Very welcome, everyone, to our 9-month report, and this time we'll do it not so you can see me. You will only hear me. So, I will move on and present the numbers just as we usually do and then allow for questions after this presentation. So, the highlights for the first 9 months are that we have a pretty good development on the top line: we are growing 4% organically, and that in spite of the fact that we have lost these contracts in Europe that hampered our growth in the European business. So, we have a pretty good speed on the top line: we are gaining market shares in North America. The market value is growing about 0, and we are doing about 4%.
We are taking market share also in South America, while in Europe we are on the contrary situation due to these contract losses that we still carry. Including acquisitions, we are doing 12% real sales growth for the first nine months and 13% in the quarter. The operating margin is basically the same picture as we have described in Q2, that we are behind, very much due to the situation in the European business. I will come back to the explanation of that, but it is the same story as you heard before, namely the loss of contracts, the acquisitions in the UK, and the price-wage balance.
Then we are moving on now after the fact that we were not able to acquire Niscayah, which was concluded that process early September, and now we are moving on to build our own position in the technology with technology resources, and I will explain that a little bit more in detail later on in the end of this presentation. On the numbers again, you can see basically the same picture: very good growth organically but especially including acquisitions. We have been very active on acquisitions in South America, the big acquisitions in Europe, the government acquisition in the U.S., and a lot of small, medium-sized acquisitions around the globe. So, moving on very well on top line and good speed on the top line, and also in the quarter.
No change there, so that makes me quite optimistic for the coming year that we have a good speed on the top line, and we will get the full effect on a number of acquisitions next year as well on the top line. Margin, I will come back to that, same as I just said. Real change, even if it looks a lot worse in Swedish kronor, about 10% total change on operating result year to date, in real terms it is only 2%. So, 8% is basically the currency difference. North America continues with a good top line growth, taking market share, good extra sales in the quarter as well, and that is also reflected on the group level. On extra sales in the group, we are at about 14.5% the first nine months, and we were about 13.5% last month, and Q3 was about just over 15%.
So, the trend looks pretty good on extra sales as well globally for the group. Then also our strategy of building more security solutions as a bigger part of the American sales portfolio, that is moving on in a very professional, very systematic way, and improving that share of the business and also improving margin. That we explained a lot to many of you during the Capital Markets Day, and that still continues with a good trend, and we are optimistic for the coming year in that respect. On the margin, we are basically flat compared to last year. It is a small dilution there because of the low margin acquisitions that we have made in the government sector, but no drama in the quarter, and basically the same situation as we related to you after the first six months.
Good bottom line, real change in real terms, 8% better than compared to last year. In Europe, we are losing market share mainly because of the major contracts that we lost. We are around zero growth, even if it was 1% year to date, it was zero in the quarter, which was the same in Q2. So, we are on that level, and it would have been the market is probably growing around 3%, and we are about zero. But we have a good growth in many, many countries, but of course due to those contract losses in the UK and Belgium, that hampers the numbers.
A very difficult market situation in France, which mainly affects us on the margin, but for example, our largest competitor in France has been in Chapter 11 now for the past 8 months and still remains to see what is going to happen with that in the next week or 2. We will probably know what will be the result of that process. The margin is the same story as you heard before. The numbers changed a little bit, but basically the same story, namely that 2 of those are negative things in the sense that we have lost those contracts, that reduces the margin with 0.5% year to date, and then the discrepancy between price and wage with another 0.5%, where it is mainly in France and Sweden, primarily France, but also to some extent Sweden. In many other countries, we are doing fine.
We are on par or even better when it comes to price versus wage, but these two countries have a major impact on that balance. We will not, and then I should finally also comment that the conscious decision of making the move in the U.K. and being a strong competitor in the U.K. market, that has a diluting effect, but that was not a surprise to anyone, but it has an effect, of course, on the margin. On the price-wage situation, we will not be able to get on par for this year in the group nor in Europe, but I am fairly optimistic for next year that we will have a much better situation.
We got into a squeeze this year because we had, in many countries, a situation where there were no wage increases whatsoever for a number of years throughout the recession, and then when things looked better one year ago, we were starting to see a couple of percentages in wage increases, and then when we were about to raise the prices, there was no understanding for inflation, there was no understanding for the macroeconomic situation that started to get worse, so it has been difficult for us to pass it on. For the coming year, we are catching up, so to say, during the second phase of this year.
We are pushing price increases very hard in France with a second price increase this summer that was reasonable in this effect, but did not compensate fully still in France, but we are moving on with that and really pushing on to that so, we should have a reasonable situation when we enter 2012. Secondly, with the macroeconomic situation in Europe, I would expect that the pressure on wage cost increases would be less the coming year than it has been one year ago. So, I am more optimistic for the coming year that we will be able to keep this in balance in a better way than we have been able to during 2011. Yeah, that is what I have to say on that one.
We are also taking quite a number of actions, not big dramatic actions, but a little bit here and a little bit there throughout the European organization in Security Services Europe and Aviation, to reduce our indirect costs. We have done that for the first nine months, and we will continue to do that, and we are planning, but not yet decided exactly what to do, but we will take some further actions in Q4 that could then result in some cost related to do that. It will not be a big drama, but there will be some costs probably in Q4 related to reducing further the indirect cost in order to be as efficient as we possibly can and also to prepare ourselves for the macroeconomic difficult times in the year to come.
