Very welcome, everyone listening into this conference of the Q3 result for Securitas. I'd like to start off with introducing Bart Adam. So Bart, if you would like to show who you are. Some of many of you have seen Bart before, when we have had our Capital Markets Day days, and you know Bart as the Security Services Europe Managing Director. Now the new CFO of Securitas, and we have a kind of a hybrid organization right now where I'm gradually moving into my new position as running the European division, and Bart gradually moving into your new position being the CFO, but at the same time we are finalizing the year in the old structure, so to say, the structure you know, the way we report it. So it's a little bit of a moving target in that respect how we work.
Gradually, step by step, we are moving into our new roles.
Yeah, very happy to be here today and looking forward to work with all of you in this fantastic company. Thank you, Alf.
Good. Thank you, Bart. So I will move now into the results for the first nine months and the quarter, of course. Organic sales growth has declined from 4% to 0%, and half of that difference is due to three countries, which are very difficult environment that we are fighting with France, Spain, and Portugal. And that is 2% of the year-to-date numbers. If we take the number for just the third quarter, it's actually 2.6 out of the 4% that relates to those three countries. So and it's also a big chunk of our business, 17% of the total sales is related to Spain, Portugal, and France. The price/wage we are managing to keep on par, so we have done for the first nine months, and we think that's gonna be happening also for the full year.
There are very few wage-related issues for the last three months, so it's pretty predictable, and that we should be able to manage for the full year. The operating margin is behind. It has been behind all year and continues to be behind. Main reasons, of course, North America, where we have to blame, unfortunately, most of a big part of that reason to ourselves, while in Spain we cannot do much about the macroeconomic situation. Very difficult conditions. Those are the two main reasons to why we are behind on the margin. And then, of course, the big reorganization program that you hopefully have read about a couple of weeks ago, and adding to that also today actions that need to be taken in Spain that will give another savings and the restructuring cost in the fourth quarter.
If we look on the numbers, we are even though the organic sales growth is 0% quarter and year-to-date, we are actually still growing. Important to say that, using acquisitions, by acquisitions, the tail of acquisitions, so to say, and also, adjusting for foreign exchange, we have a real growth of 3% in the quarter and 5% year-to-date. And the other numbers, they speak basically for themselves, and you know them probably by now having read our report. So I will come back to them as we go through the different divisions. In North America, the organic sales growth is on a 0 level year-to-date. It was minus in the quarter to -1%. And the same reasons as you saw in Q2, the federal government business, the defense and aerospace, and the CNI Pinkerton business, which is hampering the growth in North America.
Also in the quarter, there was a lot of extra sales last year. We had quite a lot of strikes that were we had to team up a big amount of guards to support and protect the employees in those companies, and a few other incidents that really contributed to the extra sales with good margins during the third quarter last year. This year we didn't have anything of that nature. Also, to mention maybe for interest, the Sandy hurricane did not have any effect on our extra sales, just very little. And that was, so to say, small positive, but on the other hand, many of our guards couldn't come to work. So that was a negative, and the net is basically zero in the fourth quarter from the storm, for us.
Yeah, moving on to the results in North America, the margin is 1% behind. Roughly speaking, about half of half of that difference is related to the federal government business and the CNI business. So about 0.5 of that is the federal government and the issues we had of integration and the difficulties we've had in that business. And the rest, one part is the CNI business. So half of that difference is related to that. You have 0.2 of a difference related to the settlement that we had last year, but we didn't have this year, which you see in the last bullet here. And then the lower extra sales and a few small pieces here and there, they contribute with the remaining 0.2, 0.3% of a difference compared to last year.
In the quarter, also the extra sales had a major impact, of course, of a difference. The difference in the quarter was 0.9, and it was about 0.5 of that is related to the federal government CNI business, and the rest is related to the extra sales. Yeah, those are the, I think, the main things to mention there in that in respect to that. That also sparked, boosted the sales in last year, so we had a good growth in the third quarter by those extra sales, which we, as I said, didn't have this year. There's a lot of preparation going on right now in North America for the healthcare reform.
It has not really started to be operational in the sense that we are meeting with, facing the clients and discussing that matter, but that's gonna start now during the first and the second quarter during 2013, and we see quite substantial price increases that we need to manage. And you can either increase your price or come with solutions, which we are working a lot on, to try to introduce technology, try to replace guards, and find ways to reduce the cost for the client and mitigate the cost of the increase that would otherwise everything else be equal, probably be in the range of 12%-16%. So it's a substantial amount of money as of January 1st, 2014, but the preparation work will be one of our major operational issues during 2013.
The development in Europe, we still have growth in Europe, in spite of the tough macroeconomic situation in France. France was negative in the quarter by 9%, and year-to-date 6%. Even so, we had 2% growth in Europe, in the quarter and also in the second quarter, and 1% year-to-date. Good growth in Germany and good growth in the Nordic countries in Europe. France, again, negative, and a bit concerned about France. The environment is kind of pessimistic about the future, in many places. There are cutbacks in many parts of industry, and there are reasons to be concerned about the top line in France.
Actually, we have now another major contract, which represents another negative growth, or impact on the top line of 1%-2% that we are losing in October to the French Railways, which is a major contract. It has a negative margin, so it's not, from that perspective, a major issue, but on the top line, it will have an impact, an increase, so to say, the loss on top line going forward. But on the bottom line, it's the contrary. In France, it's one of the main contributors, together with Germany and Belgium and the UK, to the good development of the margins in Europe, which are now gradually picking up. Even we have lost in the top line in France 6% year-to-date on the top line. We have improved the result by over 20%.
