Very welcome to everyone listening to the first six months report of 2012. On the first slide, you get a little bit of a summary of the things, but I will, of course, just suggest that you read what is on the first slide. In addition to that, I would like to start off with saying that, okay, we understand that we have a weak first six months. But at the same time, I like to stress that there are quite some good news in this report and in the first six months performance. Not getting blinded by the numbers, which the numbers are the numbers, a nail is a nail and a hammer is a hammer. But even so, there are obvious good news, and I'd like to point out some of those.
First of all, that we have a price and wage balance that we now have been able to keep on par for the first six months, and I'm confident that we will be able to do that for the full year. There are still some price and wage increases to come in the second half, but those are minor. So I'm pretty confident that that will be the case for the full year. The cash flow has picked up substantially compared to last year. It was weak last year, but even so, it picked up, and it will be very good during the second half of this year. The integration of the acquisitions in the U.K., the Chubb and Reliance acquisitions, is performing basically according to plan, and they are now contributing substantially to the improvement of the results in the European business.
In France, we have increased the prices more than the wage costs have increased this year and covered even a part of what we didn't do last year. So we are compensating a bit of 2011's poor performance in France of a French organization that has done an excellent job increasing the prices. And the pricing campaign is now over and done by the end of Q2, so we are ready with that. We have to pay a price on the top line, though, but even so, there is no more prices basically to be increased. So we have now completed the price campaign with a very positive outcome in France. Germany has always been below group average in Europe on margin. They are now ahead.
So now Germany has a very good development with better-than-average margins in the German business than the European average represents. The integration of the Cobelguard acquisition in Belgium is doing well. So all in all, the European business is back on track, in my opinion. Outside Europe, the Canadian aviation business is now making money in second quarter, lost money in first quarter, contributing in the second, even if it still dilutes the margin a little bit. But even so, it's on the right track. The core machine guarding business in the U.S. is doing well, and performing basically as last year. The weapons we have in Spain to fight the war in Spain, by the investments that we have made in technology.
So we are better equipped and better in a better position than ever to deal with the very extreme conditions in Spain. Latin America is doing very well and contributing a lot. So having said that, okay, why are the numbers worse? Well, we have two main issues, and one is caused by ourselves and one we cannot do much about. We just have to manage. The disappointment is the situation, and to our surprise, the very negative development that we now lose money in the federal government business in the U.S. These are not satisfactory, and they, I will come back to the details in a minute. The good news is that they are repairable. We can fix it, but it will take some time, and it will still be a loss-making business for the rest of this year.
And then the second main reason to why we have a weak performance is because of Spain, where market conditions are extreme, for many different reasons, which I will also come back to in a minute. Spain will remain a concern, and it's probably gonna get worse before it gets any better. So it's, and we have -19% organic growth in the second quarter in Spain, which is as close to a free-falling market that you can get in our portfolio business. So it's a very concerning situation in Spain. But at the same time, where we have these problems in the two main issues, in the U.S. and in Spain, we at the same time have very strong organizations to fix the problem and manage the situation, and we also have extremely good leadership in those markets.
So I'm confident that we will be able to fix the U.S. situation and manage the Spanish situation. All right. So I think that concludes the first page, and I'll move on to the numbers. Well, you see the numbers on that page, and that's basically we have a weak top line. We are basically growing with a market on the same market level in the segment Services Europe. We are bit worse off in Spain than the market because we have walked away from a few contracts, which we disclosed in Q1, worth about EUR 50 million on an annual basis. So we are behind on the market in Spain. And that's basically for the reasons that we have stepped away from those contracts. Other than that, we are more or less like the market.
But we were losing money on those two contracts, so that didn't hurt us at all to walk away from those contracts. And in North America, we are behind. We are growing 1% first six months, market probably in the range of 3%-4%, very competitive market situation where we have lost some contracts, and we have not been able to generate new sales at the speed as the market in general. But there is a price to do that. You have to fight with price, and in fact, it's the case then you cannot defend your portfolio and your margin. So, this has, it's not to any surprise that we have a tough market situation in North America.
In North America, then yeah, I think I already commented on that to some degree. We have a weak top line situation in the aerospace segment where we lost the contract, the major contract, the federal government business and Pinkerton. I will come back to that in a second. And then, the specialized sales is about 10% of our period and of our sales, and it's growing. I guess one of the key topics that requires some explanation is, of course, the weak margin in the quarter and in the year to date. And I will focus on the year to date to give you a little bit more of details of the 1.1% where we are percentage points that we are behind compared to last year.
First of all, the last bullet is the 0.2 where we had a settlement with a client in the automotive sector last year, so that you can take away. Then you have 0.92, which it was a one-off. So 0.92 explained. 0.5 of the 0.9 relates to the federal government and the C&I business, and the remaining 0.4 is 0.1 on bad debt, a little bit more Chapter 11s in Q2 than we had last year. We had to restructure the Mexican business and change management where the aviation Canadian business is still diluting the margin. So when you look on these explanations that of the 0.9, 0.5 is in federal government and C&I, and 0.4 is bad debt in Q2, Mexico and Aviation Canada.
You also can conclude that the core machine, the big guarding, core business of ours is performing basically as it was last year. So the core machine is continuing to work in the way it should work. So that's the good news that the core is good, doing well. Now, what went wrong then? First, in C&I, we had a mistake in China where we employed too many people, and the market was not developing as it should in the C&I in Pinkerton C&I business. So we had to reverse that, and that cost us quite a lot of money. That hit us in the Q2. So that was a mistake of ours, and we had to fix it.
Secondly, in the C&I business, it's a very volatile business, and we have had a very good year last year and not as good a year this year. So that's the nature of this business. But most of the problem in Q2 was because of our own mistake, basically, in the part of that business. In the federal government business, that was already weak in Q1, but it got a lot worse in Q2 and much worse than we expected when we closed the books. In this business, we had last year due to the flooding in the Midwest last year a lot of extra sales with good margins. So that's one of the reasons. And we haven't had any of that to the same extent this year.
