Hello, everyone. Very welcome to second quarter and first half year report for Securitas. Go straight on to the figures, and the comments to that. It was a good quarter from a growth point of view. Encouraging, in Q1 we said that we saw signs of improvements in the macroeconomic situation. It's clearly improving in North America. That's more factual; it feels more factual now than before, and also giving a good growth to the security market. We expect about 2%, but we still have 3% organic growth in North America in the quarter, which was encouraging. Good activity in the market, lots of bids, ACA getting closer. We are gaining market share in Q2 in North America in the U.S. to be more precise.
So that's really encouraging. Really good news, and that we have good growth, and we have to go back quite some years to find these organic growth numbers in the Securitas. Also, some small signs in Europe, not as clear as in the U.S., but France is growing in the second quarter, which we haven't seen since more than five years. Spain, still negative, not as negative. It's still a minus, but it was minus 11% in Q1, minus 7%-8% in Q2. So even if it's still a minus, it's still not so much minus as it was in Q1. I think from a macroeconomic point of view, Spain is on its way out of the crisis.
So good signs in the export industry, but still it will take a while until the domestic sector will enjoy the improvements and with high unemployment, I mean, still, generally speaking, it's a tough market. And we still think that the Spanish market will be negative by 5%-10% this year. France will be more like a break even, and we are gaining market share in France in Q2. Sales of security and technology at 9% on group level is still a long way to go to the 18%. We keep that target. We still believe we will get there, but it's a long way to go, and there are a lot of things have to happen in the coming 18 months.
But we are also quite confident that it will, because there are so many, many good things happening, and until we can close the deals and get them into our portfolio, it takes a while. And also the ACA implementation and effect of January 1st will hopefully also bring speed in, in North America. The only caveat to that will be if the customers simply just accept the price increase, because then, of course, that they will not go for the option. But we don't know that yet. There's still, there's still a bit of a way to go.
The good news about what's happening on the ACA reform is that we are 60% compliant as of mid this year, and we said in the Capital Markets Day back in December last year that we were expecting to be at 50% by this time in July this year. We are now at 60%, so we're ahead of our time schedule, and we still think that we will be 100% compliant by the end of the year. Compliant mean that the customer has either accepted a price increase effective as of January 1st, or we have offered an alternative solution, or they have been compliant since a long time because they already offer medical benefits in compliance with the ACA to the guards since years. So all in all, 60%.
That's also encouraging that we are a little bit ahead of our internal time schedule in the US. A bit weak on the margin, get back to that in a minute. Flat in North America, basically flat in Europe. It was a little bit behind in the quarter, but year to date, we are only 0.1 behind. The big problem we have is Spain. In the segment, Ibero-America, the only negative deviation from the first half year is in Spain, while Latin America and Portugal is doing well, and Latin America actually improving the margin in the first half year. Yeah, so Spain is our concern, and we keep struggling with that. I'll get back to that in a minute. Negative effects from Argentina.
The business is doing well in pesos, so we have good growth in Argentina. We make money, good development. So the crisis in Argentina is more an FX currency issue than a business issue in Argentina. So when we convert those pesos that we are earning in Argentina to Swedish krona, of course, it has quite a dramatic effect on the sales on the top line and also on the bottom line, so quite significant in the first six months. Even if it was a bit of a weak quarter, we still improved net income for the first six months. The EPS is up 3%, and the free cash flow, we are on target to our goal, a little bit ahead of last year.
It wasn't good last year, but it's—we are ahead of last year. Get back to that in a minute as well. Well, here you see the P&L. I already commented on those, so not much more to add to that picture. The encouraging, again, the top line, the good organic sales growth, which is substantiated by a lot of activity in the different markets and encouraging news, especially in the U.S., as I said. Yeah, going to North America, a very good development. Keep repeating that on the market. Good activity as well. A lot of tenders, a lot of bids. We're winning market share. We're winning some global clients.
That also has a positive effect for our new markets, that we get contracts not only for the U.S. supply of services, but also for a couple of new markets that they can enjoy step by step. So good activity in the North American market, but also we have a better story to tell. I think it's important to say that... but when we are meeting the clients, even if we don't sell technology at that moment, we have a story to tell, that we have a capability which is completely different from many of our competitors. We have a good story to tell. We have a mobile business. We have a monitoring capability. We have made an acquisition in Q2 in the U.S. to support our technology strength and also our monitoring capabilities.