So that is impressive, under the circumstances in France. And remember that in France, 70% of companies in the security industry in France are in red, lose its money. Only 30% are in break-even or make money, and we are one of them, making money in France. So the French organization has in very difficult market conditions done an excellent job in order to manage this balance, so improving the bottom line 20% even though we have lost 6% on the top line. Yeah, so and also Q3 was a very, very encouraging result on the margins in Europe, 4.8 versus 4.3 last year. In the mobile and monitoring business, we are slow on the top line. It's the mobile business.
The alert business, which is the monitoring business, is doing well, basically on the same level as last year, while the mobile business is behind compared to last year. It's driven by we have lost a couple of major contracts, especially in the UK and Norway, and also by a lower level of new sales due to basically the macroeconomic situation in many of the countries where we do operate. On the margin, we are the same picture. We are behind in the mobile business low due to the loss of contracts. Also in the early part of year, we had some issues in the integration of two major acquisitions, in France and in the Netherlands, which is now coming into order and picking up on the margin gradually during the third quarter.
But even so, it has hampered the margins for the year-to-date number. And then we have Ibero-America, which is kind of two worlds, one in Latin America and one in the Ibero part, Iberia part, Spain and Portugal. So it's a mix of very negative numbers and very positive numbers. Spain was -16% year-to-date, and it was -21% in Spain organic sales growth in Q3. We have terminations of contracts because of that we have terminated the contracts, which is a major part. We have walked away from contracts with low margins, which we did early this year. And then also we have left contracts where we see the risk of a customer not paying, simply. And then we have reductions in our contracts, and lower extra sales, of course, because of the macroeconomic situation.
The development in Latin America is very positive, doing very well, good growth driven by price increases and inflation in Argentina, which is a major factor of that. But tough environment, and it's not gonna get any better. It's gonna get worse before it gets any better, I think. It's the situation in Spain, I think, and Portugal is that we will continue to see a negative market development in the years to come, before we will get out of it before the security industry and the macroeconomic situation will improve. So it will be tough times in a couple of years, two to three years to come, in Spain and Portugal. And on the margin, of course, the same reasons, decline on the margin, due to the lower sales, the negative leverage, and excess guards.
When we have reduction in contracts, we get stuck with the guards, expensive to reduce, and then that hits our margin until we can find a solution. A very tough price competitive market today. It's almost impossible to sell a contract today with just guarding hours and make money on it. Basically, you have to integrate it with technology and to find a solution where you can then find a way to make a margin. And we are, together with our main competitor in Spain, we are basically the only two of the best equipped companies to face with the very tough conditions because we have a technology in our company now and building that platform and investing quite a lot of money in the technology that gives us that's a matter of survival.
If you don't have that, I think it's gonna be very difficult to survive in the Spanish market. If you're just a pure manpower company playing by the rules, supplying guarding hours, you will have very poor results, if any. On top of that, the customers pay in the best case in 100 days. So, that's it. It's not a good equation, so that's gonna be tough.
And I think we will see quite a lot of shakeout in the Spanish market and the Portuguese markets in the next couple of years, where there will be opportunities for the ones who are strong and good in good shape and who has the technology in their portfolio to manage and take advantage of that and pick up portfolios and come out of the situation in years to come in a very good way. And we are gonna be one of those companies doing that. We also have increased payroll taxes, which is a major issue I mentioned in Q2. That happened now. The decision was made end of July, effective in August, and that we need to try to find a way to compensate. It's quite a large amount of money.
We have now entered, and we are right now in negotiations with the unions to reduce wages, to increase working hours, and to cut benefits. That is not a very popular discussion, of course, but there is, by the new labor legislation in Spain, you have ability to do that. And that is what we are doing right now. And then there is also process for how long that can go on, regulated by the Minister of Labor, and in the end of the day, you basically will have an arbitration process, which the parties will have to follow. And that is what we are doing. We are moving in this direction, and that process should be finalized before the end of the year.
And my aspiration and our plan is that we should be able to, by those actions, compensate those payroll increases, so that should not have an effect for 2013. We continue to invest in the technology platform, in Spain, and some people say, "Are you crazy? Are you investing in Spain?" I think it's the opposite. We are clever because if you don't, you will not survive, and that is exactly what we are doing. So we need to do that, and that we carry some costs for that this year, but that should start to contribute, as of next year into the results of next of the Spanish operation. Latin America moving on well, and very good development on the bottom line and on the top line. Cash flow was weaker than last year in Q3, but we are still better year-to-date.
So we are SEK 500 million better than we were last year. And then, and it sounds like maybe a poor excuse, but the fact of the matter is that the last two days of September was a Saturday and a Sunday, and some of that money that we were expecting to come in in the end of September actually came in in October. And that came in the first three days in October. And we have a preliminary number already for, for October, and it looks like the cash flow in October was really, really good. So we should end up with a good Q4 in the in from a cash flow perspective, even though Q4 actually ends on a Saturday and Sunday as well, and 31st of December is a bank holiday.
So we but this time, we learned from a mistake from last quarter, so hopefully, I cannot use one excuse twice, so we should not use that in the next quarter. So we really have to try to be rough and tough on collection now and get the money in before the end of the year. So we should have a good Q4, even though we are still quite substantially better than we were last year. Net debt development, we are supported by the foreign exchange, the strengthening of the krona. That helps a lot. Free Cash Flow and acquisitions are flat, but now it's gonna be a good cash flow in the Q4, and as I said, October really supported that statement.