It's been very dry in the Midwest this year. The price-wage balance, we are behind in the federal government business. So that is a second thing that we need to fix. I should also say that this federal government business represents about 7% of the total sales of the North American segment. The main issue where we ourselves have not performed as we should have done is the integration between the IT systems of the two of the federal government business and our own core guarding business where we switched from one system to the other, and that didn't turn out very well.
It's a lot of details in this, how you accrue for holidays and vacation pays, how you interpret the collective bargaining agreements, what data you load in the system. We have, in this small, relatively small business, for your information, 36 different collective bargaining agreements, fixed every one as a binder, a fixed binder full of papers. So it's quite a lot of work. And there we have not been able to perform that integration in the way as we should have done, and we simply now have to repair it. We lost money in the first six months. We will continue to lose money, less, but still, in the second half of the year. So it will be a loss-making business for the full year, and we hope we can fix it and repair it.
And as of next year, we should not have any loss anymore, at least turn this business into a break-even situation by, hopefully, a little bit more luck, let's say, success on the marketplace, a little bit more extra sales. We hope for that. You never know, but we hope for that, that we manage the price-wage balance and that we repair the mistakes that we have caused ourselves, in the integration process and fix those problems during the remainder of this year. And that was, and as I said before, the remaining 0.4 of the 0.9 to explain was 0.1 in bad debt, 0.1 in Mexico, 0.1 in Aviation Canada diluting the margins.
But still, the good news in Canada is that we now make money in the second quarter, not a lot, but still, we make money. And the trend is very positive. They're doing a good job, and we have a very good team there, so we expect to see a very good continuing trend. And Q2 was a positive after a negative Q1 in the Aviation Canadian business. Might be some more questions, but we'll see when we get back to the session of questions. So I move on to Europe. Europe, we're growing more or less as the market, very good development in the Nordic countries and Germany. France, -4% year-to-date, -7% in Q2, and mainly due to that we are tough on prices.
And the 7% negative in Q2 was mainly, most of those contracts that we lost in Q2 were very relatively low-margin contracts. It's not a disaster. And if we wouldn't have and then these customers, they did not accept that we increased the prices on the level that we needed to. And then if we had continued with those clients, we would have been even lower margin. So then we need to walk away. There is no other way. So it's the 7% we lost, it's not, it's still 7%, but it's not dramatic because it was low-margin contracts. And now the pricing campaign is over, and it's done. It concluded by the end of June.
Basically, that so now we know where we are, and we can, so to say, have a good visibility of the second part of the year where we'll have very limited price and wage changes. So we know that in France for this year, we have been able to increase the prices more than the wages increased and also to compensate not all of it but still a part of that gap that we suffered from last year. On the result, the U.K. is the main contributor, and that is the reason we took all those restructuring costs, and now we see the effect of that in the U.K. for the first six months and also, of course, the French situation, but also many others, Belgium, with the good development with the integration of Cobelguard.
The Nordic countries are doing well. The German organization is now actually our largest org business in the European segment of Services Europe. It's also a better margin than average, which was unheard of if you go back in history in our organization. Fantastic development in Germany by the German team. Yeah. That's what's about Europe. So Mobile Monitoring, not too much to say still, slow top line, too low. We are working a lot with that, but we still need to prove that we can improve the net change in the portfolio in the mobile business, which is too low, and basically on the same level as we were last year.
And the margin is, in a way, okay because the reason why we are behind compared to last year is because of the two acquisitions that we have made in the Netherlands and in France, two acquisitions in France, one in the Netherlands, which took a longer time to get the synergies out, was more complicated than expected. And one of them in France was the takeover of one part of the Neo mobile business, which has been in a turmoil and very messy for quite some time. And that has caused delays in taking out the synergies and difficulties in the integrations. And that's the reason why we are behind.
Other than that, we are doing more or less like we did last year with a good development in the monitoring business and reasonable in the mobile business. So the second main topic in this report is, of course, the situation within the segment of Ibero-America, where the market conditions in Spain are extremely difficult, and it's getting dramatically worse, quite rapidly. So we had a negative organic sales growth in Spain in the first six months of -13%, in the second quarter of -19%, which is a lot in our business. And the reason we have that is because we walked away from those two contracts that we have mentioned before, you are all aware of. The second reason is that extra sales is basically mighty close to zero, very, very low levels compared to last year.
Thirdly, because we have a lot of reductions in the contracts, and that we already saw in Q1, but it has accelerated in Q2. And fourth, we have to actually by our own initiative walk away from contracts with decent margins because we know that if we don't do that, we are pretty certain that these customers will not pay the bills, and they will not survive. So we will need to instead of having continue to have sales and margin in the P&L, we will have bad debt down the road, 6-12, 15, 18 months from now. And we don't want to do that. So we better to face the fact and walk away from those contracts before it's too late.
So that has also had a negative impact on the top line, in especially in Q2. The volume is not dramatic. It's not of the size of the two contracts that we walked away from, but still, it has its decent margin contracts, so it has an impact on the bottom line. Latin America is doing well, good growth, positive development in Latin America, basically in all the countries in Latin America. So that these investments are really supporting the division. On the result, we are behind on the margin, and that is very much because of the situation, especially in Spain, and where Latin America is doing well while we have a tough situation in the Spanish market.
We still make money, of course, in Spain and Portugal, and we have very strong teams and organizations to manage the situation, but it's a tough market. What has also happened now is that two weeks ago, basically, we faced the fact that the government in Spain has decided to take away subsidies on the social costs that the security industry has enjoyed for a long time, and also other service segments in the industry such as people with an age over a certain age with subsidies for employing unemployed people and so forth. So subsidies from the government was decided to be taken away, and it had an effect. So it started last week.
It was decided 2-3 weeks ago and with an effect last week. So this is very recent. It has a negative impact. I prefer not to quantify it, and the reason is that we don't know what we can do yet fully to compensate for that. What we are doing is that we are looking into if we can then, because we cannot get it from the market. We cannot increase our prices, but that's not going to work. We need to reduce our cost. And that means that we will now have to revisit the collective bargaining agreement and see if we can again find ways to reduce our labor costs because that's the only way.
