Morning, everyone. Very welcome to the nine-month report from Securitas, and I will lead you through very briefly a few comments on the slides, and then allow for questions after that, the usual way. We have a quarter which we really don't grow. We have 1% growth, so we continue to struggle in a market which doesn't give us much help on the top line. But we continue to improve our margins. We have improved the margins in the first nine months in all divisions. We get the full effect of a restructuring program, which we did, and the cost savings we did last year. It's going exactly according to plan, so we deliver 100% according to what we were expecting and what we have promised to do on that, and that is giving the support to the margins.
So if we look on our result, we are improving the results and the margins in all divisions. And then, we have also had a good cash flow in the quarter compared to last year, which was not a good quarter, but this year we did better. So we had a good cash flow in the quarter, and we should continue to have a good cash flow also in the fourth quarter, as we usually have in the second half of the year. And on the technology side, we continue to work on that plan, and it's moving according to our plan. So we are step-by-step moving up the value chain and delivering more and more technology solutions to our clients, and that in that way, improving our margins.
So looking forward, I mean, we are not the macroeconomic climate is tough. It's not gonna... And we are usually about a year late to the macroeconomic recovery. There are some fragile signs of recovery, but doubtful from place to place, from country to country. But no matter what, I don't think we're gonna get much of a help from a top-line point of view, in the near future. So improving results comes from our strategy of increasing the share of technology and security solutions, which for sure drives our margin, and that should continue to improve our margins going forward.
If you look at the results more in detail, you can see that we have improved pretty well in the first nine months compared to last year, and in real terms, on net income after tax, we are up 26%. We are also helped by a lower finance net compared to last year because we have restructured the financing of the group and where we got rid of a very expensive bond financing in beginning of April this year. And that, of course, helps the finance net in Q2 and Q3 and so forth, compared until we get until we reach the comparatives in Q2 next year. In North America, we have won some contracts from competition in the federal government business.
So, in addition, some other segments in the U.S. have supported the top line. It's still not dramatic. We think the security market in North America is growing in the range of 1%-2%, and we are pretty close, but maybe slightly behind. The Affordable Care Act, you are fully aware of, I suppose, the situation on that. Nothing has really changed. There has been no impact from the messy situation recently in the U.S. That had no impact to our business. But there is, of course, still a low activity on the tender activity because of question marks and the uncertainty about the ACA, and it's being questioned all the time.
So many customers, they just wait and do not re-tender their contracts, and so there is a lower tender activity in the first nine months than there usually is in the U.S. We are approaching the clients now, and we are starting to get a lot of interest from our clients with our alternative solutions to how to organize the security, and to find ways to mitigate the ACA when it comes in effect, with a 10% cost increase effect in about a little bit more than a year from now. But of course, the interest to take decisions is limited for the time being until things are getting a little bit closer.
So, a lot of activities, but not a lot of new sales in that respect yet. The margin is improving, and as in all division, mainly driven from the cost-saving actions that we took last year. So that helps the margin in North America as well, and the other divisions. We also had some issues last year in the federal government service, and those have been taken care of, and that is now contributing to the results in North America. So we have turned that business around, and it's making money. Not a lot, but it's still making money, and that has a positive impact. Yeah, we can go more into detail later if there are any specific questions about that.
I'll try to just go through the main headlines before we allow for questions. In Europe, we are pretty much flat in the market. Germany and Turkey, good sales growth to highlight two countries. To highlight two countries which is negative, it's France and the U.K. The French security market this year is probably negative with about 3%-5%. Next year, I expect France to be flat, so it should not continue to decline next year. U.K. is pretty much flat. We have been negative because we lost some contracts in U.K., and I don't think it's gonna be any different next year.
It's probably gonna be more or less a flat market next year as well. The same pattern where we are lagging the business cycle, so any very fragile signs of recovery in some countries in Europe, it still remains to be seen that that is going to happen. And when it happens, we are 12 months late normally in that business cycle. On the operating margin, it's good in Europe. We're happy with that. It's in the quarter, we were at 6.9% versus 6.2% last year. Then you should remember that that is boosted a little bit by a one-off, a few one-offs, one a little bit more restructuring cost in negative in U.K., but the plus by selling the residential home alarm business in the Netherlands and Belgium.