This is an important thing that we have spent quite a lot of energy on, and a lot of efforts in order to prepare and organize and plan and execute, and it's moving on very well. The reason for the actions that we are taking is to improve the results, to also improve internal efficiency and avoid chit-chatting and difficulties and discussions and tension between divisions and risk of sub-optimization between divisions. So now we will have one country president in those 11 countries where we didn't have that before in Europe. That will have a, I think, an efficiency improvement effect, efficiency in Securitas. And it's also well received by the organization on all levels, among the guards and among the staff people in the different countries in Europe by this change, so that feels very, very good.
Then, of course, also to invest in technology. So the savings that we are making available and telling you that we are making of SEK 300 million on an annual basis, plus the Spanish actions, those are net savings. The gross savings are higher than that, but we will invest quite an amount of money of the gross savings into technology, during 2013 in order to speed up on the technology side, and that is then already included in those net savings, so to say. Yeah, we are creating one European division, including all those areas that you can see here. In North America, we're reducing the number of geographical regions. We have a cost-saving program in Spain, which we have announced today. Important is that ap point CTOs, chief technology officers, in all the countries.
We have on a group level, we have on a divisional level, and we have on a country level with a lot of seniority, authority, and operational responsibility in order to give that function more power in order to coordinate and move on the technology side and always directly reporting to the managing director of the country, of course, and also being a part of the management team in the country. So that is much more simple, much more straightforward, and much more efficient organization in order to speed up on the technology side. And then we are investing heavily in our global competence center in Malmö in Sweden within the video solutions, remote video solutions, and in order to build a real good competence.
Today, we are about 15 people there, and we continue to hire people in that organization to be able to support the different countries who are in the startup phase. We have already started to sell quite a lot of those in the Nordic countries and now starting up in many other countries in the US and in Europe during the Q4 and Q1 to come. Yeah, this was announcement days. It was the middle of October. We will determine all the costs for that during Q4 and then be able to nail down and specify exactly that these numbers which are our estimates are the correct numbers, and that will be accounted for in Q4 as a one-off as the restructuring cost. The savings should be, including Spain, SEK 370 million bottom line for 2013.
So everything else equal, the result next year will improve SEK 370 million, operating result next year. And this is, of course, the strategic direction. And this is a, a very important step in Securitas to make this change in order to move up this lab and increase the, the value that we offer to our clients. And by doing that, mitigate a very difficult market situation in many, many different in many, many countries and at the same time improve our margins, in under those circumstances. In the U.S., with the healthcare reform and in the difficult market climate that we have in southern part of Europe, but which is now those clouds are now also, we see those clouds in, in every day in the newspapers, also in the northern part of Europe.
This is the way to manage that, where it's no other way but to increase the value of our services and by that, improving our margins even though we have a tough, top-line situation, so to say. That was what I was planning to say here, and we should by then allow for some questions. And we have some friends here, and please, go ahead.
Thank you, Peter Trigarszky. Danske. 2 questions. First of all, in France, do I understand you correctly? You are when it comes to France, you are negative on growth, but are you also negative that, you know, next year's earnings will, you know, turn south again, or do you believe that you have already taken the right actions?
When it comes to I mean, very much of a negative top-line development this year, 6%.
Development year-to-date, 9% in Q3, and probably continue to be tough in Q4. This is related to that we have been very tough on the price increases, and we actually increased the prices more than the wages increased in 2012 in France. So we compensated a bit of a gap that we suffered from in 2011 that we have done. Then, for next year, our ambition is we will not see the same. I don't think we'll see the same size of wage cost increases, but you never know about subsidies disappearing. You don't know about social charges and government decisions and so forth.
So I think we have to be prepared that we will have another battle on the marketplace in France in 2013 where we need to also continue to be quite aggressive on price increases to at least compensate the wage cost increases. So that will not make life easy in the macroeconomic environment. And on top of that, I think France is in difficulties and will continue to be in a difficult macroeconomic situation, and I don't see that's gonna change very quickly. On the contrary. So I think those two facts that we have in a very difficult macroeconomic situation, the need for compensating price increases and other things that are wage increases and other things by price increases makes me concerned.
We have been doing an excellent job in 2012, absolutely marvelous work by the French organization, and we'll continue with the same philosophy. And also, the fact that helps us is that 70% of the companies are in red. So I mean, they cannot be there forever. Sooner or later, they will either die or they just have to work with the prices. Bottom line, I think it's gonna be another difficult year in France next year. That's the best I can answer to your question.
If I understand you right, you know, you feel confident with the organization. You believe you are, you know, prepared to take action if needed to take out more overhead costs if volumes continue down.
Yes, we are.
And I meant that. I mean, we are now making an adjustment of our cost structure in many countries. For the level that we expect, partly due to the reorganization but also to make sure that we are on the right level for the year to come. If things go totally south compared to what we expect, then we have to take more actions by all means. I think the French organization has really proven itself that they can manage the situation. We are the market leader. We have more than 20% market share. And when we do what we are doing, they will have to follow or they will have to die. And I think many of the competitors will follow, and that should at least help the situation.
So I feel confident that we are able to manage the situation. And again, under the circumstances that we have had in France this year, we improved the bottom line 20%, more than 20% in operating result, which I think is an achievement. And we will leverage that knowledge also for 2013. So we are in good shape. We are well prepared. We have a good team, so we should be able to manage, but the conditions are difficult.
Okay. And then going over to cash flow, looking at the charges you're going to take, we are not going to see the full cash flow impact from that directly in Q4, or?
No, no.