We are really putting a lot of extra efforts during the second part of this year to make our indirect cost structure even more efficient than it has been. In Mobile and Monitoring, reasonably good growth, and in Mobile, we have now decided not to increase the sales force for the coming year in order to speed up growth, but what we will do is that we are putting a lot of process changes with the guidance and with the leadership of a new management in Mobile in order to reduce terminations. We are at a termination rate in Mobile of 10%-12%, which is way too high, and if we can reduce that with a couple of percentages, that will improve the organic growth to the equivalent amount.
So, the focus will be to rearrange our internal processes in order to reduce terminations and thus improve growth in times to come. That will be our key focus in the coming year. Margin, no big drama. We had very tough comparatives in Q3 last year with a very good result, very good margin in Q3 2010, and with the explanations that you can see on this page and also in our quarterly report, basically we are doing okay when it comes to the operating margin in the mobile and monitoring business. Ibero-America, very good growth, very much driven, of course, by Latin America, but we have good organic sales growth actually also in Spain and Portugal. Even if it is low margin contracts, it still drives the top line. Very good growth in Latin America, very much due to the high inflation in Argentina.
Well, the high inflation in reality is more officially, it is half of what it is in reality, more or less. So, reality is more like 30%, and that becomes price increases, which becomes organic growth. So, that very much drives the top line and the organic growth. But all in all, we are taking market share. We have a real organic growth as well, even if we take away the inflation. So, there is a positive net change in most of the Latin American countries.
So, very good development on the top line in Ibero-America, and on top of these numbers, you should also note that we have made a number of acquisitions in Argentina in the beginning of this year and in Chile, and then we have added Ecuador to the number of countries, and two days ago we made a small technology company acquisition in Argentina as well. So, that will also, in absolute numbers, make a huge difference in the Ibero-American division. So, moving on pretty well. The margin is also pretty flat compared to last year, and so the margin is doing well, especially in Latin America, but we have difficult times and tough times, especially in Portugal.
Even though we have a very good business and good position, we still have some pressure on the margins in Portugal, and in Spain, we are making a number of changes in the organization on the cost structure, reducing the indirect cost, and taking a number of actions in order to manage that difficult market, but still we are doing pretty well even if we see some decline on the margin in Spain. But all in all, good development in Ibero-America with a 13% real change improvement in operating result the first nine months. I suppose the question to come would be the collective bargaining agreement in Spain, so, I might as well just answer that question right away, and that is that it is still no change. Nothing has been signed or agreed.
So, what is agreed is a collective bargaining agreement that would mean inflation plus 2% next year. That is the agreement in the market, which means in reality 4%, 4.5%, maybe even 5% wage increases in Spain next year, and that will not be possible to get in the market in price increases, that is for sure. So, that is a big issue. The good news, that is the bad news. The good news is that there is a lot of discussion, a lot of activities going on, and when people talk to each other, then you still have hope.
So, we plan for the worst and we hope for the best in this respect, but so it is still uncertain what is going to happen, but again, the good news is that there is a very active dialogue between the unions and the employers in realizing the situation and the consequences of this situation, and there is a will to discuss and see if there is a possibility to do something about it. So, I am hopeful, but nothing signed, nothing agreed at this point in time. Cash flow picked up pretty well in Q3. We are still lagging behind compared to last year, but we had a decent Q3 on the free cash flow. We have almost SEK 900 million free cash flow in the quarter, and we will have a good Q4 as well.
So, we are on the right track, and this is basically according to our expectations. So, yeah, we will have another good quarter in Q4, but what we are doing in order to get to a better balance on our free cash flow to net debt is to slow down on acquisitions. We are completing the ones that we have been working on for quite some time, but we are not initiating a lot of new acquisitions, and if we do, we prioritize acquisitions in consulting investigation business and technology companies rather than guarding companies because that is our strategic focus, so to say, to improve our position in the area of technology and advice and consulting investigation.
So, for the coming quarters, we are probably going to see a slower pace of acquisitions than we have seen for the past quarters in order to restore the balance between free cash flow and net debt. But again, we will have a good Q4, and that will put ourselves in a much better position than we were in the end of Q2. Yeah, here you have a net debt situation, development since the beginning of the year of acquisitions at a very high level and the dividend. Then the translation difference from the beginning of the year is relatively small. It was a lot larger between the end of June to the end of September, where there was quite a big negative effect and the net debt increased due to currency rates between the krona and the dollar and the euro.
Yeah, finally, a few words about the philosophy, what to do now after the Niscayah deal was not accomplished as we were expecting to, and I actually flipped this slide on that. So, what we are doing is kind of a double track, and since the process came to an end in early September, we have used the summer to prepare ourselves for what to do, and then now after the deal was finalized, so to say, and we were not able to buy Niscayah, we have started to execute on that strategy that was our Plan B, which means that we have a double track, and that dual track consists of, on one hand side, organic growth, organically building a position within technology, and the other one is by acquisitions.
