Hello, everyone. Very welcome to our nine-month report for Securitas, and I will lead you through the main highlights from the report. Switching to the second slide here. We had a good quarter. We are pleased with the quarter. It's good growth, 4% organic growth in the quarter, and margins are also good in the quarter, when you kind of compare apples to apples. So we are pleased with the growth and the result in the quarter, and we have a real change in operating result and in earnings per share. But there is also quite some other good news in the report about the healthcare reform in North America and U.S. We have some tax cases which have been positive outcome.
We have cash flow, which is good. We have made a technology acquisition. We have signed a collective bargaining agreement in Spain. We have taken some actions in Spain that will pay off during as of January next year, and so forth. So it's not only the results and the growth, it's also the other factors, and I'll come back to those in a minute. So I will not go into all these details here, but we'll come back to the most of the key issues throughout the presentation. The numbers you see on, of course, on, on, on this slide here, and I think most people have already looked on those, so if necessary, I'll come back to this slide. I go straight to North America, which is, of course, quite a lot to say about the situation in, especially regarding the healthcare reform.
First, a little bit about the market, though we have good growth, 4%, we think we are taking market share in the third quarter in the U.S. And the good news is, it's about our guarding regions. The five guarding regions are now starting to gear up, so to say. We start to see the growth in a good way in our new sales, in our organic growth in the guarding region. So it's kind of a big machine which is driving the growth, and so that is really encouraging. And we have about 3% organic growth the first nine months, which we think is pretty much in line with the security market. We think the market will probably be in the same similar range next year, 2%-3% organic growth.
Not ours, we are not making a forecast for our business, but the security market next year probably growing in the range of 2%-3% in North America, also next year. When it comes to the ACA, important information, we are 80% compliant as of mid-October, and which means that we of course have a tricky 20% left, and normally those customers will be quite difficult to find an agreement on with those customers. Those 20% are not very likely to accept the price increase. We will fight for that, but probably will be more like finding a way to reduce the hours, maybe 4%-5%, the number of hours on on the at the site, or coming with a technology solution in order to mitigate the cost increase.
So, so we still have 20% to go, but we are basically in line with our plan. We were at 60% in mid-July. Now we are moved 20% - 80%, and our target is, of course, to get to 100, but it's not that... I mean, we have the most tricky ones left. So, but our bottom line ambition has been all along to protect our margin, and, and so far, so good. We have 80%, but we still have 20% to go. Important to also mention is that the expected cost increase will not be in the 8%-10% that we have said for a long, long time. It will be more like in the range of 4%-5%.
And, the reason is that, in our equation of the 8%-10%, we were assuming that, we will also increase the price in order to compensate the guards for the piece of the healthcare that they have to pay themselves. We had, of course, our premium to compensate, plus the part that the guards were going to pay. So we were trying to get the higher wage accepted by the customer for our officers, for our guards, in order to make it more or less neutral for them with the signing up for the healthcare reform. What is happening? We have made assumptions of that, so when we discussed this in after Q2, we were making an assumption, and now we see reality in a different way.
The fact of the matter is that basically all customers simply refuse to pay that extra wage to the guards, to the officers, in order for them to be cost neutral to the healthcare reform. And then as they refuse to do that, then, or we are not able to manage to get that, compensated by the customers. That means that less guards than we expected will participate, sign up for the ACA, which reduces our cost, so, as well. So that means that is the equation that brings us to the 4%-5%, which in a way, is bad news for the officers. We feel sorry for that, and that the customers do not want to pay for that.
Our financial exposure for the year to come, of course, it cuts the risk in half, basically. So the potential exposure is 20% of the portfolio in U.S., with 4%, 4%-5% cost increase. That is what we have left to deal with in the last quarter. We have also got, for quite a while, quite some speculations and questions on what will be the net impact. And we have made a guidance in the report in order to give you some guidance, at least, what we think is the net impact on our organic sales growth next year from the ACA.
Given all the factors, terminations, price increases, more technology, cost mitigations, et cetera, et cetera, all the factors, and I will not elaborate on how that equation is built, because then there will be too many estimates and speculations on the remaining 20%. So we just think the net impact on the top line next year from ACA will be 1%. But that is our guess, based on an assumption also on the remaining 20%, the outcome on the remaining 20%. And then on top of the 1%, you will of course have a security market growth, which we expect to be in the 2%-3% range for next year as well. So that is on the ACA, I think. Maybe there will be some questions, we'll get back to that later on.
Good margin in the quarter in North America, and also year to date. We are doing well, good development in U.S. and, so business is developing well, top line and margin-wise in North America, driven by the U.S., of course. Yeah. We'll move on to Europe. Encouraging in the quarter, the probably European security market in some kind of average, what we define as Security Services Europe, which excludes Spain and Portugal, is growing in the range of probably 1% or something like that.
So we are pretty much in line with the market growth, even we had a good quarter, and that was we gained speed, just like in U.S. and North America, we were gaining speed in Q3, and we do the same in Europe with a good 2% organic sales growth in the third quarter. Good in Turkey and Norway, where we have won some good contracts and good development, but also France had a good growth in the quarter with 4% organic growth in Q3. That was very encouraging. We have won some contracts and that, so I think we are growing better than the market in average in France.
