Morning everyone. Very welcome to the Securitas half-year Q2 report and we'll go straight to the slides and the slide number 2. The organic growth continuing more or less on the same level. It's it's a pretty tough market there. I think we are pretty much in line in Europe with the market growth. In the U.S. the market is growing 2%. We are 1%. No major difference but still slightly behind. And what has happened there in the U.S. to comment that already now is that the activity on the tender activity has been much lower in the in the first six months waiting for the healthcare reform. And what how that's gonna play now with the postponement of the of important parts of the healthcare reform it's too early to speculate about that.
In Spain, we are growing with a market negative, or we are not growing. The negative growth is in Spain. We expect to be 10%-12%, which is basically the range where we are in. So pretty much in line with the market, but still a tough market. In the mature markets, growth of 1%. The macroeconomic picture is difficult, especially in Europe. We are improving the margins, and that is very much driven by the restructuring and the cost-saving program that we have executed during last year. Things are playing out exactly as we expected. It's working very well. The organization has adapted to the new structure. So it went perfect, I would say. That also pays off on the margin improvements in the quarter and for the first six months.
The price/wage balance is slightly negative, and that comes from Europe. And it's, but it's balanced by operational improvements and the lower social costs in France. So if you take that into account in Europe, it's pretty much on par if you take the two and balance that to the price/wage. And I would expect that the picture we have now for the six months is gonna be similar for the full year. It's not gonna be any major differences to that; that is my expectation for the coming six months.
Yeah, important news is of course the Affordable Care Act, the ACA, in the U.S., which has important parts of that have been delayed and which means that in reality in practice it means for us that it doesn't really come into effect until January 2015. Even if the law as such is being implemented, important parts of the legislation is not coming into effect, which delays the actual cost increase which we still expect to be in the 10% range. But it's gonna be a year and a half from now. That will allow us to prepare ourselves to work with our clients in a more progressive way than the Big Bang in January first.
and allow us to yeah simply to prepare the implementation of the ACA in a bit of a different way than we were expecting up until July this summer. Free cash flow to net debt 0.15 below our target. The cash flow was poor in Q2, and the main reason for that was in Europe. Lack of focus in Europe in June to collect the receivables as we should have done. And then as a poor excuse it ended on a Sunday, so the last collection date was a Sunday. And then I can mention that we had in July a very good cash flow much better than we normally do in July. So basically to make it simple the money that we should have come in June came in July.
Yeah, if you look at the numbers, it's of course also quite an improvement in the financial items as you can see compared to last year. And that is because the expensive bond that expired on April third is no longer in the quarter, and we had it in the quarter last year. So now we have replaced an expensive 6.5% coupon with a cost of financing which is dramatically lower. And that has a major impact in the quarter on the financial net and will of course continue to do so for the future. And also the acquisition-related costs are also substantially lower due to the fact that we are much more restrictive on acquisition than we have been over the past years. Yeah, North America we have a positive development in the federal government business.
It is on the top line. And in the critical infrastructure in Pinkerton business areas. And again I already commented on the ACA that has been delayed. And there might be questions on that that we can come back to that in such a case later on. If we look on the margins in North America they are improving. The main improvement comes actually from two areas. One is the restructuring and the cost-saving program that we did last year in the fourth quarter. And the other improvement is from the federal government business where we had a big issue last year and suffered a lot of pain due to that. But that we have turned around now in exactly according to the plan that we put in place. And that is now performing in Q1 and in Q2.
So we actually had a small profit in the first six months in this business area. Yeah. And we have said it should be a break-even result for 2013. And I think we will slightly, not dramatically but just slightly, exceed that. So it will be a small profit in the federal government business. So mission complete. We can tick that box and that is now in a totally completely different shape than it used to be when it was one year ago. So that has also been done. So those two things are the main reasons for the improvement of the operating margin in North America. In Europe we had a pretty good quarter in Q2, not on the sales side but on the margin side.
On the sales side it's a mixed picture where we have a negative growth of 8% in France for the first six months and 5% in the U.K., while good development in the Benelux countries. Germany as well. Some slight growth in the Nordic countries. Good growth in Turkey and some slight positive number in the Eastern Europe. So it's a mixed picture, and I expect that the French market will continue to see a deterioration of the French security market this year. I predicted in Q1 in the range of 4%-5% and I stick to that number. That we think it's gonna contract by yeah 4%-5% this year in France. We are negative -8%.
On the margin side, the improvement of the margin. We had a good margin in the second quarter. And that improvement is very much driven from the restructuring and cost-saving program. And yeah, that's really the main contributor. We also have the Easter effect. I should also mention that that was negative in Q1 and now positive, coming back in Q2 as expected. So all in all, a good quarter in Europe. In North America, also even more a mixed picture on the top line than it is in Europe. Two different worlds. Very much decline in Spain, even though I'm beginning to be more and more optimistic about the macroeconomic situation in Spain.