On the first one, we have up till today basically hired about 25-30 people, most of those coming actually from Niscayah and now working for us and supporting our services organizations within the area of technology competence, and we continue to do that. We will continue to employ people from competition or from partners or from whoever. We will continue to build a position within the technology organically by employing people, and that we are doing, which means that those people are employed when we need them, and they will basically generate income one way or the other as of not as maybe of day one, but maybe month 1 or 2 or 3, so it will not have any dramatic impact on our cost structure. There will be some cost, but not any dramatic impact. So, that is basically risk-free, and it generates income fairly quickly.
So, that we are doing and taking a larger responsibility for the technology piece of the delivery to our clients. And then the other track is to make acquisitions, and we have made one acquisition in September in Turkey of a larger technology company, and then we have also made the day before yesterday, we made a minor acquisition in Argentina of a fire security technology-oriented company, a minor company, but still with the competence that will give us a lot of value in our largest market in Latin America, namely Argentina, and then can also support the other countries in Argentina with that competence. And we actually made one minor acquisition in Thailand as well recently, which also is more technology-oriented, giving us a much stronger position in Thailand, and we will continue to build on that. So, there is hopefully more to come.
We are shortlisting and identifying acquisition targets in the technology area, country by country. There will be no huge global company that we can acquire or could be interested to acquire, so we will do it country by country, and we are shortlisting which are the companies interesting for us to negotiate or to approach in order to acquire sooner or later, and we are also starting up discussions with some of these companies who already have done that in order to be able to acquire that competence that will give us the support in technology and the competence we need in order to improve the combined solutions to our clients. So, compared to the Niscayah business, of course, this will take longer time, but it will be much less risk and no restructuring and no one-offs cost of any kind, but just to build it step by step.
So, it is less risk, but it takes a little bit longer time, but that was our Plan B, and that is the one we are executing now, and you have seen the proof by what I have just mentioned. Yeah, so all in all, we are doing pretty well in my opinion on the top line, good growth, and then you still have to account for that we have lost those contracts in Europe early this year, so that is encouraging and makes me optimistic for 2012.
On the margin, we suffer for a reason primarily due to the European aviation business and the U.K. situation is moving according to plan, so that negative deviation will be totally different next year when the U.K. will start to contribute to the bottom line and the earnings per share, and the contracts we lost will be flushed through the system by basically the end of this year. And then I am more optimistic about the price and wage balance for next year than the reality has been for this year, where we got in kind of a post-cyclical squeeze basically.
We will also get the effect of the acquisitions that we are doing next year, and we are presently now after the acquisition in Latvia in 50 countries worldwide, and we still keep our aim of 60-65 countries within the 2-3-year period that we have in front of us, and that will not due to even if we are slowing down a little bit the coming quarters on acquisitions, we are still not worried about that because many of those countries where we like to enter, the value and the cost of entering those countries is quite minimal, so we can still keep that target even if we slow down for the coming quarters on acquisitions. That was the short version of the first nine months, so now we will be happy to answer any 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 here from Rajesh Kumar from HSBC. Please go ahead, sir.
Hi, good morning. Could we get a better sense on if you saw any slowing in growth during the quarter, i.e., the October exit growth rates?
No, we did not. The quarter was a strong quarter from a growth point of view, and we didn't see any variations on the growth throughout the quarter, so there was saying, so to say, that September should be totally different than July and August. So no, it is a good quarter all the way through. And in terms of seasonal weight, isn't October a bigger month than the rest too? Sorry, could you repeat the question?
Yeah, in terms of seasonality, which month in the quarter is the biggest? I would assume it was end-weighted quarter rather than... I mean, the seasonality in Q3 is primarily in the mobile operation, where we have usually very strong July and August, and that was the same pattern this year as last year, so no surprises and nothing dramatic there. And that's helpful. Another one, if we look at the one-off sales trend or the spot business, how do you see that progressing during the quarter? Could you repeat, please? The one-off business trend during the quarter? Extra sales? The one-off spot business? You mean extra sales? Extra sales. Okay.
The extra sales during the quarter, I don't have those numbers, and it doesn't make much of a relevance to look on that actually, but as I said before, in the Q3, we had just over 15% extra sales, and year to date we are at 14.5%, so mathematically that means that we had a, so to say, had a positive trend of more and more extra sales throughout the first nine months.
Thank you very much.
Next question comes from Laurent Brunelle from Exane BNP Paribas. Please go ahead.
Yes, good morning, Laurent Brunelle with Exane BNP Paribas. Three questions, if I may. First, on the organic sales growth, given easing termination contracts for 2012, is it a fair assumption to assume an organic sales growth acceleration next year, and what is your view on Q4? And can you please split the Q3 organic sales growth between volumes and price increase?
Second, on margins, you are obviously more optimistic about your ability to manage the balance between wage increase and price increase, and given the benefits of past acquisition, do you expect clear margin improvement next year? And lastly, can you update on market development in government, please? Thank you.
We don't give any forecast for the next year, so I am sorry, I will not give you any answer on the question if margins will improve or not improve. I mean, I try to summarize my picture in more broader terms, but I will not dress it in numbers.
