Good evening, everyone. Very welcome to our Q4 report, and we will lead you through the, the highlights of the fourth quarter and the full year of 2012. Some of the highlights are here on this slide, but I'd like to start off by saying that we have had a quite of a turbulent fourth quarter, and that is very much due to the restructuring actions that we have taken in Europe and North America and in Spain, which have impacted the performance of the group. I will come back to that in different ways during the presentation here. But of course, when we make a big change like that, we put a lot of new management into place. That has an impact. It's been successful because it's done in a very short period of time.
We are now ready to go. The cost savings are in place. The restructuring is all, all set and done, and I think it's been executed in a very, very fast way and a very professional way. So that's the good news. We're ready to go, but it has had an influence on the performance and the review of the different balance items in the balance sheet throughout the fourth quarter. Anyhow, the organic growth declined to 0% for the year. And of course, it's very much due to the situation in France, Portugal, and Spain, primarily France and Spain, where we have a negative development, and I will come back to that in a minute.
On the good news, we had a very good cash flow, very good in the fourth quarter, SEK 1.5 billion, a little bit more than that. So we came close to SEK 2.1 billion for the full year, which is really good, and that means that we, we actually, before we expected, reach our financial target of 0.20, free cash flow to net debt. We have managed to keep the price of the wages on par throughout the 2012, and we also have been able to catch up in some countries where we were behind, like France in 2011. The margin, of course, disappointing, and for the reasons we have mentioned throughout the year, but I will come back to the margins for the different units step by step.
But basically, the main difference comes from North America in some specific segments and from Spain, where the conditions are really, really difficult. I mean, that basically, if you'd like to make life easy and explain it with two reasons, those are the reasons that really explain most of that difference on the operating margin. We have done the restructuring program. It's all executed. The restructuring cost slightly higher than we anticipated, SEK 458 million compared to SEK 430 million, but the savings are confirmed. They are now there, and they will show up as of January first for this full year of SEK 370 million, with an effect on the bottom line of an equivalent amount.
The dividend is proposed to be 3 SEK, the same as last year, by the board of directors in our meeting yesterday afternoon and evening. Also, it has been proposed, as you might have noticed in the report, that the board will propose to the AGM to have the ability to be able to repurchase or reacquire the shares in Securitas itself, to buy back the shares. The business reason for that is that as we put a lot of focus, and will continue to put a lot of focus on bringing in more technology and increasing the share of technology in our company, we cannot do too, too many things at the same time. We need to put all our efforts on that, and management really needs to focus on that item.
Doing that, we cannot make a lot of acquisitions in mature markets at the same time, because those are the markets where we will really drive the technology and where it will make a change from Securitas point of view on the bottom line. So that means that looking for buying market shares and guarding mature markets, we will not do that, basically. So that means that that acquisition capacity will really be freed up and could be used, if so decided, to buy back shares. So there is a business logic behind that statement as well. Okay, if we look on the margins, I mean, the top line, you know, it'll be...
I think one thing to notice is that we have the real sales growth. It doesn't matter. It's fine. The real sales growth, including acquisitions, have come down. You see in the fourth quarter, it's 1%, and it has been higher throughout the year, but that's coming down now. And that, of course, together with the organic sales growth of 0%, means that we are basically not growing at this point in time. The margins are below last year, and for the full year, the main explanations are the ones I just mentioned. It's Spain, and it is the situation in North America, in U.S. particularly.
In the quarter, you can make it fairly simple by saying that 0.4 of a difference of 1.2 comes from that we last year had a one-off positive from selling the Securitas Direct home alarm business in Switzerland. That gave a positive last year of 0.4. So adjusting for that, you have 0.8 to explain. 0.6 of the 0.8 comes from one-offs and corrections due to the reorganization, due to different valuations of a lot of different items, and that is kind of a one-off, one-off and adjustments that we have taken in the fourth quarter, and the remaining 0.2 is basically Spain. As simple as that. That's the big picture. Yeah, so, that explains the margins. We will see it more in detail when we look on the different segments here.
When we look on North America, I think we can see a slightly. We had had a declining trend on the top line for the first three quarters of 2012, and now in the fourth quarter, it's actually not a breaking the trend, it's not a substantial increase, but still it's a different trend than we've had before, so it's turning upwards. And, my feeling is that the sentiment in the U.S., in particular, is more optimistic than it has been for a while. We see now that there will probably be a decent growth in the market, or there has been a growth in the market in 2012, about 3%.
We were lagging behind, but there will continue to be growth in the North American market, and hopefully, we can then take better advantage of that in 2013 than we have done in 2012. The big challenge, of course, and which is really the main focus of the North American organization, is the Affordable Care Act, the healthcare reform in the U.S., coming in effect January first, 2014, a year from now, which will impact our cost with about 12%-16%. We are now preparing ourselves to this major increase. There are two options. One option is, of course, just to increase your price. With that amount, which will not be too much appreciated, of course, by the clients.
The other option is to offer the clients a possibility to replace that cost increase with using technology to a higher extent, to replace guards on site with guards remotely, and to find a solution, a security solution, with technology and a different setup, and bringing down the cost and mitigate that cost increase. Either it disappears or at least to reduce it. Now the North American organization is really preparing itself for that big challenge. We will start to face the clients, and really, the rubber kind of hits the road in springtime when we start to approach the clients with the different options, either a cost increase or a technology different setup solution. That we are now preparing ourselves.
There's a lot of preparation work, a lot of training, a lot of packaging, a lot of pre-work that has to be done before we start to approach the clients. So how that's really gonna play, we really don't know until Q2. Q1 will be too early to tell. We will not really have started to approach the clients at that point in time, because it's still a year away, so to say. But that is really the, in addition to running the business day-to-day, that's really the big, big, big challenge in the U.S. in 2013. And our aim is, of course, to compensate that cost increase by price increase or to mitigate it and still protecting our margin.