We think the market in France this year is kind of flat, and will probably be flat, zero flat next year as well. But we have been a little bit more successful winning some contracts, so a good quarter in France on the top line. And also Germany supporting organic sales growth. So, all in all, a good top line in Europe in the third quarter. And we also made an acquisition, which you might have seen, end of last week. It's also included in the report of a company in Belgium. It's a relatively large technology company, which will add a lot of value to our business. They do the traditional, let's say, security solutions, security integration of security solution systems.
That's one part of the business, but they also have a knowledge in connectivity. I mean, how basically the—I'm simplifying a lot, so excuse me for that. But, I mean, the connectivity means how you secure the connection between the site, the cameras, the access control systems, and the servers or the monitoring stations, and how you make that whole process in a very, in a very secure way. And they have a lot of good knowledge in this field, which is more limited in Securitas in general, in Securitas today, and also on data integrity. It's also in the same area on data storage.
These are areas where we have limited knowledge in Securitas, and the SAIT company in Belgium will add a lot of value, not only for Belgium, but also for the group in many different ways that we can take advantage of. So we are very happy that we have been able to close this acquisition, and now starts the integration of that business in the Securitas family, and we look forward to that. It's a EUR 25 million operation located in Belgium. When it comes to the margin in Europe, we are a bit low. Last year, we had some one-offs last year, which makes 0.3 of the explanation in the quarter.
And then also the other two main reasons are that we have some renewed aviation contracts, where we have some lower margins, as we always have when we renew contracts. And then we have a timing issue of the technical installation business, where we are behind compared to last year in the quarter and year to date. But that will be offset in the fourth quarter, so we will pick up on that, and it's just the timing between quarters, basically. So that will be picked up in the last quarter.
If you want, roughly the 0.3 difference in the quarter that remains between the 6.9 and the 6.3, you have 0.6, just to explain. 0.3 of that is the one-off, and of the remaining 0.3, half is the aviation and half is that timing issue on the technical installation contracts, to give you some kind of guidance on that. In Ibero- America, the Spanish market is, of course, the main factor influencing our numbers. We have good growth in Latin America, continues to be double digits, over 20%, as it has been for quite a long time.
Mainly driven, of course, by price increases in Argentina, and the backside of the same coin is the high devaluation rate in Argentina, where all the numbers are in the report. But also good growth in Chile and Uruguay. When it comes to Spain, we have an improving trend. Excuse me. Where we are at -6% in the negative organic sales growth in Q3. We think the Spanish market this year is in the range of -5% to -8%, security market growth in Spain, but things are improving in Spain. The macroeconomic situation is improving in Spain, and it's moving in the right direction. Many good decisions made, costs are reduced, becoming more competitive. So we think that the security market will be kind of flat next year.
It will not continue to decrease, so it will be more or less on the zero growth path in 2015. But still continue, of course, with a good growth in Latin America, that is what we expect. On the margins in Ibero-America, we have an improved operating margin in Latin America, and then, of course, we suffer from the situation in Spain, and that is very much driven by those labor-related taxes that we were not able to compensate in the market, so we just had to bite the bullet and swallow those. And also an aviation contract, which has been renewed at not satisfactory margins, so that we're trying to deal with. Good news in...
So the whole drop, basically, when it comes to Ibero-America, compared to last year and all the comparatives, is explained by Spain, as simple as that. Good news in Spain, though, is that we have signed a collective bargaining agreement for next year with a 0.5 wage increase, which is a reasonable amount. We think it's a responsible agreement. It's a good agreement, we think, which gives us hope that we have a chance to compensate that on price increases. And the good news is also that it's already signed. That's important because that gives us a good chance to deal with that and manage that in order to really handle it on the market and to get the price increases to compensate the wage increase.
So that is also a good development in the quarter. Cash flow was not as great as it was last year, but last year was tremendously good in the Q3, but still it was a good cash flow, and we will continue to have a good cash flow in the fourth quarter, as we always have. So that is moving along in the way that we are expecting it to do, so no surprises here. When you look as a part of education, we just like to highlight that when you look on free cash flow in Securitas, you have to remember that we are investing in the technology...
And we are expecting, I mean, we have said before, in the range of SEK 300 million-SEK 400 million per year in CapEx, in order to manage the growth in the technology and solution area. And that is, you see in the lines on the top there, that has an impact, where we are investing much more this year than we did last year. So when you look on free cash flow, you have to remember that those investments are, so to say, already taken, already accounted for when you come to the free cash flow line. The net debt primarily influenced by the FX, actually, which is the weaker Swedish krona to the dollar and the euro.
But of course, yeah, that's the main, main, main factor why the net debt is not, not decreasing in the way it, it otherwise would have done, so to say, by the free cash flow. Yeah, we are at 9.5% in Technology and Solutions. Obvious question, which I already got this morning, is then, of course, what about North America now with the ACA? And what we have seen in Q3, and it's quite clear, up to mid-October, more customers than we expected have chosen to go for the price increase, given the fact that it's not as high as we have said before. And they just take the part, which is the premium for the ACA and not the compensation to the guards.
