Welcome, everyone calling in, and we will present briefly the 2011 results and then allow for questions. 2011 is a year that we are not too proud of, from a result and cash flow point of view. So, we had also a relatively weak fourth quarter. Anyhow, I will explain that and also to prove a little bit the optimism we show for the year to come because we have done a lot of the good things in 2011 that we will benefit from in 2012. We have had a good growth, mainly driven by acquisitions. We've had the highest growth in 10 years, 11% including acquisition, but still a decent organic growth of 3%. And it's mainly in the divisions, North America, Ibero-America, and mobile monitoring growing.
In Europe, we have lost market share, due to the major contracts we lost, while we in North America has gained market share. We have been growing the market is pretty much flat, and in North America we have been growing in the 3%-4% range organically. So we have taken market share in North America. The high growth has, of course, meant that we have tied up capital, working capital. We have high needs when we grow, because we have more receivables than we have accruals or liabilities. So when the balance sheet grows, it ties up working capital. And we have also been growing in markets where some of the many clients are slow payers, so that has also had an effect. The operating margin is behind compared to last year. We'll explain that in a minute.
The dividend is proposed by the board today to be the same as it was last year. Yeah. If we look at the margin development, we are behind in the quarter. We're 1% compared to last year. Normally, we have a good fourth quarter, which was not the case this year. Anyhow, I would suggest that if you try to analyze Securitas and have a view on Securitas going forward and how we are doing, don't pay too much attention to the quarter. Even though you cannot disconnect the quarter, you still have to look from a full-year basis, in order to have some visibility and some guidance, so to say, for what you could expect from this company going forward.
So the quarter gives a little bit of a different picture, and there's a lot of one-offs in the quarter due to restructuring costs that we have taken in Europe where we have taken quite some measures. And we have an adjustment on the payroll taxes in North America. We were hit by the federal FUTA tax in the U.S. in the fourth quarter, which was, in a way, belonging to the full year. And so there was a number of smoothing issues, so to say, in the U.S. which hit, so to say, on the payroll level and explains basically half of the difference compared to last year in the quarter.
On the full-year basis, the difference of the margin, half of that comes from the issue you heard many times, namely the price wage matter in Europe, particularly France and Sweden, and the lost contracts. And then the rest is about 0.2 of that comes from the dilution from acquisitions, and then there are a minor payroll explanation of 0.1 and a few other minor things. So the main issue on a full-year basis is to manage the portfolio. And when it comes to price and wage, our ambition and our top target is to keep that in balance in 2012 compared, the price versus the wage. And we have done a lot of preparation in many countries for that during the fall.
And now we are launching a number of price campaigns where we will ask for price increases in line with the wage cost increases and actually, in some cases, even more than that in order to try to compensate for some of the parts that we lost where we were behind in 2010 in 2011, such as in France and that FUTA tax that we were hit with and we had no visibility about, which we were hit with in the fourth quarter. And that we will also try to recover from the market in 2012. Yeah. In North America, we're growing well. On the first North American slide now, we're growing 4% organically, which is good. And the North American market feels stable. It feels good, and we are in a good position.
So we're optimistic about that we should continue to have a decent development in North America. On one hand side, we lose this large automotive contract, which is worth about $80 million, in the U.S. We retain the pieces worth about $20 million in Canada and Mexico. So that will disappear. It will have a negative effect on the top line, but it has a good effect on the margin because we basically don't make any money on that contract. On the other hand, we gained the CATSA contract in Canada on the airports where we have had startup costs in November and December.
We will still have a bit of a startup, so it will not contribute to the numbers in Q1, but as time progresses during 2012, this will start to contribute to the bottom line as well, and it will do more so than the contract we lost in the automotive sector. Yeah. That basically covers that slide. On the margin side, this I think is more important, especially when you analyze North America to look on a full-year basis and not pay too much attention to the quarter as such. On the full-year basis, the payroll tax-related issues and we have the HIRE Act and a few other minor things, they all add up to about 0.2 of the 0.4 that we were behind compared to 2010.
And then we have the dilution from the SCG acquisition, of 0.1, and then we start, of course, for the Canadian contract of another 0.1. And the FUTA tax matter, as I said initially, we will try to recover from the market in 2011 in 2012. And also the Canadian airport contract will gradually contribute, and we are optimistic about the development of that contract during 2012. In Europe, we are basically flat on the top line, and the delta and we are behind the market growth mainly due to the contracts we lost, and those are the contracts, as you have many times heard about, in the U.K. and Belgium. The U.K. contract we lost as of January 1st, so that is now when we start to this year, gone in the comparatives.