On the operating margin, we have had difficulties throughout the year in the federal government business, and that is the main deviation compared to... That really explained most of the difference. We have some small 0.1 here, 0.1 there. You can read for yourself, and you can read in the report. But the main difference have been in the federal government business, where we have really suffered a lot due to the integration issues with bringing that business into our big machinery. And that is now under control. It's done. All actions have been taken, and we expect that that business will be at a break-even result in 2013. So that mission is complete, I would say, and now it's about time to perform in that business.
We also have been, luckily enough, we have got some good growth in the segment. We got some big orders that we now came in in the fourth quarter, so that, of course, also help, helps in that equation of bringing that business to a break-even situation in 2013. I'm confident that that will be the case. In Europe, we have a zero growth and pretty much in line with the market. Difficult conditions, of course, in France, where... Excuse me. In France, where we have had a year to date, 7% negative in France, and 10% in the fourth quarter, coming from, mainly from that we have lost a major contract to the French Railways in early October that hit the fourth quarter for that.
But the situation in France remains very, very difficult, and I think the French market will, in 2013, continue to contract or to reduce by another 2%-4%, the security market in France. So it will remain the biggest challenge in Europe, I would say, is really the situation in France and continue to manage a very difficult market. The good news in France is that we actually improved our bottom line. So even if we suffered a lot on the top line, we have improved the operating result with 25%, which is pretty good.
So it's quite impressive situation that in spite of that market conditions, walking away from low-margin contracts, managing the situation in a very professional way to deal with contracts that we don't make money on, and really pushing the price increase as proved, where we'll be able to compensate the wage cost increases in 2012, plus a piece of that piece that we lost in 2011. We have some one-offs in the quarter that disturbs the pictures in Services Europe, and adjusting for those, there's another 0.4 to add to the margin. And then, of course, again, repeating what I initially said, the cost-saving program, the restructuring programs have had an impact in Services Europe and in Mobile and Monitoring .
With new bosses, new managers, and new positions, and everyone making sure that everything is in order for the coming year, that, of course, cannot be ignored because it has an impact when you do major change like we have done in the fourth quarter. So don't make too many conclusions out of the fourth quarter individually as a quarter as such. Of course, it counts, but still, there has been some disturbance and turbulence throughout the quarter. What is good news is that it has not impacted the sales. The top line, we have been able to protect. The whole restructuring program has been done in a very high speed, and we have not seen any losses, touch wood, on the top line, due to the restructuring program. Mobile and Monitoring , we are not happy with the top line.
It has been fairly weak on the top line, and it has been throughout the year and continues in the fourth quarter. We are not pleased with that. And then when you look at the margin, you kind of get a shock when you look at that margin in the fourth quarter. But when you adjust for the one-offs, which we can categorize as one-offs in the quarter, then we are at 11.2%, then it's not so bad. But still it's not a good quarter, and for the same reasons I just mentioned in Security Services Europe, plus the fact that we have a business in Spain in mobile that impacts the quarter in a negative way.
So not a very pretty picture, but not as bad as it looks when you look at it from a first glance on the quarter as such. So don't make too much conclusions from that quarter as such. Yeah, and then the mixed picture of Ibero-America, where Latin America is the shining star, while Spain is very, very difficult and very tough conditions in Spain. And we are, of course, losing top line in Spain, 17%-19% in the quarter, 19%-17% year to date. Very, very difficult conditions for all the reasons we have mentioned throughout the year, where we have to walk away from contract, terminate contracts, be careful to not continue in contract where there was a risk of bad debt, customer cutting back, all kinds of reasons, very tough conditions in the Spanish market.
And it will continue to be difficult in 2013, where the market probably gonna continue to decline with 4%-5% in 2013. But on the other hand, Latin America is really booming. 21% organic growth in Latin America, driven by primarily Argentina, but also very good development in the other countries in Latin America. And that will continue throughout 2013. We see no reason that that's gonna change. The operating margin suffered by Spain, that's the only reason. That's the reason, basically, the situation in Spain. And we are in a negotiation with the unions in Spain right now, hope to be ready for today, but it's not. It's still ongoing discussions to reduce the wages in Spain, which is not very much appreciated, but that's necessary. And there are negotiations going on.
And if that doesn't work out, then we will leave a collective bargaining agreement in Spain, and we'll make an individual agreement with the unions, and if worse comes to worse, it has to go to arbitration, which the legislation in Spain allows you to take a dispute about wages to arbitration. That, and then we'll do that. There is no other way. We, we have to reduce the wages. It's the only way to, to have some kind of decent situation in Spain. So that is very difficult, a very difficult situation, but it's under full attention, of course, of local management.
We are also investing a lot in the technology side in Spain, with a lot of efforts in the Chillida acquisition and hiring people from primarily Niscaya, to bring up our competence within the technology side. Because to sell a guarding contract with just manpower in Spain today is basically impossible to make any money on. So you have to sell a security solution, including the technology side, and then you can make money on it. And then that we are starting to see some success in that respect in Spain, and quite optimistic about the ability of that organization now to continue along that path in a good pace throughout 2013. The cash flow was good, as I initially said, SEK 1.5 billion in the quarter, just over SEK 2 billion for the full year.
So we have been expecting that, but it was actually better than we expected, and it was a true, good, true cash flow in the quarter. And we have been pushing the organization, of course, but this cash flow is really reflecting the true situation from 2012. And you might remember that we had a very weak cash flow in 2011. So that, it should come back someday. We have said it was stuck in the balance sheet, and this is proven. This now it proves that it was, and now we've finally released a big chunk of that, so we can enjoy a good cash flow for the full year. So that's good, and we then meet the target of free cash flow to net debt.
When it comes to the restructuring cost, about SEK 150 million of that has been paid in cash in Q4, and the remaining piece will mainly be paid in throughout 2013. There will be some small pieces left for 2014, but most of that will now come mainly in Q1, but and then throughout the rest of probably a third of what remains, a third of the total, probably in that range in Q1, and then the rest throughout the remaining three quarters of 2013. That's our guess right now. Net debt came down below SEK 10 billion, so it was reduced throughout the year. The numbers I think are pretty much self-explanatory, so SEK 9.8 billion net debt. And then, of course, finally, just a few words on the technology side.