So, in Q3, we are behind in the U.S. when it comes to Security Solutions and Technology. And then the obvious question, what about the 18% for the run rate end of next year? Well, we still stick to the 18%. We have some good news. It's moving on very well in Iberoamérica. We are way ahead of plan, and also we now made an acquisition that will support with a couple of tenths in that equation. But of course, important and decisive factor for making the 18% is, of course, what happens in the U.S. And as we were, we are now behind in Q3, we still have not changed the 18%.
We will just wait for one more quarter and see what happens after Q4. Because as I said before, those remaining 20% are not very eager to accept price increases, and then hopefully, it's more likely than not, that they will accept technology or solutions instead of price increases in order to mitigate the cost increase. So it's too early to tell. We will wait one more quarter and then make a new judgment when we see the effect of the ACA. Yeah, that's the comment on in that respect. All right, those, I think, were the main headlines. Please, if there are any questions, we'll be happy to answer them.
Yes. Ladies and gentlemen, if you have a question, please press zero and then one on your telephone keypad, and you'll enter to a queue. You have to press zero and then one. First question is coming from Miss Sylvia Barker from Deutsche Bank. Please go ahead.
Yes. Hi, good morning, everyone. Congratulations on the results. I had a few questions for you, so let me just take them in turn. So first of all, looking at the EBITA beat in absolute, I guess that's versus kind of SME Direkt. That's coming from North America, where the margins were stronger than expected. I was just wondering whether you could explain why, kind of looking sequentially, why they were stronger in Q3, but perhaps even they weren't stronger in Q2 when we were again seeing fairly good organic growth. And then in the other line, is there anything unusual in this quarter at all, please? Thank you.
Yeah, I mean, first of all, it's not a dramatic differences to start with, but we had in North America. I mean, when we, when you start to get growth and you get, you have a lot of, well, not a lot, but you have some start-up costs when you start up a contract. So that may explain one small part of the difference of your sequential question of Q2 to Q3. So now those contracts that started in Q2 are now up and running in Q3, and we also have some good extra sales in Q3 in U.S., which with good margins, so that also supported the margins.
We didn't have any strong extra sales in North America, in U.S., in Q3 last year. So, and then we get the leverage, of course, but that, yeah, that should have been the same, so to say, given the same top line. But we had a little bit better growth now also in Q3, so good growth in Q3, so we get a little bit more leverage as well.
Okay, thank you. Just to check, on the extra sales, you used to provide a range on where you are within that kind of cyclical range. Can you just update us on that, please?
On extra sales, we are in the quarter ahead of last year. So and then also for the full year, we are ahead of last year with about 0.3%, so to say.
Okay.
But the trend is positive. I mean, we have a higher extra sales in Q3 than we had for the full year. So a positive trend on that. So normally, that is also what happens is that when we start to get an upswing in our top line, also extra sales is kind of following that. That's normally the pattern, and it seems to fit this time as well.
So it's starting to look a bit more like a later cycle, in your view. So your spot sales as a proportion of the overall in North America are probably higher within the cyclical range?
We had good extra sales in North America and U.S. in Q3, yes.
Yeah. Okay. Then just on the ACA, please. So in terms of the price increase on the 80%, I know that on 30 of them, you didn't actually pass anything. But in terms of what you've done on the 80 so far, as of the middle of October, is that around 4%-5%? Or had you also, and also, had you have any 8%-10% increases with any of the customers?
A lot of, I mean, a lot of those 80%, they have been compliant for years because they were compliant from the beginning, so to say. So, I mean, the delta, I mean, what has happened is that we have gone from 60% - 80% in the quarter. So that is where we have to find either a way of increasing the price or mitigating the cost increase by other measures, technology, reducing the hours, all kinds of different ways to manage that. So, but the cost increase is, of course, the 4%-5% on the part which is non-compliant from the beginning.
But in the 80%, a large part of that was compliant also since many, many years because it's different kinds of contracts where the customer is willing to pay for medical benefits or it's mandatory to have it.
Okay, sorry. My understanding was that 30% was compliant to begin with, and the remaining 50, you negotiated. So just my question was, because you didn't quantify it at Q2, what the magnitude of the price increase is overall on, I say, okay, let's take the extra 30, everything else that you've done since the beginning of the year. Is that 4%-5%?
You're correct. 30% was from the beginning, and then we came to 60% in Q2, and now we're at 80%.
Got it.
The cost increase is 4%-5%, correct. That is-
Yeah
what we expect. We see that now when the guards are now coming. I mean, now it's time to sign up for the ACA or not, and then we start to see it.
Yeah.
So we now, the rubber hits the road, and we had some indications of where we were heading already in Q2, but we didn't want to make any mistakes in that. So we just waited with, and to get a clearer picture, which we have now after when we are 80% compliant.
Okay. But on the 30 that you have made compliant this year, overall, is the price increase about 4%-5%? Not the cost increase, but what you actually-
The cost, the cost increase is 4%-5%, yes.
Okay.