And when we tell this story, it, it attracts attention among our clients, even if it will just, maybe just renew or give us the bid for a traditional guarding contract, at least we have a chance down the road to convert it to, to more of a solution. So, so it has a direct effect with the strategy that we are driving, but also an indirect effect in the sense that we have a better story to tell in front of the clients. And that, that feels that we are gaining some traction on that. Good example, I think, is in North America, where we are taking market share right now. France is the same thing. We are winning market share in France in Q2. So, we are confident that we are on the right track. That's for certain, that's for certain.
The compliance, again, I said, that the 60% is also good news, and we made the acquisition of iVerify to strengthen our capabilities. There is more written about that in the report and in the press release when we made that acquisition. The operating margin, same level as last year, not much to say about that. Europe, organic growth, better than last year, at least. Turkey is doing very well. Norway, we won a big contract, that helps Norway substantially, and France is back to positive organic sales growth.
Little bit of a struggle in Eastern Europe, and we have also stepped out, I will say, of a couple of contracts which have been very low margin contracts in Europe, which improves our margin, actually, but it suffers a little bit on the top line. So, but still, encouraging news, not as strong, of course, as in North America, but some small bits and pieces and positive signs in the European organization. The margin was low in the quarter. It's suffering from mainly two things, one-off timing differences in France related to social cost and training expenses, which explains about half of the difference in Q2 compared to last year.
The other half is because of renewal of aviation contracts. The bad news is that we always suffer a little bit on the price level when big contracts are re-tendered, and then step by step, we have to work our way up. But the good news is that they have been extended, generally speaking, on a five-year basis, so now they won't be re-tendered for the next five years. So that's the good news about it, and step by step, we will recover that, of course. Yeah, that is the explanation of the quarter. So a bit of a weak quarter, half of the difference, timing, one-offs, timings in France and the other because the aviation contracts.
Year to date, we are only 0.1% behind, and as you know, usually the second half is we look historically in Securitas, we always have a stronger second half of the year than we had in the first half. That's no-- that is, that has been the fact for many years. Sorry, wrong way. And Ibero-America, also good growth, of course, very much driven by inflation in Argentina. But not only that, it's also that we have good growth real growth in Argentina, but also in the other Latin American countries. Spain and Portugal, of course, difficult times. Portugal has always kind of more used to the crisis than Spain.
So, Portugal, we are maintaining our business in a very professional way and they're doing fairly well, very well to manage their business. While in Spain, we suffer the organic negative growth, and that of course, together with the pressure of the social cost charges that were imposed by the government in late December of last year, which we were saying in Q1, that we were expecting, at least we were trying to get some of that compensated by price increases, we can now say it doesn't work. It, we will not do that.
With EUR 7 million, they will basically hit us for this year, and it's almost impossible to get those compensated by price increases in the market without creating turbulence in the portfolio. So, yeah, we just have to suffer that pain and see how we can manage in Spain. We still make money in Spain, but, of course, the drop in margin is exclusively explained by Spain. So the conditions remain difficult in Spain, and the market will be negative 5%-10% negative growth for the full year. We keep that expectation.
Generally speaking, although I still say that in Spain there are quite some positive signs in the macroeconomic climate, but we are dependent on that coming to the domestic demand, and that will take a little bit of time. But yeah, it's hard to predict, but I think the crisis in Spain is on its way out of the crisis, but it will still take a little bit of time.
Cash flow, the free cash flow was better than last year, year to date, and also for we have highlighted on this slide that when you look at the free cash flow, we have to remember that we are, so to say, burdening the free cash flow with the increased need of CapEx due to the investment in technology that we are, when we are the owner of equipment in our solutions to our clients. So you need to take that in consideration when you look at the free cash flow. So doing that, it's actually even more, it's even better than when you look at the line free cash flow compared to last year because we invest more this year than we did last year in that equipment.
So, we're moving on like that, and we think we should be able to have a very good second half on the free cash flow in the group, as we usually have, and it's a similar situation like we had last year, but we are a little bit ahead of last year. Yeah, the net debt is just mathematics. The dividend is, of course, a big difference. Weaker Swedish krona, stronger euro and dollar, has a translation difference to our net debt. But other than that, and the acquisition is the US acquisition that we made in Q2. On acquisitions, we are looking on primarily technology companies. We have some that we are investigating.
If things would go well, hopefully we could close maybe one of those before the end of the year. Not major, but still important. So that's where we spend our activities, and then a little bit also in new market. If there would be opportunities to make acquisition, to enter the countries which we think would make sense to be present in, to service our global clients, then we would do that, but those will be quite normally minor investments. So it's technology companies in the mature markets that we're looking at, and it's regarding traditional guarding operations, smaller ones, medium-sized, in new markets to strengthen our global presence.