We are doing a lot of investments and employing resources in the technology side. We will focus on acquisitions to buy technology companies when we find the right ones, country by country. That is one of the few areas where we'll be more active in acquisitions, and it is in the technology side... in addition to maybe Latin America or there will be specific cases, but when buying just man guarding businesses in mature markets, that's not going to be much of a case. We have put the organization in place. We have country organizations with a better decision power, more functional, more direct lines to make decisions in the organization now than we had before when we have more divisions.
So we will be more speed to implement the technology by the new organization that is now in place and up and running. We have CTOs, Chief Technology Officers, in the main countries, established, and we are rolling out the remote video solutions, the intelligent cameras, in all the countries where we think that will make sense to do that. And that is mainly in Western Europe and in North America, where we do that. We will start to report, for your information, from the first quarter, the share of sales, which is under the definition of technology and security solutions. In 2012, it was 6%. We think we can triple that in three years, by the end of 2015.
And that will, of course, have an impact and will improve the margins of the group. And I always show this one, and then everyone will ask how much, and I will not answer that. I will just say that look on this one, you can, I think it tells you the picture, that when we move from man guarding to more sophisticated solution and at, in the optimal cases, a complete security solution, the operating margin is substantially improved. And when we can increase our share from 6% and triple that in a three-year period, that will, of course, have a positive impact on the operating margin of the group.
That concludes my part, and I'll be happy to answer any questions, if there's any questions here from the room to start with, and then we'll move on to the, to the lines. Please go ahead.
Thank you, Peter Garske at Danske Bank. Two questions. First of all, the one-offs you had in related to holiday payments and then for salaries in Sweden, should that still be seen as, okay, it's a one-off, but it is a cost you should have had over the year and will have over the year to come with?
The piece in Sweden, yes. The answer is yes. It belongs to 2012. It was corrected in the fourth quarter. We usually have been on the safe side, and this year it was the contrary, on the contrary. We usually are on the safe side, but this year we were not. So we have been, this year, been too optimistic about how, how that provision was in the balance sheet, and then we had too low provisions when we came to the fourth quarter. But in Sweden, yes, it belongs to the fourth. It belongs to the 2012 full year. Yes, it does. When it comes to U.K., where we had a similar, well, vacation accruals, it does not. It, the majority of that piece goes back to, previous years.
So that has no effect for 2012, even if we had to take the hit in the fourth quarter.
Okay. Thank you. And then, coming into your proposed buyback program, are you changing anything, how you look at, your gearing or rating, credit rating?
No, no. We have the same financial target as before.
You maintain that, and if there is excess cash and you're not using it for acquisitions?
Well, that has to be decided by the board. That's a board decision, but we will ask for the mandate to be able to buy back shares. But what I'm saying from my point of view, from the business logic, we will be less in the mode of acquisitions as we have been in the past, when we've been buying 15, 20 companies in guarding, in the guarding area, to a large extent in mature markets over the past years with quite high numbers. We will not continue to do that. We will might be some selective cases where it has a strategic impact for us, we will still do it, but we will be much less of acquisitions in that respect.
That could mean that we will have a better net debt situation. That could allow the board to make such a decision, but if we will do it or not, that remains to be seen and decided by the board.
Okay. Thank you. Maybe one question also on your pointing out France and Spain, that most likely there will be continued negative organic growth for 2013. Is there any other markets where you, you know, you have any big tenders or where you have lost any big tenders, which could, you know, create the same kind of impact as we saw in the beginning of 2012?
No, not really. Not really, nothing of major significance for the time being, no.
Okay. Thank you.
All right. Nobody else? All right. Then we move on to the telephone lines. Yeah, we have one question up here.
Thank you. Yes, I have two, three questions. The first one is regarding South America. I wonder if the inflation in certain countries have any impact on the operation, how you plan to tackle it?
Well, I mean, inflation is high in Argentina, and that drives the price increase, which means organic growth. So that when you look at organic growth numbers, a big chunk of that generates from the high inflation in Argentina, which is mainly the key country that is in that respect, because the inflation in the other countries is not as high. Argentina is very- and the official inflation in Argentina is way lower than the true inflation, so it's the true inflation that is reflected in our numbers. I think, I mean, the concern about Argentina is, of course, if there will be a-- because they have-- you cannot take money out of Argentina. So the concern is there, if when there will be a devaluation and the size of that devaluation.
That will have, of course, an impact in the sense that we will, the pesos that we today calculate the Swedish krona and becomes a part of our P&L, they will become less the minute they devalue the peso. We haven't got a clue when that's going to happen, of course.
Typically, when it comes to inflation, do you have the power of negotiation so that you can raise your prices before you have to raise salaries or?
No, that pretty goes hand in hand because you have to have a reason. I mean, you go to the client, and you cannot say: "Well, now we're going to raise the price, because three months from now, we're going to have a wage increase." They will not buy that. They will. That has to go more or less, the timing is more or less at the same time. So yes, I mean, but we are managing that, and we are. The organization is used to that. So when you have high wage increases, you also have the same equivalent number in the price increase.
Another thing, you mentioned that the write-down of inventory is one of the reasons for the lower margin in Europe. What kind of inventory is that? Is that something we have to get used for?
We have had some home alarm that we have been buying at large extent. We have had some other equipment that we have bought and misjudged the need for that, and then they've been sitting there for a long time, and now it's time to, we've decided to write it off, basically.
And finally, with regard to tax rate, I just calculated in my head, and it seems to be that the tax rate is pretty low. Could you elaborate a bit on-
Well, it's-
What to expect in the future?
We wish it would be lower, but it's 29.9%, something like that. So it's not that low. It's but I mean, based on it's a mix of the countries where we're in, where tax rates are different. In all kinds of countries, you have very high tax rates in the range of 40%, 38%, 40% in the U.S., while we in many European countries, it's below the average. So it's a blended average, of course, of the group.