But doesn't mean that the price increase is the same. Well, it means that the price increase on the apples to apples is the same, but we need to find a way to— Because if you're trying to translate what I'm saying to organic growth, you cannot do that because we are mitigating those cost and price increases on the hourly rates by having maybe less hours or more technology or it's all kinds of things. So be careful—
Right.
Not to translate it to organic growth. But if your question is, is it 4%-5% price increase when we have 4%-5% cost increase? Yes. Hour for hour, yes.
Yes. So then it's maxed on the 30. Okay. And I was just curious, on the take-up, so how does it work exactly? Because I was under the impression that if guards don't take up the health care, obviously, on the personal mandate, they need to pay the fine. But then do you not also need to pay a fine as an employer having employees who have no coverage?
No, no.
What is the reason for that?
I don't know. You have to ask Obama. I don't know. We are—Well, if we don't offer it, we have to pay a fine, but we offer everybody. We offer all guards, and then they have to make a decision whether to do that or not. But we have. That's the law is that we have to offer it to all our guards, and we do. And we are compliant with the legislation in that respect. Then if a guard decides not to take it, they will have to pay a fine, but that's much less than what they would have to pay to sign up for the ACA.
Are you going to?
But the company-
Offer to find the company?
The company does not pay any fine if the guards decide not to sign up for the ACA, of course.
Okay. Okay, and that's, that's me. Would you subsidize guards to pay their fines if they-
No.
I guess, if they don't take it up, no?
No. No.
No. Okay. Sorry, I'm taking a lot of your time, but this is the last question, please. Then on the wage negotiations, you have signed the collective bargaining agreement in Spain. I was just wondering if that covers the expected wage increase. Then secondly, which other geographies would require new collective bargaining agreements? So in France, for example, I think you previously mentioned that you would need to pass price increases for 2015. How far have you progressed with that, please?
Well, in France, it's open. It's being, there's still a, still an open question what the agreement will be for next year, so that is not known yet. It's ongoing discussions. Spain, I was... I, I'm not—didn't exactly understand your question, but, I mean, yes, we have signed 0.5 wage cost increase of for the collective bargaining agreement, effective January 2015, and we will try to compensate those 0.5 on the market by price increases.
Right. Okay.
Now we have some headroom to prepare for that as it's already signed, which is good.
Okay.
Then, yeah, then in... Yeah, I guess that was the answer to the question. I'm not sure if it was the answer to the question, but-
Yeah, no, that is actually... Sorry, maybe I didn't phrase it correctly, but that's-
Okay.
That is the answer. On France, you have no idea of what the increase might be?
No, not in France.
No.
It's, it's still uncertain, both on, both on the wages to the guards and, on the social costs, related to that coming from the government decisions.
Right. Okay. Thank you.
Thank you.
Next question is coming from Mr. Rajesh Kumar from HSBC. Please go ahead, sir.
Hi, good morning, all. Rajesh Kumar from HSBC. You know, the ACA seems to be a very complicated piece, and I'm just trying to... I know, Sylvia was asking a lot of questions. I'm just trying to understand three moving parts that you have. Obviously, first is, can you simplify in terms of what you're saying about man hours for next year, impact of ACA and wage inflation, which clients have agreed to?
I'm not 100% sure I understand your question. I might try-
Well-
Maybe I'll try... You have to try... I'm not sure what... No, sorry, I didn't understand what you meant.
Yeah, the thing is, what I'm asking is, when you say 4%-5% increase, how much of that is because of ACA? How much of that is because man hours are going backward?
No, no, that is, that is ACA. It's ACA only.
Okay, so 4%-5% is the ACA increase?
Yes.
When you negotiate the price increase with the client, you're obviously factoring in some headcount and wage inflation other than the ACA.
Well, I mean, usually that is a separate discussion, because there are some collective bargaining agreements in U.S., but mostly it's individual cases and very little, if any, wage inflation in U.S. at all. And it's still a labor market where it's possible to find guards, with few exceptions. But basically, that is the situation. So we see very little or limited wage inflation, but that is kept separate, and that is usually discussed with the customer at the annual renewal of the contract. So when I'm talking 4%-5%, I'm speaking only about the ACA, nothing else.
Understood. So have you agreed on any headcount reduction at all in the U.S.? Because clients are not taking up the technology bit, so how are they managing their cost base?
Well, so far, most of the agreements have been that we have agreed on a price increase. A relatively few have been security solutions and technology as a way to mitigate the cost increase. I'm sure there are some contracts, but it's still not a major part. Some contracts where we have reduced the headcount in order to or reduce the hours, I should say, and the headcount in the end, in order to mitigate the cost increase. But mostly it has been price increases accepted by the customers, and those vary. Our estimate is, of course, 4%-5%. That's our judgment, but it could vary depending if a customer has or has not any kind of medical benefits that they have paid for in the past.
Yeah, so that's most of them have been price increases so far, yes.
Great. In Europe, could you quantify the impact of CICE this year and last year's same time? I mean, what is the incremental margin benefit from CICE?
