All right. Hello everyone. It's Alf Göransson here, from Securitas with a couple of my colleagues who will present the Q1 numbers. So we go straight to the PowerPoint. We're gonna hurry up a little bit today. I'll try to be fast because we have an AGM around the corner here this afternoon as well. Anyhow, we look on the summary of the first three months. Basically, you can say we are living in a market which is not growing. So the only way to improve the result is by cutting cost and improving the technology and the added value content in our offerings, and by that, improving our bottom line. We don't get any support from the market. In Europe, it's easy to be pessimistic. It's quite tough, including Spain, when I speak about Europe.
It's that the market situation is quite dramatic, and it's quite negative in a number of countries, while in Latin America, it's very good. And in North America, it's seemed to be slowly and gradually improving. I'll give you some numbers on that in a minute. Price wage balance on par. Not much to say about the coming quarters. Too early to tell, but first quarter is all right. Margin improves by the cost-cutting actions primarily that we did last year, from our big program, and that now pays off, in the operating margin, as expected. We are on plan. We're doing what we're supposed to do. We deliver on what we promised. Things are moving on exactly as we were expecting it to do on the cost savings.
We are still on the free cash flow to net debt ratio of 0.20, so we are on target there. We continue to be very restrictive on acquisitions unless it's technology or very interesting strategic opportunities that otherwise we will not spend money on acquisition. If we go to the highlights, you see the top line is not growing. Same there, there. The same numbers I just talked about. It's, we are a little bit burdened, like everybody else, in Sweden. We have a strong Swedish krona compared to last year, which means that, in real terms, we are 9% up on operating result compared to last year, and, a bit more when we look further down the P&L.
If we look at North America, the growth is zero when you look at it in the report, but the reality is more like 1% because of the leap day. And since we have a schedule of four, five weeks, it's for sure. It hits the whole volume. So it's actually so that the leap day has an effect of 1%. So without that comparison, it would have been 1%. We have a good development in the federal government business and the Pinkerton side. And in the government services business, where we had huge trouble last year, we are now back on track. We are delivering according to plan. So I expect that business to deliver a break-even result for this year, as I said last year, it would.
So that is working as we expected. And the Q1 supports that forecast. Most of the work, though, in the U.S. is spent on the Affordable Care Act, which we'll see beginning of next year. We have said before that the effect of that will be 12%-16% cost increase, though in price increase. But as we learn more about the details and it's quite complicated formula quite to understand exactly what will be the impact. We think it's more like the 10% cost increase range rather than the 12%-16%. Still a big number, but at least lower than the previous one we have communicated. We're doing a lot of internal training.
We have, during the past three months, spent enormous resources and an amount of time, training all our people who, in sales and branches and areas and so forth, who will face the customers on what it means and how we should manage it and what are the offers and what we can present as an alternative to our clients. And actually, last week, the first customer letter was sent. So I cannot say anything about the reaction from the market because we sent the letter last week, and that was the first thing that went to the market. And now the discussions will start during the second quarter and, of course, continue during the rest of the year, of course. And the whole game plan is, of course, to offer the clients two options.
One is the cost increase in the range of 10%. And the other is, of course, an alternative where we can do it in a different way and reduce the cost using more technology and less hours on site. Yeah. Margins improved, coming from the restructuring program where we cut the number of regions in half last year and made some further cost savings. And also, of course, from the fact that we are improving the results in the government services business where we had difficulties last year. Also, Pinkerton is improving their performance compared to last year. So basically, I would say pretty much on track in North America. In Europe, the top line is very difficult. We have -9% growth in France, -5% in the U.K. The French market will probably be in the range of -5% negative security market this year.
Sorry, I forgot to say. I should mention. I'm sorry to reverse the tape here, but in North America, I expect the market to be growing in the range of 2%-3% this year, the security market. Okay. Back to Europe. France, security market probably -5%. U.K., more or less flat. It's hard to tell, but in that range. So we are a little bit worse. We lost some major contracts in France, as you probably know, Q4 last year, early Q4 last week to the French Railways. And the same thing in the U.K. where we have some losses on the portfolio. So, but on the other hand, then Germany is doing very well. Very good growth in Germany. And so is Belgium, for example. So it's a bit of a mixed picture in Europe.
But generally speaking, it's a very difficult environment, and it's certainly not gonna get any better, I think, at least not in the near future. Margins improving. 0.2 comes from the restructuring program. Also here, we have, not on the margin, but if we look at absolute numbers, the FX has an impact, because of the stronger Swedish krona to the euro. And then also in the quarter, we had the Easter in Q1, this year and in April, last year. So that has an effect. And of course, the lower situation in the U.K. is also a little bit reducing the margins, due to the leverage from the lower sales. Germany and France supports. Germany doing very well, generally speaking. And France, we have got some money from the government, from that social cost subsidy.