The airport contract in Brussels was February 1st, and then we have the European Commission, which was April 1st. So you have to take that into account when looking forward. On the margin, on a full-year basis, it's basically the same explanations as we've had a number of times before, and eventually now we will finally get rid of those explanations as they disappear from the comparatives. The losses of the contract were influencing us by 0.5. Then you have the acquisitions in the U.K., which was 0.3, and those acquisitions are moving on well. They, the profitability of the U.K. operation is gradually getting better, and they are on the right trend, trending in the right level that what we expect that the U.K. should produce for 2012.
So October, November, December, if we look on the individual months, has been moving in the right direction. So it seems like we are on track in the U.K., and they should perform as we expect them to perform and contribute to the bottom line. At the same time, we get rid of all the costs for integration and restructuring because all those costs, acquisition-related costs of the U.K. acquisitions of SEK 110 million, they disappear now when we come into 2012. The price and wage matter is a major issue primarily in France. We launched, prepared in the fall, a large price increase campaign, where we also tried to recover some of the gap from 2011. We launched that now January 1st. It’s too early to tell. We have only come a short way on that journey and got some acceptance.
So far, so good, I would say, but still, it's a long journey to go, so it's too early to predict the outcome of that. But the first weeks of this year has been basically in line with what we expected. And then we have taken quite some restructuring costs in Europe, also in mobile monitoring in the fourth quarter in order to cut the overhead costs. And all those costs have been taken, and there are no other actions expected this year. We have taken the costs. We have reduced the overheads, and the people have either left or are about to leave related to those measures. Yeah. That mainly explains the margin in Europe. And in the quarter, there was a major impact.
You might have noted, but there was a major impact in the European margin in the quarter. The margin in the quarter in Europe was 3.9%, but that is then carrying about 0.9 of one, of course, related to the restructuring measures taken in Europe, primarily in France and Sweden, to some extent in Belgium. Mobile monitoring is doing reasonably well. A little bit weak on the growth in the fourth quarter. We were moving on the 3% level, which is the full year, but slowed down a little bit in the fourth quarter. But still, they are doing well, and I feel very confident that that team and that group of managers will have a good development in the year to come.
On the margin side, we are pretty much in line with last year if you adjust for the. We have tried to explain that in the report. There are some one-offs, especially in the monitoring business, that have a negative effect, and the monitoring is actually doing better than last year if we adjust for that. On the full division or the segment, it's pretty much in line with last year, if we adjust for the one-off, so to say. So the mobile and monitoring business doing well and moving on well and good prospects moving forward. In Ibero-America, Latin America, Spain, and Portugal, of course, a very difficult, very fragmented market from a growth perspective. France and Portugal being tricky, while Latin America really looks good.
And we have a fantastic development in Latin America with a very high organic growth in 2011, developing well and good teams and good organizations doing a good job. And we are really having a very nice and healthy development in Latin America. Good organic sales growth to some extent driven, of course, by inflation in Argentina, but still, all in all, it's good, good development. We had two contracts that we have mentioned in the report because it has a significant impact with, basically no profitability. And those two contracts, we have now been able to find a solution without any costs or penalties to get out of those contracts. We don't want to do business if we don't make money on it.
Those contracts will now be terminated, one as of February 1st, and the minor one as of March 1st, actually. So that will be good for the margin and hopefully also for the cash flow because it's been quite extensive payment terms on those two contracts. On the margin side, we are slightly behind on the full-year basis compared to last year. And that we have a tough time in Spain and Portugal while Latin America is doing well. So that is mainly the explanation, the difficulties in Spain and Portugal. A question that I'm sure will be asked, but so I might as well answer it already now is what happens on the collective bargaining agreement in Spain. The status is, in short, the following.
We expect that—well, we know and expect that that agreement will mean cost, labor costs, wage increases in 2012 in the range of about just over 4%. This we will not be able to pass onto the marketplace. Realistically, maybe in the range of half of it, plus/minus, a lot of uncertainty, but roughly speaking, in that range. That is at least our plan and our ambition. We try and aim for more, but realistically, that I think is more or less where we would guess. Now, at the same time, it should be said that both we as employers and the unions realize that this is not a good agreement for anybody in the long run.
As long as the parties sit around the table and negotiate this contract and discuss this contract and see if there is a solution that will mitigate the cost increase in 2012, then at least one is hopeful, and that is the case. So there is still an ongoing dialogue on that, and, hopefully, there will be a solution, but it's we don't know, and it's not easy, but we still hope as long as the parties are willing to talk to each other. There they did in the fall when it kind of froze during the election period, and now it's back again and there is at least some discussion. So we'll see how this will. It's the final word is definitely not said, but it's an issue that we need to work with.