We prefer not to do that. It has an impact, but it has had some positive impact, but still at the same time, we have spent a lot of the increase, as the money that we get from the French government is higher this year than last year, the tax credit, I should say, but it's a tax credit.
Mm-hmm. Yeah.
That we have also invested quite a lot more money this year in training and training of our organization, in education, in Technology and Solutions, for example, than we did last year. So the net improvement is quite limited. It's some, but not a lot, but I prefer not to give any more details on that. But it should not be seen as a major explanation to the European results. I mean, the delta we have used primarily to increase our investments in training.
Also, many customers are, of course, expecting to get to enjoy that. So some of it is being diluted in the price discussions with the customers.
No, I, I totally understand that you're not getting price increases because you're getting CICE. So it should be seen as a part of price increase. I'm just trying to understand the magnitude of it, because that will help us frame the full cost.
The net difference is limited, from a European division point of view, when you compare one year to the other nine months results, because of more dilution going away. More of the CICE money is being used to, so to say, to compensate for price increase, and also we have spent more money in training.
Understood. Thank you very much.
Thank you.
Our next question is coming from Mr. Henrik Nilsson from Nordea. Please go ahead, sir.
Good morning, and thank you for taking my questions here. You say that more customers than expected have opted for the price increase, and, and you say that relatively few have chose to go for the, the security solution and technology contract. Can you in any way quantify? Have you got any uptake at all? Is it 1%, 5%? Is it less than 1%, please?
I don't have that statistics, but it's more than expected. I cannot give you a number.
Okay. So, okay. Thank you. Can you also on Europe, the delta in the margin, I didn't quite understand. You were talking about 6.6, I think?
The quarter, the quarter is we are 6.3 versus 6.9 in the quarter, 0.3 of that difference, plus 0.6 difference. 0.3 of that is a one-off that we had last year from selling some residential home alarm businesses in Belgium and Netherlands. And the remaining 0.3, half of it, to make life simple, half of it, 0.15, is related to the aviation renewal of contracts in aviation with lower margins. And the remaining 0.15 is the timing difference that will come back in Q4.
Okay, thank you.
Our next question is coming from Mr. Angus Stein from UBS. Please go ahead, sir.
Hi, guys. It's Angus from UBS, stepping in for Rory Mckenzie. Is there any impact on effects on margins in Q3, given the strong positive impact on revenues you reported and-
No.
No? Um.
But there is, of course, a significant effect. You have pluses in when you convert the krona from the U.S. dollar and the euro, but it goes the other way, is the peso in Argentina. So, I mean, you can... We are, and we are disclosing in the report underlying change and total change. So it gives you quite a lot of guidance, and we put also the number of the peso adjustment there. So it does not affect the percentages, but it, the margins, but it, but, in absolute numbers, of course, there is an effect, and you can see that by yourself, by in the report. You see a total change, for example, of 6% income before tax, and underlying change 4%, so.
Okay. Okay, and, and just on the market outlook in Europe, you talked around France being flat, for the rest of this year and next year, and, and you're getting market share there, but can you give any sense of the outlook for Europe in, in general, just given the concerns over-
No, I think, I mean, generally speaking, I would say that, we'll be probably. I mean, we think the European, we estimate, it's very difficult. I mean, there is no reliable statistics at all to lean on. But I would say that we are probably growing in line with the market this year. That is 1% year to date. And I would expect the European market is to be probably more or less in the same range, let's say 1% growth next year, probably.
Great. Okay. And again, you, you touched on the free cash flow conversion and how we should think about that, but is there a right level you believe you could achieve when tech solutions gets to your target 18% of group revenue? We're just trying to work out how much of the current CapEx is ramping up versus the requirements on to, to-
We have a target of being free cash flow to net debt of 0.20, and we're a bit behind right now, but that still remains our target. So that's the- and we have been on that target for quite a number of quarters, but from time to time, we get below. We had a very strong quarter in Q3 last year, and we still had a decent quarter this year, and we're gonna have a good quarter in Q4 as well. So I prefer not to make a forecast, but that's the target that we are using, free cash flow to net debt.
You look in our historical free cash flow generation, it's been hovering around SEK 2 billion, more or less, for a number of years. But you have to remember now, when you look in free cash flow, and that's why I highlighted that point, is that we are investing more than we traditionally did in the technology area. So that is already taken when you look at the free cash flow. So it means that free cash flow, that's basically available for dividend, potentially buyback of shares, and for acquisitions.
Right. Okay. Sorry, what was that number you said at the beginning, the Free Cash Flow to Net Debt?
0.20 .
0. 20. Thanks very much.
Thank you.
Our next question is coming from Mr. George Gregory from Exane. Please go ahead, sir.
Good morning. Perhaps just following up on some of the questions around collective bargaining agreements, Alf, perhaps you could give us your, your high-level thoughts on the wage-price balance across your key markets this year, and how perhaps that wage-price balance could evolve next year, please?
We are always trying to manage this, so we keep it flat, price, wage, and price and wage. We don't see a lot of pressure on the wages and high inflation wage costs, so which makes it, of course, less risky in the sense that we could not compensate those by price adjustments. Our plan, our ambition, as always, is to compensate full labor wage cost increases next year by increasing the price in the same amount. If we look on it year to date this year, we are a little bit lower on the price adjustments, and that's basically because the main reason for that is compared to the wage cost, and that's for the labor-related taxes that we got in December, and we just couldn't manage simply in Spain, in Spain.