And that process is going to be very tricky, very difficult because, as you know, we already just came out of the renegotiation of a collective bargaining agreement for this year and the coming two years, and now we need to revisit it again. But there is no other way. When things are changing quickly and dramatically, we need to also do the same thing, and we need to take a look at that. So that process is ongoing. It's already started. The fight has already started. The news has broken in Spain. Discussions are going on. Unions are informed. And there is also more flexibility to take actions in this respect by the new labor legislation in Spain decided back in February.
So we have better weapons now to manage this kind of situation than we used to have with the previous government in Spain. So, but the outcome of that is too early to tell. I mean, this is fresh out of last week. The effect came in last week, and the decision came just a few weeks ago. And we have full speed on what we can do, so I prefer not to quantify it. The net effect will be negative for this year, that's for sure. But how much is still, I prefer not to speculate in that until I know what exactly we can do about it. Let's see if I forgot something about that. Well, yes.
I also said before that we would have wage cost increases in Spain of 2.4% and that I expected in Q1 that we will be able to increase our prices in the range of about 2%. I don't believe that anymore, because it's very difficult, and it's getting worse. So I think we will be more close to about 1.5% wage-price increases, than the 2% I said a quarter ago. The good news in Spain, though, has to be stressed, and that is that we are better equipped than ever to meet this situation, to fight this war. And that some people have asked me after the Chillida acquisition that we made, in March, April this year, "Are you crazy?
Why do you invest in a country like Spain, and make huge investments within that country?" I think the answer is the contrary. We are not crazy. We are doing the only thing we can do in order to fight this situation. Because after the divorce from Niscayah, so to say, and our attempt to acquire Niscayah, we have then hired a large amount of a large number of very qualified engineers and technicians from Niscayah and others to our organization. We have built a strong team, and we have made an acquisition of Chillida, giving us now a very strong structure and platform. We have also finalized basically the integration of all those resources into our own guarding organization.
So now we have an organization ready with all the weapons we need to fight the war, and we didn't have that before. Without those weapons, we would not. I mean, if you don't have this technology weapon, I think if you are a security company in Spain, in the coming couple of years, you will have difficulties to survive. Now we have those weapons, so we can fight this situation and find a way, a good balance of how to maximize for the customer that gets the best security for the least money.
We see reductions and discussion about cost-cutting all the time, and now we can optimize between technology and manpower, which we couldn't do before, which gives us a chance to get contracts, to keep contracts, find solutions to our clients, and protect our margins. Well, if you only sell hours today in Spain, you will not make money, that's for sure. Cash flow improved, better than last year, and we will have a good cash flow in the second half. I said that last year, and that was not fully correct, but this year, I'm sure that we will have a very good cash flow during the second half.
We are working more than ever about the cash with the cash flow, and it's really sticking in the organization and integrated in all the plans, in all the follow-up, in ranking lists and manuals and good ideas and sharing of best practices, bonus systems, you name it. We, I think we have done everything that you can possibly think of when it comes to how to improve cash flow, and that will has proven to work out for the first six months, and it will continue to do so during especially during the second half. And in the meantime, we will be restrictive and continue to be restrictive on acquisitions.
We will see some smaller, minor acquisitions to strengthen ourselves, but in principle, we will not be very active on acquisitions until we really come back to the 0.20 of free cash flow to net debt. We are at 0.15 now, so it's improving, but still, it's still some way to go. And the net debt increased quite a bit because of the dividends paid every quarter. All right. That's it for what I had on my notes here to share with you for the first six months, so I'll be happy to try to answer any additional questions to that.
Ladies and gentlemen, if you have a question for the speaker, please press zero, one on your telephone keypad. Our first question comes from Mr. Peter Trigarszky from Danske Bank. Please go ahead. Yes. Thank you.
First question is, I'd like—now we've listened to you, you have been, I would say, fairly positive, is it, two or three quarters in a row. Could you just maybe say a few words if you just look at the performance you have during Q2, you know, what happened that you didn't expect? And then second question, on North America, you know, the factors you mentioned, should we see them as, you know, just one-offs and then that we are going to see a more normalized margin in the second half of the year?
Well, the main thing that happened in Q2, I mean, I had an optimistic statement after Q4. I think we had that for good reason. I kept it in Q1. What has happened in Q2 to revise this situation, and it's not very in the report anymore. The main two issues is that the thing that we caused ourselves and the problem that we have, in the federal government business primarily, but also to some extent in the C&I business in the U.S. And secondly, the dramatic change of in Spain, both for the quarter and going forward with new legislation and so forth. So that these are the main negative surprises to me and to us that we had to face in the second quarter.
When it comes to the second question, I think, I mean, if you look on the margin again, I repeat a little bit for you, that. It's that the 0.2, it was a one-off, compared to last year of a gap of 1.1%. The more, let's say, one-off-related issues are the C&I business. We messed up. We complicated our life in China, and that had a negative effect. And we also have very unusually low volume in the first half compared to where it normally should be. That is one of the reasons of the s which is, well, in a way, kind of one-off. It's not normal that we do it. We had these kind of situations. The bad debt, I don't know, what's going to happen. It's higher by 0.1 point. Mexico, definitely one-off. We have changed the management and restructured, made some changes to the organization.
The Aviation Canada is still diluting the margin by, basically, 0.1 compared to last year, but it's moving in the right direction, so that should also gradually get back on track or get to a better situation. The federal government business will still, during the second half, be a loss-making business, but we should, we should fix it, and hopefully, we should be at least on a break-even situation next year. But last year, we made money on it, so it still will going forward, this will hamper us. It will have a negative effect. So, I guess that's the best way I can answer the question, if it helps you.
Okay. Thank you. And just a quick question. You mentioned that you have a new claim in Germany. Have you taken any provisions for that? And then also Spain, Loomis, which was part of you a few years back, they have taken back part of their provisions, related to the Spanish overtime payments. Can you maybe comment anything?
We have some provisions, and we think that the net effect will not have any net effect on the P&L of the German situation, of that Deutsche Bank situation. So we don't expect any effect on the P&L from that. On the overtime situation in Spain, we have not touched our reserves yet. We wait until we get to the end of the year, when we have better visibility. And we also have a much larger number of employees in this process of overtime than Loomis has. So we wait. Hopefully, hopefully, we will be on the safe side. We are on the safe side, but we wait another one or two quarters before we make any changes to that provision. But if I would guess today, we are on the safe side.