The one-offs, most of that, most of the one-offs will hit from a cash flow perspective, a big chunk in Q4, but most I would say for the next six months, Q4 and Q1, you will see most of those costs also from a cash flow point of view. And then you will have some, the rest spread over the rest of next year. But you can, I would say that at least more than half of that you will see in the next six months.
Okay. Just a small question. Looking at the elimination line, it seems like there is a little bit higher cost than normal. Is there anything extraordinary?
Well, I think we are if there is anything, it's also written in the report.
If you mean that we have had an impairment of one business operation in Europe. Is that what you refer to? We have written off the goodwill in one in the Montenegro business of ours, and we have had some positives, a reversal of the deferred payments, which will not take place. That will come as a positive. Is that what you're thinking about?
No, I was looking at EBITDA before impairments.
There has been some extraordinary cost in one of the countries in Southeast Asia. That is probably the reason on if that is what you mean.
When you mentioned goodwill.
It's not a major number, but it sticks out a little bit, yes. Yeah.
When it comes to goodwill because you do goodwill test in Q3.
Yes.
Considering that your earnings have gone down quite a bit during the last year, can you comment anything?
Yes, we have a goodwill impairment, and the only one that didn't pass, which we have also written off was the Montenegro, the portfolio and the goodwill of Montenegro, which has been written off in Q3. The other ones were okay.
Okay. Thank you.
Stefan?
Hi, Stefan Andersson. Sorry. On a question on the U.S. operation, we see some improvements when it comes to macro in the U.S., and we also heard G4S comment that they felt this commercial market was kind of okay. You're talking about problems on the government side, but there were some difficult comparisons on the commercial side last year. But if you try to look at excluding that, difficult comps, how is it developing quarter by quarter?
No, I mean, the big machine in the US is doing. I mean, there are some; we had some of these extra sales I just mentioned, which comes into the different regions. But if you look on the big machine, the guarding business, US. Which is the core of the core of our business. It's doing well. It's moving on. And okay, it's a little bit less growth, a little bit lower margins, but we are talking 0.1 here, 0.1 there. No major, no big drama. So the commercial market is good. It's still good, and we are performing well. It's those businesses which are smaller businesses, a little bit more in the periphery of our business, if I may excuse my expression, but that's to use that terminology.
The CNI business, the federal government business, and so forth, that's where we have been suffering, and that has had a dramatic effect on our operating margin. As I said, those two together had is half of the explanation. Then you have the GM settlement, and so forth. And that's where you have the big chunks of so it tells you that the core and the commercial market is still okay. Then we are, of course, as always, a mirror picture of the GDP development. So depending on the GDP in the U.S. market, that will, of course, have an impact on us. Our key operational challenge for 2013 is certainly to manage the healthcare reform, the Affordable Care Act, as it's called, ACA.
And that will be a very big operational challenge to manage that. But at the same time, it's an opportunity because if we can present a solution to our clients and to other clients where we can mitigate the cost increase by finding a different solution using video technology, remote guarding, etc., that will be able to give us an opportunity to take advantage of this situation at the same time. So it does not necessarily have to be negative.
If you look at the other part of the U.S. operation that has been kind of disappointing throughout this year, the federal side or government side, I guess you're kind of referring to the two acquisitions made there.
Yes, correct.
I mean, has there been a dramatic change in the market, or do you feel that maybe the sellers promised a little bit too much when you bought that?
You know, I mean, I think it's no point blaming others in that. I mean, the main blame in that is ourselves. We did a bad job. We didn't do that job as proper as we should have done. And we didn't understand this business as well as we should have done. We should have spent more efforts on it. The integration process didn't go very well. And then, on top of that, we bought the second one too quickly after having bought the first one.
And then we tried to move it from variety-based solutions to our system, which is a different animal in a way, and all of those things. So we messed that up ourselves, I think. That is the true answer and the correct way to see that. So we should not blame others. We should blame ourselves. We did a bad job, simply.
And if you look at forward, is it fixable, or, or?
It's fixable because right this year, we will lose quite a lot of money. And we see now by the actions that we have taken, we are renegotiating a lot of collective bargaining agreements. We have plenty of those in that kind of business. It's a whole different one from the other business. We have gained some contracts that we are starting up now in Q4, one major contract starting in December.
We are renegotiating some of those contracts, and we're also merging our Pinkerton government business, which has been a separate region, with the federal government business during the restructuring process, and then we're cutting some cost out of that. So when we put all those things together, this business, having lost quite a substantial amount of money, will now in Q4 run at a much lower rate but still a loss, and we expect it to be at break even 2013 and then improving after that. So the whole negative impact will disappear 2013. We feel pretty confident about that. We do the same thing within the CNI Pinkerton organization.
There, we have also done quite a lot of cost cutting, reorganized the eastern part of our business to a more in a different way, similar to what we have in the western part of the U.S., and made some reduction also in the international part of the CNI Pinkerton business. So those cost actions will also contribute to the improvement of that business. So, so all of those things are tangible. They are real. They are happening. They are there. And we start to see the results now in September and October, November, December. So yeah, the loss in federal government business will be a break even next year. And the Pinkerton business, we have basically already we are pretty, pretty good pretty well underway to fix those issues, as we enter 2013.
And then on Spain, first the two questions there. First, the, the drop, of 21%.
As we see it's when you come to the quarter-by-quarter drop, it's kind of stabilizing, I guess. It was 19 last quarter. But is this a level—first question, is this a level where you think it's stabilizing a little bit? And the second question is, which is connected to days outstanding as well, you're leaving some contracts where you think that the client might have difficulties to survive, and I guess you probably have some receivables out there. What kind of risk for bad debt do you see, and is that also calculated in the SEK 70 million that you take for the sale?