We will think we can pass some of these cost increases onto the market, and then we have taken quite some measures in order also to reduce the cost structure, make it more efficient. We're working a lot with integration with technologies, so that should improve our ability to get a better margin in our contracts. And we have cut our overhead costs, which we have taken some costs for as well in the quarter. So, yeah. That's the situation in Ibero-America. Cash flow was a disappointment to us, but it's very much; it should have been stronger in the fourth quarter, which it normally is in the second half of the year. So we came out short of our own expectations. The money is not lost. It's still in the balance sheet.
We just have to shake it out of the balance sheet, and that is what we're going to do. We are doing more than ever, in this respect with a lot of follow-up, not only by the financial team but also by all managements. Everybody who is a manager and has a bonus in Securitas will now have as part of their bonus linked to the cash flow in 2011, and it's also kind of black-and-white bonus. Either you make it or you break it. If you reach the target, you get your bonus. If you don't, you don't get anything. Otherwise, it will not get the focus which should be on that. So that is one of the key measures that we have taken, and that is has been implemented already.
Many other measures are being taken in order to focus on this, and a lot of people are dedicated to work with the cash flow in order to shake out the money which is in the balance sheet. The reasons to why we have not had as high cash flow as we normally have is, of course, the high growth. So that's the good news in the sense that we have been growing well, but it ties up a lot of working capital, and we will now be very restrictive on acquisitions in 2012 in order to restore the balance between free cash flow and net debt. So that will a little bit, of course, have an impact on the top line and the growth, but it will have a positive effect on the cash flow.
We also have some slow payers and some large contracts. I just mentioned them that will also disappear gradually this year, early this year, and that will also have a positive impact. So we will catch up, but until we have done that and we see that we are on target again, then we will be restrictive on acquisitions, until we come to that point. We will prepare ourselves, and we continue to investigate, but we will not close and complete acquisitions until we have restored the balance. We also had a slight decrease of the DSO. Our days billing are standing one day. That explains about SEK 200 million. One day is about SEK 200 million in working capital. Of course, we had a lower result. That also explains, compared to last year. Yeah.
The net debt has increased, of course, mainly because of the high speed of acquisitions that we will benefit from now in 2012. So our net debt is SEK 10.3 billion. Yeah. Our strategy, I flipped to the next one, is the same as it has been for a while now where we put a lot of focus on trying to improve our position within the technology area. And we bought two companies in 2011 or during the second half, one larger one in Turkey and a smaller one in Argentina. And we have employed, up till today, in the range of 70-80 technicians and system engineers in the group, primarily in Spain, Portugal, and Sweden.
But we continue to look for more resources in this field, and we continue to have a high speed of employing technical people into the group in order to be able to work with solutions to our clients, allowing us to have a better margin and a better solution, more cost-efficient solution for our clients. So that is really moving on in a very good way, and a lot of good things happening right now in the group that we will benefit not only in 2012 but also in the years to come. We keep to this. This is one of the areas where I spend most of my time right now and will continue to do so because this will give us the leverage that we need for the coming years in order to improve our margins. Yeah.
So all in all, we'd like to leave 2011 behind us and move on with 2012, work with the margins, work with the cash flow, slow down on acquisitions, and produce a good result in 2012, with a good cash flow. And, I'm optimistic that we should be, that we will have a very good year in this year to come. So that summarizes the situation for 2011, and we will now allow for questions. So see if our technician here can get somebody on the line, and we'll try to answer those questions.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad, and you will enter a queue. We have a question from Mr. Peter Trigarszky from Danske Bank. Please go ahead.
Yes. Thank you. First of all, could you perhaps talk a little bit more on this tax impact, as in, in North America? As you're saying that we should look at the full year, is, do you mean that when you start now, 2012, does that mean you are down 20-30 basis points and not the 90?
No. I mean, if we look in, in North America by itself, the full-year impact if you mean I suppose you mean North America and the full year.
Yes. I mean North America. You know.
Yeah. In the.
If you get that big deviation in the quarter.
Okay. In the full-year impact of the, of, those tax payroll tax-related issues, that is a point too. So that's 20 basis points, correct.