Well, for my modeling, my best guess would be that-
You can keep, I mean, that has been fairly stable over the years, and you can continue if you like to put that into an Excel model. You can use the same number going, the same percentage going forward as we have been having.
Thank you very much.
Use 30%. All right, so we move on to the if somebody is on the line there. Somebody-
Your first question comes from the line of Robert Plant of J.P. Morgan. Please go ahead.
Morning, Alf. You've helpfully said that 0.6% of the margin decline was one-off. I'm a little bit confused, though, because listening to your comments about Swedish pay, for example, I'm wondering whether this is a one-off that isn't going to hit 2013. Could you give a bit more granularity in terms of what makes up that 0.6% and how much of it will affect 2013? Thank you.
What I said, meant by that, it's a relevant question. It's a good question, but what I meant by that is the 0.6 is in a quarter, and that is—that's why I use that as an explanation in the quarter, because it really doesn't represent the fair number of Swedish performance in the quarter. But then you have to... So when you look in the full year, it's a different number, but the 0.6 I used was for Q4, and then you can use it in that way. I used it as a one-off because it was a major correction for all the preceding quarters of the year in the fourth quarter, and that's a piece of the 0.6.
But doesn't that mean that Sweden is less profitable going into 2013 than we might have thought in our modeling?
Yes, it does.
Yeah.
It does.
Thanks.
Your next question comes from the line of Andrew Ripper of Merrill Lynch. Please go ahead.
Morning. I've got a couple, if I may. First of all, on the U.S., you referenced an improvement, I think, in the federal business. I wasn't quite clear whether it was the federal business or the Pinkerton business. Just could, can you give us a feel as to what those businesses lost in 2012, and what the, sort of the, the magnitude of the, the orders that you're bringing into the businesses, please?
Well, it's the numbers that we lost, the deviation, that it represent, is disclosed in the report. So that as far as we can get when it come to the numbers. We have—So it's a major difference. If you look on the full year of 2012 in North America, by far the major difference explaining the drop in margin comes from the federal government business.
Yeah.
And then-
Can you just remind us of the revenue then, please, Alf?
The magnitude of those sales that we have now in Q4, we have got some orders in the range of $20 million-$25 million, which is quite substantial being in that business, which is, has a-
Yeah
... annual volume of about 250, I think, in that range, 250, so in the federal government business, yeah.
SEK 250 million?
Yeah. So I mean, just about that, that specific orders represent more or less 10% increase.
Yeah. Okay, I'm not on the slide in the pack, but I think you talked about a 0.5 percentage point deviation. So you're basically saying broadly it was break even in 2011 and lost 0.5% of %2.50 in 2012?
...Well, I wasn't following you very well there, but anyway, it's the main deviation, I repeat, the main deviation comes from that in North America in 2012, and we'll bring that business to break even. I'm confident about that for 2013.
Yeah, sorry. Our math wouldn't quite work because I think you're talking about 50 basis points of the total U.S. sales. So, okay. Second question on the U.S. Just in terms of the U.S. in its entirety, can you say what total employment costs are as a percentage of sales?
Total employment cost as a percentage? What do you mean by the total employment cost?
Well, the wage cost plus the indirect component.
I mean, it all our costs are in our people. I mean, there's, we have almost nothing else. So if you, I mean, if you have 100%, you have 5% operating margin, 95% is basically wages and indirect costs and social costs, and that we have some leases and some rents, and so, I mean, you... That's the only cost we basically have, of any significance, is the labor cost and the indirect cost.
Okay.
So I don't know if that answers your question, but, I mean, the rest-
Well, what-
We have some cars, we have some uniforms, we have some leases.
Yeah.
But that's peanuts.
Is the gross margin double digit?
Yes, yes, yes.
Yeah. Okay. And then you talked about the outlook improving, and obviously, you referenced the federal government wins just now. In terms of the broader trend of where you are relative to the market on the commercial side, I mean, do you see yourself sort of coming to the end of that period where you lost a bit of share? Do you think you sort of you're a bit more on the front foot now in terms of the commercial business mindset?
Oh, I think we are extremely well positioned in the commercial business, and the big machine in the U.S. is doing well. I mean, the bulk of our all our regions, the guarding business is continuing to do well and has been, of course, coming a little bit in the shadow of a poor development in primarily the federal government business-
Yeah.
-to some extent, in the Pinkerton C&I business as well. But the bulk of our business is in the commercial sector, and that is continuing to perform in a very good way.
It's doing okay.
When you have a big deviation in a small piece, it still becomes a big piece. It still makes a major impact for the full North American business.
Yeah.
So that I see now, I mean, very, very, I'm not so concerned about that. Continue to perform very well, and we look pretty optimistically on the market situation. It has been growing in the range of 3% in 2012.
Yeah.
Seem to be in the same range going forward.
Yeah.
So it looks fairly okay for North America going forward. So we just have to fix this terrible problem that we've had, and now we think we have done that, and we have cut the cost, we have made the changes, we've done all the things we possibly could, and now we get a little bit of help from the top line as well in the fourth quarter. So we will be at break even 2013, and that will help the North American business.
Okay. And then on Spain, can you just remind us broadly what the revenue run rate is or what revenue was in 2012, please?
We lost 17% in Spain. Organic negative growth in 2012.
Can you say broadly what the sales were, though, in Spain in 2012?
Spain is total Spain... Yeah, close to EUR 500 million.
EUR 500 million. Did you make a profit in Spain in 2012 or a loss?
We made a profit, but margins were lower than the year before, of course.
Yeah. Okay, and then finally for me, in terms of the cash, reorganization charges, I might have missed it on the call, but, how much more cash have you still got to spend in 2013 against the reorg charge, please?
Just about SEK 300 and SEK 300 million, right? Yeah, more or less SEK 300 million.
Okay.
About half of that, roughly estimated, about half of that will be Q1, and the remainder throughout the remaining fourth quarter and this tiny piece in 2014.