So if you adjust for that, the margin would have been 6.6 compared to 6.2 in the quarter last year. So still an improvement, and even so on a year-to-date basis, that is though offset on a group level basis, I can mention already now in others, on the line others, which is outside the segments with a negative impact of a more or less the same amount, in the write-off of assets in Singapore, which is more or less the same amount, just over SEK 30 million as the one-off profit from selling the home alarms within the European segment. So that kind of evens out on a group basis.
Price wage behind in Europe because we have to be a little bit have to be careful in a few countries not to get too much turbulence in the portfolio, but compensated by in Europe by operational improvements and reduced social costs in France. So all in all, Europe is improving, mainly driven by the cost savings that we did last year, and the big chunk of the cost saving were in Europe, and they deliver in Europe, we deliver on plan, so I'm happy with that development on the margin side in the European segment.
In Ibero-America, as always, a mixed picture, good growth in Latin America, 20%+ in Latin America, while Spain remains weak at negative of -12% year to date, and I think it was -11% in the quarter. The Spanish security market this year is declining by about 8%-10%, sorry, 10%-12% this year. So we are pretty much in line with the security market this year. It will continue to decline next year, with probably in the range of 5%-8%, is my guess for next year in Spain. On the margin side, we have the same picture there. Very good support from a restructuring and cost saving program that we executed end of last year.
We also had the collective bargain agreement, which was favorable, that supports us, and we also start to see some really good effects of this, of the solution and technology implementation, which is now contributing to the results in Spain in a good way and substantially has improved compared to the same period last year. And then we are lagging behind on the price increases in, in, especially in Argentina. So Latin America is, in the quarter behind on the, on the margin compared to last year. And if we look on the, on the, on the year-to-date basis in Latin America, they are pretty much on the same level as they were last year.
So it's in the quarter, we are lagging behind, and we're going to catch up with that, that difference on the price increase campaign, in Q4. So that's more timing issue, in Ibero-America. Spain, we are delivering better margins and better result compared to last year, while Portugal is suffering compared to last year. Cash flow, we did well. We had a good quarter, with a free cash flow of just over SEK 1.3 billion, and on year-to-date basis, SEK 1.1 billion, and it should continue to be a good cash flow in the fourth quarter, and October was on a plus. So that supports, October supports that statement.
Yeah, net debt is mathematics, as you can read for yourselves, so to say that the development of a net debt varies. So we may be worth mentioning is that acquisition, acquisitions, we are very restrictive on acquisitions and basically not looking for buying mature guarding companies in mature markets anymore. We are focusing primarily on technology companies, and we bought two in the last couple of weeks, one in South Africa, which adds a lot of value to our very well-developing South African business, which now starts to be a sizable business and delivering on the margins that they should do. So that was a good acquisition that will add value to that operation.
And then we also bought the leading technology company in Croatia, just a few days ago, we closed that deal, which will add value to our Croatian operation. We are number two in Croatia, and I'm quite optimistic that Croatia will be a very interesting and very developing market in years to come. And now we are strengthening our position in the technology side, not only for Croatia, but also for neighboring countries, where we can use this technology company to support that strategy in that region. Yeah, and, then, this slide you've seen about 50 times before, I guess, so you're getting pretty used to that, but consistency pays off, we think. And, so we keep working on the same agenda.
We are moving up the scale on the ladder here, and we are step-by-step also improving the share of solution and technology sales out of total group sales. It's a process, but we are moving in the right direction. We are on track according to our plans, basically. The good news is that the margins we can confirm, we see the margins, and as we take every quarter, one more step on this journey, we can confirm that we are delivering on that margin improvement as we expect. So that's, that box seems to, that part seems to work well, but there is still a lot of work to do to get to the 18%, where we should be by the end of 2015.
