Hello everyone. Very welcome. We'll present the January, March numbers, the Q1 numbers 2014 , and we move on straight away to the first slide. Good news in the report is that the top line is growing 2%, compared to flat last year. We see signs, good signs of recovery in the U.S. security market, and also that our we ourselves are improving our ability to take advantage of that. We have made a couple of actions last year to strengthen our market attention, our market and sales organization. We made some reorganizations last year. All- in- all, it starts to pay off. So we enjoy having a better growth in the U.S., as well as that the security market in the U.S. is growing at least 2%, we think, in 2014. So good signs, positive recovery in the U.S. internally and in the total market.
In Latin America, continues strong. In Europe, not as strong signs of recovery, but still it's better. The trend is positive, but not as significant as it is in the U.S., mainly driven by France because France was quite negative last year, and the French security market was dropping about 5% last year. This year we expect it to be basically flat, and we have also our negative organic growth last year has turned into basically a flat organic growth this year. And that, of course, both from a market and from a Securitas point of view, has a major impact. The Spanish market, though, is still difficult, even though I strongly believe that Spain is on its way out of a crisis, and a lot of positive things, measures, and signs prove that Spain will step by step get out of a crisis.
And then we, as being late cyclical, will hopefully enjoy that with a more or less one year's time lag. Anyhow, this year we think the Spanish market will continue to decline in the range of 5%-10%. So we still have a very difficult situation in Spain, and that has hit our operating margin, which is mainly the only reason why we are 0.1 behind last year. North America and Europe are flat compared to last year, but in Ibero-America, the whole difference is explained by Spain. Latin America is actually better than last year on a margin point of view, but Spain is declining dramatically a nd, and the reason being two.
One is, of course, the tax on the social cost that was imposed by the government the day before Christmas last year, and that we didn't have a chance to compensate for that already in December and not in January, February, and March. So we have been caught by surprise in a way and not been able to pass it onto the market. So that cost is EUR 7 million on an annual basis and just divide by four when you have the effect in Q1. So that one is that we have not compensated in Q1. We will continue to try to compensate that during the rest of the year, but it's quite difficult. So what we have lost is lost in Q1, and then we'll try to do whatever we can for the coming quarters.
The other reason for the margin drop in Spain is because of the renewal of contracts. To keep them in the portfolio, we have to make price concessions, and those have had an effect in Q1 as well. The devaluation of the Argentine peso, which was dramatic in January, has had an impact when we convert the result to kronor, SEK 21 million in Q1. Even having said all this, the EPS actually improved, mainly because of the improved finance net. But anyhow, everything counts. All money counts, and in the end of the day, it's EPS that counts. So bottom line, improvement of 9% Q1. And our target of free cash flow to net debt remains 0.20, and we are at 0.20. So no big drama on the cash flow.
It's always fairly weak in Q1, and so this year as well b ut no dramatic surprises there. Yeah. Here is even numbers again. The good news on the top line, the suffering a little bit from Spain then on the operating margin a nd in absolute numbers, the FX in Argentina has an impact as well. T he financial expenses we have dramatically lower because of the repayment of the expensive bond that we had in euros, that now we have enjoyed for the last quarter. We have had that for three quarters last year with a lower interest net than we had the year before, and so this first quarter. And then from April 1st, we are now calibrated such that to the past to the comparatives.
In North America, again, good support in the different business units, and also positive signs regarding the regions, we start to see a gradual increase in tender activity. On the healthcare reform, we still believe an 8%-10% price increase, or cost and price increase. And so that judgment still remains. And we presented in the Capital Markets Day that we think that we will be compliant to about 50% by mid this year and then 100% by the end of this year, and that is still for sure what we will be able to achieve. That is our ambition, that we should be in that level, and we are moving very well on that trend. And some customers will accept the price increase. They will just take it simply, a nd some have already accepted.