So, not a lot, not the same activity as we have had in the past, so a little bit lower on the acquisition side. Yeah, and the strategy slides, I think you have seen those a number of times. If anyone has any specific questions, we're happy to answer those. So that was, in summary, the second quarter. So if there is, if there are any questions, we'll be happy to answer those. Go ahead.
Ladies and gentlemen, if you'd like to ask a question, please press zero one on your telephone keypad. That's zero one to ask a question. Our first question comes from Mr. Rob Plant from JP Morgan. Please go ahead.
Morning, Alf. In Ibero-America, the margin declined from 5.3% to 4.2%, and the statement says there were three factors. You've mentioned the labor issues in Spain. It also mentions the aviation customer negotiation and some one-offs in Argentina. Could you split those three out in terms of the impact? And the aviation issue, is that the same as in Europe, and also in Argentina, what were these one-off costs, please?
The one-off costs in Argentina were severance costs for some reduction in personnel. They are minor, so don't pay too much attention to that. Latin America, the margin is better the first six months than last year, so I think it's more relevant to look on that. And when we look on the quarter, it has a minor influence. The major, the main influence is Spain, clearly, and when you should give a big picture, so to say, it's Spain, which is our concern. You have those EUR 7 million on a full year basis, which is a problem. Of course, you get negative leverage from the negative growth, and it's always like that in our business.
It's very difficult to adjust perfectly well to that. And so, there is a price pressure in the market, so we have to struggle when we are retendering. On the aviation contract, it's primarily the Madrid Barajas contract, where we have renewed the contract at different price levels than before. And at the same time, also to some extent, our earnings in the first half, in that contract, is dependent on the passenger flow. So, the first half year, there hasn't been as much as we were hoping. So, those all together explains the aviation drop. I mean, to make it simple, the issue we have in Ibero-America is Spain. We're dealing with it. It's tricky. The rest is doing fine.
Thanks, Alf.
Our next question comes from Ms. Sylvia Barker from Deutsche Bank. Please go ahead.
Hi, good morning. First on North America, can you please ask, so when you're saying that you're 6% compliant, you haven't really signed any agreements with customers yet, have you? And what shape will they take? It sounds like they'll be given an option between a price increase and taking up a different, differently structured positions. What exactly would they look like, please? And in that sense, it feels like the margins will be down, kind of, at least during the first part of the year. What's your view on that, please?
Our view on the margins is that we should be 100% compliant by January first, which means that we should not suffer on the margins due to the ACA in the North American business. That's our target, that's our plan, and that has to be, I think, not only us, but I think it would be hard to imagine that anyone would do differently than that. So that is, it should not have an effect on the margin. When it comes to the compliance, when I mean I didn't exactly hear your question, but I guess that you were asking that what the compliance mean. It means that we have agreed with a client of a price increase effective January first, and we have that in written.
So it's accepted, and then we can continue. We can just impose that when our cost increases, and then. Or it's that we have agreed on a solution where we are redesigning the content of a contract, meaning that we are mitigating the cost increase by using more technology, more mobile patrols, more monitoring with video camera, with cameras and so forth, and by that managing the and covering the cost increase, I'd say. But that has. It means that we normally, when we do that, we improve our margin. The top line will stay basically the same or maybe even a little bit lower, but we improve our margin, and that's the whole idea with our strategy.
So that is for us a way to help the customer, but also to improve our margin. The balance of we were discussing in Q1, and we were saying that, well, if we have enough confidence to speak about the mix of price increase, and how much will be new solutions of our portfolio, we will do that in Q2, but we don't think we should do that yet. Even if we are 60% compliant, still 40% is not compliant. So we don't want to throw any numbers into the market and then have to revise those or not be they will feel unstable to do that. We have our own internal guesses in that, of course, and it will be a mix.
I mean, some you will have a price increase of 8%-10%, which will be the maximum cost increase. Other contracts are already having certain benefits, and the cost impact will be less. It will be some, maybe it will be 3% or 4% or 5% or 6%, depending on how much benefits the the guards already have. But they are not fully compliant yet, so we need to add some cost to those. So okay, so there will be some of those, and there will be others who will just retender, others we will lose, we will win others, and some will have solutions. And then how much will be the mix of that? It will have a positive effect on growth. It will.
The net effect, we, it will be a plus. That we can say, but how much and to what extent, we don't want to guess that yet. We prefer to wait another quarter.
