions, so back to you, speakers.
Okay, thank you very much for calling in and bye-bye.