Others will look for an alternative solution, and some have already found an alternative solution effective as of January 1st, 2015. And that is still moving on. What the number will be, it's still too early to predict. We will be more probably, hopefully, more specific about that in the coming quarters. But of course, some effect of what on the top line from the ones who accept the price increase, for sure, that will be the case. The operating margin is on the same level as last year, so not much to comment there. In Europe, also, some signs, but not as strong recovery signs as in North America. Good development in Turkey. We won a contract in Norway to the oil and gas industry, which we started the past week. So that will help us going forward.
In France I already commented, and we lost some contracts in the U.K. in the quarter, and we also have some history, so to say, that we suffer from in the U.K. So still negative growth in the U.K. in Q1 b ut we have a new team in place in the U.K. They're doing a very good job, new management team. So I'm in a market which is not growing. It's more or less flat. I'm still optimistic that we will start to see some good developments from the actions taken in the U.K. going forward. Operating margin on the same level as last year, so same comment as for the North American part. Not much to say. It's in line with the previous year. Yeah.
And then, of course, in Ibero-America, very good growth, continued driven by inflation to very high degree in Argentina. Even so, that's always been the case in Argentina. So good organic sales growth of 7%, and a very good growth in Latin America, 24%. But suffering, of course, in Spain with -10% and very difficult conditions, which I already commented, and we're doing a good job to mitigate that, in the technology area and the solution area. So we have doubled the amount of sales in the past two years in Spain. We're now up to 16%. We were 8% two years ago. And we've a good trend, moving on very well. But even so, that is not enough to compensate for the difficult part in the overall guarding business.
So the technology part is still too small, so to say, to manage the drop we have in the guarding part. Margin, suffering from Spain. I have already given you the comments to that. We will do whatever we can going forward to try to manage this, the need for compensation through price increases b ut in a tough market, declining market, it's difficult. But that is the message to our organization, to our market, but it still needs to be seen if we are able to do that. So I cannot predict that. We will do our best and fighting hard with a very good team in Spain, but they are fighting under very difficult conditions. Yeah.
The cash flow, I basically in line with last year, we basically consider it ourselves as more or less in the same level as we were in last year. So no big changes there. And our prediction on the need for CapEx remains the same, provided, of course, that we keep the speed to reach 18% of total sales in technology solutions by the end of 2015. And we still believe that we will do that. And you will see an exponential increase of that speed driven by the ACA, the healthcare reform in the U.S., of course, that will put some extra fuel to that a nd secondly, of course, all the investments, all the activities, and all the things start to pop off.
The popcorn starts to pop, so to say, hopefully in the rest of the organization, especially in Europe that will then we will see that drive to that. So our target is 18% in the run rate Q4 2015, and our forecast is that we will reach that. Net debt is fairly stable, very little acquisitions, and that will be our strategy going forward, that we are not going to make a lot of acquisitions. We have a couple that we are looking at, but they are mainly in technology. So making guarding acquisitions, that will be exceptional cases, but not very many, if any. But in the technology area, we have a couple that we are studying, not very large, but still important.
And there might be some of those, but it's not going to be any dramatic numbers from an acquisitions point of view anyhow. So we continue to be restrictive on acquisitions, and we will need some of our acquisition firing power to manage the CapEx need, of course, given the fact that we increase sales in solutions and technology. Yeah. You've seen this picture before. I think many of you are familiar with that. The security market growth is in line with GDP nowadays, which historically was better than that.
We will try to mitigate that by taking a larger share of the insourced security market, which I think will be challenged, in a good way as technology becomes more and more important, and the insourced capabilities are normally fairly limited to more or less run the business in a traditional way. And when things are changing, they will be questioned, and then I think there is a chance to attack that market. And also, in some countries, there is quite an active discussion, Sweden being one right now, where the government will investigate the possibility of a private security market to take a larger responsibility from what is presently done by the police.