Okay, thank you. But within the 30% incremental, you do know the split of price increases versus changing content, or you're not prepared to discuss?
No, no. We don't want to do that, because...
Okay.
Still 40% of portfolio remains, and it—we don't want to... I mean, if those go one way or the other, more than we expect, it will have quite a dramatic impact. So we prefer to wait, and we will speak more about that in Q3.
Okay. Good. And, I also want to ask, on the European margins, do you think that level sustainable? I mean, it does sound like some of that is timing, but, what is your view on social cost benefits overall? Do you think that, I mean, in France, do you think that goes away next year?
Well, I think, I mean, this what we are doing now is that we are managing the price and the wage balance in Europe. We are on par, so that works fine. And then what legislation will come next year and the changes to that, there will be some social cost increases probably next year. There will be some wage expectations for next year, and that is still to be determined exactly what that will be. But there will be a need for us to increase prices in France also next year, as there always is in France and has been for basically every year. Exactly what that number will be is not 100% clear yet, but there will clearly be that for next year.
Okay. Sorry, finally, what is your expectations of the—so where are you seeing the effect impact from Argentina for, I guess, the current quarter now running, as you're seeing things unfold at the moment? Because, what was it, SEK 38 million overall for the first half on profit.
SEK 48 million, SEK 48 million is the impact for the first six months compared to last year. In absolute numbers, it depends, of course, if the currency exchange rate stays where it is between the peso and the krona. If it stays where it is, which is actually the case right now, it will continue, of course, to have an impact for the second half of the year compared to last year, as the devaluation came in January. The big devaluation came in January. So you will have a negative staying on the same level or not, but it will be a negative number also for the second half. And then, of course, what will it devalue more or not, the peso versus the corona in the second half? I don't know.
If it stays where it is, you will also have a continuation of a negative number for the second half, as it was for the first half, SEK -38 million.
All right. Thank you very much.
Thank you.
Thanks.
Our next question comes from Mr. Stefan Andersson from SEB. Please go ahead.
Yes, hello there. A little bit follow-up there on the healthcare reform. When it comes to the, well, you're not going to answer the question on the portion there, of course. I understood that. But skip that one instead. When it comes to the Aviation Europe, I think is that very temporary for the quarter, or you say that you will have start-up costs also for next quarter?
No, it's not much start-up costs as such, it's more about the contract, because we already is reviewing existing contracts. So the start-up cost is not the issue. What is happening is that, as I explained, I mean, when contracts are retendered, usually what happens in all our businesses, and it's always been like that, you end up at the lower price level, and then you work your way up throughout the contract length, and sometimes they are extended for one or two years on top of the contract length with options in the contracts. So that is what's happening. We are now on a lower level than we were before in Q1, on some specific contracts, which are quite large a nd those that we suffer from that, and that, okay, step by step, we will try to improve, but it will not happen in Q3, of course. So that explains more or less half the difference in Europe, and then the other half is one-off items which are specific in France.
Okay, thank you. On the currencies, to understand the top line, it's been the currency has been fluctuating quite a lot, the Swedish krona has been coming down. Could you maybe elaborate on what I didn't get it, I didn't understand really what's happened on the currency side. So is it, if you could help, how you've been using the currencies in the main, I guess, peso, euro, and the US during the quarter, would be helpful.
Well, I mean, the way we do it, we calculate the average currency rate for the period, and that is what we apply. So of course we have-
Is it-
I mean, you know how it works, I guess so. I mean, the pesos become substantially less kroner, but then, we have a weakening of the krona versus the euro and the dollar, so, yeah.
Yes, okay. I'll clear my question. Have you been using the closing currency for the closing date of every month in the quarter, and then taking the average of those three? Or have you taken the average of-
Yeah
... of the currencies during the quarter?
Stefan, we have a specialist here, fortunately around the table, so you will get an answer from Jan, Jan Lindström.
Monthly rate, and we calculate, and then we add next month at that rate.
One more time.
So we take each month at that rate, and then we add it, so we don't go back and recalculate on the three-month average. So it's a periodic value that we keep on adding at each month-end rate.
Aha! Okay. Thank you. Thank you very much. That was all for me.
Our next question comes from Mr. Henrik Nilsson from Nordea. Please go ahead.
Solutions and technology share, sales run rate.
You have to repeat the question. You disappeared for 10 seconds.
Okay, sorry, sorry. Thank you for taking my questions. On the security solutions and technology share of sales run rate, what trends are you seeing here in different markets?