But I mean, of course, in the European business, which is the big difference this year, where I mean, if you look at the margins in all our divisions, this year is doing pretty well compared to last year, and compared to 2010, which was the best year ever in Securitas history. It is only in Europe where we really suffer a lot of pain on the margin, and again, repeating my message before, the situation in the U.K., I mean, in the U.K., we don't make a lot of money in the U.K. this year due to that we are merging three big operations into one, and at the same.
On top of that, so that is what hits the operating margin, and then below the operating margin, you have all the acquisition-related costs to those acquisitions, first doing the acquisitions and secondly the restructuring, and more specific numbers are available in the Q3 report on that. So that, of course, all that will be totally different next year, so that should have a positive impact on the margin next year and also on the earnings per share. And then on the price-wage situation, it is, of course, a very difficult situation to, but we are putting a lot of efforts, especially in countries where we have been behind and we are behind this year. I would like to still stress that in most countries in Europe, we are doing well.
Countries like Germany, big countries like Germany, many of the other Scandinavian countries except Sweden, then Norway, Finland, we are doing well. Denmark, we are doing well. Netherlands, and so forth.
We are keeping this balance, we are managing the balance between price and wage, so we are doing well in most countries except a few, and France being by far the country where we have most trouble, and there we have really, really put in a whole battery of actions and focus on managing this situation, but France is a tricky market, and yeah, I mean, that is, I think, in a way best or at least well described by the fact that the largest competitor of ours employing 10,000 people, they have been in Chapter 11 for eight months, and we still don't know what is going to happen to them, which, of course, means that there is a structural problem in the market that needs to be corrected, and the market needs to understand that, and the consequence of not understanding is that companies will go bankrupt.
So I think that will change, and we as market leaders, we will maybe take some hit on the top line, we will be rough and tough, but we will do it, and there will be no way back but to get paid for what we deliver, to be paid for professional services, and that we will ask for to the market, and the organization is totally committed and focused on that, so that makes me optimistic for the coming year that we have increased the understanding of the focus and the methodology of improving that for the coming year. And now in France, we have had two price increases this year, and we will have a third one now around year-end and for the early January, so we are pushing on, and there is no other way in France.
And at the same time, I think there will be less pressure on the wage structure due to the macroeconomic situation, so that makes me reasonably optimistic that we should have a better balance between wage and price for 2012.
Thank you. Next question comes from Mr. Peter Trigarszky from Danske Bank. Please go ahead, sir.
Yes, Peter at Danske. I just have a question on your performance in Ibero-America. Normally, you have a very strong Q4 on the margins, but in Q3, you are saying that Latin America is going well while there is a weakening in margins in Spain, if I understand it right. Is that meaning that there is a higher risk that we will see less, how should I say, we will not see the same kind of boost on the margin side?
Well, we are doing, when it comes to the way we are accounting in Spain, the same way this year as we have done every other year, meaning that we are accruing for our expected cost of all the social costs and uniforms and all those things that we then have to calibrate in the Q4, and usually that has had a positive effect in Q4. I cannot give you a number for Q4, but we haven't changed the methodology, and so hopefully we will have a similar pattern than we had in the past when it comes to Spain, which is the country which has by far the biggest impact in this respect, but again, it is still an unknown until you have done it, but we haven't changed anything in the methodology in Spain.
It is the same principles and the same provisions as we have done in the past years.
Okay, thank you. And could I also, I understand that you are a bit more optimistic looking at next year wage-price balance. What has really changed versus your message at Capital Markets today? Because you clearly sound more optimistic. Is it situational?
No, but I think that, I mean, first of all, we are, I mean, we have now gone through during the since we met in London in early September, we have spent the time basically daily since then on our business plans for 2012, so that process has been now thoroughly completed up till yesterday basically, and then we have a time, we have an opportunity to review all the countries, all the areas, all the branches, all the divisions, everything for two months, and ask all these questions and see what actions are behind, and then there is a lot of focus and a lot of self-confidence in the organization that they are able to manage a tricky situation, and on top of so that is one thing which we didn't have that information we did not have.
We had a sentiment, but we didn't have the plans, we didn't have the numbers, we haven't had the meetings and we didn't have the conclusions at that time, so that has strengthened my belief that we will be able to manage that balance for the coming year. Secondly, the macroeconomic situation is tricky in most European countries, which means that there will be less pressure from unions, I would expect. We don't know yet, but that is what I would expect on increasing wages due to high unemployment.
Then there is one parameter which is still unknown in all that, and that is if government decisions will impact the social cost of the social charges, so even if you have no wage increase, you might have social cost increases because government decisions to cut for national debts or any other decisions in that respect where we put the money and the cost on the employers, so that we don't know. That can change, but normally that has a pretty, you have some kind of warning before that actually happens, so there will be some of those in some countries we already know, but that is already part of our plan and our prediction for the years to come, so yeah. And also we see that there is a growth in the market. I mean, Europe is growing 3% even if we are not growing.
North America is not growing that much, but we are strong in North America, we have a strong position, and it is a little bit different market dynamics there, so even if we take a little bit of a beating on the top line, it is not a disaster in order to protect the profitability and to make sure that we get the margins that we need to have on the contracts.
Okay, thank you.