You see some good signs of correct actions and good decisions in order to turn around the macroeconomic situation. It's gonna take a while, but I think some positive signs in the right direction. But the market, the security market's gonna continue to contract in the range of 10%-12% this year. And we are pretty much in line with that with our -12% in Spain. You might remember that in the comparatives in Q1 last year we still had the big contracts that we now don't have in the comparatives that we stepped out of. And those we do not have in Q2. So that helps, but it's still a negative number. Portugal is similar situation. And in Latin America it's the contrary.
Very much driven by our price increases and inflation increases in Argentina. But also in the other countries a good growth, a real growth. Not only inflationary or price increase growth but real growth in Latin America. So 25% for the first six months in Latin America. And it continues to look good in Latin America not only on the top line but also on the margin where the things are improving. In Spain the operating margin for the first six months was slightly better than the equivalent period last year. Even in Q2 it was slightly behind in Q2. And that was actually because we got some one-offs last year in Q2 from the repayment of debt from the government that helped our bad debt reserves last year in Spain.
So, a good development, very strong in a very difficult market situation. But still, in spite of that and losing 12% on the top line, slightly better margins the first six months in Spain, which is impressive. And then you have all the details here on the slide and in the report. And if there are any specific questions, we'll be happy to come back to that later on. Cash flow, I commented, not as expected for the reason I mentioned initially. July was good, but much better than it usually is. So basically the money that should have been in free cash flow in Q2 came in July. I'll leave it at that.
And then we have the net debt which is usually also always the highest at this period of time of the year because we have the dividend payments in Q2. So SEK 11.7 billion-SEK 11.8 billion net debt at this point in time. Yeah and the margin target is the same. Even if the the healthcare reform has been postponed one year it doesn't change our target. It's just that the the the execution and the implementation of of more technology and solution that curve will look look a little bit different because we need we we will now do it in a different way. But it doesn't change our target. It's just the timing during the three-year period. But that has not been communicated so so exactly how it's gonna be quarter- by- quarter and year- by- year.
So it changes a little bit but it doesn't change our target for the three-year period. And a big improvement's gonna come when we start to really see the sales coming in and the conversion of existing portfolio to more technology and solutions in North America. That will help that number quite a bit. And that process has started and it's now being discussed with clients during Q3 and Q4. So that should help that number going forward. In Europe we are in a rollout phase in many countries now. So we expect that we will see some improvements also next year in that respect from the European side where all the rollouts of the video analytics and many other technology solutions are now being implemented during August up till November this year.
And then we'll start to see. We should start to see the sales coming in in early next year, hopefully maybe even end of this year but definitely early next year. And then just for you who are interested, you are most welcome to our investor day which will be on December 5 in Stockholm. And you will get more details from the team here as time goes by. Yeah, that was the quick version of Q2. And now I'll be happy to try to answer any questions related to that.
If you would like to ask a question, please press star one on your telephone. Your first question comes from Sylvia Barker from Deutsche Bank. Please go ahead.
Hi, good morning. Congratulations on the good set of results. I had 4 questions please.
Firstly, can I confirm that you are actually converting contracts in the US to ones with more of a technology element, please? Secondly, is it possible to get some idea of how big the French subsidy sort of help on the margin is in Europe? Then, thirdly, on the Spanish margins, what sort of have these repayments also affected H2? So, what kind of margin development can we see in H2? And finally, on the free cash flow, what is the reason behind the lower prepayments? And you're saying July was better. Would Q2 have been sort of flattish if these payments had actually come through in June? Thank you.
Okay, I didn't catch one of the questions, but I'll do my best, and I'll start with that and the ones I understood. So then, maybe you can repeat one of them.
But the prepayment the last one I can answer that I mean that the prepayments were slower than in Q2 was simply because the cutoff date. So they came in July. So that was just a timing issue of the cutoff date. In the U.S. we have basically I would say no conversions yet of the existing portfolio to technology and solutions contract. I mean we have been preparing ourselves in a very impressive and a very thorough way throughout the first six months of this year and also during last of this year. Quite a lot of efforts a lot of money a lot of effort spent on preparing ourselves for the healthcare reform and all the training and education on that.
And then the plan was, and to some extent still is, to now start to approach the clients in Q3 and Q4 with the solutions where we could replace guards on site with guards and services either mobile or remotely from the using cameras to a higher extent. And that was the plan and still is the plan. So we have not started that process selling that yet. So that's basically that number still remains zero in the U.S. But as we now approach the market and the clients not in the same speed and we need to do it a little bit differently due to the delay in the healthcare reform. But the strategy is still the same.