Okay, so the impact this year has been solely in Spain?
Yes, basically.
Next year, is it fair to say on the basis of 0.5%, you would hope to compensate for that?
Yes.
Thank you. Maybe just summing up on the ACA, there has been various discussions here. Do you have any overall thoughts on the likely margin impact in 2015?
I'm not gonna make a forecast. I'm not gonna make a forecast. I'll just repeat my statement. Sorry to be a bit bullish on that, but, I mean, I, our plan has been and is and remains to be to protect our margins throughout this tsunami of the ACA, but we have to manage them. That still remains our target, to protect that we do not suffer on our operating margins in the U.S.
Okay. Thank you very much.
Thank you.
Next question is coming from Stefan Andersson from SEB. Please go ahead, sir.
Yeah, thank you. First of all, on the U.S. operation, we can see that employee turnover is coming down despite the improving labor market. I was surprised about that. So maybe if you could have a view on why that's happening, and then follow up on that or connected to that, since your employees are going to get a little bit of a... The ones who participate in healthcare reform is gonna take a little bit of a hit on their salary. Do you see a risk that you will have employee turnover going up or more difficult to find guards, you know, comparing to other works that are out there?
Well, I mean, the turnover rate is higher. Sorry, was your question about on the turnover rate, but it was going down? I think it's-
Oh, sorry, sorry. Oh, sorry. I was probably looking at the Iberia America. Sorry about that.
Yeah. Okay. So it's going up in the U.S.
Sorry, it's actually up. Yeah.
So I think, I mean, the labor market in the U.S. is improving. So the turnover rate is actually higher than last year. And we don't have trouble, we don't have problems to find guards still. And when you look on the ACA, I mean, there's tens of millions of Americans who are influenced by this reform, and everyone has the same issue. So I don't think the ACA, as such, will make it any different from any other service sectors, because everyone has more or less the same matter.
We have not seen a tightening on the labor market yet affecting us, but. Of course, that could be a little bit down the road, could be an increasing concern because of the fact that the labor market, I mean, the unemployment is reducing in the U.S. But not yet, not yet.
Yeah. And then on another question, I don't know if you how you're going to answer this, but on one of the news wires today, they quote you saying that in worst case, if the 20% that remains are not going to accept price increases or other solutions, the whole U.S. portfolio is going to be affected by 1%. If you remember saying that, is that you're talking about the revenues there? Is my question really, to get a confirmation on that, that that's what you're saying. Secondly, are you willing to say anything about how the margin would be impacted if in this worst case scenario?
I don't remember saying it in that way, actually. I haven't seen any news wires. I haven't looked at those, been too many.
Well, we'll
But I mean, basically, what I'm saying is that what I'm saying, I mean, if it's... We have made an estimate, also of the remaining 20%, what the outcome will be in that, and we will not disclose that. And that net of all those things, to give you some guidance, even if it's very preliminary, at least, but still not to have many mistakes made in the expectations on the growth coming out of the whole ACA equation, that's why we put that number of 1% in there. And then on top of that 1%, you will have the ordinary market growth. And I have not given any details of that equation, how that is built and how we, how our assumptions are made.
Of course, I think the other, the other question that was asked, I'm not sure I'm answering your question, but I'll try. The other question that was asked was that if the remaining 20%, there was speculation, then if that will be still a very, very low amount of contracts that will be converted to Technology and Solutions contracts, how will that impact our 18% target? It will, of course, it will. I mean, the whole 18% was built on the assumption that a relatively decent amount of contracts would be mitigated by the Technology and Solutions alternative in the U.S. And then, of course, that will make it more difficult for us to reach the 18%.
But I will not go any further out on that branch now, because we still have to wait and see, because I think the remaining 20% of those customers, they are not going to accept or very unlikely to accept price increases. They are more difficult than the others have been so far. So there we'll need to find other solutions. But it could be that they, to a higher degree, just accept reduction in number of hours or officers with 4%-5% to mitigate the cost increase and less of technology solutions. And then, of course, that will impact our target of 18%. But it's no point spending more time and energy on that right now.
It's better to wait for one quarter and then make a calibration of that at that point in time.
Okay. My last question then. On, you know, going, just looking at this, this quarterly development, if you had the last 20%, if quite a few of them are going with the technology solution, would you have time enough to install those solutions already to the first quarter, or do you expect it to be a longer process than so?
That could be, that could in some weeks, maybe, or, organize quite fairly quickly, but the others will probably take some time. But then you will have to find some kind of compromise in the main, in that remaining time frame for two or three months or something like that, and that's probably manageable.
Yeah. Okay. Thank you very much.
Thank you.
I remind you once again, if you have a question, you have to press zero and then one. Our next question is coming from Mr. Paul Checketts from Barclays Capital. Please go ahead, sir.