Okay. Thank you.
Our next question goes from Mr. Stefan Andersson from SEB Enskilda. Please go ahead.
Hello. Just first a question on Europe. You're mentioning that you're unsatisfied with the development, and it's back on track, and you're commenting on improvements in France and Germany, which is fine. When I look at the margin, we're seeing 3.5% for the quarter and, you know, around 4% for you, I guess. So just trying to understand if you mean that this is the new level. I mean, historically, we've been at 5.5% margins in Europe.
So, are you saying that this is the level we should expect for the European business? Are you happy with that level? No, not yet, but it's moving in the right direction. So, it's moving in the right direction, but the margins, in total, are still not on a satisfactory level, but it's moving in the right direction. Which, if we see the improvements in some of the regions in France and Germany, which regions are, actually, maybe also the U.K. or which ones are declining? Is it the Nordic region where you're having some difficulties at the same time offsetting the improvements?
No, the Nordic region is roughly on the similar levels than they were last year. The U.K. part has a relatively higher weight this year than it had last year, so but it's low margin, but the margins as such are improving, so it contributes in absolute numbers quite significantly. Where we still had lower margins in the Turkish market, which is quite a major part of our business, the first six months this year than last year. Yeah. And also in Eastern Europe, it's slightly below what it was last year.
Okay. If you look at Spain and, oh, sorry, not well, yeah, really, actually, Spain and the top-line development there, you're talking about a 90% decline in the quarter. Just to get a feel on where we're heading, has that accelerated during the quarter? So you ended the quarter at even worse levels, or was it already from the beginning of the quarter that you had that kind of negative development?
Well, it's basically it has not accelerated. If you take the month of June as such, it was actually 19% in the month of June itself.
Okay. Thanks. On the U.S., if you in any way could try to explain really what's happening with that operation. Yeah, yeah, I'd just try to understand how the operation works. If I understood it correctly, the government business and Paragon and another acquisition I can't remember the name of, if it is 10%-15% of the U.S. operation in that range?
It's 7%.
7% s o it's a small operation, and we see a rather big impact on the margin. I'm just trying to understand how the losses can be this big. Is that an operation where you more of a consultancy business where you have people on the payroll, and if they're not working, you're paying the salaries and really making a big loss? Or because if you look at all other businesses, you are really getting rid of people when you don't have work for them. So I'm just trying to understand how the losses can be so big in that operation. Do you understand the question? Sorry.
Yeah. Yeah, I do. I mean, this business was generating a margin in the range of 3% operating margin last year, and this year, we lose money. And there are three basic buckets to explain that. One is that we had a lot of extra work because of the flooding, and the extra sales work, during the first half last year, but we do not have this year. And that is t he nature of this business.
From time to time, there will be flooding, hurricanes, some kind of extraordinary events that strikes, things like that that all of a sudden require that our customers need extra people in a very short notice. And then we provide; we are equipped and structured to provide that, and then we get good margins of that. And when we don't have that, that hits us. That helped us quite a bit last year, and we have nothing of that this year. Secondly, we are not managing the price-wage balance fully in this business as we should, so we are falling behind.
That explains one another part of the drop. And thirdly, it's the integration where we ourselves have not been able to manage this as we should have done. And that is when we switched from very more project-based IT systems with calendar months, where they are running the contracts and spread the costs and the startup costs and all those things over a three or five-year period, just like a construction company would do, basically, where you smooth the cost over the period of a contract. When we move that, I'm simplifying now, so you have to excuse me for that because maybe my people in the U.S. will not fully agree in the accounting department with everything in detail, exactly how I described it, but I try to make it understandable.
That is, when we now move that into our 445-week system, which is totally different and it's working extremely well in our guarding machine, guarding a U.S. core guarding business, then we get difficulties. How do we accrue for things? How do we interpret all this? We have all those 36 different collective bargaining agreements. How do we put that data into our system? And here, we went wrong, simply. We might, and we have to trust the numbers coming out of the system, and until we have something else. It might be too conservative that the loss is not as big as we think, but we cannot prove it, and then we have to use the numbers, which comes out of the accounting department.
So those are basically, what it means is that when we switched from one IT system to the other, we didn't do any parallel runs. We just switched in order to cut the back-office expenses and get the synergies. And that there, we moved probably, too fast, and, and, and, and it also went wrong, and now we sit with, a loss-making business. That's, in short, basically, the situation.
Okay. Thank you. And then my final question comes to, sorry, comes to the, the Olympics. You have talked earlier about, possibilities that the closer to games you get, you might get some, some volumes, as, as demand, you know, comes up, and, and with G4S having difficulties to deliver. You know, ha-has it has this, played out favorable in any way for you, or, or has it not have any impact at all?
Well, we have never... we have not supplied any services to replacing, so to say, G4S. That we have not done. We have got some, but less than expected, extra sales, extra work for other clients than the Olympics as such. So, that we have got some, but it hasn't been as much as we hoped it should be. We have got some with good margins, for clients of ours or other clients, so but it has been less because it seems like, at least, my understanding is that the expectation was, to some extent, that the normal tourist season will be there, and then you would have Olympics on top of that, but that has not been the case.
People very much, so to say, the basic tourism has been reduced due because during the Olympics because, so there has been not as much activity in London as one would guess, one would have hoped or expected. So we have got some. That's the answer. Good margins, but not as much as we hoped.
Okay. Thank you very much.
Our next question goes from Mr. Rob Plant from JP Morgan. Please go ahead.
Morning, Alf. In Spain, Securitas seems to be doing so much worse than Prosegur. Prosegur did 1% growth in Q1. You were down 13%. Prosegur did a 3% decline in Q2. You were down 19%. I'm trying to work out what is specific to Securitas. What is the market? I wondered if you could break out that 19%, for example, between the market and where you've deliberately shed contracts. Thank you.
Well, first of all, we are comparing apples with something else, and that is because, I think that in the Prosegur numbers, they report all their cash handling business, and they report all the other segments within the same geographical split. I think the only piece not there is the residential market, so I think they have the technology. They have the cash handling and the guarding business. We are doing worse than Prosegur, I think. That's my still even so, even if I don't have those when you compare the numbers, my opinion is that we have a lower growth than Prosegur in the guarding business, apples to apples, in the first six months.