Yeah. Thank you.
Thank you. All right.
Your next question comes from the line of Mikael Laséen of Carnegie. Please go ahead.
Yeah, hi, hi, Alf. First, just on clarification on the mobile monitoring side, could you specify how much of the margin decline there that was, what was in Sweden and the social costs accrues, which I guess will not have a year-to-year effect in 2013?
In the fourth quarter of that 4.2, it was less than half, but it was a big chunk of it. It was close to, close to half of it.
Okay. That tells us that there will be a margin, all else equal, there should be a lower margin than going into 2013 for that-
But it all depends on all the other things that's going to happen. I mean-
Yeah, sure.
We don't like that situation, of course, and so we need to think about how do we manage the price increase versus the wage increase for 2013, based on the fact of 2012, of course.
Yeah, of course. And second question on the cost savings, you have always said that the cost savings are net of other investments in technology solutions and so on. And the full effects from the cost savings we will see as of first January, I guess that's something that you reiterate. But the other sort of investments in technology, when will that peak? Will we see higher cost savings initially than the annual rate or how do you see those investments?
No, those investments we do gradually. We have done in 2011, we've done in 2012, we will continue in 2013. And the benefits of a net amount, as you mentioned yourself. So we'll continue to do that because that's the way we will and the result of that, you will not see in cost savings as such, because we are spending more money, we are employing more people, we are building more resources in the technology field, but it will you show up on the margin. It will show up in the sense that we will improve our operating margin as in parallel to the development of the share, when that moves from 6% step by step, up to 7%, 8%, 10%, whatever % going forward.
When we increase that share of sales, then it should also see an improvement in the margins.
Okay.
There's no cost saving coming from that. It's more of a way to improve your margins.
Yeah, sure. But the annual cost savings that you mentioned, that was net after-
Yeah.
investments in technology and solutions.
Then in 2014, we probably have more investments to be made in the technology side, and, and so on, and so on, and so on. But the net, the net effect should be a plus-
Mm.
on the bottom line.
Yeah. Could you say something or quantify? You mentioned that the cost savings program but has disrupted the ordinary business as well, and had a negative impact in the quarter on operations. Is it possible to quantify that in any sense, and, and-
Well, I would have done that if I could. So then I would have written that in the report, having a poor margin in Q4, we would have done that, but it's impossible. Yeah-
Could you say something where we are now in, in Q1? Has those disruptions, do you feel that it's-
Yeah.
-been, made up?
We did, we started that program. We made it official mid-October. Everything should have been done by December first. That was the mission to the organization. Basically, all of it was. We did the restructuring in six, seven weeks. And it was a major change throughout the group, in many in Europe and in North America. So it was performed in a very high speed. And then we had some adjustment to made in December. So now when we start January first, we are up and running. It's done, it's over, it's settled. The people who should leave have left, and the new organization is in place. So we are fine now. It's over. So now we are ready to go for 2013.
Okay, final question from me. Could you say something about the competitive situation in France, whether or not it's been, it's improved, and the cost, or sorry, the price increase campaigns that you've been running now for some time, is that being broadly accepted, generally as we move into this year?
We have not really started. We're starting now the price campaign for 2013. So it's in an early phase, and it's too early to tell. We just starting sending letters and so forth. So we don't know yet. The competitive landscape is as terrible as it has been for a long time, and will continue to be very, very difficult. It will remains to be like that. Two-thirds of the companies in France are in breakeven, Chapter 11, or losing money. There are 3,000 competitors, it's just difficult. But having said that, please, I'd like to repeat and don't be too negative. I mean, from a market perspective, top line perspective, yes, it will—it's a difficult situation, negative climate.
There will be a decrease in 2013 on the market for sure, on the top line, or not on the market growth. But our team has improved the operating result 25% in 2012 compared to 2011, by doing all the things that they should do, and they have done that in an excellent way. So we are one of the few companies, or the major ones, that actually makes money in France. We are not happy with the margins, could be better, but still, we do make money, and we have had a good development throughout 2012.
Okay, thanks.
Thank you.
Your next question comes from the line of Laurent Brunelle of Exane BNP. Please go ahead.
Yes, good morning. Three questions, if I may. First, can you elaborate a bit more on your top line outlook for 2013, in terms of organic sales growth, and are you confident with the 1.5% growth expected by the consensus so far? Second, can you comment a bit on the ramp up and phasing of new sizable contracts that you've been able to win recently? And third, regarding the cost reduction, can you remind me the phasing through 2013? And don't you believe that part of the savings will have to be shared with clients? Thank you.
The organic growth, I prefer not to give a forecast for 2013. I'm talking about the market. We usually don't give a forecast. When I look upon our situation, we have, I'm fairly optimistic about the development in North America. It's more gloomy, primarily due to Spain and France, situation in Portugal, in Europe. So, out of that, I cannot give a number. I'm not willing to give a number for the organic growth for 2013. I repeat, we see in Spain, I think there will be a negative market, security market growth of 4%-5%, France 2%-4%, North America plus, I expect in the range of last year's growth, 2%-3%, positive.
Then how we develop, I prefer not to forecast that. New contracts, nothing really significant. We never put up for tender, nor any contracts with Norway. We have one of any, of any major significance, nothing really special to mention there. On the cost side, we are not intending to share that with our clients, of course. That is, those cost savings are coming now as of January first, month by month, the full effect as of January. And then, and, so there is no phasing of that. It's full effect as of January, and, in Spain, North America, and in Europe. And, the intention is not to share that with the clients, no.
Okay, thank you very much.
Your next question comes from the line of Will Vanderpump of UBS. Please go ahead.
Morning, everyone. Just going back to the cash flow again and this, I suppose, slowing of mature market M&A and potentially giving the cash back. Could you just perhaps quantify how much you think you've spent, you know, of your billion average of M&A over the last few years on those mature markets? I suppose, by extension, why you're not putting that into emerging markets or into technology, firstly, please.