Morning. I've got three questions on the acquisition in Belgium, please. Of the EUR 228 million of revenues, can you give us a feel for how much is security solutions and how much is technology-based work? And then what is your plan for trying to expand the technology side across the group? How will you do that, and at what pace is it practical? And lastly, regarding their data storage business, can you give us a bit more information on precisely what sort of data they are storing, what the work involves, and whether or not that is something you expect to use across the group, too? Thanks.
When it comes to the acquisition, it's, I mean, you can if you to give some kind of a rough estimate, I will say that about one-third of their business is related to security solutions, security solution integration, to make the integration of technology into a security solution. One-third is related to the connectivity part of the business, and one-third is to data integrity, roughly speaking. So, data storage is, I don't know any details on that, so I mean, we're not having tapes or disks or things like that. It's just a part of the data integrity part, server capabilities, I'll say.
So I would not pay too much attention to that or worry about it, I'll say, in that respect. So we are not trying to build a data storage, server, hall or server, facility or anything like that. It's just, let's say, a piece of that data integrity, capability... when it comes to the technology expansion of the group, I mean, that is our main focus. That's where we spend every minute on, trying to work on that and try to improve, or increase the amount of Technology and Solutions in our total offering. And we have a target to grow that from the 6%, 2012, until to be at the run rate of 18% of total group sales, and at the end of, of next year, and then after that, continue to grow it.
So that will be the path we have embarked on to add more value and find different solutions to our customers. By that, integrating more components into our total solution offering to our customer, and be more of a man, more of a security solution company than a manned guarding company, so to say. That is what we are, that's what we spend the day and night on. Was that all your questions, or was there one?
Well, I think really what I was interested in is the acquisition really about buying a standalone business that you like, or is it about adding it to the group and then using the skills within the acquisition across the group?
It's an acquisition that we can use in the group, absolutely, because they have capabilities, as I said initially, on connectivity and on data integrity, that we have in a very limited way in the group elsewhere. And that we can use this company in order to expand and use that Belgian competence and knowledge also in other countries. So that's the... We are not buying this company just to be strong in Belgium, but also to improve the capability in the group.
And is the practical means of achieving that you use their staff, you send their staff to different parts of the world to-
Or we send staff from other parts of the world to this company and train them, and they learn how it works, and then we interact, and they have a capability to understand exactly how to recruit what people to what kind of profiles to recruit and so forth. So it will be a mix of those solutions.
Okay, understood. Thanks.
Next question is from Mikael Laséen, from Carnegie. Please go ahead.
Yes. Hi, thanks. Just had a question regarding Security Solutions and Technology, the growth there, and if you can update us on the level in different larger markets, France, Spain, U.S., the Nordic region, for example?
We prefer not to give too many details. In EU, I can give you some hints anyway. I mean, Ibero-America is moving faster than our plan, doing very, very well. We are at good levels. We are approaching 20% in Spain of total sales in Spain, so that's really moving on in a fantastic way. Europe is also picking up, and the speed is increasing. We are more or less on plan, slightly behind right now, but speed is improving quite a bit. So I think Europe will also be good. U.S. is very much dependent on the world, we have said many times already, so we are behind on a very low level.
Other than that, I prefer not to dig any deeper, if you don't mind.
Okay. So, U.S. is about 2%-3% still?
It's a low, it's a low number, yes. It's a very low number. It's in range of, I think it's a range of, 2%, more or less right now.
Okay. Thank you.
Next question is from Allen Wells, from Morgan Stanley. Please go ahead, sir.
Hey, good morning, guys. Just a couple from me. Firstly, just on technology and why you think there's been this aversion to taking up the technology offering. It seemed obviously you, like, you were more positive about the take-up at the start of the year. That's, that's disappointed. What's the reason behind that, do you think? And is this mainly a U.S. issue, or are you facing some similar headwinds internationally? That's my first question. Thanks.
I don't think we have to be too disappointed about that. I think, I mean, what our key concern has been throughout the whole ACA in the U.S. is to mitigate the cost increase, and that is still our target. And whether we do that in one way or the other, I mean, we can still live with that because our target is to manage this huge cost tsunami that is hitting us as of January first, and then to mitigate that in all kinds of different ways. But we knew that we had to build an alternative to the customers because some will simply not do that, go down that route. And you might remember that our estimation of those cost increases, they were even higher if we go back some time, maybe 8%-10%.
So we were really concerned about that. Then, given the very competitive U.S. market, you cannot play with fire, so we had to come up with alternative solutions, and that's what we did, and then how we were expecting that to help us. And now when the fact of the matter shows the rubber is starting to hit the road, we see that those increases are not at all on those levels that we initially expected and then lately expected. Then, of course, it's more easy for the customers to accept a price increase of 4% than changing the security solution totally. And that is what's happening to a higher extent than we expected. You should not make any conclusions of that in any other parts of the world.
This is a totally standalone U.S. situation, and this has no impact on the movement, how we are developing the security solutions in other parts of the world.