The main reason is that we walked away from those large, a couple of those large contracts, and that really explains, in my view, other than that, there should not be a huge difference between the two of us. I wouldn't expect so, and I think that, all in with that exception, in general, I think we are seeing more or less the same development as others. We are quite bullish and quite active on the marketplace, and maybe more than a few others, at least. I don't know about Prosegur, but others are really questioning if we should continue to supply to customers and avoiding bad debt down the road, so that might explain some, too, in comparison to some other competitors.
But other than that, I think we are facing, basically, the same situation as others. Then from time to time, you will have some losses and some reductions that others don't have, and they will have it the next six months and so forth, but I don't think we are falling behind other than because of the reasons I just mentioned that were on our own initiative. And again, I am in this turmoil and difficult situation. I'm very confident we have an extremely good team. We have a very well-organized business. We have very good management managers. We have very good leadership in the technology and the guarding business, so we are well-equipped to take advantage of a very difficult situation.
I think when we get into next year, there will be a number of companies in Spain that will be really in difficulties because their margins will have vanished, and they will not get paid, and they will have terrible balance sheets, and very long payment terms from clients dragging their feet in order to pay the bills. So I think that and we are better equipped than most, and we still make money in the guarding business in Spain to manage this situation, so but it will be difficult, but we are in a good position to manage it, I think.
And how much, Alf, of the 19% decline was Securitas walking away from business?
Roughly half.
Okay. Thanks.
And then the rest is related to reduction of extra sales and reduction in the existing portfolio. Rough numbers. I don't have the numbers in front of me, so I take it from the top of my head, but roughly speaking, the two big contracts plus the other walking away is probably in the range of half of that 19%.
Helpful. Thanks, Alf.
Thank you.
Our next question goes from Mr. Tom Sykes from Deutsche Bank. Please go ahead.
Yeah. Good morning. Just had a couple of questions, please. The first one was just what your early thoughts are on the dividend, please, given where your cash flow is, the increase in net debt, and what's happened to the earnings number. What your early thoughts are on your dividend, please.
Well, normally first of all, it's not my call. It's not the... it's the board who decides and suggests, so that question is to explain a little bit how it works. That question is never addressed, basically, at any board meeting until we get to the February board meeting, and then we know the numbers and how the cash flow turned out. As you know, the dividend was due even though we had a poor cash flow in 2011; the dividend was still kept on the same level for two now, back in May. And we expect now that we are now performing better than last year.
We are close to about SEK 900 million better than the first six months last year, and I see that we will have a good cash flow during the second half. And different from last year is that we had last year quite a dramatic growth, very much driven by acquisition growth, but to some extent also organic, while this year we have basically no organic growth or very small organic growth, and the acquisitions is getting less and less impact in on our top line, which means that the need for working capital is getting less, which will also free up working capital from the balance sheet, which was the main reason to why we fell behind last year, and now it's the reverse situation the second half of this year.
Okay. In your conversations with the ratings agencies and one particular, do you think they're looking at that cash flow, or they're looking at earnings, a combination of it? What's their conversation?
When I read the reports from them, they look on both. They look on the cash flow. They look on the debt. They look on the acquisition ambition, what we are saying, if we are cautious or not. They look on the earnings, of course, and yeah. So I think it's a combination of all the factors influencing our net debt and our earnings capability and our free cash flow.
Okay. Thank you. I wondered if you could just repeat, please sorry, the basis points impact, the different reasons for the North American margin coming down.
Well, in year to date, we are 1.1 behind. 0.2 of that comes from that settlement, which was a one-off last year, so then you can change the number from last year from 5.7 to 5.5, so then you have 0.9 left to explain. 0.5 of that comes from the federal government issue and the C&I mistake and volatility situation, so federal government and C&I represents about 0.5 of those 0.9, and the remaining 0.4 is 0.1 on bad debt, 0.1 on Mexico, 0.1 dilution from a Canadian aviation business, and some other small things here and there.
Okay. Thank you. Sorry, just finally, on the subsidy issue in Spain, I know you can't quantify it, but in terms of how that's going to impact you. Sorry, could you just repeat what the subsidy reductions are going to be for? You know, how many people do you take on, for instance, that perhaps in where it might impact you, how many people do you take on that were previously unemployed? What are the kind of where are the areas you're most you feel you're maybe most at risk from the reduction subsidies? If you just give a bit more on that.
I mean, yeah, yeah. I mean, it's almost the same question as quantifying the number. If I start to, I mean, I don't know, actually. I don't know, actually, how many people it affects.
I don't have that number in my head, but what it is, that if we employ women over 45 years of age in our business, we get a subsidy. If we employ people with certain handicaps, we get a subsidy. If we employ people who have been unemployed for a long time, we get certain subsidies, and so forth, and those subsidies will not cease or be reduced. And that will have a significant impact, which means that we need to revisit the collective bargaining agreement.
The net effect for the remainder of a year because this law comes in force August 1, the net effect will be negative, for the remainder of this year. How much depends on what counteractions that we can take and how quickly we can get those in place in Spain, and that I simply don't know since the law has only been in force since one week back.
Okay. And are you hearing of any similar proposals in any other European countries?
Not yet.
I'm thinking most. You know, whether there's any chatter of it in France at all.
No, not yet. But you never know. That could be and then we have to decide how to manage that, either by reducing our cost or ask for price increases.
As we have, it's not a subsidy, but we have—I mean, the reverse situation we have in the U.S. where we have a healthcare reform now, which seems to be quite certain that will actually happen January 1st, 2014, and the only way to manage that or the main way to manage that will be to ask for price increases on the marketplace in order to compensate for those cost increases.
So how to handle that depends on which market you're in and what are the reasons and what is our ability to manage that, but in Spain, we can never get more price increases than we have asked for yet, so we need to go the other way. We need to reduce the labor cost and our cost in order to manage that, and as a part of, let's call it, an internal devaluation and lower standard of living, which is one of the ways to get out of this situation for, I think, the Spanish economy.
Yeah. Okay. Thanks very much for your answers. Thank you.