No. Well, let me start with the first question. It's hard to talk about flattening off in Spain right now. It doesn't feel like that.
Every time you go there, it's rough and tough. But it's correct that we are not dropping as dramatic as we used to do. So it's leveling off, but it's still going to be on a sliding scale, but not at the same with the same inclination as we have had so far. So it's in that sense, leveling off, but I still think that the security market in Spain will be is in a negative trend and will continue to be negative 2013, the security market. On the DSO questions, we are well provided. We have quite a lot of provisions made for risk, bad debts, I'd say. And if we had anything different, we would account for it in Q3. So we don't think that that is the situation.
There is none of that in the SEK 70 million. No, zero . We, we think we are okay. And I think the management is very proactive in this respect. It takes a lot of guts from branch managers to go to clients and say, "We want to terminate the contract because we don't think you're going to pay." So but that is what we are doing. And I think the management is managing this in a very proactive and a and a pretty good way. So you you have to be humble, due to the situation in Spain. But I have, right now, no reasons to believe that we should have any major bad debt out of a normal course of business, I'd say, going forward.
Okay. And then the, the last question is regarding tax rates. We have some proposals of new legislation in Sweden.
Of course, you could get some benefits from a low tax rate here in Sweden, but you have a more foreign operation. So, the limitations that come to tax planning, will that have a negative effect for you, for 2013?
No, I don't think it will have. There will be some changes here and there, but no major dramatic impact. So for your purposes, you can continue to use the same tax rate going forward. In Sweden, the reduction of the tax rate is, of course, positive. We will pay less tax. But at the same time, we have to also manage that we have losses carried forward in the balance sheet, which will be less worth, so that we also have to manage.
But all in all, for your purposes, I suppose the question is related to what is your expected tax rate going forward. And at my judgment at this point in time is to continue to use the same tax rate for next year. Any other questions from here? Okay. We'll see if we have some questions. Yes, we have some. Please go ahead. Anybody on the line?
We have a question from the line of Jamie Brandwood from UBS. Please ask your question.
Good afternoon, Alf. I had a few questions, but Alf, I'll try and restrict myself to two or three. Just on the savings, the other SEK 370 million savings. So we know that SEK 70 million of those are in Spain. Can you elaborate on some of the key other countries that are going to be benefiting from these cost savings?
The SEK 70 million is in Spain, correct. And the other SEK 300 million is in the U.S., and it's in North America, more correctly to say, but mainly U.S. And then it's all the countries where we have more than one division. So Sweden, Norway, Denmark, Finland, Belgium, Netherlands, France, Germany. But if we look at the big ones, I mean, you say the U.S. So what is the U.S., like SEK 100 million out of that SEK 300 million? No, I don't want to give a number on that. I prefer to keep it all together. But it's the largest part of all the countries I mentioned is U.S. The single largest country is U.S., but it's spread over the 10, 11 countries.
So for example, when you were talking earlier about how you're confident that U.S. federal government is going to be break even in FY13, obviously, that incorporates the fact that you're going to take a ton of costs out of that particular area. So, so some of that $300 million is encapsulated in that assumption of returning.
That's a minor minor minor part because that is that's only a small part. The big part is to, to manage the, the pricing, the, the collective bargaining agreements, and the other operational inefficiencies, which is kind of a separate issue, so to speak.
Okay. Fair enough. And then on the cash costs of the restructuring, so I understand you're going to be taking most of the cash costs in Q4 and Q1 next year, but what are the cash costs?
So if we look at that total restructuring charge of SEK 430 million, are the cash costs 80% of that, 90% of that? All cash. It's 100% cash. It's all cash. Okay. Perfect. And then just thinking about the group dividend policy, so, you know, the promise to pay 50% of free cash flow as dividend, obviously, you've been outside of that policy in the last two years. In other words, you've paid a higher percentage. Given that it appears the business seems to be stabilizing and that hopefully you can get some profit growth, in 2013, is the view at the moment that you would like to try and maintain the dividend at SEK 3, even though the payout ratio, presumably on free cash flow, will still be a lot higher than 50%?
It's not my decision. It's the board decision.
So we'll come back to that in February, when we publish the Q4 report. Well, my job is to make sure that we have a good cash flow and make sure we will have a good cash flow. I mean, and then we are taking the actions that we need to take in order to also have a good development into next year. And based on all those things and the projections, etc., etc., etc., the board has to make that decision in February. But if you look on our track record going back, it takes a lot, but we haven't changed our dividend policy for the past at least 10 years, I think, and we have continued to prioritize the dividend.
I think that is the track record of a company, but it's not my judgment to decide what the dividend should be.
Okay. And then just lastly, on France specifically, you talked about the termination of this railways contract, and you said that was about a 1%-2% impact. Did you mean a 1%-2% impact on French revenue, or did you mean a 1%-2% impact on the whole European security services? On the French revenue.
On the French revenue on an annual basis. It's. Okay.
So not that big in terms of Europe security services?
No, no, no, no, no, no.
Okay. Thanks a lot, Alf. Thank you.
Thank you.
Next question from the line of Robert Plant of J.P. Morgan. Please ask your question.
Afternoon, Alf.