And that, we've seen a couple of markets, so that are ways that can mitigate the trend of less guards, I think, going forward in the longer perspective because the solutions and the technology will have been more and more important, and solutions will be more and more important in selling security solutions for the clients to the clients. Yeah. This one is I think everyone is familiar with. If not, we can come back to it later on. So that was the short version. We are a little bit under time pressure, so we will allow for questions, but we have an AGM in an hour and a half from now, so we need to rush to that as well. So please, go ahead. If you're going to have any questions, we'll be happy to answer those. Thank you.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad. Our first question comes from Mr. Rob Plant from JP Morgan. Please go ahead.
Hello, Alf. In terms of the situation in Spain where you're seeing price reductions as contracts renew, has this trend just continued from before? Has it got worse, and when do you think it might start to abate? Thank you.
Yeah. I think it's got a little bit, I mean, maybe worse. It's too dramatic to say, but I mean, we were expecting the market to decline in the range of 5%. Now it's more like 5%-10%. So price competition is fierce, and then we got this Christmas gift from the government in December, which made life difficult, of course, in Q1. So conditions has got worse in Q1, a little bit worse than we expected without being too negative saying that.
Okay. Thank you, Alf.
Our next question comes from Mr. Laurent Brunelle from Exane BNP . Please go ahead.
Yes. Good afternoon. Three questions, if I may. First, can you elaborate a bit more about Spain and how about your ability to pass on price, I mean, to pass cost inflation onto clients? So can you give a bit more color about that, please? Second, can you elaborate a bit about improving market condition in France? And finally, you're talking about a quick ramp-up in Spain for your technology business. Can you give more details in other key countries, please? Thanks.
There in Spain, I mean, there is basically no inflationary cost to pass on. I mean, in Spain, the inflation cost we have in our business is the wage cost increase, and that has been successfully negotiated with the unions, an agreement, a labor collective bargaining agreement, a CBA, which means zero cost increase this year. And that was a good achievement. So, from that perspective, there is no labor cost to pass onto the market. The thing we have to pass onto the market is, of course, the increased social cost that came in December, and that we have not been able to do, but we will try to do that. It's not easy, but we will try to do that going forward. And yeah. And then, the second question, France. Yes. I mean, things are picking up in France.
We still—we, I mean, from a macroeconomic point of view, I think what is worth saying is that we start to see actions taken, and an insight that actions needs to be taken, and that is good news, and that gives some credibility and confidence a nd the security market is not decreasing anymore, and it has been decreasing in the range of 3%-5% last year, and now we see it being more flat this year. So and we ourselves as well, we are also flat in Q1 in France. So that's good news in France. So, and that has, of course, been a major impact to our European business about what happens in France. The development in Spain has been very, very good.
The team where we, we made an acquisition of a Chillida company, and then we have hired a lot of people from, well, formerly Niscayah, nowadays Stanley. We have built an organization by employing a lot of engineers, a lot of technicians, a lot of maintenance people, and we have invested tremendously into this in the technology area and been questioned, of course, from time to time, but we are investing in a market which is in a severe condition, but it has paid off. I mean, now we are doing well. We make good money. We improve the margins. We mitigate the decline. We have more weapons to fight with in the market.
So given that, it's not enough to compensate for the drop big drop in the guarding in the traditional guarding business, but it makes a difference, and, and it's content becoming higher and higher, and going from 8%-16% in two years is, is really an achievement in a very difficult market, but it has been forced by the fact it's been a very tough market. So, the urgency or the sense of urgency has been higher, of course, than it would be when you do not have the same survival mode that we have had to have in Spain. So Iberia, the Spanish organization, has done very, very well. We see the same trend in a number of countries, and others are not moving as fast as they should.
So there we are, supporting and helping and following up and, and trying to find all kinds of means and ways of developing that. To give you another example, right now in Belgium, we have a very, very good speed in improving the solution sales of our total portfolio is in Belgium. So that's another good example around and there are many others, but others are still in the they have not started to pop yet. I mean, there's still some way to go to get the popcorns to pop in some of the other countries.