Thank you.
Our next question goes from Mr. Jamie Brandwood from UBS. Please go ahead.
Morning. I just wondered if I could start by asking again about the U.S. government business. I think you said it was 7% of North America Security Services.
I'm sort of struggling to get to that 7% because I think that implies about SEK 1.6 billion of revenue, and from memory, before you acquired Paragon, you already had some exposure to U.S. government, and if I add up Paragon security professionals and Security Consultants Group, you acquired almost SEK 2 billion of revenue, through those acquisitions in U.S. government, so has the U.S. government business shrunk dramatically for you over the last two or three years?
Well, first of all, when I talk about federal government business, what I talk about is, basically, the Paragon and the SCG acquisitions. That's those are the two where I'm talking about. Even so, having said that, yes, we have had a, we have a negative organic growth in this, in this segment of, 9% year-to-date.
A nd what was that Q1 and Q2, please?
In basically, roughly the same numbers, quarter by quarter.
Okay. And then just on the whole sort of price-wage balance, I mean, my understanding and also from talking to WSI to Wackenhut, is that most of the U.S. government business is cost-plus, so in other words, if there's a wage increase, you can normally pass it straight through to the customer. Is your business with the U.S. federal government not cost-plus?
I cannot, I guess some part of it is, and most of that part, most of the business is, but even so, we have a gap, all in all, and I cannot tell exactly where that gap sits, but most of it is cost-plus, but even so, we have a gap. It's not a major gap, but still a gap between the price and the wage.
Okay. And if you include everything that could potentially be defined as U.S. government, so including any work that you do with local authorities, any work that you do in the nuclear sector, which is kind of U.S. government regulated, what would you say your total U.S. government exposure is within North America security services?
I would say 10%. Well, hang on a second. I'm gonna see here. I'll look on my support team around me here. But I would hang on a second before we give you.
Thanks. Thanks.
I mean, it depends on how we define this. We have I to give you at least a feel, it might not be exactly accurate, but it's pretty close. It's, I would say, in the range of 12%, something like that.
Okay. That, yeah, that was more the kind of number that I had. Thanks. And then just moving on to Spain, again, appreciate that you can't quantify this impact as the earlier questions already asked, but just wanted to at least know where we're starting from. Is it right to say that Spain, in 2011, was a business doing about SEK 5 billion of sales? And can you give us a sense? You said it was profitable. Can you give us a sense of how profitable it is? I mean, are we talking a sort of 2% or 3%-type EBIT margin? Is that roughly where it is right now?
I prefer not to split those numbers out, but I can give you. I'll just a second here.
I'll just get to the right page here. It's quite some numbers to try to remember all these, but anyway, I mean, yeah, the Spanish business, well, let's say the Spanish and the Portuguese business, sorry, the Spanish business, was about SEK 5 billion, yes, last year. That's correct on a full-year basis, yes.
Yep. And as I say, in terms of.
But it is, it was a profitable, it was a good margin in Spain last year. It's dropped now, of course, significantly, but we still make decent money on the remaining portfolio that we have. Also this year, but so it's not that it's, it's not a lousy margin, not at all. It's still reasonable margin, but the delta is, of course, quite dramatic where we have a quite big drop in the margins, but even so, at this level where we are, it's still reasonably okay.
Yeah.
But, of course, it was a lot better last year.
And without a precise quantification, but just to at least get some kind of sense of the delta, if you do nothing, can the removal of the subsidies take you into a loss-making situation?
No, no, no, no. It's not that bad?
Okay. Perfect. Perfect.
No. Well, it's far away from that, far away from that.
Okay. No, that's helpful. On France, I think you mentioned that you were -7% for Q2. You gave us for Spain that in June it was -19%, so similar to Q2. Was that also the case in France, or was the June in France quite a lot weaker than the -7% for the whole of Q2?
It was in the month of June, you mean?
In France, yeah.
In the month of June, in France, it was -7%.
Oh, it was also -7%.
Okay. Perfect. And then very lastly, again, just to get a sense for the moving parts, the U.K. definitely seems to be a positive driver this year. Can you just remind us what your revenue in the U.K. is now, if we include Chubb, Reliance, but also, I believe, obviously, you lost a very large contract to G4S a while ago, kind of what the annual revenue of the U.K. business is right now?
It's, yeah, well, I'm not sure. Hang on a second. Hang on a second. I mean, just to give you a rough number, at least, I mean, the size of that business, about, if we try to take in Swedish kronor, I would say in the range of about SEK 4 billion.
Okay. Thanks a lot. Thank you.
Our next question goes from Mr. David Hancock from Morgan Stanley. Please go ahead.
Thank you. Morning, everyone. A couple of questions on the receivables that you collected in Spain in the quarter. Could you tell us how much that was from a cash flow perspective? And also, I see that you had a benefit to the margin in Ibero-America from that. Is that writing back receivables that you'd previously written off, and how much did that contribute to the margin in Ibero-America, please?
We got, roughly, we freed up about EUR 15 million in Q2 because of, thanks to those repayments. It had some impact. We had some bad debt, not a major number, but still, it had some positive impact. I prefer not to give you the number precisely, but it helped the margin a little bit in the second quarter. Yes, it did.
And was that EUR 50 million or EUR 15 million?
15. 15. EUR 15 million .
Great. Thank you. And then my second question, just to follow up on the U.S. federal business, so if that business is declining sort of 9%, is that coming from the government and government agencies, insourcing contracts or reducing volumes on existing contracts?
Oh, we lost some contracts. We lost some contracts, and now, hopefully, we are well, let's see. I mean, we won one contract during the second quarter that will gradually help that number, but even so, we lost some contracts. So the reason is that we lost some contracts.
So it's not that the marketplace overall is shrinking 'cause things are being insourced or volumes being reduced?
I don't have a very clear view on that, I must say, because that has been kind of second to everything else that we have facing, so I cannot give you a precise answer to how the market is developing within this segment. The negative growth, though, in this segment in the U.S. was not as bad in the month of June by itself. I mean, even if we were 9%, we were 9% in the, as I said, for the first six months, it was -4% in the month of June isolated.