But this is a fascinating and fantastic shift that's going on in the security industry, that we are spending a lot of time and efforts on, and really focusing on that, and also trying to lead the industry in this direction. Some commercials, we have Investor Day on December fifth in Stockholm. And if you want more details on that or any questions, you can contact Micaela, and she will guide you, give you guidance to that Investor Day. All right, that was the short version. So, please, if anybody has any questions, we'll do our best to answer them.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you'll enter a queue. That is zero one on your telephone keypad to ask a question. Our first question comes from Sylvia Fotedar from Deutsche Bank. Please go ahead.
Hi, good morning. A few questions by region, please. In North America, can you please ask about pricing trends going forward? And also, what are you seeing in terms of SUI and workers' comp ? And, in Europe, is it possible, maybe you or Bart, to talk a little bit about the French impact, so the impact on from the French tax subsidies, and is that offset, will be offset by tougher pricing, what are you seeing from clients? And also, the delay of the ACA. Have you changed your strategy in North America to - I mean, I know you were using partners for the tech before. Are you going to be building your own capabilities there? Just if it's possible to get some details on that, please. Thank you.
Also on the Singapore write-down , please. Thank you.
Okay. We'll do our best to answer all those questions. In U.S., we don't have much of a wage pressure in the U.S., and we are pretty much in line on the balance with price, price and wage. The SUIs we have not increased, there is not a pressure on that. The unemployment has been fairly stable in the U.S. Workers' comp, I don't have any details there. I'm looking here on my friends if there is any impacts there, but I don't think so. Nothing that we have at least noted. Everyone is shaking their heads here. No, no, no major impacts on that, obviously. Price concessions. Sorry? Some price concessions we have, though. Yeah. But I mean, generally speaking, we can say that price/wage is pretty much in line in North America.
So the improvement on margin is basically driven by the actions we took last year. And then we have explained some more details in the report. So much more to add on that, I don't have right now. In France, the reduction of social cost by the government support has a positive impact in France, absolutely. On the other hand, we are not increasing prices as much as wages are going up in France this year. Mainly for one reason, because of this money that we are supported by the government with.
And also, some of that money we are also investing, that we get from the government, we are investing in the technology implementation in France and in training of our people, which is also the intention of this support. So it has a positive impact, yes, but we are, on the other hand, more restrictive on the price increases in France. On the ACA, I mean, the delay had an impact that we have more time to prepare and work with our clients and talk to our clients. Our offering in the U.S. is based on that we have a partner, we have partnered with a company in the U.S., who does the monitoring.
We don't have a monitoring business of our own in the US, so we have a partner in the US who does the monitoring part and as a part of our package, which is one ingredient in the total package, for our clients. But, I mean, all the—to put the technology together, to package that, to do the guarding part, the mobile part, the call-out business, the patrol business, all that, all those things we have in-house. But on the specifics of the monitoring business, we have a partnership with a company. Singapore, it was a contract. It was a bad contract that we entered some years ago. We should not have done that, but it was unfortunately a mistake.
The people responsible are no longer with the company because of that, mainly because of that. So we have decided to not continue with that contract, but to sell it. And then we have to write off the investments in assets that we have made in order to manage the contract. So that is the negative impact, and as I said, on a group basis, it's offset pretty much exactly by the gain of selling the home alarm business within the European segment. Does that-
Okay, thanks. I think North America, my question is more on pricing on contracts, and do you have any maybe large ones that you will be extending, in the coming months where you again might see pricing pressure take place?
No, no, no, there is no. There has been some large contract within the healthcare business and the aerospace business, which have been renegotiated. When you do that, you always normally have a negative impact, and then you have to start, let's say, work your way up over the coming 3-5 years. So that we are suffering a little bit from that this year. We have also explained that in the report. But there is no major other ones that is for the next few months, no, there is not.
Okay, thanks. And so just finally, are you bidding for any airports?
There have been a couple of airports which have been on the radar screen. We looked into it. If we were going to do that, they were, so to say, available to bid on, more or less, at least. But there were some issues, and we were not prepared for that, so we decided not to spend the money and the efforts to go for those bids. These are large contracts, and it costs quite a lot of money to make a professional job to bid on this kind of contract. So if you're not fully prepared and not fully ready, and you don't think that we can make money on those contracts, and the other prerequisites are not there, then we simply just don't bid.