A lot of good activities. We're doing a lot of work, and it's not yet reflected in the numbers. Things takes time. It's a big machine to revamp. But I mean, very much in North America, we think that the healthcare reform will speed things up, getting close to January first. Europe, a lot of activities, a lot of tenders outstanding. We're measuring the activity levels nowadays, how many customers we have met, what many security scans we have made, what offers we have sent, and so forth. A lot of activity. So I... And we are spending all possible efforts in chasing and trying to support and help our organization to achieve their targets.
The same in Ibero-America, very good development in Spain, encouraging, we are at good levels, margins are coming around the way it should, and also to some extent in certain new markets. So things are. There's a lot of activities, but still the number is 9%. And if we didn't see those activity levels, we would not be confident that we will reach 18%, of course, but we still think we will get there, and we are fighting hard to get to that number. The margins are there. We are not concerned about those. We still keep reiterating that, but when we do those conversions, the margins improve, as we have said. The challenge is, of course, to transform those, all those thousands and thousands of contracts into solution from being traditional guarding contracts b ut we still think we're gonna get to 18% run rate by the end of 2015.
Okay, and continuing on that, are you seeing any difference between more mature markets such as, say, Sweden and the Nordic countries, compared to the U.S., how fast this is progressing? Is the transitioning continuing in mature markets as well, or is it mainly the less mature?
The main possibility is in mature markets because that's where we have, normally have the highest wage costs. And when you're gonna make the story, I mean, you make the calculation, you like to offer better security at a lower cost for the client, which means that you need to do guarding in a bit different way. Meaning that you have less hours on site, and you do more guarding with mobile patrols and using smart cameras. So then, of course, the payback is higher if you have higher wages. So that's where the conditions are the best, where the wages are the highest.
Okay, I understand. May, may I re- try to rephrase my question there? What I'm meaning is, in, in Sweden, to my knowledge, you have a significantly higher penetration of these type of contracts-...How is the, sort of the trend there? Is it accelerating or is it decelerating, so, so to speak, have you found?
We are doing well in Sweden. We are selling, we are taking market share. We have a good story to tell. We're winning contracts, and, and, and again, we are taking market share in Sweden. We are winning market share because we have a better offer to make. We have a better story to tell. The same in France, the same in North America, and also a number of other countries. So we have said, going back to our capital markets day, that we think even if the market is growing less going forward, more GDP flat than 1%-2% plus, we think that we can win market share because of the strategy that we are implementing. And we have the proof is in the pudding, and it works.
Okay, very good. Thank you. And one last question, if I may, here on the ACA. As I understand it, it will not impact smaller companies that have less than 50 full-time employee equivalence. Do you see that this will impact your competitiveness compared to those micro-cap companies, or what do you see?
No, no. No, it's not a concern.
Thank you.
Our next question comes from Ms., Patricia Albert from UBS. Please go ahead.
Hello. Just two questions from me. The first one is, if you can talk about the impact that the Social Security contributions and training costs in France will have for the full year, and how that fits into your expected Europe margin?
Yeah, but so we have is reduced social costs in France, correct, like everybody else has. And a large part of that is invested in training and in the development of a technology area. So we are using a large part of that to support that, which is also the whole idea with that. So and then we have some benefit from it. That's, that's, that is clear. We do. And of course we think that's going to happen also during the second half of the year.
We're doing well in France, but we invested a little bit more in training than we did last year in the second quarter, and that is more a timing issue, where we invested more in the second half of the year last year, as compared to what we expect this year.
All right, thank you. Then, has there been any change to the expected full year impact of the higher Social Security taxes or the pricing environment in Spain? Because you said, previously that this could cost SEK 65 million.
Over EUR 7 million, exactly, which is the number we have disclosed, half a year ago. That number remains the same. That's the impact of those social charges imposed by the government in December last year, just the day before Christmas, by the way. And that number still stays the same. And we were hoping to be able to compensate some of that by price increases, but it, I'm repeating, it didn't work. That we don't expect it to happen. So we are suffering the pain of about EUR 3.5 million for the first half year, and we will have the same pain the second half of the year.
Okay, thank you. And lastly, how big is the aviation area in Spain?
It's a small area. I don't have a specific number here right now, but it's less than 10% of sales, our aviation business in Spain, I would estimate. But give me a second now. We'll look into the files here. We have all the support people around myself here, so we're looking for the number. Just a minute.
Okay, sure. Thank you.