Great. Thank you. And then last one on Spain. Do you think you have more to do in terms of reviewing existing contracts for credit risk, and would you expect to be shedding incremental contracts as we go through the rest of the year?
Well, that's a million-dollar question. I mean, I wish I could answer that, but we have decided that if we are afraid or pretty convinced that we will not be paid and we will have huge bad debts six, 12 months from now, we'll walk away. We tried to cancel the contract. I mean, depending on what happens in Spain, that could get worse. Yes, it could get worse. It's probably gonna get worse in Spain before it gets any better.
I'm very supportive and very impressed by the decisions made by ourselves, but also by the government in Spain to take actions in order to fix the situation in the Spanish economy. And I think they will. It's gonna be a tough time until that happens, but I am pretty confident that that will be the case. But of course, depending on the macroeconomic development, that could hurt us and depending on which customers we have. So I cannot say that it will not be anymore. It could very well be that we need to walk away from further contracts. Now, we are taking a couple of such decisions in the second quarter.
It could be more of that, but hopefully not dramatic, but still so, it could continue. Yes, it could. On the other hand, I like to say by the same token that many of—I mean, many of—our competitors have zero capability to even manage any discussion or any solutions re-integrating technology or replacing guarding ours with technology and reducing the cost for the client, and that will create opportunities for us. There will also, I'm sure, be bankruptcies, maybe not now, but next year and the year after. I'm sure companies will go out of business because they will not survive, and we could pick up at almost no cost.
I'm guessing, but I'm hoping that we could pick up portfolios or pieces of portfolio that could enhance our business because companies will simply not survive if this situation continues with pressure on margins and low margins and very tough conditions in the market and poor payment terms. Companies will not survive, and that will these two facts gives me hope and confidence that we will and we also have a very strong organization and very good leadership in Spain, both in the technology area and in the guarding area. So that gives me good confidence that we will be able to take advantage of a very difficult market situation.
Thanks. If I can just squeeze one more in. You obviously had some integration issues in the U.S. with the systems, and also in Mobile and Monitoring on acquisitions. Are you happy with the way the integration is going in the U.K. business at the moment, please?
Yes.
Okay. Great. Thanks.
Our nex t question goes from Mr. Paul Checketts from Barclays Capital. Please go ahead.
Morning, Alf. And my first question is on your thoughts on margin progression for the North American federal business and Spanish business for the remainder of the year. You've made some comments on your expectations for the full year, but are you really saying that both of those are as bad as it gets in Q2, or will we see Q3 deteriorate again?
Well, in federal government business, my best judgment today is that we will lose less money in the second half than we lost in the first half of the year in the federal government business in the U.S. And the same goes for the C&I business. So we will, in the federal government business, continue to lose money. It will be minus in the second half, but it's not as bad as it was in the first half.
In Spain, I prefer not to make any forecast. I think I've tried to answer that question from different angles in different ways, but to give a more precise number than that, I prefer not; I cannot and I prefer not to do that without, and it also makes me forced to be to actually issue that to everybody in the marketplace if I need to, if I should be more number precise on that when it comes to the Spanish business. I'm sorry. I can't give you more than I have given you.
Okay. And in Latin America, you've said that the margin deteriorated in the second quarter. Can you talk about that a little more?
No, I don't think I said that.
I think you maybe mentioned that you were expecting some wage increases to come through in July.
Yeah, yeah. No, yeah. Okay. Okay. Yes, yes, yes, yes. True. So, yes, there has been a long process to come to a new collective bargaining agreement in Argentina, which was concluded in June, with now effect as of mid this year. And that means that we will now have big price increases going forward in Argentina during the second half. And usually, what we are able to do is that we get higher price increases than the wage increases when we do this kind of process because these are big numbers. So that will support the margin during the second half. Yes.
Okay. And can you just on France, are you saying now that the way the price increases have more than made up for the wage increases from last year? I just want.
No.
To be clear on that.
It has not made up for that. We were, I mean, we were 2% behind last year. We had wage cost increases of 4%, and we increased the prices 2%. We have not made up for that. We made up for part of it, but the but, it's not the major part of it. Definitely not. No. But we made up some of it, which I think was a big achievement from the French team.
Right. And lastly, Mobile and Monitoring. It's the one segment where you don't comment on client retention. You brought in the new management to try and reduce churn of existing clients. Can you perhaps comment on client retention and how that's going? We, it's still, it still hasn't made any dramatic changes.
They're working on it. It's not an easy thing. We've tried for many years to do that. It's, and they're trying hard and doing a good job and really, really, really trying to come implementing some new thinking and actions and ideas and processes in order to improve on that number, but it has not yet shown up in the numbers. But, hopefully, they will that will give an effect down the road. So there's a lot of work, but you can't see it yet, and it but I think it will hopefully show up in the numbers down the road.
How large were the few large contracts you mentioned that had been lost in the quarter?
Which in where? Where? Where were they?
In Mobile and Monitoring. It mentions it.
No, no. We lost. There has been, when services have major contracts, then sometimes they suffer as well. I mean, for example, one of the major contracts in Spain where we walked away, and we mentioned in Q1, that also had a negative effect on the mobile. It's a relatively small part of a total contract, but for mobile, it's a relatively large part. So there has been a couple of services contracts where we have lost, and when services have to do that, then it hits mobile one way or the other normally. So there is no specific major contracts as such that I like to highlight, but it's just those effects and then also that we have not been able to reduce the terminations yet.
Thanks. Okay.
Thank you.
And our next question goes from Mr. Andrew Ripper from Merrill Lynch. Please go ahead.
Yeah. Morning. A few, well, most of mine have been answered, but I've got a couple more, maybe. Can you say how big the Consulting and Investigations business is, now, both in terms of sales and gross profits, please? I'd say, I mean, the C&I business is, it's a relatively small business from a size point of view. It's 1%-2% of the total sales in North America. Yeah. And would that be more, as well, materially more as a percentage of GP because of the nature of the business?
Sorry. Repeat that.
Would that be more as a percentage of gross profits, presumably?
Yeah. I mean, usually, that business has a higher margin than the average North American business. Yes. But for the first six months this year, it's a loss-making business.
Okay. So, well, that was the next question. So it is loss-making. Is it possible to quantify what the loss was from the FedGov and the C&I business for the first half or for the second quarter?