There will be others coming, there will be more of that, more so and so, step by step, there will be more contracts next year and the coming years, on the market, and we are spending an increasingly amount of efforts to decide exactly how we're going to go about that and if we will be more active to bid on those contracts coming the next couple of years. We will try, we will do that, but we need to be sure that these are contracts or it makes sense for us to go in there. We don't make a hostile, so to say, we don't get into a hostile environment, and we also have a good chance to make money on these contracts. We are fully prepared to take on a big, normally, a pretty big airport.
I mean, these are huge contracts with a lot of exposure and responsibility, so we need to be very well prepared before we bid on a contract like that. So, yes, I think that, I hope that we will bid on some contracts during next year, but this year we probably don't do it.
Very clear. Thank you very much.
Our next question comes from George Gregory from UBS. Please go ahead, sir.
Good morning, everyone. Two questions, if I may. Firstly, just following up on the North America margin, you saw about 60 basis points year-on-year improvement in the first quarter, 70 basis points in the second, and the third quarter margin was up 10 basis points. I presume that is attributed to the renegotiations of the aerospace and defense contract. Interested in whether we should extrapolate that year-on-year impact into Q4, and/or whether there's anything else going on there that we should be aware of? Second question, following up on the French tax credit. The price concessions that you talk about in France are in quite stark contrast to the temporary staffing companies like Adecco or Randstad, who have been telling their clients that the benefit is for them to keep.
Perhaps you could elaborate on the conversations you're having with clients on this topic, where you are clearly somewhat more willing to pass on that benefit. Thanks.
You are—I mean, in U.S., yes, you're correct. I mean, we have had a positive impact from the restructuring actions that we took last year on the margin in U.S. compared to the year before, but it has been hampered by the renegotiation of that aerospace defense contract, which was a major contract. So, and that, I mean, that renegotiation happened—these things happen all the time. So that's a part, that's the, that's a natural part of our business. And when you do that, you drop in margin, so you live with that.
So the answer to your question is, that specific contract, yes, it's on a lower level, and it will be, and then step by step, you work your way up over a period of time. And then that goes for all the contracts in the portfolio. But this contract is a large portfolio contract, so that has had a negative impact in the quarter. I don't think I can be more specific than that, on that specific on that matter. On the French situation, there is, of course, an increasing demand from our clients that we should, that they should get the money that we get from, as the lower social cost in France, and they are pressuring a lot on that.
And that's what I'm saying is that as a concession to that, we are not as aggressive on the price increases as we would normally have been without that subsidy or that money. So, to some extent, yes, and the clients, of course, will continue to be very demanding and ask for price concessions, and that they should get the benefit of this money. On the other hand, what we are doing with this money, and a large part of that money that we get, is that we use it to invest in the technology. And we can speed up the implementation of the technology and train more people than we otherwise would have been able to do with the money we make in France.
So, so we are spending quite a bit of that money in order to speed up the technology implementation and the training of our people, which will benefit the clients, because then we will quicker be able to offer them solutions which will be more cost-effective than the traditional way of doing manpower guarding, where we can combine technology and modern technology with the guarding part, and then they will have better security for less money. So that, I think, is a very relevant argument to use the money in that respect as well.
Okay, thanks. Thank you. Our next question comes from Mr. Paul Checketts from Barclays Capital. Please go ahead, sir.
Good morning. I've got a couple, too, please. The first one, it's on the technology side. On acquisitions, what sort of EBIT multiple are you having to pay or vendors looking for? And on the same topic, if you think about the investment required in meeting your target of tripling technology sales, how much do you think that will be acquisitions, and what proportion will be self-investment?
The self-investment is the predominant part of that. I mean, we basically don't expect acquisitions. We don't include acquisitions in that calculation when we have put the targets internally. Maybe they will help us to—if we lag behind in one country, we can cover up by acquisitions, so to say. But generally speaking, most of that, I would say to 90% of that journey, and/or even more than 90% of that journey, is gonna come from pure organic transformation of Securitas. Winning contracts from competition and transforming the existing portfolio primarily. The multiples we pay for technology companies, the ones we have looked recently, we—I don't want it to be...