Most of the acquisitions that we have made throughout the past five years, well, if you go back in history, you can go even longer if you want to, have actually been in the mature market.
Okay.
If you look at the money, that has been where really been allocated most of the money in the most big acquisitions in the U.K., in the Belgium in last year, Germany in some years ago, in North America. We have been buying quite a lot of companies in Latin America, and that we will continue to do. So our focus going forward is to buy companies in high-growth markets and technology. There might be the odd case where it makes sense from a strategic point of view to still make it, let's call it the guarding acquisition, in a mature market for very special reasons, and there could be some of those. But they will not be significant from a money point of view, enterprise value point of view, but still there might be such.
But that, the bulk of our acquisitions will kind of disappear.
Okay.
Then we will see what happens on the technology side. If we can find attractive acquisitions there, that could be of significance like it was with Chillida in Spain, which we bought last year. But of course, the acquisition pace in total will be less than it has been looking five years back, the last past five years.
Okay. No, thank you. That's clear. And secondly, on North America and the margins and your comments about the Affordable Care Act, I gather that you're, you know, still in the process of planning and approaching the clients, but I just wondered if there's any sort of early signs you can give of those negotiations or any, you know, perhaps percentage of pass-through of this additional cost that you might be able to achieve with your main clients. Any sort of color there would be useful, please.
That's an important question. It's a very important question, but we haven't started yet, so I cannot answer it. I cannot answer it because I don't know. We have not started the process yet.
So, you're not-
We are in the preparation phase, and we will start to face the clients with this situation when we come the coming spring.
Fine. Okay. Thank you very much.
Your next question comes from the line of Andy Groch of Credit Suisse. Please go ahead.
Hi, good morning. Just three questions from me. Firstly, on France, you've talked about market declines of 2%-3% through 2013. In terms of sequential development in that market, what are you expecting? Because it looked as though that market slowed towards the end of the year, so, you know, 2%-3% doesn't suggest big sequential declines.
No
through the rest of the year.
We lost 7%, and we lost 10% in the fourth quarter, but that was driven because we lost one major contract with the French Railways in early October. So that was the main reason why we have had a higher speed in fourth quarter and higher. And yeah, so that's the reason. And why we have 7% for the full... So we really didn't accelerate in a way, in my opinion, because the tough time was really the first six, maybe nine months, where we really pushed through the price increases, which were substantial in France. And we also had to compensate a piece of 2011. So it didn't accelerate, except for that we lost one major contract in Q4, so that got our numbers worse.
7% because 7%, and the market didn't decline as much, but we declined more. Reason being that we had to manage, we preferred profitability rather than volume, and that's what we prioritized, and we had to push through the price increases. And it paid off, as I have said a couple times now, bottom line.
What do you think the market declined through 2012?
It's less than 7%, at least. I don't know if my colleagues have a better number. I would think, maybe, yeah, in range, I would guess 3%-5% somewhere, probably in that range.
Okay. And then the second question, just on the move to technology. You've talked about the improved margins that brings. What are your expectations for the impact on revenues? You know, is the absolute level of EBIT higher as you shift more of your business towards technology?
Well, I mean, theoretically, what it would mean is that we, when we replace guards on site and we reduce the cost for the client, we will invoice less. Otherwise, we don't reduce the cost for the client. So you replace guards on site by guards remotely from the monitoring station using then, intelligent technology to manage the guarding and the security of the site anyway, but in a different way. So then theoretically, you would lose on your top line. It's not necessarily true. I mean, that could very well be the case, and it might be the case in certain markets. But we have seen when we have sold hundreds of installations already now in Sweden with good success, that the client actually increases their technology or increases their security need, and they invest in more security.
So we have had an organic growth, even if we expected a negative organic growth. But it's hard to tell to be specific on that. Yet, we have to see. We have to drive this now and see for a while how this develops. So it's not necessarily negative, but it could actually be flat or positive as well. The key, no matter what, is no matter what happens, it will improve the payoff is there. The pay, the improvement on the margin, even if we lose a little bit on the top line, it still is a plus. It's still a positive development on the earnings per share in the bottom line.
Okay, thank you. And then just the last one, your working capital and cash flow improved markedly during 2012. As you look forward over the next couple of years, do you feel you've now hit a solid base, and we should go back to normal cash flow dynamics for Securitas?
I think we have taken an enormous amount of actions throughout 2012, and, and the organization has done a tremendous job on that. Really, we have changed our routines, we have changed our way to operate, the focus among management. We put it in the bonus system, that people have a piece of a bonus based on the cash flow, and so forth and so forth and so forth. It worked. We were nervous to the last minute, but still, it worked in Q4. We had a good cash flow. So we have changed, to a large extent, the mechanics of the machine, and then that speaks for that, we, that it will prevail going forward. But there are still a lot of things that we can improve.
We have learned a lot, and we can still improve on many different things. On the contrary, the clients prefer to wait to pay and drag their feet on paying the bills. So, but I think we have changed a lot, and that we will benefit from going forward. So we are now running in a different way. The mechanics are running in a different way in Securitas than it did in the past, and that gives me confidence for the future.
Okay, thank you very much.
Your next question comes from the line of Paul Checketts at Barclays Capital. Please go ahead, Paul.
Morning. On the cost savings, are you still expecting that one-third will fall in North America and two-thirds in Europe? Within the European component, how much will be in mobile monitoring?
We have not made that presentation with Mobile and Monitoring because now we are putting everything into one package as we have reorganized Europe, so we don't have divisions anymore. So now we, as of January first, we merge Services Europe with Mobile and Monitoring Europe. That becomes one, so we have, I cannot split that number in pieces, actually.
Okay.
The cost savings are coming, too, in Spain. It's about SEK 70 million coming from Spain. Then of the remaining part, the SEK 300 million, one-third was North America, roughly, and two-thirds were coming from Europe, yes.
If you added all that up, I guess it would, it would imply that the margin should improve by 50-60 basis points year-on-year. What, what are the—what impact, what negative impacts should we be bearing in mind to mean that that won't be the outcome?