So, some of that comes to the P&L, and some of that will be invested in technology, which is the intention of this money, of course, also to be invested into technology and to speed up the pace in France in technology and security solutions in order to make our offers to the clients more cost-efficient. So we use some of that money for that purposes. Ibero-America is two different worlds: a very good one in Latin America, which today now represents more or less half of the profits from that division, and a more difficult one in Spain. We have organic sales growth very tough in Spain, -14%. We were expecting the market growth in Spain to be in the range of five, six, maybe up to 8% this year. I've said more or less in that range in previous communication.
It's gonna be worse than that. It's gonna be more than 10% - this year in Spain. So the 14% 's gotta be seen in that perspective, that the context, the Spanish market continues to weaken. Latin America, very good, good growth everywhere and, good situation. Very fantastic organization. 36,000 people in Latin America today. And moving on very, very well. The good news, though, is in Spain that there has been a number of actions taken and also the investments that we have suffered from in our P&L for the past two years and through acquisitions as well. It's now starting to pay off. We see a very good development in the technology side, and that is with much better margins than in the guarding side of it.
So with solutions and technology, we are still able to support the margins. And of course, also coming from the restructuring and the cost-saving program from last year. We have, during March, finalized the negotiations with the unions only for this year, to be remembered, which means that we do not have to increase the 1.6% in the CBA as it was agreed or written before, plus that we will have a 1%-2% lower, a pay cut of 1%-2% for the guards in Spain. And that basically compensates for the increased social cost charges that we got, you might remember, back in July, August last year. So we have suffered in the meantime, but now it's basically compensated. This is just a one-year agreement.
So then it will be a new ballgame and a new wrestling, starting, I think, second half of this year. Yeah. That's what to say about Ibero-America, I think. You might have some questions. We'll get back to that in a minute. Free cash flow. If you look on free cash flow, it looks a little bit worse than if you look on the operating activities. So on the operating level, it's pretty much the same level as last year. We had some financial income that we paid this year in Q1 that we paid later last year. So that explains basically the difference, see that on that line, financial income and expenses paid. So it's more a timing issue than anything else. So no worries. We are on track. We're doing well on track. DSO is pretty stable.
We have to watch out, of course, for getting paid from clients, but DSO stays stable. And we did a major effort in the end of last year. And we can hold on to the net debt as we basically on the same level as it was by the end of the last year. Increased a bit, but with some IAC payments. I always can never say that, but IAC payments, as we have also disclosed in the report. And yeah. That's basically it. Very little acquisitions. We are extremely restrictive on acquisitions, and we'll continue to be so also this year. And then the really challenging and very interesting and fascinating and energizing activities in technology, which is moving on very well.
We are having a lot of activities going on throughout the group, and it's really the game changer. I think we're doing pretty well in that, and we are moving on with a lot of activities, investing a lot of money, hiring people, putting resources in the right spots, and starting to offer and roll out solutions to our clients at a fairly good speed in many, many, many countries. That basically summarizes on this page here. We have a target to triple the share from the 6% last year to three times as much in end of 2015. We have made a plan for doing that, which is a year-on-year plan. Basically, the 6.5 in Q1 is according to the plan.
So, we are moving as we would expect in that target. Yeah. The next slide is the one you've seen a million times, so I won't comment on that for the sake of saving time. So if anyone has any questions, I'll be happy to answer that. Please go ahead.
If you wish to ask a question on the phone, please press star one and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from Sylvia Barker of Deutsche Bank. Please ask your question.
Oh, yes. Hi. Good afternoon, everyone. I just want to ask perhaps a little bit on your, just firstly, on your exit rates, by region.
And secondly, just on the cost savings, what kind of run rate should we assume throughout the year? How much, I guess they're worth about 60 basis points, annualized for the group. How much of that might we actually see come through? Thank you very much.
Sorry. Can you repeat the first question? I didn't catch that. Can you repeat? I didn't. Please repeat your first question.
Sure. It was just the exit rates, the exit organic growth rates by region, please. So just in March or April trends, if possible, please.
Yeah. No. Okay. I mean, basically, but you can say that it's not changing. April, I cannot comment. It's the wrong quarter. So, but it's, I mean, the rate has stayed fairly stable throughout the quarter, if that is your question.