Next question comes from Mr. Laurent Brunelle from Exane BNP Paribas. Please go ahead, sir.
Yes, one follow-up regarding government contracts. Can you maybe update on market development and growth prospects for your government division and how Paragon Systems is doing at the current time, please?
Government, the Paragon business and the SCG acquisition is basically going according to plan, so Paragon is improving its margins compared to where they were one year ago, and then the business is developing well. Yeah, so I mean, we don't see any decline there, it still has a good, healthy position, yeah, so it is basically according to plan. Okay, thank you. Next question comes from Mr. Robert Plant from J.P. Morgan. Please go ahead, sir. Alf, the good performance in North America where you are outgrowing the market, who do you think you are taking market share from, and why do you think you are doing so well in North America? Thanks. I think we are not to exaggerate, but I think we are better than everybody else in North America.
I think that is even if it sounds a bit rough to say that, I think that is actually the truth. We have a very, very good team, a very stable team, a very strong position in the market, and we also develop a business better than most others, and I think that simply pays off. That is my belief and that is my sentiment, and having been in the U.S. a large number of times this year, I think that is basically that. The simple truth is that we are running the business and managing the situation with our clients in a more systematic, professional way than anybody else, and that pays off. And is this across the board, or have there been specific large contracts that you have taken from bigger rivals that might have boosted the growth? No, not really.
We have lost some contracts, actually some major ones. We always get bugged with this question, which we lose and gain and so forth, but we have not disclosed that. But we have lost some contracts, we gain others, so that is not the truth. The truth is that is not the fact behind it. The fact behind it is that we are successful basically with small clients and medium-sized clients and larger clients.
Thanks, Alf.
Next question comes from Mr. Jamie Brandwood from UBS London. Please go ahead, sir.
Morning, Alf. Just wondered if I could start by asking about the US business as well. Clearly, you make the comment in the press release that extra sales has been a big part of the reason for the better margin trend in Q3 versus the previous quarters. I am just wondering, what do you think is driving this extra sales?
Is it the economic environment? Is it your own specific initiatives? And then also, given that it appears there is positive momentum in the extra sales in your US business, why isn't the organic sales growth accelerating? Why has the organic sales growth basically been at 4% in Q3, same as in Q2?
No, I mean, the 4% is still pretty good, I think, but what has driven the quarter? In the quarter, we had, well, there have been many different things, but there was one thing that sticks out, and there was a strike with or a threat of strike, first threat of strike and strike with one of our major clients during Q3, which required a lot of extra guarding services, and that boosted the quarter actually.
Yes, but why, if you have got extra sales coming through and the underlying base business is presumably also showing some organic growth, why doesn't this translate into organic sales growth acceleration for the U.S. business?
I mean, still, it is still the extra sales in the total is still a relatively limited piece of that, so it has an impact, of course. It has had some impact, but let me just have a look here, and I mean, the extra sales in total in the U.S. is about 12% of the total sales, so even if that is doing well one quarter, it doesn't translate a lot for the total number for North America, which also includes Canada and Mexico.
Yes, and from what you are saying, so, are you basically saying that the extra sales in the U.S. in Q3 was a bit of a one-off rather than an underlying improvement in the trend?
Well, we had, yes, yes.
Okay, perfect. And then just in terms of some of the other things, I think the answer will be no, but have you seen any further contract losses in Europe, either the U.K., Belgium, or any other country, or have the large contract losses now basically stabilized?
In Europe, no, we have not. In Europe, we have not, there has been no large contract losses in Europe, no. It is still the few contracts, and we gain some, we lose some, that is business as usual.
Since we have 90% retention, you kind of lose 10 and you gain 10 every year, and some are large, some are smaller, but no, no drama there. The only big contract going on right now, well, one of the big contracts going on now is the tender for the Stockholm Airport. That is an ongoing tender right now, and that contract expires in February next year so, we are now fighting for keeping that, of course, but it is still an unknown how that is going to end, that process. But during the period, no, the answer is no.
Okay, and then in terms of, I mean, you have talked quite a lot about France. Can you talk a little bit about the performance in Germany and Sweden in terms of how things are going there in Q3?
Well, in Sweden, we have the same situation as we have had for a long time, but we are losing on our margin because we are not able to increase the prices to the same extent, but wages have gone up, and that is the situation we have had for the past three years at least. So there, we are putting a lot of pressure and a lot of activities, and we also have employed quite a lot of people to support the technology department in the Swedish organization to strengthen our ability to go more, to sell less manpower and more of combined solutions in order to get back to the margins where we used to be. From a growth point of view, we are not growing in Sweden. We have basically no growth in Sweden, so it is more or less flat. Germany is doing very well.
I mean, we are improving margins in Germany. We have done for quite some time, and we also have a good growth in Germany actually. I mean, we are growing for the first nine months, the growth in our services business in Germany has been in the range of 6%-8%, organic growth.
And you managed to push through those wage increases in July, right, in Germany?
Yes.
Okay, yeah, perfect. And then lastly, any interest at all in buying the number two player in France? I mean, is that even a possibility for that company?
Probably not, probably not.