And that consists of a number of things, the FUTA being one, and that we will try to compensate on the marketplace by asking for that from our clients. It's a tax, and we need to get compensated for that, which we are not responsible for. It's a tax, basically. It's a federal tax, and we have to be compensated for that. So that we will try to recover. And then the other parts of that was, we had some HIRE Act money in 2010 and some other minor things, and that money is gone. That money is gone. Can you also split it up? No. I don't have exact number, but I mean, roughly speaking, about half of that is I would estimate be the FUTA, and the rest is the rest. So, yeah.
Roughly half of that we try to recover, and the rest is kind of lost money, so to say.
Okay. Then, looking at the restructuring you are doing in the U.K., how come that you got so large restructuring needs, now?
Well, we have never quantified how much it's going to be by quarter, but we have, it is a huge, it's a huge integration of that business, and where we change a lot of things, we are moving the financial we've done it step by step. We started off concentrating on getting the organization and the market and sales organization in place so we don't bid on the same contracts in three different companies. So we did that first.
And then when we felt that was in place, we started to work with the back office and the finance and administration, the routines, the IT systems, and so forth. And that process we have been working on during the second half of the year primarily. And that, of course, we shut down the whole back office business of Reliance, which was in the Wales area, moved that to another location, and so forth. So there has been quite some cost related to make this second wave, so to say, of integration. So it was according to our plan. We are not surprised, but the market estimates were a bit quite different from our outcome, our actual outcome on the acquisition-related cost. But it's no surprise to us. It was basically according to plan.
And now all those costs are taken, so when we enter 2012, that is history.
Okay. Thank you.
We have a question from Mr. Chan Liu from UBS. Please go ahead, sir.
Hi everyone. Chan Liu from UBS here. Just a couple of questions if I may. To begin with, is the increase in days of sales outstanding mostly mixed-driven, reflecting the fact that you've grown faster in more working capital-intensive regions, or is there anything else driving more working capital intensity? And the second one is, your year-on-year organic sales growth was 3% for FY11, 2% for Q4. Could you give us a sense for what this looked like in January this year?
On your last question, sorry. We need to stick to the Q4 reporting, so I prefer not to mention that.
I, I don't want to give bits and pieces of Q1 yet, so you have to excuse me for that.
Okay. That's all right.
Then on the DSO. Yes. I mean, to some extent, of course, it has been it has been a reflection of that we have been, making acquisitions in areas where in Latin America where payment terms are normally worse or reality is more, more or less worse than it is in, in other countries. And, but it's, it's, it's fairly well distributed, in many different, areas. So, I mean, it's, it's a little bit here, half a day there, point that day there. So it's one day on the full on, on, on it's one day for the full group, and, yeah. I mean, it's, it, it, it, it, it's nothing that sticks out.
It's not I cannot entirely blame it on that we made acquisition in certain markets. I should not do that. It's a little bit here, a little bit there. So, we just need to put even more attention to that in 2012, simply. And it will be. And I and there will be. I mean, this is the fact that we now put it in the bonus systems and also I explain I think it's important to mention that we do this in a it's an important part of the bonuses for all our managers, and it will also be a black-and-white bonus in the sense that if you reach your target, you get it. If you don't, you don't get anything.
and that will be that so you make it or break it, and that, I think, will put extra strength and focus that you need to take some actions if you expect to get that bonus. And that, I think, plus the fact that we will follow this in a very close way, from the divisions and from headquarters will put more focus than ever on this matter.
Cheers. Thank you.
Our next question is from Mr. Robert Plant, J.P. Morgan. Please go ahead, sir.
Hi Alf. Trading at Q3 and the tone of the Q3 conference call seemed much better than it does today back in November. What do you think are the main things that have gone backwards since November for the business overall?
Well, I think, in which respect? You have how do you what do you mean more precisely?
I just thought the tone of the Q3 conference call, the share price rose. It seems to be much more front-footed. And when I look through the results today at every divisional level, there seem to be slight weaknesses. The cash flow's gone back. I just wondered what did you sense this back in November, or?
Well, let's say like that. I mean, we were ourselves negatively surprised by the cash flow. It should have been better. It was way below our own expectations. And we didn't expect that, and the money is still there. It just sits in the balance sheet, and we just have to get it out of the balance sheet. And it didn't happen the way we were expecting it.
So, the money is still there, and we just have to shake it out of the balance sheet. So, other than that, I think—I mean, we had this surprise on the payroll taxes in the U.S., which was negative, of course. But, I mean, we still kind of feel that those we can manage, or they are more of a one-off nature. So our sentiment about the numbers are not good in Q4. I mean, we cannot hide away from that, and we don't try to in any way. But, our sentiment for our optimism for the year to come, I would say, if anything, is actually better now than it was a quarter ago. I feel that we are doing a lot of good things. We have taken further actions. We have cut back on overhead costs.