Yeah, it's between 5%-10%. It's more closer to 5% than 10%. So, in the range of 5%, roughly speaking, maybe a little bit more of the total Spanish business, not of Ibero-American business, but out of the Spanish business, right? Yes.
All right. Thank you.
Gives you some guidance, at least, the size of it.
Yeah.
But difficulties, not negative margin on that contract, so we need to find ways of how to do that. We don't want to continue to have negative margins on an important contract like that. Part of it because, of course, it has been renewed, but part of it also because of difficulties with the client and with the part of the revenue related to the passenger flow. So that's—we suffer from that. So we are taking some actions and to remedy this situation. So, because we don't like to continue, we cannot continue in this way going forward.
All right. Thank you so much.
Thank you.
Our next question comes from Mr. Rajesh Kumar from HSBC. Please go ahead.
Hi, good morning, Alf. Just trying to understand the topical question on North America. In terms of, when you say you've renegotiated 60% of your contracts, have you basically, when you've made assumptions about costing, have you thought about staff churn, if that goes up or down? Because at the moment, it's quite high compared to history, and if it moves, then that can potentially swing the cost base. So what are your assumptions on that one? And second one is on Spain, but okay, fine. Why don't we go through that one, and then we can go through Spain, the Spanish question?
I mean, when you calculate the cost increase and the impact on the ACA, you need to make a number of assumptions, and I will not disclose our formula. That would not be very smart from a competitive point of view. But I mean, we have made assumptions, and we see no reason to change those assumptions. I think they hold, and yeah, it works, and we keep checking that all the time. So I think we are making the right assumptions based on the way we read the market and how it will look.
I should also say that when we had the capital markets day, we should just remember that we said that 30% of our portfolio at that time in December was already compliant, and we were going to be at 50% mid this year. So a number of contracts to federal government contracts, to some unionized contracts, et cetera, are, of course, already compliant, and they have been for years or for the length of the contract because the customer is willing to pay for medical benefits for the guards, or it's required, or there are other regulations that makes that a part of the situation. So 30% was already compliant. Now, those 30% are 60%, and they will be 100% by the end of this year.
That sounds good, but the only reason I raised that subject is because if I understand it correctly, depending on how long an employee is with you, the medical benefits vest, and if the staff churn is as high as it is at the moment, then you don't have a problem. But should that come down, then you'll need to incur larger healthcare costs. So when you say it's compliant, does it mean that as and when it vests, the customer will take it, or is it a fixed price increase?
No, I mean, it's an agreed... It's compliant means that the contract is either compliant since before, that always has been, and we don't need to do anything. It means that we have agreed a price increase that covers our cost increase as of January first. Not we don't increase the price now, 'cause why should the customer pay for something between today and January first when we don't have a cost increase? So it's agreed that this will be imposed and applied as of January first, or we have... We designed the whole solution, so we are compliant. When it comes to, I mean, you look on unemployment rates, they're coming down in U.S., and if that happens, normally our churn is going up, actually-
Yeah
... on our employees. That's normally what happens. It takes a while, but that's normally what happens.
Cool. On Spain, if I understand correctly, you're not part of, basically the collective labor agreement. Do you think that's hampering your competitiveness at all in terms of keeping your contracts or negotiating the prices or?
I mean, there was a renewal of a collective bargaining agreement in February this year, and we are part of that, just like everybody else is, so the major players. There are always some smaller players who play of their own arena, but I mean, that doesn't really matter. So we are bound by the same collective bargaining agreement. There was a big fight about that during last year, and there was... We were willing to step out of that and sign our own agreement, but in the end of the day, everyone came, become friends, and then there was an agreement signed back in, I think it was in February this year.
Understood. That's very useful to know. Thank you very much.
Thank you.
Our next question comes from Mr. Laurent Brunelle from BNP. Please go ahead.
Yes, good morning. Three question from my side, please. First, could you remind us your Argentina exposure, and what are your assumption in term of further devaluation, but the country default, please? Second, can you update us on your current pipeline of contract and bidding, let's say, tender for the coming months? And lastly, I'm trying to understand why have you performed so well in France, and why could you explain us why you turned to positive sales growth in Q2? Thank you.
Yeah, Argentina, I mean, we don't I cannot disclose what we, what forecast rates we use. I mean, when it comes to Argentina devaluation, it's hard to, I mean, we know the facts, and I've explained those, and what's gonna happen to the currency rate during the second half, I haven't got a clue, and I am not sure very many do. So, I mean, your guess is as good as mine on what's gonna happen to the exchange rate between pesos and krona for the second half of the year. I mean, the effect of the first year I already explained, and you see the effect of the report.