It's just that the execution will look a little bit different. So we will gradually see that happen especially coming next year as we now start to approach the client. In France I prefer not to give a number on the reduction of social cost. But what I can say is that we are not increasing prices as much as wages are increasing in France. It's below. And of course there is a big discussion about this matter in France where clients are using this argument that we have this reduction of social cost as a way to not accept price increases or at least lower price increases. So that is a tricky matter.
But we are not increasing prices but it's balanced and the operational so if we look in Europe on the we are behind on price wage. It's basically balanced and compensated though by the lower social cost and the operational improvement. So if you take that in account that will be flattened out. Then the Spanish question I didn't catch that one. Could you please repeat that?
Thank you. On Spain I was just asking what did this sort of year-on-year effect in terms of the repayments from the government?
Okay
yeah it does that continue in the H2?
Yeah no I mean we got a bigger repayment Q2 last year which we didn't have this year. So that of course explains in the comparatives. So yeah.
Okay that's clear. Thank you.
And lastly, I was just on the cash flow. So I was just wondering about the magnitude of how much cash in sort of how much inflows have actually been delayed to July versus June. So I was just asking whether Q2 would have been more?
Yeah, I mean if you compare to last year basically the gap came in July. That's the simple answer. Okay, if you look at the free cash flow compared to last year that gap basically came in July. And I say that by saying that what we normally get is positive in July and compared to what we had this year. So that was much better than it was last year. So it was very much a timing difference on prepayments on paying the payables and collecting the receivables in Europe primarily.
Okay.
And for your expectations for H2, sorry, lastly.
Well, I mean, we should have had a very good cash flow, especially in the last quarter and in H2 last year. And we need to do the same thing this year. So we should have a very good cash flow in the second half of the year. And, of course, since we are behind, we are putting extra efforts, extra pressure on this matter. We have the same methodology, the same systems in place. We have a bonus system for the full year tied to the cash flow by the end of the year. So there's a lot of incentives in place for people to collect the receivables push up until the end of the year. So we should expect a good cash flow in the second half.
That's very clear.
Thank you very much.
Thank you.
Thank you. Your next question comes from Peter Czort from Danske Bank. Please go ahead.
Yes, thank you. Just could you perhaps discuss a bit, you know, your cost reduction programs seem to have been very successful or had a very good payoff here in the first half of the year. Have you in this process been identifying new opportunities how you could help your margins even more going ahead? Or is the key question when looking ahead that you need to improve your technology part to drive margins?
No, I mean, the program is working well. We did what we were supposed to do. The savings are there, the numbers are confirmed. Things are moving on exactly on plan according to plan.
The quarter is clean. Very, for that period, the quarter is clean. I mean, there's no provisions that we are backing at back so to say to the P&L or helping the result with that. So it's a correct number. We took the provisions last year and the savings are coming as expected. So we have not identified any further savings. I mean, this was a big change in the group. We not only cut costs, we also changed the organization. We invested money for the technology side in order to be more aggressive and speed up things on the technology side. We have identified that we need to do some further actions in countries where we have a decline on the top line.
The main one being the U.K., where we have taken further actions now during this summer. We have actually taken some costs also in the quarter. You can see that the impact of that is 0.2 on the operating margin in Q2. So if we wouldn't have taken that cost, it would have been 0.2 better, so to say. We took those restructuring costs for the U.K., and we are cutting and have cut quite a lot; it's already done. There's still some which is being executed, but it's being communicated in the U.K.
It's all in all about close to 100 indirect people and about 50-60 guards that we are cutting due to the situation on the top line in the U.K.. We're also changing managing director in the U.K. organization. So that is really the only thing that has been added to that program but for specific reasons. So the answer to your question in the end is exactly what your own phrasing namely that the margin improvements this year is supported a lot by the cost savings that we did last year and executed last year. But going forward it's clear that. Believe the technology and the solutions that will make the difference.
Thank you.
Thank you. Your next question comes from Rajesh Kumar from HSBC.
Please go ahead. Hi, good morning, Alf. Just touching on the cash conversion point. If you look at the end of Q1, that also was a Sunday. So how much of Q1 cash flow moved to Q2? That would help us understand. And also on the other side, have you seen any pickup in the one-off businesses in the U.S. or Europe, any parts which might be interesting? The third one is obviously on the prepayments. Could you give us a bit more color where and why do you get prepayments and what are the typical structure of these contracts?
Yeah, the prepayment matter is that we, on, for example, you take a monitoring contract where we do monitoring of the alarm installation and at the client. We don't invoice that every month.
We send the invoice once a year. That is one example. You don't send the invoice after you have done the monitoring for one year. You send the invoice in advance because it's a one-year service that we will provide without having the risk of getting paid. But these are the kind of prepayments that we are referring to. And that becomes from time to time quite a decent number. And unfortunately, that money did not show up in June and it came in July instead. So that answers that question. On the extra sales, it has been picking up on a group basis in Q2 compared to last year.