Great, thanks. Then just a couple more. Firstly, just so the general market commentary you sort of put around market size, as you said, 2%-3% expectation for next year for the U.S. market. You also flagged that this year you were taking some market share in most of your regions. Would you expect those market share gains to increase to continue in 2015? And then similarly in Europe, it sounded like you were saying no improvement in European underlying markets in 2015, 2014. Can you confirm that as well, please?
No, that's, that's what we said. We think the security markets will probably be in the same range, in Europe next year as this year. North America, more or less the same as well. We have, we have gained speed, and we think we are gaining speed because we are working more than anybody else, in my opinion, in the security solution field and, and offering our clients alternatives, and that has paid off in Q3, by us being growing faster. So we have a bit of a higher pace in Q3, than, than the market, has, both in North America and in Europe. So we are happy with that. And, and all the hard work that we have put in is starting to pay off.
Whether that speed will, how that will look going forward, I will not give you any forecast on that, because you always have, you win contracts, you lose contracts, and market shares move depending on all kinds of things. But right now, we have a good speed.
Sorry, final question, just on technology again. Obviously, you provided some, some, some details on some of the CapEx plan and what we need to be spent as you look to move towards that 18% technology target. Would we expect if there is a decision to change that target a changing spending plan? And is there any reduction or adjustment in the spending plan on technology being enacted already because of the slightly lower uptake in the U.S.?
I mean, those are linked to each other. So, I won't speculate anymore in, as I'll say, where we're gonna reach for eighteen or not. We think we're gonna—we still have a good chance to reach for 18. It will depend a lot on the last quarter in the U.S., of course, but we have all said it many times by now. We think that we need a CapEx of SEK 350 million-SEK 400 million per year to reach the 18%. That is the number we have put in, we have communicated, and it's still valid. We have no reasons to change that. Of course, if the number...
If we wouldn't be on the 18%, and then at the end of next year, it's probably gonna be that the CapEx need will be slightly lower, yes. That makes sense. But of course, it depends on the mixes and all kinds of things. But basically, the simple answer to your question is, if we would come out at a lower number than 18, it's probably need net, a little bit less need for CapEx as well. Yes.
Great. Thank you very, very clear.
I remind you once again, if you have a question, you have to press zero, then one. We have our next question coming from Ed Steele, from Citi. Please go ahead, sir.
Morning, all. Morning, Alf. Two areas for questions for me, please. First of all, do you have visibility of any big contract rebids in the next couple of quarters, please?
There are always some big ones going on. We are working on the airport in Amsterdam, Schiphol. We are working on the Paris airport. Charles de Gaulle is being tendered right now, just to give some examples. It's mainly in the aviation business where there are, where that is, where the big con- really big contracts are. And then there is quite a number of global multinational companies who are tendering their security total global security solutions right now. So there is various number of large bids, but that's not nothing abnormal, so to say, from a normal business pattern in that sense.
Got it. Thanks. And then, you've answered lots of questions already on technology. I suppose I just wanted to try and get a little bit more color from you. It's hard for me at least to envisage a better catalyst for uptake of your technology solution than the ACA, step change in the U.S. You've put a lot of capital into technology generally, but also into the U.S., particularly. It sounds like apart from Spain, the uptake or the pull from clients is behind where you guys had envisaged. Why are you not more worried, and at what point does a lack of pull in the market change your overall strategy, please?
No, I mean, then I should clarify myself, because in Ibero-American division, they are way ahead of plan.
Yeah.
The whole division, not only in Spain, but also in the other countries in Latin America, Portugal, Spain, all of them, they are doing very well on the technology implementation, and as a division, they are ahead of plan. So they are way ahead of what we expected, or where we expected them to be at this point in time. The European division is slightly behind, but I repeat, slightly. But the speed is very good, and the speed is picking up in Europe. And, for example, myself visited most of the countries in Europe throughout September and October in our business plan process now, seeing with my own eyes that the speed is picking up. So the European division is also moving on in a good way.
U.S., we talked about many times already, so I think that is very much depending on one single fact, the ACA, and I've explained that. They are starting from zero, and moving, they're moving, and there has been still a good change, but lower than we expected.
And why-
I think you should-
Yeah.
I repeat, don't, for God's sake, make any conclusions or any connections between the ACA reform and the impact of that in the U.S. market and what is happening in the other 70% of the group businesses.
Thank you. I understand what you're saying. But why aren't U.S. clients taking up technology? It seems quite compelling when you've got such a big cost price, price increase otherwise.
Well, I mean, historically, many customers in U.S. have been buying the technology separately from, in the case they have technology, and then they have the manned guarding separate. And there is a totally different tradition than there is in Europe, for example. So, and then the manned guarding piece, I mean, our U.S. business has always been, and the guarding industry, the security industry in the U.S. is very much a manned guarding business and relatively low wages as well. And then, it is a compelling offer. We can offer them an alternative, but people, many people say, "Well, we prefer to have the officers in place. We like to have the officers here. We like to have the people here.
We don't wanna change, and if the cost increase is only 4%, okay, fine, we'll, we'll just take it.
Okay, great. Okay, thanks for your answers.
We have no further questions, so back to you again, speakers.
No more questions? No. Okay. Very good. Thank you very much for all your questions, and thank you for calling in. Thank you very much.