I know that the Prosegur and the Securitas businesses are different in Spain with them having cash, but there is such a stark contrast between them being down 4% in Q3, you being down 21%, the gap has widened since Q2. I just wondered, do you think in the security services business you're losing share? And related to that, Prosegur said on their Q3 conference call that Portugal had shown signs of picking up, and they seemed a bit more upbeat about Spain and perhaps your being on the call saying that they thought perhaps Spain was a year behind Portugal and the pickup in Portugal was a good sign for Spain next year. Thanks.
Well, I don't want to comment too much about their view, but my view is I don't see any kind of upbeat in Portugal, that's for certain.
I think if you ask the Portuguese people, they don't feel very upbeat. So, I don't think so. I think that might be in that their business had—I don't know. I have no idea what their business is doing in Portugal, but I think that those markets are very difficult. One of the main, first of all, it's apples and bananas and oranges to compare, because they have cash handling in their business, they have technology, they have a home alarm, and they have the guarding business in Spain. And we don't have a home alarm business. We don't have a cash handling business. And secondly, I think that what we have done is that we left voluntarily some major contracts, and that has, of course, a major impact.
So those and they didn't have the same situation, as far as I know, but they haven't walked away from any major contracts. But we walked away from two major contracts, one in the retail area and one in the public segment, early this year, and that has a major impact, of course. Then the customer mix can be different, of course, depending on how it looks like. So but I think we are facing the same market situation, and then sometimes one is doing a little bit better than the other, but that usually kind of reverses itself, a year after or so. So no, I think we just have to be realistic and think that Spain and Portugal will be difficult markets for the next two to three years.
Of that 21% decline, Alf, how much was walking away from those two contracts?
It's a major part. I mean, roughly speaking, we're talking about half of it.
Thank you.
Thank you.
Your next question comes from Andrew Ripper of Merrill Lynch. Please ask your question.
Hi. Afternoon, Alf and Bart. Just wanted to go back to the restructuring, please. Just to be clear, I think on the slide and the previous statement, you talked about net savings being affected as of January the 1st, which sort of suggests you've got to do a lot in the next couple of months. Is the SEK 300, SEK 270 the full savings, or given that you've talked about cash costs running into the first half of next year, is there more to come on an annualized basis?
Can you talk about the changes that you're going to make in the next couple of months and also about the phasing, please?
The 370 million is the effect as of January 1st next year. So it's a full-year effect next year. And we are executing those savings right now. And we have done a lot since we announced this on October 17th. And in many places, a lot of people have already left. And we are moving faster than that. And the majority of those changes will be executed by the end of November, actually. That is our plan because we like to get it done quickly.
When you do these kind of changes, the first question asked by everybody is, "Do I have a job or not?" And then you have to answer that question very quickly. And then secondly, once you've done that, which is done by now in all the countries, after that, you need to try to get the people who are leaving to also actually leave the operations because otherwise, it creates. There's a risk. It creates negative energy and leakage of focus on the business and so forth. So we are moving very quickly. It has to. It's a surgery, but it has to be done. It's painful, but it has to be done quickly, and it's executed to basically to full extent during the months of October and November. And that's why that saving will be effective as of January 1st.
Yeah. Okay.
Very clear. Thank you. Then secondly, moving to the U.S. and the impacts of the Affordable Care Act. I missed it initially. I think you talked about 12%-16% price increases, or were you talking about the cost of the guard?
Cost of the guard? The cost and guard impact is it's the same thing, basically. The cost increase will be 12%-16%, which is the same as the requirement to increase your price, 12%-16%. And that is, of course, not too much appreciated, so we need to. That is, of course, one option to do that.
The other option is to be able to propose to our clients and find ways of how we can by using different ways of solving the security needs of the client, that we can mitigate that cost increase, that price increase by solving the situation with technology or without technology in a different way and then find a solution. That work is starting up now during Q1 and Q2. It's kind of been kind of there, and everyone has known about it, but it has not really started. Then there has, of course, been a lot of speculation. Who will be the president? Will Romney, if he wins, will he take it try to, change that or not and so forth? But now we know the way forward. It's clear. The rules are set. It's crystal clear.
And then we can just continue the work that we have actually started quite some time ago. But that, that is the size, that's the magnitude of that reform as of January 1st, 2014.
Yeah. And does this affect at all sort of outsourced versus in-house guards? Is there any sort of impact in terms of customer sort of being in-house versus outsourced to you guys in terms of how the, the act is affected?
I have no, not what I've heard of. I must admit I have not asked that question the last quarter, but so my information might be a quarter old. But anyhow, I have not seen any major. It has not been on the agenda. No major changes on that. It seems not to. We think it's going to move over time, but it never really does.
There has been in some areas in the educational area, we have been successful in gaining some contracts, for colleges and universities. We have the same thing in the healthcare, but it still doesn't make the big game changer. It hasn't been of that magnitude, no.
Yeah. The 12-16, is that a Securitas number? Is that, basically a sort of general number that the industry is expecting?
I think that will apply for everybody. When you compare apples to apples, then, of course, in some situations, the guards have some kind of Medicare and some kind of medical benefits. And in other cases, you have a collective bargaining agreement, and then you have a full package. But in most of the market in the commercial sector, most guards do not have any medical benefits whatsoever.
And whether you buy that service from us or from somebody else, everybody's going to have exactly the same rules to play with.
Okay. Thank you. And then just finally from me, on Europe, obviously, it's quite a good performance. You've sort of referenced France, profits being up 20%. Have we seen the full benefit from the price increases that you've put through? And also on the UK, didn't really get mentioned for Q3, but are you still seeing improving profitability in the UK as a result of the integration benefits that have been coming through from the three-way merger?