We were last year at, on a group basis, 13.7. It's 14.5 this year. And for the first 6 months we are 0.2 ahead of last year being at 13.8 this year the first 6 months. So it's a little bit better and a slight upward trend actually in Q2 compared to Q1. And what was the first question? Can you?
The first question was Q1 and was a Sunday as well. So how much of Q1 cash flow moved to this quarter?
Oh I mean there was Q1 was quite a normal quarter I would say. There was no big I wouldn't say I mean it's that's marginal in my opinion. It was just that Q2 was poor. And that money shortfall showed up in July unfortunately. Okay.
So, no, no, nothing that moved from Q1 to Q2. No. It does not. No.
Now, so we are quite aware of the fact that there are organizational changes in alarm contracts, in terms of the mobile monitoring moving into a different division. And that's where you're seeing the payments getting shifted. And also Q1 end was a Sunday; this quarter end was a Sunday as well. But this quarter you've seen the cash flow move out late. Do you think the organization was more internally focused this quarter than it was last? And I mean, have you identified any issues that you need to resolve around that?
No, I mean, it's we it's it's I mean the you the we have no issues in the sense that we have problems that would create costs or not receiving money.
It was, I would say, purely a lack of focus primarily in the European organization to collect the money when it was supposed to be collected, namely in June. And then the cut-off date when you put on the invoice, June 30, it happened to be on a Sunday. And then many clients pay the day after, which is a Monday, July 1. So, which was actually what happened, which is confirmed. That's why I'm mentioning the July numbers. So no issues. Simply lack of focus and a bit of bad luck with the cut-off date.
Okay. No, that's quite clear. Just to be a bit more comfortable around the issue.
Is it after the organizational change? Is it the same guys who issue the invoice or is it a different department and a different brand which goes out and? It's basically the same organization. It's the same routines. It's just, I mean, in many countries that was a shared service center servicing the different divisions. So the machine is the same basically, I would say. How's the margin? Okay. So the client does not see any difference in terms of where the invoice comes from? No, no, no, no. Okay. So the reorganization then, just to understand it a bit more, is more on the delivery side?
Yes, the reorganization where we've put the divisions together was to be able to avoid internal loss of energy in discussion between divisions.
It was to save cost, to reduce cost and improve the results, which, as we proved, that we are able to do. And it was also to speed up the implementation of the technology and the solutions because having too much internal debate between the divisions would slow down that process. And it was also a way for us to cut cost. And we actually cut more than we are now taking to the P&L because we invested some of that cost savings into this to speed up on the technology change, which we would otherwise have hit the result if we would have done that without doing those actions.
But it was all those things combined that to be more efficient and also to be one face in front of a client and not have two divisions approaching the same clients in some countries. So those things together interacted.
That's useful to know. Just this last one. In terms of the free cash to net debt charge target of 20% which you have, is it driven by any external factors or is it something that the board of directors of the company have suggested you should stick to?
No, that is our target. It was decided many years ago. I think we go back 5, well, maybe 6-7 years by now. And that was the target, the leverage target that was decided by the board at the time. And we stick to, I think it's a relevant target.
It makes a lot of sense and it's still our target. So that has that is the history of that.
Thank you very much.
Thank you very much.
Thank you. Your next question comes from Robert Plant from JP Morgan. Please go ahead.
Morning, Alf. You've mentioned that you've taken extra cost out and restructured the U.K. Do you think you need to do anything to France in particular? What can you do to France to make it keep up at least with the industry decline? Thank you.
No, no further. We took a lot of actions already last year. So no, no, we have no plans of taking any further actions in France.
And we are now investing money, some of that money that we have as coming from the reduced social cost. Some of that money is invested in the technology to in order to be able to offer more competitive solutions and to speed up that process. And we are also spending a lot of time and money to actually now start the rollout of the whole technology offering in France. So no, we don't have any plans of taking any further major restructuring actions in France.
And the fact that Securitas is declining more than the market is that you're choosing to be selective about customers?
Yeah, I mean it is this happens from time to time.
And we lost some major contracts, especially in, we lost a big railway contract, for example, in Q4 last year. So we have lost some major contracts, which puts us a little bit behind the market. But also, we have been quite tough on the price increases in 2012. And we get, maybe I think, to some extent that also explains why we get a little bit more negative growth than the general market picture. It's not exact science, the market estimate either. So yeah, these are the main reasons.
Thanks, Alf.
Thank you.
Thank you. Your next question comes from George Gregory from UBS. Please go ahead.
Morning, all. A couple from me. Firstly, in terms of.
Brian just wants to make sure I understood this properly because the margin improved year-over-year in the first quarter but not in the second quarter. Is that because you exited those two contracts in Spain midway through Q1 so the comps were easier in Q1? That's, or is there something else going on there?