So it's, I mean, the levels you see that we have given for the first quarter, they are pretty much the same throughout the different months. It's not going anywhere different, basically. And on the second question, on the cost savings, I mean, we have said that we're gonna save SEK 370 million, on a full-year basis in 2013. And it's you divide it by four, and that's the number per quarter. It's basically the number, and we are moving on, we are delivering on that, and we're doing that according to plan. So one quarter has been saved, so to say, in Q1, and the remaining will be saved in the coming three quarters. See if there's more questions.
Your next question comes from Rajesh Kumar of HSBC. Please ask your question.
Hi. Good afternoon, Alf Göransson.
Basically, trying to understand the nature of price discussions in Spain. Are your clients asking you to take a bit of price cut, or are you seeing a new level of volume stepped down, which is why the organic number looks like it's going backwards?
That's it. Well, I think I mean, one of the number I used before, more than 10% decline, that was for the security market. But what happens with us is a different story. But I mean, as you see the first quarter, we have a negative situation, and part of that -14% means that we have to walk away from clients because we don't think they're gonna be able to pay their bills.
So it's better to take a walk away now than having a bad debt down the road. So that continues to be an issue with a number of clients facing bankruptcy or even in bankruptcy or in some kind of Chapter 11 situation. On the price, on your question on the price, price matter, it's of course more to, I mean, discussing price increases in Spain today is almost impossible. I mean, no one else pays much attention to that. So it's more to try to defend the price level we have. Now, luckily, the situation has changed that we will have lower wage costs than we had last year because of the, I think, a very wise and responsible agreement that has been made between the association and the unions.
Even though it's only one-year agreement, so we cannot get carried away with that. So we have to be—it's still a wrestling game for the year to come, years to come. But anyhow, I think it's more to defend the prices when thinking about price increases in Spain. So, so I mean, even theoretically, basically, you can say that if we can manage to keep our prices on the same level or some concessions, we should be okay based on the fact that we now will have lower wage costs than we had last year. So that's it. But it's too early to tell. I mean, we are still at this point in time of year, it's pure guesswork, and you will not know much more until you come to Q2. And then you know a lot more when you come to Q2.
So I prefer to be more conservative. Basically, we've been taking that.
That's very helpful. In terms of extra sales, have you seen any trend in pickup towards the end of quarter in terms of extra spot sales or spot sales for the group level?
Well, no. No. The answer is no. Extra sales is actually on a fairly low level. It usually fluctuates between, I mean, 13%-16% in that range from good to bad bad to good times. And now we are we are basically on 13%. And the month of March was actually on the same level. So very slow to compare. So that remains on a very low level, which I think reflects the macroeconomic situation that we are that we are living in. Having 95% of our business in the pure market.
That's very helpful.
In the U.S., have you gone through price negotiations with your customers at all, or does it start in Q2?
Well, I mean, that price negotiations are ongoing in the U.S. because that there is no specific date when you do that. So that depends on the contract, duration time. So, so you will do that basically gradually, gradually throughout the year. First quarter is okay. There has not been much of a price and wage increases, so but still in some part. But, yeah. I mean, that is an ongoing process, for the remainder of the year.
Thank you very much.
Your next question comes from George Gregory of UBS. Please ask your question.
Good afternoon. Couple from me. Firstly, just on the Affordable Care Act. It's good, good that you've, you've clarified the cost increase for us there.
Any further thoughts on, you know, how that could impact the margin next year? I appreciate you'll be able to offset some of it through technology and some of it through cost increases. But bringing all that together, do you have any idea at this stage what, you know, what that might look like on the margin? And secondly, on the U.S. business, you mentioned you expect the market to grow between 2% and 3%. Obviously, your North America business grew 1% working day adjusted in the first quarter. So if you could help us maybe understand what the delta is there and then whether indeed we should expect an acceleration over the course of this year.
Thanks.
Yeah. I mean, on the ACA, I mean, our plan is, of course, to protect our margin.
that is, that's all the efforts. I mean, we are spending all our efforts on that. It's an enormous amount of time and trainings and activities going on in our organization. So, I mean, the answer is that everything else equal, our plan and our ambition and our target is to protect our margins. But it's way too early to tell. And then, you have some risk, which means that you might not get it at some specific clients for specific reasons.
On the other hand, when you can introduce more sophisticated solutions, and you can cut the costs from for the clients by reducing the total spend on security by having a better, let's say, security solution available to them using technology at a higher extent, that then we can share some of that, that benefit, some of that saving, and we can improve our margins. So all in all, my best answer in Q1 this year is to say that we will we will or we, we will try we will really make sure that we try to protect our margins. That's the best I can say today. On the on the growth side, I mean, it's hard to tell. I mean, you have ups and downs and swings, and if it we have 1% and the market is due, it's very difficult.