And if it stays on this level, of course, there will be a negative impact when calculating absolute kronas into our earnings per share, also for the second half, just like in the first half. Pipeline, good. A lot of activity. U.S., absolutely. I repeat, very encouraging. We're happy to see that. We are doing well. There's a lot of activity in the market, a good pipeline, a lot of good bids. We feel fairly confident that we will continue to enjoy that, and we are encouraged by that we are winning market share in Q2 in North America. And so that's really good news and a shift of trend compared to Q1. So that's more positive now on that than we were in Q1.
France, we are also winning market share in the second quarter. We have won a couple of large, or medium-sized contracts. It's not by coincidence. I'd like, I like to believe that it's because we have a better story to tell, and we do a good job, even if the market is growing more or less, 0%. So we have been successful, a good team, strong work, persistent, strategy, professional delivery, but also that we have a story to tell. And I repeat what I said initially, it's not always that we are able to-- We are entering discussions with the customers of a solution.
We made a security scan, we have made those proposals, and then at the end of the day, customer says, "Yeah, very interesting, but I just renewed the contract I have. And maybe during one or two or three years later, we'll have a look at that." And, but we win the contract because we have the potential to offer something that is not being purchased right now, but it could be at least modified down the road, and we can work with a contractor in the length of a contract. So, so it doesn't necessarily have to be a part of the 18%. We're also gaining some traction just because we have a better story to tell. And I, I hope to believe that that is also the reason we are growing better than the market in France.
Okay, great. Thanks. And coming back to Argentina, can you please, give us your exposure in terms of sales, group sales, please?
Argentina, the business in Argentina is.. Over the.. Yeah, it's 25% of the division. Exactly.
25% of the division. Okay, great. Thank you very much.
Our next question comes from Mr. Ed Steele from Citi. Please go ahead.
Morning, Alf. Morning, everyone. Two questions for me, please. The first one is on these aviation contracts in Europe. You mentioned that pricing is, or margins at least have come down, presumably because pricing's seen a dip. But do you expect the margins to migrate back up to the five-year life of the contract?
That's normally what happens.
Yeah.
You could come down when you return. That's not only aviation, but it's all very price transparent, large contracts. That's normally what happens.
Yeah.
So then you work your way up, step by step during the contract length, and I expect that to happen in most of those cases as well.
But my question really is how plausible is that? I think we've seen, to some extent on third, fourth, fifth iterations of contracts in other parts of the guarding market, a situation where margins haven't migrated up to the same extent through the life of a contract because the client gets better procuring, and a lot of the efficiencies have already been driven out of the contract.
Mm-hmm.
So to what extent are we looking really here at a bit of a maturation of margins in these aviation contracts rather than the traditional situation?
Yeah. Yeah. No, it's a relevant question, but we take that into consideration as well when we bid on those contracts. What is the potential to do that? So when we... If we would go down more before, because we have more potential to improve, we could go down further on the price. Today, maybe in many cases, just like you point out, the potential to improve during the remaining contract length is less, and then we have to rebid on a higher level, so to say, than we would normally have done. So it's a part of our thinking to do that, but even so, you have a lower margin, and then you have to migrate yourself over the contract length to do that.
So there is still a potential to improve the margins in those contracts. We have had quite a large share of contracts that have now been renewed during the first half of the year, and the effect comes in Q2, as most of those new contract terms were applicable as of Q2 and not Q1. But I still think that we can migrate in some cases, not as much as before, but we have thought about that when we were re-tendering or rebidding on those contracts.
Can you give us a flavor for the sorts of things that are left to do in, say, Madrid, that hasn't been done before to drive out cost efficiencies?
There is one part which we cannot influence. That's the number of passengers, of course, but there are other things where we can introduce. Also, there are more technology and suggest we have to redesign the offer. And I think the client also will understand that there, something has to happen, because in a where everybody has the same collective bargaining agreement, the same conditions, the same structure, everything, it's not going to be any different to pick somebody else. So there we need to. We have some ideas i prefer not to disclose the details of those, but we have given and entered discussions with a customer in Spain, specifically in Madrid, to suggest changes due to the unexpected drop in passenger flow.
Okay. Thank you. My second question is back on Obamacare. Sorry for that. You've talked a lot about how many of your clients are compliant now. What's your current thinking about the uptake of insurance by your guards? What percentage do you expect them to take it up in the first quarter from first of Jan, and what, yeah, how has that thinking changed in the last few months, please?