That is one reason. That's a good point. It's a good point. Yeah, you're that is correct. That's one reason. But also last year what happened when we got the cleaning of the pipes, let's say, the repayment of debt from the government and it was quite a substantial number. We had some of that money we had actually made provisions for not fully but to some extent because we didn't expect it.
Our internal rules decide or set stipulates that when we come to a certain point months of overdue then we start to make provisions. So we got the one-off when we got that money then we could reverse that provision basically. And that is actually the main reason so for the Q2, and then it's not a big difference. It's just a couple of tenths behind in Spain in Q2 compared to Q2 last year. And for the full year we are a few tenths better than it; it's not for the full year, sorry, for a half year. We are a few tenths better than the first six months last year.
Okay. Great. Second question was on Europe and on your point around the price and wage balance. Where are we on that?
What is the trend? Which countries are you seeing the most implicit gross margin pressure? Any commentary on that would be very useful.
Yeah, no, it's France is definitely an important part of that where we are behind on price compared to wage for the reasons I mentioned before. I expect it to be like that for the rest of the year. But of course that is supported or balanced by the reduction in social cost which you could define as a wage part of the equation but we keep it separate. And in so that is, I guess, the I think that is the most important country where there is a deviation so to say.
Tough conditions in all countries but in most other countries we are keeping this balance pretty much in a reasonable way. But there are I mean I don't intend to go into every single country so to say. But if I pick out the major one the situation being France being France.
Okay. And just in terms of the reduction in social cost sorry maybe I should know but precisely what is that? Does that relate to the reduction in the tax credit or is it something else?
It's the tax credit that's set in France by the legislation.
Okay. It's the tax credit. Thank you.
Thank you.
Thank you. Your next question comes from Laurent Brunelle from BNP Paribas. Please go ahead.
Yes good morning. So Laurent Brunelle at BNP. Two quick questions if I may.
On the top line side, do you expect similar market trends for H2? And can we extrapolate, let's say, the, the, your Q2 performance—I mean at +1% organically? And second, in terms of financing costs, can you maybe give us a guidance for full year following the, the refinancing of the two bonds, please?
Well, I mean, on the—if we take the, the market situation, the market situation—I don't think it's gonna dramatically change during the coming six, six months. North America, Europe, South America. I think the picture that we have experienced during the first six months is gonna be macroeconomically, so to say, pretty much, pretty much the same. And yeah, so I would not think that that's gonna make much of a, of a difference.
Then how our performance will be, that I prefer not to forecast because that will be too much of a forecast. Yeah, I think what we have seen in North America I mentioned initially but I repeat that is that the tender activity has been very low, much lower than normal. But also given that the U.S. economy is in a slight recovery mode generally speaking macroeconomically. But the reason for that low tender activity has been that everybody has waited and see what comes out of the ACA reform and just wait and see.
And now when that is one and a half year down the road instead of half year down the road, it's it this came just a few weeks ago and everybody and most people are still on vacation or have been on vacation. So it's hard to tell if that tender activity's gonna pick up or not given that the ACA is now a year and a half down the road in reality. So I prefer not to speculate in that. But that's an important information to mention. Yeah, that does. I guess that's as much as I can say about that question.
The second one on the finance net, I mean you saw that in Q2. Well, basically, I mean the finance net as it was in Q2 gives you some guidance of what it, so to say, should be going forward. So it's better to use that number than using the full first six months to give guidance for the coming quarters.
Great. And maybe one more regarding your client retention rate in Europe. We've seen a slight improvement in Q2. Could you explain why please?
Normally our retention rate is a bit over 90% as I think it's more small that it was abnormal last year when it was below when it was 89%.
So, I mean it has been. There has not been a lot of turbulence in the portfolio the first 6 months. It's been on a good level of good stability.
T hank you very much.
Of course.
Okay.
Thank you. Your next question comes from Paul Checketts from Barclays. Please go ahead.
Morning. I've just got a couple of questions. The first is on the U.S. and you've answered it at least in part. But could you perhaps give us the growth rates between the federal government business and the federal private sector and perhaps some commentary on the customer behavior within those?
The second one is on large contracts that you currently have and will come to an end or will be rebid in the coming months. Perhaps you'd give us a quick reminder of those and anything large that we'd expect to be bid, please.
Okay. If we look on the first six months in North America, our so to say bulk of our business, that means the guarding regions in North America, has pretty much flat on top line. So the growth, the 1% in North America, it comes from the growth in the federal government business, the critical infrastructure business, and in the Pinkerton business. That's where we generally get that percent, so to say. Yeah. And what was the second question?