Well, in France, we've seen the benefits. The answer to that question is yes. In the UK, it's a gradual improvement. It's step by step. So, we have an improving trend, but it helps.
So yeah, it's an improving trend. That I think is the answer to your second question.
Okay.
Thank you.
Thank you.
Your next question comes from Andy Grobler of Credit Suisse. Please ask your question.
Good afternoon. Actually, all of my questions have been asked and answered, Andrew. I've got the last one in about the UK, so I'm fine.
Thank you.
Okay. Thank you.
Your next question comes from David Hancock of Morgan Stanley. Please ask your question.
Thanks. Good afternoon, Alf. I have two, please. One on technology. If I remember correctly, at the Capital Markets Day last year, you said you'd pursue both a sort of bolt-on acquisition approach and an organic approach. And I think you said you'd leave it up to divisional presidents to decide what weight to put on those.
Can you just update us on the progress there, and perhaps also tell us how many people you've taken from Niscayah in building up your own organic approach to the technology, please?
Well, I've stopped counting how many people we steal from Niscayah. I think that doesn't add more value anymore. We are continuing to build that competence now. So we are continuing to hire people and to gradually build that competence in all the different countries. So but we are, I mean, it's over 100 by now, that's for sure. On the technology side, I mean, we are moving on here very rapidly now, and the new organization will even speed it up even further.
I feel very confident about that, but it, it's a lot of work, and it's a, it's a you have to be humble because it's a long journey, and it requires a lot of efforts. On acquisitions in technology company, we are looking on those over time. We made actually some tiny ones, which we haven't disclosed because they were quite small, but we have made a few small ones in Germany. We are looking on in others in the European arena. We will continue to, from an acquisition point of view, be very restrictive on making acquisitions. But the only thing that we really prioritize is to buy technology businesses. And that will be basically our only type of acquisitions that I
foresee to do, if any at all.
And they will be quite minor, to strengthen our capabilities in the different countries, during the next at least the next six to nine months.
Okay. Thanks. And then two, two very small ones just on the weekend quarter-end effect of cash flow. Can you say roughly how much that effect was? And secondly, on the US business, can you say what proportion of revenue in the US that loss-making government business is, please? Well, on the cash flow I prefer not to mention the number. These are still preliminary numbers, and we haven't closed. I haven't got the final confirmed numbers yet for October, so I prefer not to say a specific number. It was really good.
We had an excellent cash flow, and all that cash that we kind of expected to come in September, they came the first three days of October. So, so, it could be more in the sort of the SEK 100 million mark rather than just tens of millions SEK?
It was hundreds of millions of SEK, yes.
Great. Thanks.
So it gives you at least some help on your answer. And then, the federal government business in the US represents, I would say, in the range of, yeah, 7, well, to be specific, 7.5%.
That's, that's quite precise. Thank you. Thank you, John. Of the total US,
US or North American business?
North American business.
Yeah. That excludes the aerospace and the defense segment. So just the federal government business as such is 7.5% of the North American business year to date.
Great. Thank you.
Thank you.
Your next question comes from Pierre Cassedanne of Exane . Please ask your question.
Yes. Good afternoon, Pierre from Exane . I have one question, please, which is actually about, perhaps the timing of the ramp-up of the cost-benefit that you expect, i.e., the timing of the ramp-up of the SEK 370 million and perhaps also about, your degree of confidence in achieving the entire targeted number and perhaps what would be a worst-case scenario. Thank you.
The timing is, it will be full effect, so it will come month by month. You can divide 370 by 12, and that's the monthly number. Or divide it by 4, you have a quarterly number, for 2013. The second question, I simply didn't understand. Maybe you can?
Yeah.
Well, actually, I was just trying to perhaps to assess your degree of confidence in achieving the entire targeted SEK 360 million cost improvement and also perhaps what might be a worst-case scenario if you have any.
Well, I think I mean, that part I mean, that is pretty clear. I mean, we have a list for all the countries by name, by number. So it's quite accurate. We can pretty well, but we have to finalize the process before we can more specifically determine what is the cost of that process and what will be, but the saving we can reasonably well determine because we know at least what the plan is. So that the accuracy of that is pretty good, I would say.
The more uncertainties of the rest, of course, the whole business as such, what will 2013 be. But the SEK 370 million cost saving, we feel pretty confident that that is a very tangible number. But what is less tangible is the restructuring cost. That is an estimate, and those negotiations are, of course, difficult. Individual people, many people have been in the company for 20, 30, even up to almost 40 years. And then you have to make a settlement, and you have negotiations with the unions, and you have to follow the rules by every country. So that number is very difficult. That's an estimate, and that number, we should be able to determine and finalize, finally account for in Q4. But we need this quarter, the Q4 quarter, to be able to do that to finally determine that number.
The saving number is we, we feel pretty, pretty confident that that is going to be the saving.
Thank you.
Thank you.
Your next question comes from Rajesh Kumar of HSBC. Please ask your question.
Hi. Good afternoon. I, I couldn't find what your debt covenants were in the annual report. Did you disclose it at all? The debt covenants.
We don't have any covenants. We have no covenants.
You have no covenants. Okay.
All the financing we have is without covenants.
You have all financing without covenants. That's good. In terms of extra sales, you said last year you had benefit. And I remember in Q2, it was about 1.5% of sales, if that's right. I've noted that right. How do you see that progress, in, in terms of Q3, as a proportion of group level? What was that?
Q3 was weak on extra sales.
We are behind, compared to last year. Year to date, we are also behind 0.5%, I think.
Okay. 0.5%
compared to last
year. Year to date, we are total, extra sales is around 14% of the total revenue, I think.