We are ready with the integration of many of the acquisitions. Continue to see the growth in the business even though it's a difficult macroeconomic situation. We step out of contracts we don't make money on or we don't get paid on in an orderly way, and so forth and so forth and so forth. We have prepared ourselves on the price and wage fight that we will have. I feel as confident as I did a quarter ago about that because we are now very well prepared to fight for that, and we will. So, if anything, I feel more optimistic now than I did a quarter ago, even if the numbers were not as good as they should have been in the fourth quarter.
Thanks, Alf.
Our next question is from Mr. Andrew Ripper from Merrill Lynch. Please go ahead, sir.
Yeah. Hi. Afternoon, everybody. Just wanted to come back on the first question, the FUTA tax issue. I wasn't quite clear, Alf, when you were asked at the beginning of the Q&A. I think the tax was enacted in the fourth quarter. So the sort of 20 basis points overall hit you've taken for the year. Does that reflect the full impact of the tax, or is there a bigger annual impact rolling into 2012? Can you be clear on that, please?
No. I mean, the roughly half of that point, too, relates to the FUTA, and the rest is the rest. And that, of course, has an impact. So that's why we need to recover that in 2012 because that money we lost in 2011, and we need to recover that money in 2012.
Yeah,
So that's what we will do. And that tax is a tax that you—it's a little bit strange. Well, that's—it's not so easy to explain in a short way. But what happens is that you get a tax for unemployment from a federal unemployment tax in the U.S., and then you get a credit at the same time. And the net is what you pay on a federal basis. Now, the credit you only get if you pay your state unemployment, the SUE rates, the SUE unemployment tax. And we do, so we get that credit. Now, if the state cannot pay, and if the state cannot pay the money to the people who are unemployed, they have to borrow money from the federal from the Fed.
And when they do that, and if they cannot repay that money, then the federal government, they just recover that money from the employer.
Yeah.
So we need to, and that you don't know until you come till mid-November. And then, quite a number of states in the U.S. are unable to repay their loans after two years. And then for all wages up to $7,000 a year, you get this extra; you get less credit from the federal government. And that is a fact. And you, it's on a full-year basis, and you need to recover it. It's 0.3%. Yeah. It's 0.3% on that income bracket. And we need to get that money back. It's a tax like any other tax, and we just need to get it back.
Yeah. So basically, it has an effect in the fourth quarter, essentially, in terms of what you've described if you know that you don't know whether the states are going to be able to pay the money back or not, and that sort of Fed will basically leverage the tax towards the year-end. So it's a Q4 impact.
It's a Q4 impact.
Every year. Yeah.
It's a Q4 impact. And of course, we have to make an estimate. What do we expect now will happen next year in November or this year? In November, sorry, in 2012? I mean, we have to try to make a little bit of better projection. Do we expect the states to be in better shape, or will we have another 0.3%?
Yeah.
In that case, we need to be even more aggressive on the marketplace.
Yeah.
In both states where the state financial situation is as bad as they cannot pay back the loans to the federal government.
Yeah. I'm with you. I'm with you. Understand.
Okay. We learned this the hard way. We will try not to make the same mistake again. So we will now put this on the radar and ask for the money just and compensate for this as any tax imposed on any company.
Yeah. Yeah. Okay. And are you happy with the balance of sort of wage and price growth in the US, the gross margin study?
Yeah. I mean, we do. They do a fantastic job. And we had some negative surprises in Q4.
We suffered from that, and we are not proud of that. But other than that, if we put that aside and you look on a full-year basis, which I think is a relevant way to look on the business, the FUTA, we will recover. We will try to recover. The dilution from the acquisitions, yes, we will.
Yeah.
That will disappear. The startup cost, they will be gone. We will have a little bit of a startup phase where we still slightly in the first quarter. But basically, that contract will be a good contract we expect in Canada.
Yeah.
And then on top of that, our solution-based Sales in the U.S. is continuing to grow. We have presented the numbers in the report.
And that continues to be a very good development. It's now 7% of total sales. And it continues to grow in a rapid way. And that really makes a difference on the margin. Santiago said in our Capital Markets Day in September in London that, if he could move the whole business into solution-based sales, it will make 2% difference on the operating margin.
Sure.
So I mean and that is moving on well, and they do a good job, and we have a good team and good position. That is also reflected in the organic growth that we grow faster than competition. We gain market share and still at reasonably healthy margins. So we feel that we have a good position in the U.S..