I mean, our view is that that cost saving is gonna show up on the bottom line. That's why we do it. And also to get a better, stronger organization for the future to implement the technology. But basically, these savings belong to—should be, should be improving the bottom line. And the drawback you could ask yourself by—I mean, the main concern that we have been having throughout this restructuring is to merge the services and the mobile organization, and then that the large client organization will kind of not be too much focusing on the small clients, the medium-sized enterprises in the mobile business.
But we have tried to take care of that, to protect that we don't lose focus on the mobile business in that reorganization in many different ways, and I prefer not to. It will take too much time to go into all the details. But that is, that's kind of the only little risk I will see that would have an impact there. But I think we have mitigated that throughout the restructuring process.
And maybe lastly, on the mobile monitoring, which I appreciate will be subsumed within the European group. The new management was brought in to help improve client retention, to try and underpin the margins. That doesn't seem to have worked. But what do you put that down to?
I mean, we have, we have lost a number of contracts in U.K., unfortunately. Some of those contracts connected to the large client organization, the Services Europe. You lose a big contract there, it has an impact on mobile. We lost one big contract in Norway. So we were unfortunate to lose a couple of major contracts in a few markets, and then Spain has been very, very tricky, very difficult. So, but all in all, it's our explanations. We were not happy. We've not been happy with that development, that we didn't grow the top line as we expected it to be, but there are reasons for it.
Now we think we are. We have that behind us, and we are well equipped to look forward to much better 2013.
Just to finish, can you explain the bad debt write-offs in that division?
We have taken a different approach to bad debt. There has been promises and promises and promises that certain of those overdue payments should be collected, and they never did. And then we decided to be stricter and rougher and tougher on the valuation of how we apply the bad debt. And then we have we think we're still gonna collect the money, but we have provided for it because it, the expectations were not fulfilled. Viktor?
Thanks.
Your next question comes from the line of Rajesh Kumar of HSBC. Please go ahead.
Hello, good morning, Alf. Rajesh Kumar from HSBC. What is your read why there is so much contraction, mainly in Europe, but also in Ibero-America now? So what's going on in the organization? Why are you losing so many contracts? And clearly, you're winning more, so organic decline is not that bad, which is good, but what's... Basically, you don't see that in other guarding companies, more, less so in private ones, and in the industry.
Well, I think, if you put it all in all, it's not, it's not that dramatic. I mean, we have basically a flat top line in a very difficult macroeconomic situation, so it's we should not exaggerate, I think, the situation, right? I mean, very, very, these are tough markets, and it's very difficult conditions in these markets. I don't think we perform. We have probably performed, we have lost more in France, we have lost more in Spain, yes, than competition has. That's for sure. We lost more than the market.
Mm-hmm.
But the reason being that we had contract we didn't make any money on. Now, why should we, why should we continue to subsidize our clients? It doesn't make any sense. So, so if we don't make money on the contract, we might as well lose it. And when we, we walked away from those contracts, and in France, we had to. We don't want to be a part of those two firms who are in Chapter 11 or losing money. We don't want to be in that league. So we prefer to, to then take the approach we have taken. I think that's the fair way to do it. And then you suffer on your top line, but there is two sides to the coin. And then you, but you protect your margin.
You may still make money and you improve your results. And I think our approach is the right one. We have had in Spain customers with good margins, which we know is not going to be able to pay the bills six months down the road, and then we have to cancel the contract. And that's painful, of course, but there is no other way. And you have to make a decision to protect your bottom line, and I think we've done that in the right way. And then, of course, it doesn't look very pretty on the top line, but still, we protect our bottom line and our business and our portfolio in a pretty good way.
No, I get that. I mean, there are issues in France and then there are issues in Spain, which clearly they are well flagged. But also, it's not just these two countries, is it? I mean, there have been losses in Belgium, there have been losses in Sweden. So there have been more losses than that are being flagged. Clearly, there is some other issue. Why is it price pressure or what, what's going on? Why are there so many contracts? And also, the sports business is going away. That's an indication that that's basically incremental activity is not coming on. So that's basically getting a lot of people nervous. If you could give a bit of color on what's going on apart from France and Spain, that would also help.
It's a price competitive environment. It's always been in our business. I mean, this is a very price transparent business.
Mm-hmm.
And, I mean, there is this is a fact of the matter. And, I don't know, there is some disturbance on the line, but I'm trying to stand still and not make it confuse anyone. Okay. Is that better? I don't know. Okay, I'll do my best. So it's a very price competitive market, and some years you lose some, and you win some others, and it makes a big difference. We lost in North America, we lost a big contract to automotive industry, and then we gained the airport contract in Canada. And swings like that has a major impact on your organic growth. It's the difference between zero and maybe 3% growth, and that makes a huge difference when you look on the numbers.
It's a matter of winning a couple or losing a couple of big contracts. It's hard to give a very specific answer to your question. You also have to remember, we have a market leader in most of the countries where we are active. If a market leader starts to take the approach to use price as your only weapon to drive your top line, you will destroy it. It's a disaster. It will be a mess. We are a market leader.
If somebody has to be able to, to try to protect the margins and to take a beating on the top line and be the first one to do that, in order to maintain the price levels on the market and the price increases on the market, it has to be the market leader. It's a responsibility, and sometimes you suffer doing that, and sometimes it works. So that, that is also, I think, a piece to take into the equation.
No, that's very helpful. Thank you. In terms of the provision relief that you put through, I didn't completely understand. You may have explained it earlier, but apologies, the line got a bit cut off, and I had to log in again. So, it would help if you explain what's going on with provisions and in the restructuring, how much more provision have you created?
On the restructuring, we have a total cost of restructuring of SEK 458.
Mm-hmm.
That is all provided for. All the cost is taken in 2012.
Okay.
There will be no more cost in 2013 related to that. Now, it will only be the savings coming out.
Okay.