Okay. one four, you mean to say ?
And, and down to 0.7% in Q3 compared to last year.
And cyclically, what has been the lowest level of the extra sales as a proportion of the group?
The lowest level of debt?
Extra sales.
Extra sales. It kind of fluctuates between, I would say, 12%-13% and, and, and up to 15%-16% in really good times. That's the span we are talking about.
Okay. Brilliant. Thank you very much.
Your next question comes from Mikael Löfdahl of Carnegie. Please ask your question.
Yes. Good afternoon, finally.
Two questions on the aviation business, particularly in Canada and the Canadian contract. I guess there's been some negotiations with the unions there, and the strike was avoided at least temporarily. Is this something that concerns you in terms of profitability on that contract? And could you also update us on the progress of that contract so far this year?
The contract was loss-making in Q1. We were kind of break-even in Q2. We make money on it in Q3, slowly but steadily. It's moving in the right direction.
And the negotiations with the unions?
Yeah. That has been a concern. We avoided the strike situation.
It's not—I'm not fully up to speed exactly what the status is right now, but there hasn't been any interruption or any to the contract, at least so far as I'm aware of.
Okay. Regarding aviation in the U.S., are there any large tenders out there given that the market is now open for private companies?
We start to see some tenders. We are gearing up for that and getting ready. It's all. We have to go through quite a substantial paper exercise in order to prepare for it. So we are doing that right now and spending some time and money on that. We start to see it come. So I expect there will be some tenders, and there will be some activity for us bidding on those contracts, certainly during next year.
Hopefully, during the first six months of next year, actually. But, yeah, we're getting ready for that, and I'm sure that will be gradually an increasing part of the available market to the private security industry in the U.S.
Okay. A question on the U.S., again. And I guess payroll taxes. There is a suggestion of lowered payroll taxes also from the Obama side. Is this something that you expect to benefit or perhaps counteract the other costs for the Obamacare?
No. We have not gambled on that or expected that or planned for that at all. So it remains to be seen. We haven't put that into any expectations from our side. No. Not at all.
Okay. Final question.
You said in an interview today after the report that you expected to reach your free cash flow to net debt level of 0.2 in 2013. In that target, I guess the net debt is affected by the dividend. So are you expecting an unchanged dividend in that statement?
Well, I prefer not to speculate on the dividend. It's a good question to corner me on that one, but it's a smart question. You get a plus on that one. I was not prepared for that one, but I think I mean, by the fact that we are not spending any money on acquisitions or very, very little.
We are very restrictive, and we will continue to be restrictive until we have a better situation on the net debt situation. That was the basis for my statement and also that we also do these actions, and we will see the result of those actions next year. So, yeah. Those things kind of add together, and that then you have to make your own conclusion on the dividend based on that, what I said before to the question raised earlier. I mean, we have a good track record on dividend, and I think to change that track record will have to be quite a good reason to do that, I would expect. So yeah. Make your own conclusions.
Yeah. Yeah. Sure.
But just to follow up on that, regarding the cash flow effect from the cost savings, do you think the board will sort of look beyond that and or see that as a one-off or include that in the free cash flow?
I think when we have a discussion in February on the dividend, and the board makes its recommendation to the AGM on the dividend, then at that point in time, we put all the pieces on the table. I mean, we put the results. We put the expected acquisitions. What is in the pipeline? Do we have any specific investments? Do we have any divestments if that would be the case. And then, of course, the budget for 2013 and all those things together.
We put that together and then make it, then the board makes the decision on what they think the dividend proposal should be. And that's how it works.
Okay. Thank you very much, Alf.
Thank you. Two more questions. Thank you.
Your next question comes from Ed Steele, Citi. Please ask your question.
Thank you. Afternoon. Quick question for me on Germany. At the Q2 conference call, Alf, you said that Germany margins are now higher than the European average. They've had another good quarter, it looks like, in terms of both growth and margins. Is that business now fully integrated with G4S's asset? And, how does the market feel in Germany, please?
Yeah. That was done a long time ago, the integration with G4S. That's done and that is one of the good reasons to why we have had a good development.
The German market is good, has continued to be strong. There's a good macroeconomic situation in Germany. We have a very strong organization, very, very good team. We have worked a lot with technology and combined contracts and integrated solutions, a lot with the segmentations. They have basically done all the things that we keep talking about that we should do, and they have done that to a large extent in Germany. And that pays off. It's a good reference for many countries to look on how the development has been in Germany. So yes, it's still correct, still valid. Good growth, better margin than average in Europe, in Germany, and a good development. And that's very, very encouraging.
It looks good also, at least for the near future in the German situation in the German market.
Thank you very much.
Thank you. Last question.
Your next question comes from Johan Grabe of Nordea. Please ask your question.
Thanks. Most of my questions have been asked. The only question I haven't heard any answer to was the any potential, possible effects from the Olympics, if you saw anything of that.
No, we didn't. We didn't see much of that. We expected to see more, but we didn't see anything of that. And, no. Not really. Very little work because there was a lot of activity regarding the Olympics, but then at the same time, there was a decrease, I think, in visitors to London in general at the same time, thanks to or due to the Olympics. So no.
We were expecting more, the normal activity level plus the Olympics, but that was not the case. So we didn't get much extra extra sales due to that. No. We got some, but not a lot.
Thank you.
Thank you. That's it. No more questions. No? Anybody here? Very well. Thank you very much. See you in the quarter.
That does conclude the conference call today. Thank you for participating. You may all disconnect.