I mean, but there might be bits and pieces of that that could be of interest, so, I should not exclude that possibility, but there is a reason why they are in Chapter 11, and that is probably the best reason not to buy them so, the whole business definitely not, absolutely not. But there might be bits and pieces of that that could be of interest, which still have an ability with a portfolio and a decent price level in the portfolio in order to survive, but I don't think so, but you should not exclude it until you have had a look at it, and we haven't yet.
I mean, the question has, the company has been, they have been trying to restructure the company and to move on since they are in Chapter 11, but that period is certainly coming to an end, and I think, in my opinion, that is good news because that will hopefully make the market to better understand that this is an unsustainable situation, that companies cannot move on like that. They will, and thousands and thousands of people will be in difficulties.
Thanks very much, Alf.
Next question comes from Mr. Stefan Andersson from SEB. Please go ahead, sir.
Thank you. I think I only have two questions. First, on the margin, on the European margin, have the, I am going to go back to the Capital Markets Day.
You commented, if I remember correctly, that you were not concerned about the long-term prospects of Europe and it is fixable, I think was the word that you used. When it comes to the margin, have we seen much of that fixing in Q3? When you were talking about the price increases, has that had a full effect already in these numbers, what you have done in France, or is that something that could come gradually?
No, it is still to come, still to come, and we are still behind in France.
Okay, so you are still working because you saw some more of that in Q4.
I hope so, but I mean, I hope so, but I don't want to promise that, but that is our, that is, I mean, we are behind in France.
Margins are lower in France than they were last year, quarter, and year to date, and quite substantially lower, and the main reason is the wage-price difference, and we are trying to catch up, and we are putting a lot of pressure. We have for right now, for example, a whole team working with that with internal and external support in order to improve our ability to manage the situation and find better ways of how to get on par. So, I think there is a good chance that we will have a better situation by the end of the year in France and be able to manage it on par level for 2012, but so that is definitely what we are focusing on, and a lot of people are engaged in that process.
So, no, you haven't seen much, even if the margin is improving in Q3 in Europe. Most of those things that we are expecting to improve for next year has not yet, has not yet seen much of that in Q3 actually. UK being a big part, of course, what I just talked about regarding the price-wage situation being another one, and then automatically, mathematically, you will see the effect of those lost contracts once the 12-month flushing has passed.
Yes, so just so I understand correctly, when you said that you have imposed price increases from July in France, what you mean then is that that is something that you are gradually working with from that date and onwards, so it is not impacting from the first day. It is something that you will have to work on through the second half of the year, so to speak.
Yes, it is correct, but of course, you try to, you push it out at a certain date, say, "As of this date, this is what will be," but then not everybody agrees with that, and then you have to manage that, and you have to meet with clients, and you have to have a discussion, and they don't pay the bills and whatever. So, it is a process, even if you have a fixed date when you impose it, it is still a process for a period of months after that, so you see gradually the effect of it, yes.
Okay, thank you. One region in Europe that, big country that you are not so strong in, Italy, you have been there before looking, I think I remember. Is that a country that you would like to do business in?
I just hear rumors about companies might be for sale. Do you have any comments on your interest in that region?
Yes, we are definitely interested, but the timing is the wrong one, and I have personally spent a huge amount of time in Italy and met a lot of companies and investigated that market quite thoroughly, and my definite conviction is that it is still the wrong timing because a lot of these companies still have decent profitability, but it is based on historical contracts, which they still enjoy, the good margins from, and things are getting much rougher and tougher in Italy, so I think there is still more trouble to come and still more difficulties ahead of many of those companies, so it is simply, our strategy is now to wait. We will not make any acquisitions in Italy in 2012, I don't think so.
We just wait, and when things have been, so to say, calibrated in the portfolios to the new market situation in Italy, then it might be better to, or just before that actually, then it is better timing to enter Italy, but it is still too early. There is still more pain in front of that, most of those countries, most of those companies in that country, so it is the wrong time, but it is on our map, but it is not right now.
Okay, thank you. Just a last question, if you have any comments on that. Are you feeling that you are lacking cleaning services when you go to your customers, given what G4S has been, G4S and ISS have been talking about?
No, we don't. I mean, you can make, you have two choices in business.
Either you diversify or you specialize, and our choice is to specialize, and so we don't. I mean, if we have a facility management contract where the, and we team up with a facility manager company then, and we will be a subcontractor. This is quite rare, basically except for UK, that we have a situation, but we will not go down the diversification route. We will stick to our specialization route, and we are convinced that that will, in the end of the day, be the, for us, it might be different for others.
I will not like to have any opinion about that, but for us, it is in our culture, in our company, any other strategy will not be the right one, so we will stick to specialization, and we think that will be the best for the shareholders in the long run as well as in the short run.
Okay, thank you very much.
Next question comes from Giacomo Picchetto from Banque Syz. Please go ahead, sir.
Good morning, Giacomo Picchetto from Banque Syz. Just a couple of comments. The first, if you could give us an idea of how much is the inflation that you are facing in Spain, how much would that mean in terms of price increases, and how much is Spain out of the total division?
And second, Mobile and Monitoring, if you could give us an idea of a mid-term margin, if there is any structural trend that we should reason on, excluding this year, if you are targeting any specific margin. Thank you.