Okay. Great. Thank you very much.
A reminder, though, if you'd like to ask a question, please press zero one on your telephone keypad. Our next question comes from Ms. Sylvia Barker from Deutsche Bank. Please go ahead.
Hi. Good afternoon. Two questions if I may ask. First, on the U.S., would you be able to disclose the percentage of technology there or just give us an idea of how that has progressed? And obviously, the run rate has been improving every quarter. Sort of which regions has that been coming from? And then also, you're aiming to be 50% compliant by the middle of this year. So within the next kind of month, are you close to that target now, as of just relating to the ACA? And I just wanted to also check what percentage of Europe is actually France at the moment, please?
Sorry. What was the last question?
Just what proportion of your European business is France at the moment?
All right. The technology and solution content of our North American business is less than 1% today. So, I mean, we still, it's a very small part. So we are very early in the phase, and what's there is a huge amount of activity, a lot of engagement with the clients, a lot of proposals made. Very, very many of our branches and areas are engaged and making proposals. It's a very good activity level, but very few has turned into contracts that shows up in our P&L in Q1. So in Q1, we are less than 1% in North America, so there is room for improvement, but I think it's coming because when I look on the activity level, it looks good. The compliance with the ACA, 50% by mid-year, we will make that. We are pretty close already.
So, that I'm not concerned about where we will be at the 50% in the middle of this year, since we are very, very close to that already right now. So that we will do. And then we have a big challenge, of course, the second half, to get to the 100% during the second half, but all the activity levels and everything else is moving in that direction. Then I'll give you the percentage in a minute. And France is, too, in between 15%-20% of the European business, specifically, yes, in that quite in the middle, in the 17% area of the total sales of the security services European division.
Okay. And so just on the compliance, so if your 10% increase in cost, that's depending on you being 100% compliant, then would the cost be higher?
All right. I don't know how much of that will be. What I mean, I cannot give you that number yet. It's too early, but I mean, when I say compliant, it means that the customer either has accepted a price increase of 8%-10% or whatever number it would be for that customer. Some will be less because they are semi-compliant already. So we have an acceptance that that will be imposed as of January 1st, 2015. Then we consider it compliant, because it's all confirmed in writing, et cetera, or they are accepted a solution, where we present an alternative to the client whereby, we mitigate the cost increase by putting in a different solution using more mobile guards, cameras, remote video, et cetera.
And then, if we have that confirmed being implemented during from now till the end of this year, it's also compliant a nd so one part will be zero growth, when we basically mitigate the cost increase, and others will be maybe up to 8%-10% growth because or 4% or 6%, whatever the number will be depending on it and they just simply just swallow the cost increase in due to the wage cost increase. So what that mix will be, it's too early to tell. That's too early to tell. When we come to Q2, we will know a lot more about that, and clearly in Q3 for sure, of course.
Okay. Sure. But it'll be fair to say that in Q1, Q2, 2015, your costs will be—I mean, your costs versus kind of price balance would be—I mean, your costs would have gone higher versus where your pricing would have been given the progress kind of you're having now, or is that more fair when you say in terms of the time? Obviously, the run rate would be hopefully-
I mean, clearly, we will—I mean, one year from now, Q1, Q2 next year, we will have a wage cost increase which has been compensated by a price increase, and that will be organic growth a nd another part has been compensated by a different solution which will be zero organic growth because then we just mitigate the cost increase by giving the customer an alternative, and that could be flat, basically then, top line, or even a lower cost depending on what solution we will have with clients. And that's why it's too early to guess b ut one chunk one piece of the portfolio will clearly be just simple wage cost and price increase for sure.
Okay. Sure. Thank you.
Our next question comes from Mr. Stefan Andersson from SEB. Please go ahead.