Okay.
We just had a few bad surprises, and we need to smooth a little bit of payrolls in the Q4.
Sure. And on CATSA , you said that there'd still be a little loss at the beginning of Q1.
No, I didn't say loss, but we will still. It will not contribute in the first quarter. It will.
Yeah.
It will probably be very close to a break-even situation in the first quarter because we are in the initial phase in a very, very, very big contract.
Yeah.
But as things move on, this contract will be a good margin contract, or at least as we expect to be on the level that we have anticipated in the bid. So the signs look as it's on plan, basically.
Okay. Okay. Fine. Then just moving over to Europe, a couple of questions there. In terms of these contracts that you're letting go in Spain, I think it was SEK 450 million, what sort of these contracts presumably are unprofitable or operating at break-even. What sort of gross margin will they be generating?
Very low. I mean, they, it doesn't give you too much guidance to give you a gross margin because some of these contracts, they have very low indirect costs as well, overhead costs. So.
Yeah.
The relevant measurement is to tell you that they are break-even contracts, basically.
Yeah.
On the operating level and if anything, maybe even below that. So they will get rid of those. That will have a positive effect on the margin, operating margin.
Yeah. Plus. Okay.
On the cash flow because they have been slow payers as well.
I mean, you, you've sort of, you know, talked a reasonable game on sort of gross margins in the past, you know, and shifting European business towards more sort of specialized sectors. Why were these contracts sort of taken on in Spain in the first place? Just to drive volume on the fixed cost base, or?
I mean, first of all, these contracts, they were assumed to get a better gross margin than it gave. We were too optimistic on our calculation.
Yeah.
And we were expecting to get more better efficiency on those contracts, to get more bonuses, so to say, out of the contracts, which will help the gross margin.
And then, of course, they were taken at a low margin in the first place to get the leverage. But the precalculation is not the same as the reality.
Yeah.
And so they were too optimistically calculated, basically. And we just need to try to get out of them. And that is what we are doing now.
Yeah. Okay. And then can you update us on the French competitive situation? And I mean, I sort of remember you saying you'd already put through a second price increase last year in France. So, I just wondered what your experience had been in the market of putting through I think it was two price increases last year. How much did you try to put through, and how much of that has stuck?
No, we tried to increase the prices twice, actually. And we didn't manage in France all the way. And I think we learned from those. So, I mean, our profitability in France. I mean, we have had wage cost increases in France in the range of 3%-4%, and we got only half of that out on the marketplace even if we do two campaigns.
But I think what we learned from that is that we were not well prepared enough in those price campaigns. And now what we have done during 4 months-5 months, we have prepared ourselves in detail. We have really trained all our people. We have got all the arguments. We have been much more sophisticated.
We have also had external support in this process in order how to manage this process. So we are much, much better prepared this time. And management is much more, so to say, well prepared and motivated, and they know that there is no way back this time.
Yeah.
So now we are better prepared than we ever been before. We learned a little bit from that. We were disappointed on what we achieved in the first two price campaigns because the bottom line of those were that we didn't achieve what we were expecting to achieve. So we need to prepare ourselves better. And this time, the first few weeks of this year, it looks promising, but it's still a very small part that has been discussed and renegotiated.
But at least it's the first small indications have at least been in the right direction.
Yeah. And the competitive situation, I mean, is it going to get easier to put price increases through if, you know, you've got at least one major competitor in Chapter 11? What's the situation there?
I think they are out of Chapter 11 now, and they somehow reconstructed the company. Some pieces were sold. Some were, my understanding is that, some pieces will be liquidated, and they will just disappear. And a major part of the company will be reconstructed, and they will survive, so to say.
Yeah.
So but anyway, even so, I think they learned the lesson. The best for us would be that they went Chapter 11.
Now, they didn't, or they will bankrupt, but that doesn't seem to be the case. But even so, I think they learned the lesson the hard way that they don't want to make this mistake again. And there is a lot of pressure that they need to do that. And they have the same cost structure as everybody else, and they have sort of same collective bargaining agreement. So I think the market has learned a lesson in a way that you cannot live if you don't compensate your wage cost increases by price increases. And yeah. And that's why we are moving on now and asking for those increases.
Okay. Then just in terms of the collective bargaining increases, obviously, Spain's been the country that's had the headlines; has been, well, sort of anticipated it.
Are there any other major contributors in the European business where you have a similar issue in 2012?