It hasn't changed. We have made an assumption of that. I prefer not to disclose that number, but we have a specific number that we have plugged into our equation because that's exactly what you say. That's one of the key assumptions you have to make. We have made that, and that's a part of our equation. We have had no reason to change those assumptions.
How, how certain do you feel around that number? I mean, is there quite a wide range about that?
We feel certain about those assumptions. So we think we are good... and so far, so good, I would say.
Okay, all right. Thank you very much, Jan.
Thank you.
Our next question comes from Mr. Stefan Andersson from SEB. Please go ahead.
Hello again. I actually remembered my question on Obamacare. Sorry about that before. Unfortunately, just in order to understand how to model this for next year. When you on the portion where you have agreed on a price increase, have you, I mean, since you don't know really what your cost increase is going to be, it's still an estimate. Have you agreed on an actual price increase with these customers, or have you agreed that they will take on the actual cost increase you will have? Do you understand the difference of that question?
I think so. First of all, I mean, the 30% that were already compliant, back in December, we need to do nothing, to start with.
Yeah.
So there, if everything else equal, theoretically now, the growth of that portfolio will be zero. It's one to one, so to say. And then you have—we have moved from 30 to 60%, and that's a mix of agreed price increases. And those vary, because some of them are 8%, some of them are 2%, some of them are 4%, and et cetera, right? So there is a mix in that portfolio, and others have been re-tendered, and we have to bid on new conditions. So it's hard to compare because we lose something, and we win something else. So that muddies the waters. Well, I'm just confusing you now. I understand, Stefan, but it's not as—there is no simple answer to this.
And then you have the other ones, which are the contracts where we have mitigated the cost increase, and those means that we then have either a zero, basically, organic growth in those contracts, or even could be negative in some cases. So that is the equation. Then we have a cost increase of 8%-10%, which means that we need to compensate that by price increase. And of course, not to im- the purpose of that is not to use that to improve our margin. We just try to keep our margin when we impose that. And of course, it's not 100% of our cost, which is influenced by the price increase. So but, I mean, you understand that's the formula we have. We are-
Yeah.
We are just trying to protect our margin. That is the purpose. Through this big, big change in the U.S., with a mix of actions, the number is still 40% to be done. And I would prefer not to guess on the mix of those. So sorry, you have to make your own guess for the name for one more quarter, and then I will tell you a lot more about this in Q3.
Okay. But from what you're saying, you do have some contracts where you have agreed on a certain percentage price increase, and then we will see how your costs develops as you enter 2015.
Yeah, no, exactly. I mean, some contracts we will only... I mean, we have medical benefits to the guards and which means that they have something, but it's not compliant with the ACA. So we need to make some modifications, and those can be only 2% to 3% to 4% in some cases. Those, of course, then we cannot agree on an 8% price increase with the client. We will not accept that. So we just agree on a price increase that covers our costs, so we protect our margin. That's what we mean. That's the definition of being compliant as a part of a 60%.
Thank you very much.
A reminder that if you'd like to ask a question, please press zero one on your telephone keypad. We have our next question from Mr. Mikael Laséen from Carnegie. Please go ahead.
Yes, hi. Just had a question regarding aviation, and if you have, so far, the full impact in your numbers on these new contracts?
In Q2, yes.
Okay, so there will not be any more n ew contracts coming in here in the second half?
No, there has been substantial renewals during Q1, which or end of last year, effective Q2. And there are no large aviation contracts which will be around here now for the next rest of this year and also entering next year. So there has been some renewals. We're happy we keep those. That's the good news. We keep those contracts now for five, six years, with in some cases, even options to extend those further. So that's really encouraging, so we don't lose the top line, but we suffer a bit of the margins. But yeah, the answer to the question is the first piece I gave.
Okay, thanks. And the client retention in the US, 86%. Can you explain the, these levels, relatively low compared with last year, and also against the, the positive market climate and you, you gaining market share? And-
There has been quite some... I mean, we lost some contracts going back in; it's a rolling number. We lost some contracts, which we talked about in Q4 last year, and then we won some others. So there have been a bit of it. There were some big contracts for nuclear power plants in the energy sector. We lost a couple of big multinational companies in Q4 last year, and then we have won others. So there has been a little bit of turbulence in the portfolio, but also there's a yeah, I think that explains the 86 versus the 90 last year.
Mm, okay. Thanks.
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Okay. Thank you very much for listening in, and keep enjoying the beautiful summer. Thank you very much. Bye.