Oh, thank you. I have a follow-up there on the U.S. When in the presentation, Alf, you mentioned that, some have accepted the price increase and some have been looking at other solutions. I guess you meant other solutions with you. I would – that's what I'm guessing you're meaning, especially given the answer you gave in the last question. But if you now could you possibly give us a flavor if do you have had some clients who decided that they would go to another supplier as well, or has that not really happened?
No, not. I mean, I'm sure I cannot be – I don't know exactly every single detail of that, but I mean, generally speaking, there has – I mean, we have engaged with the clients, and then we discuss the alternatives. And everybody plays by the same rules. So the turbulence in the portfolio has not been dramatic. I wouldn't say so. There has been, you always lose something, and there is also some turbulence, but that has not been a major issue now. It has not been a major issue. I'm sure there are a couple of cases like that, I'm sure, but generally speaking, if I go to competitors, they will face exactly the same conditions as they would face with the price and the increase.
And we have a story to tell, I think, as well, which is the good work that we have spent an enormous amount of efforts on in the past two years is to be able to propose to the client an alternative instead of just increasing the price, namely via the solutions and technology ideas that we have put in place. So I think we have and that also helps us to keep control and minimize the risk of getting turbulence in the portfolio.
Okay. Thank you very much.
Our next question comes from Mr. Henrik Nilsson from Nordea. Please go ahead.
Good afternoon, everyone. Alf, you mentioned worsening conditions in Spain in Q1, if I heard you correctly. Does this have anything to do with the ramp-up of technology solutions, i.e., or is that causing a pricing pressure?
No. No, it's not. On the contrary, that helps us to mitigate the problems.
Okay. Thank you.
A reminder, though, if you'd like to ask a question, please press zero one on your telephone keypad. We have a follow-up question from Ms. Sylvia Barker from Deutsche Bank. Please go ahead.
Sorry, just making use of the call being a bit shorter.
Yes.
Just a very quick one. Price and wage expectations for the rest of the year, excluding Spain, please?
Yeah. I mean, our ambition is, of course, to manage that excluding Spain, to keep that on par as we always do. Q1 is normally too early to tell. Q2, much better than we have, we have come much further in the price wage discussions in the country. So the best answer I can give today, our plan, our ambition, as always, is to keep it on par, but to be more confirmatory on that, we need to get one more quarter down the road.
Okay. Sure. How often do you so the majority of your contracts will be, once a year, or?
The contracts, I mean, vary, I mean, it's a mix. Some contracts are January 1. Many contracts are at the time, the day of signing. The renewal date is the day we sign the contracts, so that could be any day during the year. Others are, yeah. I mean, others are long-term contracts with indexes and et cetera , so it's a mix. There's no simple answer to that question, unfortunately. Yeah. But I mean, yeah. I mean, that's our plan. I prefer to be not more speculative on that point at this point in time, but certainly, our ambition is to keep it on par, absolutely.
Okay. Thank you.
If you'd like to ask a question, please press zero one on your telephone keypad. We have a question from Mr. Mikael Laséen from Carnegie Investment Bank. Please go ahead.
Yes. Hi. Could you maybe talk about the U.K. market, the measures that you've taken there and what impact that could have later on this year?
What we have done, we have a new management team in place that brings a lot of energy to the U.K. organization. We have strengthened the technology organization dramatically in the U.K., put a lot of people from the U.S. in the U.K. in place. People are being hired as we speak, and also from outside the U.K. to bring good competence to the U.K. organization. So we think that we will have a good offering, a good story to tell, doing more or less the same thing as we have done prepared in the U.S. for the past two years, that basically copy and paste of what we are doing in the U.K. and getting ready to be more aggressive and more alternatives to the clients in the U.K. market.
So, I think that the conditions of doing that in the U.K. are pretty good, and that we are. I'm quite optimistic that the new team will be able to be successful. It doesn't happen overnight, so we should not be too bullish on that, but on the other hand, things are moving in the right direction.
Okay. Thank you.
No further questions on the telephone.
All right. Thank you very much, everyone. Thanks for calling in. Thank you. Bye-bye.