No, I think all the other collective bargaining agreements seems to be on reasonable levels, and we should be expecting. It's not definitely not unrealistic that we should be able to pass those increases onto the market.
Yeah. Okay. And then just very quickly with me, finally, the reorganization costs that you've taken in France and Sweden, and I think the monitoring business is something like SEK 70 million. Are you prepared to say how much indirect costs you will take out of the business for that spend?
No, I prefer not to do that. We didn't state that in the report, and then it will be a number that we would need to disclose if we should. Okay. If I should answer that now.
So, I'm sorry, I prefer not to do that.
Okay. Thank you for your answers.
Thank you.
Our next question is from Mr. Johan Broström from JRS Securities. Please go ahead.
Thank you. Johan Broström from JRS Securities. I have another question on this growth-related strain on cash flow. And I wonder if you can explain a little bit in more detail on how the mechanism works that makes the acquisition drive the working capital need. I would assume that you acquire the necessary working capital in the entities that you acquire, or has there been some sort of deficit in the acquired companies?
No, no, no. You are correct. I mean, that is correct. Even so, it requires working capital when we grow by acquisitions. And I put the acquisitions and the organic growth together.
Working capital for one way or the other is one reason why the cash flow is suffering. So one part of that balance sheet that we acquire is, of course, not affecting that, but still, it requires capital to buy companies because normally most of those companies have a balance sheet where you have more receivables than you have accruals. And when you look in our many areas, what we have is that customers pay us in 40, 50, 60, 70, up to 80 days, depending on which market we are in. And we need to pay the liability side of the balance sheet, basically salaries. That's what it is, the taxes and salaries. And those you cannot drag, whereas you are not allowed to.
So you have to pay the month the wages and the salaries in the month each month, and then you pay the taxes and the VAT in the following weeks. So it's very difficult to do something on the liability side. And on the asset side when the asset side is higher than the liability side, when you grow, that will mean that you need to you need more working capital.
Okay. Thanks.
Our next question is from Mr. Paul Checketts from Barclays Capital. Please go ahead.
Afternoon, everyone. C an you just, maybe talk us through how much you would be comfortable spending on acquisitions in 2012, given the net debt situation?
Well, we haven't put a number on it. We have said to be restricted. We have not said we will not make acquisitions.
We will continue, of course, to monitor, to keep in touch with these companies, to look, to discuss with them. If anything, we have nothing major that we are working on. We will prioritize technology companies if we find something which we will be attractive. And there will always be some minor small bits and pieces here and there. But we have not put a number, but we will be restrictive. We will entertain those possibilities that we still know we have, and they are there. And I don't think there are too many players in the market who are aggressive on acquisitions on ours, so they're not going to run away from us either. So we are not in a hurry.
We can just focus on the cash flow, and then we'll start talking when we are ready to talk, basically.
Okay. And if we look forward to 2012, which big contracts have you got coming up for rebid?
There is. I mean, we have one big contract which has been a little bit in the press already. It's the Stockholm Arlanda Airport contract, and that is in the final stage. We are relatively optimistic that we will should be able to retain that contract, but it's not yet signed. And the discussions are going on, and it's in the final phase. So we hope that is an important contract for us to try to keep that contract. And we will know shortly, I think, in weeks what's going to happen with that.
But, again, we are optimistic about that outcome. Other than that, I have no major ones off the top of my head, actually, which are on my radar screen. But there will always be some in the latter part of the year, but not in the short period, not in the next six months that I can think of right now.
Right. And lastly, on the General Motors contracts in Canada and Mexico, are you making money on those?
Yes.
Why wasn't the U.S. contracts making money in that case?
Well, that's a long story. And yeah, it's a long story. It's always been a relatively low-margin contract. And then there has been the number change.
It's difficult to get the price increases through. There has been some cost increases. There has been some social cost and labor the wage-related costs that we've been everlasting discussion on. A very professional client, of course, as a purchaser. Tough and rough. That's the way it's been. So it's been a tricky contract and low margin. And so, yeah, it's a pity when you lose a customer, but on the other hand, we didn't make a lot of money on it, so.
Okay.
We have also we've also been, actually, a lot of contracts, for the same client in many, many other countries around the world that has been up for tender recently where we have actually retained most of those contracts.
So, it's basically the U.S. which has been the one we lost, and that was, in fact, the one with the lowest margin.
Okay. Thanks very much.
Our next question is from Mr. [Wina] Middleton from Deutsche Bank. Please go ahead.