But I think one thing is that there is no specific major contract going in or out, anything like that. But I mean, what is happening is that we are spending an enormous amount of efforts and focus on the ACA, actually. That takes some of the time away from listening to clients and knocking on doors. So maybe it's a bad excuse, but at least it's I think it's a piece of the case. So let's see what happens in the coming quarters, if successful picking up or not. But a little bit behind, but that comes and goes throughout the past years as well. We have gained some market share some years, and then we lost it the next year. So no big drama, I would say.
We are protecting our margins, and we are the margins are improving as, as you have seen in the stories. So I, I, I, I'm still pretty happy with the situation as it is. And again, all our efforts are really on 2014, more than so on the, on any other major issues in 2013. Okay. Very clear.
One quick one, if I may. Within Spain, -14% in the first quarter, are we annualizing the contract exits, the SEK 450 million, yet, or is that still in the -14% in the first quarter?
Partially, because you can say that they were to make it very simple, you can say that those contracts were same for half Q1 last year. I would say that because the major one, there was two big contracts, and the major one was when was that?
We have the other one was that that was February 1st, I think, or was it March 1st? So hang on a second. We're just gonna. We'll look on it, and I'll answer the question a little bit later on.
Okay. No problem.
But basically, I mean, from the top of my head, I would say that half of the effect was in, and half of the effect is not in because we, on average, lost those contracts mid-Q1 last year. So that I think that number. If I don't hear anything for the next 20 minutes, that's the answer.
All right. Thanks.
Your next question comes from Mikael Löfdahl of Carnegie. Please ask your question.
Yes. Hi, Alf Göransson. A couple of questions.
First of all, could you say how much Spain and Portugal accounts for in this quarter in terms of revenues in the Ibero-America region?
Hang on a second. We're gonna give you a pretty. And the second question, I can connect that.
Yeah. Just over 50% on Spain and Portugal of total sales and slightly below 50 on. Oh, what are we talking?
Sales. Sales. It cannot be 105. So it's gotta be, I mean, the Ibero-American part out of the total sales in the first quarter. Let's see here. We, if I flip back so we have the right numbers here. It's gonna try to be a bit. I, we don't have the numbers there.
Okay.
Out of the total sales in the quarter was SEK 2.3 billion, and out of that, SEK 1.2 billion is Spain and Portugal, and SEK 1.1 billion is Latin America.
Okay. Thanks. Then the second question. In the U.S., if part of the achievement to sort of mitigate the cost increases from the Affordable Care Act is to increase the number of combined solutions contracts. Do you actually have capacity to take on many technical solutions contracts in the U.S.? Could that be a problem if you're successful in selling this?
Have been preparing ourselves for the past year. So that is no. The answer is no. We are ready. And we are prepared.
and that is what we have prepared now. We have spent an enormous amount of work and time and money on that. So we are ready.
Yes. But I guess you are still in a buildup phase for offering technical solutions?
No. Now the game plan, the plan is now we start to approach the clients. We start to discuss with the clients what are the options. And then, I'm sure we start to see some. I'm pretty sure we're gonna see some orders coming in in Q2, where we'll make this change or a change of the portfolio.
then, of course, the majority will happen during the second half of the year where we will start to see a lot of improvements, and a new type of contracts, I hope. So we have made some estimates, of course. I mean, and some assumptions. But we are well prepared, and we have the resources lined up, and the suppliers, and everything else is all there.
Okay. Good. And could you specify why you sort of lowered the cost increase range from the previous quarters? Which cost increase? Well, how did you?
No, but because yeah. Okay. I mean, because this is very complicated. Yeah. I know. Yeah. Material. And you have to really dig into that.
The key question, one of the key questions, is, of course, how many? I mean, there's a million factors influencing that. How many part-timers do you have? What is your personnel turnover? There is a waiting time before we get into the so to say should be offered the healthcare coverage. And then you have to make an assumption on how many people will enroll as well. And there are many, and so on and so on and so on. So that is a bit complicated. So when we now, I mean, now really, the rubber starts hitting the road.
And then when we have been able to be more specific and also learned more about what this means, and we have got clarification of what it means, our understanding is that that cost increase range is not as high as we expected, which is good news. It's more in the range of 10%. And that is not based on any penalty fees. You're used to expect it to offer healthcare solutions. No, no. We will offer. We will follow the law. We will offer the law. We will not do any other things. We will play by the rules. And we will offer this, as the intention is. And based on that, that is our estimate.
Okay. Okay. Great. Thanks.
Thank you.
There are no further phone questions at this time. Please continue.
Okay. Oh, yeah. What was the question? Okay. No more questions? Okay.
Thank you very much for calling in. Thank you.