The Federal contracts. Yes, that's right. Yeah. Yeah, there are a couple of big contracts. And usually these big contracts are in the aviation business which are because they're sort of not high margin contracts but they give big swings on the top line if you win or lose those. And right now, for example, all the, I think it's 47 airports in Norway except the Oslo Gardermoen airports which is a separate contract. But all the other ones, all the other 47 airports are being tendered right now in Norway and that is a contract we have which is in the tender process right now. And then we have the Paris airport is also in the tender phase right now where we have one piece of it and two or three competitors have the rest of it.
Madrid is being tendered right now, which is a contract we had. We had a couple of airports, other airports in Spain, where we gained, actually, in seven airports here, small, medium-sized airports in Spain in Q2. We have a Schiphol, which is still a bit down the road. We have a small piece in Schiphol in Amsterdam, but our competition has a major piece, and that's gonna maybe not come this year but might come next year. In the U.S., there are a couple of big airports which will be tendered, available for the private security market. We have not yet decided whether we're gonna bid on those or not. But there are a couple of big ones which will be out here in the second half of the year. So that, and we are not performing any airport security today.
Well, we do some but the minor ones in the U.S. So yeah, you never know. It's hard to tell. It's big swings on the top line but yeah, I think just on the U.S. what. We're giving you the forecast on that actually. So you never know when we are in the tender phase.
What would stop you bidding on the U.S. airports?
We need to feel that we are prepared for that. We think that we are that the contract is interesting for us so to say that we think we can make money on it. How what is the what is the expectations?
Then you have the liability measures, all the terms and conditions, the legal environment, so to say, that what liability you will assume or not assume doing that. So those are the things we are studying, and we'll make a decision that will happen during the second half.
Thank you very much.
Thank you. Your next question comes from Andrew Ripper from Merrill Lynch. Please go ahead.
Yeah, morning, Andrew Ripper from Merrill Lynch. Firstly, maybe two interrelated, just wondering in relation to the M&A pipeline. Obviously you did a deal I think just after the end of the quarter. Are you looking at other deals, particularly in relation to the technology expansion, and whether you could make comments in relation to the U.S. assets that are up for sale from G4S?
And then secondly on the technology rollouts you referenced a step up I think in sort of sales and marketing activity over the course of the next six months or so. Just wondering how material that might be and whether, you know, it might, you might be reinvesting some of the savings that you've realized from the restructuring actions. Will we see any impact on the short-term margin development ahead of the revenue coming in next year?
Well, on acquisitions, we are restrictive on acquisitions, continue to be, not to lose focus on the technology solutions implementation. We try to do both, as a risk that we, it will be half-hearted on both. So we have, that's one of the reasons, and cash flow of course and net debt situation as well. So we are restrictive on acquisition.
It doesn't mean that we don't do acquisitions, but we will not do acquisitions. So our prime focus is on technology. We have a couple of cases that we are studying now. It's small medium-sized companies that we are looking on primarily in Europe actually, which is yeah in the process right now. So whether it's gonna materialize or not, we will know in the coming six months. But will not make a major difference. But they are important in those countries where we are looking at it for the development. And the speed on the technology implementation and also maybe in some neighboring countries. We made an acquisition of the ISS Dutch business, and that has now been finalized, that process with approvals.
And that makes strategically a lot of sense for us because that will strengthen that corporation and in the Netherlands. And we have also done that in Norway last year. So that was a very specific reason. Other than that we are not too keen on buying mature guarding businesses in mature markets, so that we will basically avoid. We could do acquisitions in, for example, Latin America where it's interesting. And we are continuously looking on that and there are a couple of minor ones that we are in the process of discussing right now. G4S, I think you should ask them instead of me. I prefer they answer that question how they feel about that for you as business. So I suggest you discuss that when they publish their Q2 report.
Jan, I was just thinking about your sort of attitude. I mean, you said there you're less keen on buying mature guarding assets in mature markets. So how do you feel about your sort of scale-wise in terms of the federal business in the U.S.?
I think we—I mean, we have—we need to get out of the woodworks from the process we had last year now. So we are not in the acquisition mode. And the business we have we think we can develop that pretty well. We have good growth now also in the first half year in that business. So now we have a new team, new management, completely reset that organization, new better structure, better cost levels.
So we are not in acquisition mode in the federal government business and absolutely not. And now we need to prove for ourselves and for the rest of the world that we are able to perform and make good money in this business. So that is our view. So yeah that's our. Understood. And technology and the margins I mean you I guess you've seen my slide many times. And yeah. And basically that is the answer I think to the question. I mean when we move from a traditional guarding project guarding pure guarding contract you would say roughly speaking in the range of 4% operating margin. And when we convert such a contract to a complete security solution we more or less double that margin to in the range of 8%-10%.
That is our strategy to do that with our portfolio to convert from 6% of our portfolio to 18% of our portfolio from that 4 to % operating margin to be 8%-10%. And it works. I mean when we do it case by case many times over time it's confirmed based on the numbers. So it's not too much uncertainty that we are not improving the operating margin from the 4% to be 8%-10%. It's more that we. That we move from the 6 to be 18% of sales. That is of course the big work and the big challenge to be able. Yeah. To convert that portfolio. But the margins are there that's for sure.