The inflation in Spain is about 2.5%-3%, that is the range, quite high, but I think driven by the VAT, increased VAT in Spain as one of the reasons at least. So if we are going to get that in price increases, I think we can still make price increases in Spain, and I think people, the market will respect that and understand that, but the collective bargaining agreement that has been signed gives basically inflation plus 2% for 2012.
On the other hand, it closed a number of years going back at 0%, and this year the wage inflation has been around 1%, so, and at the time when that was signed, people were a lot more optimistic about 2012 than reality has turned out to be. So that will mean 4%-5% wage cost increases for 2012, and that we will not be able to get on the marketplace, so that will be too high. We plan for the worst, but we hope that we can do something about it, and I still, as long as where people meet each other and they sit down around the same table and talk about the issue, you still have hope, and that is what is going on right now.
Spain is, of course, by far the most important piece of the Ibero-American division, and I would say it stands for roughly two-thirds of the total division. A little less, that is my support here, we are about 4%, 3%; now it is less, it is, yeah, 55%-60%, yeah, 55%-60% of the total division in sales is represented by Spain, and it will continue to be, as usual, a joke and say the pain in Spain will remain, and I think so it will. The pain in Spain will remain for quite some time, and we are preparing ourselves for that, and really, we have totally new management in Spain, a totally new team.
We are taking a lot of cost reduction actions and preparing ourselves for tough times, but we also have a strong position and a very, very strong team in Spain, so I am sure we will still enjoy a reasonably good development in Spain even though the market condition and the top line might be difficult. In mobile and monitoring, yeah, I think that the main focus in mobile and monitoring with a new management team now, which has really taken on that responsibility in a very professional way, and is also in a totally different systematic and conceptual way attacking and seeing how they can improve a business than with the previous management. So I am not talking about the mobile division, which is by far the largest, which is 80% of that segment.
There, we have the main focus for 2012, at least one of the main focuses, will be to reduce the termination rate. We should be able to have, we were putting now better processes in place in order to keep our clients for a longer period of time and not having terminations in the 10%-12% range, which is way too high, and that will be the key focus, and if we are successful on that and still selling at the same level, every percent that we reduce termination will be organic sales growth, and we are optimistic that we will be able to gradually throughout 2012 improve that situation.
And also, what that means is that depending on what you lose, but I mean, having a high termination rate, at least theoretically, it should mean that it should have a positive effect on the margins because the contracts you lose are the contracts normally that you have had for quite some time, and normally those are the contracts which have higher margin than the ones you just got. So we hope that this action, we have talked about it before and we have tried it before, but this time we take a different approach with a different leadership and with a different systematic approach, and so that makes me more optimistic this time than when we have talked about it in the past, that we will be more successful this time than we have in the past.
Gradually, step by step, it will hopefully move in that direction throughout 2012.
Thank you very much.
Next question comes from Mr. Anders Tegebäck from Handelsbanken. Please go ahead, sir.
Yes, just two short questions if I may. Firstly, a follow-up question on North America and organic growth. You have already said that gaining market shares and basically outgrowing the market usually goes hand in hand with lowering prices, and now you are gaining market shares in North America, but my question is, can you continue to take market shares in North America without risking squeezing margins going forward? And secondly, if you could comment more specifically on what you are doing and intend to do when it comes to reducing indirect costs in Europe. Thanks.
I mean, when everything is equal, I think still my statement stands when it comes to saying that if everyone is basically offering the same product, then the only way to take market share is using price, and I still believe that is the case. Now, in the case in the US is that we are gradually becoming different from everybody else and much more different than anybody else, and that by our solutions, our solution sales, the development of our web-based portal to our interface with our clients, and the way we package our services, the way we professionalize our services, we are different, and we are gradually seeing the effect of that.
We have talked about that for some time, that that will also have an impact on the margins, and when you have a different product and a different service than competition, I think you can do both, and you can improve your margins and you can take market share, and that is, if you have a, I think that we are in a, even if in an early phase, but still I think that is one of the reasons to why we see a very positive development, and I think that is also sustainable in a longer period of time. And then what was your second question now? Just if you could. Yeah, indirect cost.
I mean, we have made some smaller reorganization changes in Europe, and that in order to be more efficient, we are looking over, when it comes to our management structure in the Security Services Europe segment, so there will be some cost savings that we are taking out, and we are now planning for them and initiating them, and we have done some, but there will be more to come in Q4, so there will be some cost attached to that.
Then we are also looking over the whole back office structure in the group and see if we can combine services in a better way between the different European divisions in order to save some costs there as well, and that is an ongoing process that has been initiated during Q3, and we expect that there might probably be some actions related to that already in Q4, and then there will be some costs relating to making people redundant in relation to that. So there will probably be some costs, but since we, the reason we have not mentioned any number or we cannot be specific is that we still don't know because the final decision has not yet been made.
It is more, so to say, the direction and the process put in place, so that we will figure out during Q4, and then we will take those costs in Q4. It will not be major costs, but there will be some costs. On the other hand, I should also, by the way, mention that we have a positive gain from the sale of our 50% share of Securitas Direct in the residential business, alarm business in Switzerland of SEK 20+30 million, SEK 50 million that will also be a positive, will be a positive effect in Q4 as well.