And then from a cash flow point of view, of that, about one third is cash out in Q4, and the remaining will basically come in 2013, mainly in Q1.
Okay. And the Q4 provision relief was related to what? There was a provision relief affecting-
There were some, it was an overtime case in Spain that goes back many years, Chris, back to 2007 or something like that, I think. So that was a release from that, and there were some other small pieces in that, but that was one of the main, main pieces.
With the inventory write-down, what sort of provision have you created? About SEK 50-
There was some obsolescence in the inventory, and then we decided, and we have had too many things of certain equipment in the inventory, and it's been lying there for too long time, so we decided to write it off, basically.
That, that's about SEK 50 million, approximately?
No, no, no, it's not that much. No. We haven't quantified that. No, no, it's less. We put the pieces together, bad debt, and more provisions on bad debt, inventory obsolescence-
Mm-hmm.
Changing of accruals and things like that. So it's all put in a total, and the numbers are in the report.
Okay, fantastic. Thank you very much.
Thank you. Bye.
Your next question comes from the line of Sylvia Barker of Deutsche Bank. Please go ahead.
Oh, yes. Hi, good morning. I just want to ask something on technology, please. Could you please talk about the initiatives per region, in terms of maybe the proportion of revenues from technology by region and the incremental investment needed? Thank you.
No, I prefer not to specify that by region. I mean, the main areas where we really do a major effort and invest a lot of money is in, of course, in North America and in Western Europe, because perhaps. But also in some of the other markets, by all means, but the most of it is in Europe and in North America. Because when you put technology and replace guards, if the wage level of a guard is too low, it doesn't really pay off. It might be nice to do that, and you can change your security, but still, the payoff is the—so if you have a high salary level, if, of course, it makes more sense to replace those by technology, because then you will save some money.
If the wage levels are low, in India, for example, the camera costs more than the guard, then it doesn't make much sense. So it depends. So most of it will be in Europe and in North America. And the efforts there are pretty similar. We're doing the same things and pushing it with the same efforts in both those continents.
Thank you. Thank you very much.
Your final question comes from the line of Ed Steele of Citi. Please go ahead.
Good morning, Alf. Morning, everyone. 2 questions from me, please. The first is on Sweden. Could you give us your thoughts, please, on what has changed in the economics of the Swedish guarding market? If you go back 5 years or 7 years, it was really a flagship business for Securitas. It had very concentrated market positions, it was highly regulated, good barriers to entry, great brand, and I appreciate you've got a wage price imbalance at the moment. But in the past, you would have been able to push that through quite easily. That's not the case, and margins are under quite a lot of pressure. So could you just give us a feel for what's changed economically in that business with a longer term perspective, please?
It hasn't changed that much. We still have a very, very strong position in Sweden. We are very profitable. We have a good team, good organization, strong brand. The barriers are the same as they have been, very, even higher than they were before. The competitive landscape is pretty similar. We have a big market share, so we are, we have a strong position. We have had a negative development in a few contracts, and that has, of course, impacted negatively the business as such. The rest of the business is doing well, and in 2012, we have been able to push through wage increases in price increases in Sweden. We didn't manage that in 2011, but in 2012, we did.
Do you think this will go back to double-digit margins?
Well, I mean, I prefer not to mention the margins, which we are, but we have good margins, way better than the average. We have a very strong, big mobile business in Sweden, which is very, very profitable, very, very well managed. And then we have a—we are now in the phase of discussing how we're gonna manage the price and the wage situation. The new salary agreement will probably come in force in March first or April first, but normally it would probably be March first. And when we know the outcome of that, then we also know better exactly how to manage the price situation.
So we will try to manage the clip we had from 2012, but we need to deal with that in 2013, and exactly how to do that is too early to tell.
Okay, so if I'm putting words in your mouth, you feel nothing fundamentally has changed in the Swedish market?
Well, not, not, not fundamentally. We still have a very strong position. The competitors are the same as them they have been for a long time. There are always differences, but generally speaking, the situation is we have a good, solid position in the Swedish market.
Thank you. My second question, last question, relates to this quite big change in capital allocation that you're announcing today. I wonder if you could talk us a little bit more through the board's discussion and thought process. I've got a list of about 130 acquisitions Securitas has made over the last 12-13 years, so about 10 a year. If I look at the average price you've paid in the last 3 years, obviously price has changed over that 13-year period. It's in the last 3 years, it's been about 35% EV to sales. And I assume over time, you've got the margins up to about the group average.
If I compare that to your own multiple of 48% EV to sales, it seems strange, just on the face of it, that you're wanting to pay about a third higher to buy your own shares than you were on average paying to buy to make acquisitions. Could you just talk us through why the board thinks that's a sensible move, please?
... Well, I think first of all, to relate the price to the enterprise value to sales. You need to also look at the profitability and what the value is of buying, of doing those in that equation, then things also have changed throughout the past to the future. I think I don't want to speculate in too much in that question and not disclose the discussion as such. I look upon it strictly from my perspective as CEO of the company. I do not think it makes sense for us to confuse or to distort the organization or distract the organization, sorry, by doing two main big things at the same time. If we would drive...
We need to drive a technology because that will give a fantastic. It's very important for the survival of the company, for the development of the company, but it will also drive the bottom line of earnings per share. And with a minimum, a rather small amount of money required in working capital, in investment, in CapEx, in order to manage that development. And that is very attractive, and it's a big, big, big shift and an enormous change in this organization. And if we do acquisitions at the same time, there is a risk that we will lose speed on the technology implementation, and, and that is the basis from my perspective.
Then it's up to the board to decide is this, if they will ask for a mandate to be able to do it, and then whether they will do it or not will depend on a million different factors at that point in time, and then they have to make that judgment. I prefer not to speculate in that discussion. I just look upon it from my perspective, and that I will probably be able to manage it in the way that we will have a very good situation between free cash flow and net debt and be able to reduce our net debt going forward.
Okay, thanks so much.
That's it? I think so. Right. Good. Thank you very much for listening in. Thank you.