Sure. Sure. No I wasn't questioning that.
I was just thinking about the ramp-up. So obviously you haven't been clear about M&A versus organic and it sounded from what you were talking about on the call that you're gonna ramp up sales and marketing activity over the course of the next six months.
I mean that conversion from the 6%-18% is I would say to basically completely driven by organic. Yeah, change. It's not gonna be driven by acquisitions. I mean we will, but these acquisitions are not huge. I mean they are minor medium-sized companies so they will make. I mean they are not even 1% of that, not even 1% of that change. But it will be the organic conversion of our existing portfolio. Yeah.
Are you making significant incremental investments or are you planning over the next six months or do you think from us as external watchers we just won't notice it?
I think we have the resources we need right now. I mean we have been investing not only this year but also in 2011 and 2012 when we suffered some pains. Yeah. That was on the cost side and it hit our result. And then we freed up quite some money in the shake-up. Well, we call it shake but it was called the restructuring process. Sorry for that. But the internal work name was that. But anyway in our restructuring program we freed up quite some money that we have now invested.
So I think today I would say that roughly speaking we have the resources we need. We have a structure we need to do what we are supposed to do for the year to come.
Yeah. Okay. And then just to quickly just two follow-ups from me. Just on the U.K. I mean you implied there was a management issue there. What were the local management team doing wrong which resulted in the performance which the new team might change going forward?
It's I mean there are a number of things but I'd prefer not to be too specific. But I mean we have had issues in the integration of the bigger acquisitions of Reliance and Chubb that we did some years ago. Yeah. In the internal routines in the back office.
People have been fighting hard trying to do their best, did a good job. But it was a... we went from a 4,000-5,000 people operation to 17,000. So it was a risk to do that. Yeah. But it was also once in a lifetime opportunity for us to really be a major player in the U.K. market. And it was a risky decision, and things are just simply taking more time than we expected. We have been able to protect the top line pretty well throughout this process. But to put in the Securitas's culture of a Securitas strategy, how we organize our branches, how we follow the business has not been moving as fast as we expected.
We have had a run into a number of problems along the way. So we have not been satisfied with the performance. And now we have made some changes and they have been executed basically throughout the summer here. And we are now putting a new structure a team in place and also reducing our cost and taking some other actions that we expect will make your U.K. operation perform in a better way.
Yeah. Could you just remind us, give us a rough sense of what the U.K. margin was in 2012 please?
I mean, the U.K. organization, the U.K. operation last year was pretty much a break-even operation.
Yeah. Okay.
Then just finally, could you just give us a sense how business is in Argentina in relation to Ibero-America or as a percentage of LatAm?
I'll try to be a bit more specific. I would say that I think it's the biggest of the LatAm countries. Absolutely. I mean we have 15,000 people employed in Argentina. Yeah. So it's by far the biggest country. And Latin America the first six months is pretty much half of the yeah, the Ibero-American operation. And Argentina I would expect represents out of the Latin American portion I would say 60%. Just looking at my colleagues here and see if they would agree with that. 60% of the Latin American part.
Correct. Correct. Thanks for.
But in a second we'll be more. Try to be a bit more correct, exact.
Yeah. Thank you . But just a second. I'll just kind of. 50 more than 60 in Latin America.
Okay. 50 just over 50% in Latin, so a little bit more than half of the Latin American part. So 25% plus over for the division.
Yeah. Yeah. Thanks a lot, Alf.
Thank you.
Thank you. Your next question comes from Charles Wilson from Goldman Sachs. Please go ahead.
Good morning. There's a question on the gross margins. It looks like your gross margins have improved quite a bit in the on a year-on-year basis, you know, maybe by 60 basis points or so. Could you give some color as to why that's the case?
Yeah, I mean, it's basically the things that we have mentioned here that we have in the restructuring and the cost saving program. It's the performance that we now have, the little bit more solution that we call it. It's a slightly increased 1% of the total sales. It's the active taking in the federal government business in North America. Yeah, it's both of the reasons. Thanks. Yeah, we were terminating contracts. We had some loss-making contracts last year that we backed out. So, for example, the ones we mentioned in Spain that were very bad margins and others. So a better mix of the portfolio as well is an important piece of that equation.
Thank you.
Thank you.
Thank you.
Your next question comes from Rajesh Kumar from HSBC. Please go ahead.
Good morning. Alf, sorry. A couple of follow-ups on the airport contracts. You've mentioned in the past that these are very difficult to execute contracts especially given how the shift pattern works with first half being heavy and later in the evening being heavy and middle. So pricing these contracts can be very interesting and if someone doesn't seem to understand they can make mistakes. Are you seeing any of your competitors coming out with the sort of ridiculous pricing on these contracts? We recognize a lot of them are on review in this year. So what are your thoughts on how the competition is behaving?