Yes. Thank you. Good afternoon. I have a couple of questions, please. Firstly, I'd like to know what sort of target net debt EBITDA you would ideally like to see the business trending at, given that you are now going to be focusing a bit more on cash flow and a little bit less on acquisitions going forward, please?
Yeah, we haven't put a specific target on that. The target we use is a free cash flow to net debt. And, and, we have not translated that to a target.
So, I mean, normally this business is generating, has been, if we look 2009 and 2010, SEK 2 billion in free cash flow. We were way behind 2011. We need to catch up with that. We have to feel comfortable that we see that the cash flow which is stuck in the balance sheet is coming out. So we, I don't have a specific target on net debt EBITDA that I can give a number on and say when we come to that, when we are okay, and then we move on with acquisitions again. So I don't, I cannot give you a number since we don't have that internal target ourselves.
Okay. No problem. And then secondly, have you seen any, or do you expect to see much impact from the cut to the French low-wage subsidies?
No, not yet. It's something we need to monitor. There has been some reductions in that, and that is a part of our cost increase that we need to recover from the market. But there is a lot of such subsidies in France, but the major ones have not been touched yet, and we don't expect to be in the near future either.
Right. Okay. And then, finally, I'd just like to ask for some color on restructuring in France and Sweden. I know you are unable to give us a sense of what the restructuring costs themselves were, or rather, what the margin uplift could potentially be from this. But, how have you actually gone about this restructuring, just in operational terms, please?
We have made some internal reorganization in those markets where we are cutting back on taking away some levels, taking away quite a number of high-level managers and high-salaried people. We have made an internal change where we have put together our aviation division together with our security services divisions in Europe. It used to be even if it's reported externally as one segment, it was internally two different divisions. Now it's one division. And when we did that, we have been able to save some money and reduce the overheads.
So, yeah, it's more efficient, less levels, less managers, and also some back-office savings, because we have an efficiency project going on in the group of how we can be more efficient in back-office back offices, and combine all the divisions and areas and in the different countries to be more efficient in back-office. And that's where we have also found some savings in the overhead structure that we have taken the cost for all those actions in Q4. And most of them have already left, and some will leave now in Q1, but the cost is already taken.
Okay. And then, sorry, just finally, could you please remind us of the size of the Stockholm Airport contract, please?
I don't have that number in the top of my head.
It's already a contract we have. So if we keep it, it's not going to make a difference. It will not be any different from the one we have. So from that respect, it will not impact the numbers, so to say.
Okay. Thank you.
Our next question is from Mr. Laurent Brunelle from Exane BNP Paribas. Please go ahead.
Yes. Good afternoon. Two questions, if I may, please. Follow up on the Q4 margins in North America. So if we exclude the tax adjustments and the startup costs for the airports contract in Canada, margins will have been broadly flattish. Is it fair to say that you should be able to recover gradually this year the bulk of it?
Well, I again don't pay too much attention to the quarter.
I mean, if you look on the full year, which is the relevant number for you to compare with, I repeat what I said before. The dilution we have a gap of 0.4. The dilution will disappear because, well, it will disappear, actually, in April. So you will have a little bit of dilution probably in Q1 as well because SCG acquisition was made in Q2 last year. The startup costs from Canada, they will disappear. I as I explained, we have had a loss on those bag contract in November, December, and we will, this year, even if it's, we're starting with a slow start in Q1. But other than that, we will not have a loss anymore, and then we have the payroll taxes.
And as I said, about half of that is the full time that we will recover, and the rest is the rest.
Okay. That's clear. And can you maybe elaborate a bit on the market conditions in the government sector, and especially in the U.S., and how Paragon is doing right now, please?
Yeah. I mean, those acquisitions are developing according to plan. Paragon and SCG, yeah, it's moving on as we anticipated it to do. So, yeah, no, it's been, it continues to have a good development. Margins are improving. So, yeah, it's basically as we expected it to be.
And regarding the market condition in the government-related sector, can you say something, please?
Yeah. We think we still think that this will be, I mean, when you look on the government sector, you have to look upon which areas of the government sector are you working. Some will be more better than others. And the ones we are in, we have reasons to believe that we are positioned well and that we will, we are in the areas where we continue to see growth. So, yeah, we feel comfortable with that. And yeah, we have nothing to complain about. So it's moving on as we planned it to be, and profitability has improved. Margins are gradually improving in the Paragon business. And yeah.
Okay. Clear. Thank you very much.
Thank you.
There are no further questions at this time. Please go ahead, speaker.
Okay. Thank you very much. Then we'll thank you for calling in. Thank you for asking the questions. And, have a good evening. Thank you. Bye-bye.