No, I prefer not to do that. Sorry.
Okay. And then, just looking sort of higher level in terms of U.S. market conditions, what's your sort of take on pricing and trends in wage rates, sort of stripping out the federal government, so, you know, the core business?
Yeah. The core business I mean, as I said before, we could use this, but the core business is roughly doing the same as it did last year, and it's performing reasonably well. The top line is a bit weak, 1% growth in North America, and that applies to the core business, but basically the same number. So, bit weak top line, so we don't get the leverage from the top line, as we normally do when we have a 3%-4% growth. But I mean, the price-wage balance is, we are slightly behind the first six months, slightly behind the wage rates the first six months, but usually, we catch up pretty well for the full year.
The market is the same, always tough, difficult, competitive. I think it's pretty much business as usual, I would say, when it comes to the core machine and the big guarding business of the U.S., which is really, more I mean, continuing to do well. So unfortunately, we get beaten up by these things, which is more in the periphery. In the north. And most of those are repairable and fixable, those issues that we have.
Yeah. And in terms of your on the performance on the top line for the core, I mean, you've mentioned the contract losses in defense and aerospace, and obviously, CATSA has sort of offset the loss of GM. But you sort of comfortable that the contract portfolio, you know, is reasonably stable?
Yes. Yep.
Yeah. Yeah. Okay. And then just finally, can you say what extra sales were for the group for Q2 versus prior?
Well, for year to date, we are we have, we were at 13.6% extra sales year to date, and we were at 14.1% last year, so we are 0.5% behind.
Yeah. Okay. Thanks very much.
Thank you.
Our next question goes from Mr. Mikael Löfdahl from Carnegie. Please go ahead.
Yes. Hi. Most of my questions have been answered, but a couple more. First on, could you say something about? I mean, in Spain, you have volume reductions on existing contracts, which is part of the organic decline, and I guess that leads to staff reductions. Have you taken any specific chart for that in during the first half, and so is there that something that we will not see, hopefully, going forward if volumes then stabilize at some point?
We have reduced. I mean, we have reduced our staffing with thousands of people if you go back for one year. So it's respectable numbers. But anyway, basically no. The answer to the question is basically no. There has been some cost, but roughly speaking, we have been able to in a very good way to manage this. Most of the guards when we lose a contract, the guards go with the contract. That's normally what happens. The trouble is when we have reductions in the existing contracts, but they have done a tremendous job in Spain to try to manage that with overtimes and smoothing or distributing overtime hours and moving people around and so forth.
We have had some inefficiency in the second quarter due to that in Spain, especially in April and May. But now at the end of June, we have managed that, and that's so I don't expect any restructuring cost unless we need to start to cut infrastructure dramatically. We have done some cost cutting, but those are negligible. You don't have to worry about those numbers. They are so small. But I mean, if the situation becomes one level much worse, then we have to review the central cost as well, or consider to reduce salaries to indirect people, which is also an option, and some companies are applying that already.
Yeah. I'm more referring to the direct cost.
Yeah. Now, on the direct side, we had some inefficiencies in Q2, yes, in April and May, not in June, basically. And now, I don't expect any restructuring charges due to the direct labor cost. No.
Okay. And you haven't had any major ones either due to that?
No. We haven't had any major ones. We had some inefficiencies because we had some idle people, but we have managed to get rid of that during the quarter.
Yes. We had some negative effect on the margin in the quarter due to that inefficiency. We had people customer cut back on the contracts. People had no work, and they were just having idle time where we paid them 8 hours, and they worked 5 hours, that kind of thing. But that is now basically on par now when we enter the third quarter.
Okay. And on the C&I business, the call it mistake you made in China, could has that also been capacity reductions then, during the Q2, or what kind of costs are related to this? And is that pure one-offs then that we will not see ahead?
Yeah. That's a pure one-off that we have taken now. We fixed the problem in Q2, and that's one of the reasons why we lose money in C&I. We hired too many people, which we normally subcontract, and then we had to, so we had cost, and we didn't have income, and then we had to get rid of the people we hired. So that all has been taken care of in Q2. But is it possible to specify that then, since it's one-off? No. I mean, no. I prefer. I don't have a number, actually, but it's a major part of why this why the C&I is making a loss. It's, or at least, it's a decent part of why C&I is having a loss. I can't give you a number. I don't even have it here in front of me.
But the 0.5% effect on the margin year-on-year for the first half, how much is due to the federal government, and how much is C&I?
C&I is 0.2%, and Paragon is 0.3%.
Okay. And that 0.2% is very much due to China then?
Well, also because of a general situation that this is a volatile business. So usually, I mean, it's not unheard of that we lose money in this business. And then when you have some a lot of extra work, which happen all the time every year, but depending on quarter to quarter, then we make good money in this business. So, it's also a low level of business, that explains that. Yes.
Okay. In Europe then, you took on two large contracts, or one was a renewal, but the one, the new one, European Parliament, started in April. How has that progressed, and have you had any? I guess there's some start-up costs for that contract?
Yeah. It doesn't, it's basically a break-even contract, in the first, in the second quarter, so it doesn't help us on the margin. It actually dilutes the margin. The contract is started in April, mid-April, and running according to plan, for the reason you mentioned, startup, and it was also taken at a low margin. And it's gonna be margin dilutive, I guess, for the coming quarters as well? For probably a couple of quarters more. Yes.
Okay. And the Arlanda Airport contract, which was renewed, I guess that started in June, but will that be running at a lower margin than the previous contract?
I roughly more or less the same or similar. No major difference. I expect we had to take quite a number of actions in order to reduce the total cost for the client. And that we have done by doing a lot of changes to the scheduling of our people and the working schedules and the working conditions for our people in order to reduce the total overall cost. But I hope that it will still be roughly on the same margin. If anything, may be slightly lower, but it's not gonna be a major difference. I wouldn't think so.
Okay. Yeah. I think that's it.
Thank you.
Then no further questions on the telephone.
Okay. Thank you very much for listening in. Thanks for all your questions. Have a nice summer if anything left any if anyone had any summer left. So, see you and listen to you back in a quarter from now. Thank you, and bye.