Yeah, that's kinda who you're asking our organization. I think some people will say that very that it's it's crazy pricing. But I think generally speaking I wouldn't say so.
I think most of our companies who go for these major contracts, they are major companies and professional companies. Sometimes you make mistakes, and then if you're in the wrong direction, you don't get the contract. And if you make a mistake in the bad direction, then you might get the contract on the wrong price level. Yeah. But still, generally speaking, I would say that. I mean, this is a very low margin business. And if you are at 2%, if you expect to get 4% on a contract like that operating margin, maybe competition is happy with 1%. And then they are 3% lower. And then they win the contract. So I think it's very much about how you, I mean, how aggressive are you on that.
And generally speaking, competition is behaving in a professional way, I would say, with some exceptions, of course. But generally speaking, I think it's, that is, not the main issue. The main issue is how aggressive are you on those contracts and how can you structure that contract and how can you come with proposals to the client of how you can organize that business in a better way and thus being more competitive. And you can, or if you can also maybe add some pieces of technology, you can have a bit smarter incentive system of how you will make your margin. If you perform well, you can get some extra bonuses from the client because you're doing a good job and you are achieving the KPIs that the client has set up and so forth.
And in this way you can play a little bit. You can come with ideas that gives the customer a good benefit that you also need to perform in order to make a good margin. And that those are the many times the ways you can make it or break it so to say to gain these contracts.
Yes. That's very useful. Thank you very much.
Thank you.
Thank you. Your next question comes from Stefan Andersson from SEB. Please go ahead.
Thank you. Two questions only. First on the healthcare reform before it was postponed it's my understanding that you have been out talking and discussing this with the clients in the U.S. So if you could say anything about those discussions how those have gone on and the response you received.
Yeah, no, that is too early to tell. I mean, very basically, that discussion has been more occasional than systematic. The whole process was intended to really start now and has started in August September going forward. So it's too early to say. I know I would be wrong to give. I would give a wrong impression to give any answer to that because it's just a few cases and you cannot extrapolate that to some kind of conclusion or trend.
Okay. Thank you. On the, you received a or the board have received a repurchasing mandate. I wonder if you could say anything about under what circumstances you think you would use that mandate.
No, I cannot.
That has obviously not been the topic now we have not now the good cash flow and we have a high net debt. So of course the timing to discuss that has not been raised so to say. We have a mandate and it there is no parameters that you can say that when you reach that point then it might be used or not used. So we have asked for the mandate and that's about it. No nothing else to add to that question right now.
Thank you.
Thank you.
Thank you. Your next question comes from George Gregory from UBS. Please go ahead.
Hi, just Alf, just returning to your commentary around the 6%-18% technology contracts.
If we look at a particular contract which converts from a traditional guarding contract to one with a technology component, what would the usual impact on absolute revenue be? And also what is the impact on return on capital please?
The revenue I mean normally apples to apples normally the revenue would be lower because otherwise there is no cost saving for the client. And that could be I mean that's a couple of percent. It's not dramatic but it's a few percent. But I should mitigate that picture and not be too negative by saying that for example in North America the plan is and was certainly but still is to mitigate the 10% cost increase.
and if we do that to avoid for the client to not increase the price by 10% due to the healthcare reform then, if you keep the same price then there is no negative top line effect because you keep the same same same cost same same invoicing as you had before. You just avoided the increase. And then in some cases in Sweden where we have come quite far and a lot of activities are going on, on the ongoing converting contracts here to solution contracts and it's moving pretty well is that we actually see that clients are increasing their their security needs. Apples to apples we invoice a few percent less and reduce the cost and avoid maybe a cost increase the price inflationary cost increase.
But then they decide that using this technology they can improve the security and then they add a few things. So at the end of the day when we have looked at from that in Sweden it's actually increased. We actually had organic growth when we did that. So it's hard to give. I cannot give a black and white answer to that question simply.
And what about returns?
What are the. Sorry. Returns are of course improving. We need some CapEx but the returns are substantially improving absolutely.
Okay. And just one final one on France. Are you able to say what provisions you're taking against the tax credit for investments? Some of the temporary stuff.
I prefer not to quantify that.
Okay.
We use some of those tax credits.
We definitely use quite a lot of money coming from those tax credit which is also the intention of that legislation is to invest in technology in order to make our business and the French industry more competitive and to drive down the cost and make the country more competitive. We do exactly the same by using some of that money into the speeding up and the investment in the technology organization.
Okay. Thank you very much.
Thank you.
Thank you. There are no further questions from the phone lines. Please continue.
Okay. Very well. Thank you very much for calling in. And wish you a continued nice.