I don't wanna disclose the multiple exactly on, on, on these ones specifically, but we are talking. It's not, it's not, it's not too bad. I think they are ranging between 5x and 8x EBIT, to give you a range. So it's for, for this kind of companies, with, with good knowledge base and, and good portfolio and a strong position in the market, these are, these are reasonable multiples. So 5x-8x EBIT, not EBITDA, EBIT. That is the range we are paying.
Can I just ask on the self-investment proportion of it? What actually, how does that investment split down in terms of CapEx, in terms of training, bringing in new people, and how should we think about CapEx in the coming years? In a sense, will it be higher because-
I hope that we can be more-- Yeah, sorry to interrupt. Please go ahead.
I was really saying, how should we think about CapEx in the future years? Should we almost see it as a transition from historical acquisitions through to CapEx because it's being internally generated?
To, without giving any specific numbers, and we will maybe give some more meat to the bone on that when we have our Capital Markets Day. But to be a little bit more specific, but generally speaking, out of the free cash flow we generate, one big part, normally just more than half of that, is used for dividend. And then, that's our policy, and that's the way it's been historically. That's our track record. And then the remaining part has primarily been used for acquisitions going back in history. Going forward, we have to reduce the acquisition pace in order to allow for CapEx investment in the technology side, because we will need some CapEx in order to support the technology implementation. So that's for sure.
But we will sort of finance that by reducing the acquisition pace.
Thanks.
Our next question comes from Mr. Stefan Andersson from SEB. Please go ahead, sir.
Thank you. Just on your comment made on Ibero-America and the price negotiations that are taking place during the fourth quarter, just to maybe I misunderstood that, but is the discussion taking place, or are we going to see the impact of the discussions in the fourth quarter?
We will see... If you mean Latin America, is that what you mean?
Sorry, Latin America. Sorry, yeah.
Yeah. So in Latin America, we are behind in the price increases in Argentina, having high inflation, and it's a little bit tricky to implement that. So, we are behind in Latin America in Q3, and we think that we will catch up with that in Q4.
So you're already done it, is what you're saying then?
I mean, it's... Yes, basically. I mean, a large part of that and the rest will come in the period two, in the remaining two months.
When it comes to the European margin, you say there's some one-offs in there, and it seems to be an underlying, if I understand correctly, the underlying margin is around 6.6. And historically—yeah, I'm really struggling with the seasonality of that, because historically, Q4 has been equally strong. But of course, you have the mobile operations in there, which normally boosts the third quarter. So seasonality-wise, has that business changed dramatically from where it used to be before the Mobile and Monitoring division was in there?
No, not really. No. No, not really. I mean, but it confuses. I mean, it makes your life a little bit more difficult when we have everything combined now, instead of having two separate different divisions. But basically, the pattern, the businesses are the same, and the pattern is the same as it has historically been.
Yeah. And my final question is, you started off by saying that you're not looking at acquisitions with your fantastic cash flow in the quarter, fourth quarter will be strong as well. Given that, I know you just mentioned that you will use a little bit more on CapEx, but is everything going into CapEx, or is there any opportunity, any light out there that you could use the repurchasing mandate that you asked for in the last AGM?
I mean, right now, our focus is not on that. It's not being discussed, so there is no change in that question. It's not on the table in the board. We are not talking about that repurchasing. We have a mandate, but we are not discussing if whether we're going to use it or not. Right now, it's not being discussed. It was not a topic at the board meeting. So, right now, our focus is to use the free cash flow we have for a combination of CapEx in the technology investments and acquisitions that supports that strategy.
Okay. Thank you.
Thank you.
I remind you, if you have a question for the speakers, you'll have to press zero-one on your telephone keypad, zero-one. There are no further questions at this time. Please go ahead, speakers.
All right. Thank you very much, and hope to see you on December the 5th in Stockholm at the Capital Markets Day. Thank you, and goodbye.