So I am not saying one is the same weight as the other, but there will be one positive and there will be a number of minor, but still probably some restructuring costs in Q4 that will hit, yeah, that will hit Q4, and that is in order to prepare ourselves and make sure that we have as an efficient structure as we possibly can when we enter next year.
Okay, thanks.
Next question comes from Mr. David Hancock from Morgan Stanley. Please go ahead, sir.
Good morning. Yeah, just two quick ones left, please. Firstly, you refer in the statement to increased indirect costs in the monitoring operation. Can you just let us know what those were, please, and whether they are one-off?
Secondly, why is it do you think that the U.S. market is showing no growth and the European market is growing at, as you mentioned, something like 3%? What do you put that difference down to? Thanks.
Well, when it comes to the first one, there are some, we have had some cost of acquisitions that we were never completing. We put some efforts in some projects that we were, development projects, some have been, some we are continuing with, some we didn't, but we have put some further investments in developing technology within the monitoring business, and that is basically the main components of that first question of yours. On the second piece, I have no good answer to that actually. It is a bit of a, it is a bit of a different pattern to what we usually would see.
You would expect the time lag of a 6-12 months and GDP plus 2% and all that, but still the information I have is that the North American market is pretty much flat this year compared to last year, while the European market is still growing in total, even if we are not growing, we are more or less flat. And why that is, I don't have a good answer to that actually, so sorry, I can't help you on that.
Okay, thanks.
Next question comes from Mr. Andrew Ripper from Merrill Lynch. Please go ahead, sir.
Yeah, hi, morning, Alf. Can I just ask you very quickly a couple of CATSA ? I think that was due to start 1st of November.
Can you confirm that it started on time and you will get a couple of months' benefit on the top line at least in the fourth quarter?
Y es.
Okay. Secondly, on France, just trying to dig a little bit down a little bit so I can understand the situation better. Can you say, just in terms of 2010, was France pretty much in line with the European security average margin or above or below? And then in terms of 2011 year to date, can you give us a sense of what the revenue line has done in France and what the difference has been between price and wage growth in the country, please?
The French operating margin has always been below the European average, and now it is substantially, that has been in the past years, and this year we are below, we are further below, quite substantially below where we were last year, so yeah, so it is not a good margin in France right now, that is for sure, and the market, our top line is basically flat year to date compared to last year.
Okay, top line flat. Can you give us a sense of what the price and wage gap has been in the country?
I mean, we are not talking terms of percentage, we are talking percentages, so it is a big difference.
It is a major difference, and that explains the main, that explains the situation, so, but hang on a second, I will see if I can give you the advantage of not being live on this is that you have all the papers in front of you. I cannot have that normally, but now I have it, so we are talking, yeah, I mean, roughly speaking, 2%.
2% difference. Okay. Thank you for that. And just in terms of what happens to the old G4S business, is there a sort of particular deadline where there has to be a resolution in terms of restructuring it? And how would you look at the sort of the scenarios? Is there a possibility that the business could be wound down or is it more likely to be sold onto another party? Do you have a view?
I actually don't know, and there was the first, you are talking about France, right? Yeah, I am talking about the old G4S business in France. It is the old G4S business, but then it was sold to, it became a kind of a management private equity solution which is called Neo Sécurité, and I don't want to get too deep into that, but my understanding is, first of all, what is the fact is that they filed for Chapter 11 in March this year, and then it was said that it should be a six-month period that you can be in that in order to restructure and find a solution of a company, and then that was extended, so that ran out, that period ran out in September and was extended to mid-November, and we are now in mid-November, so, and then what happens after that?
Then I know, after this I have no more facts. I mean, if no one buys the company and no one has yet, then somehow it has either, I would assume, either it would be bankrupt or the pieces have to be sold somehow, and if so, I am quite resistant to buy any of those. I mean, we, first of all, we have less acquisition capacity. Secondly, I prefer not to spend it too much in guarding businesses, more into technology, consulting, investigation, mobile monitoring related area, the areas where we are, where we have a good development then, which is not the case in Europe. So in Europe, we will be very, very careful making further acquisitions in guarding businesses right now, but better to focus on what we have.
But still, I should not 100% exclude the opportunity that there might be some bits and pieces that could be of interest for us, which could give us a very good payback very quickly, but then it has to be an extremely good business case if we should do that. And what happens after that for whatever is left? I don't know, but I mean, that has been, I mean, there is a reason to why it is in Chapter 11, and taking over a portfolio which makes you go into Chapter 11 is not too encouraging to do that, so we will, of course, never do that. Sure.
Okay. And then finally for me, just on the U.K., can you give us a sense of what the nine-month numbers are for the U.K. in terms of revenue or as a percentage of the division and profits?
Can you just talk a little bit about where you are in the integration plan in terms of putting the businesses together, please?
Basically, we don't make any money in the U.K. year to date, so that is the bottom line, and that will improve next year, and on top of that, as I said before, we have all those acquisition-related costs, both the restructuring and the acquisition by themselves, the cost of making the acquisition.
Top line, of course, very negative due to the loss organically of one large contract in the UK, but I mean, we have a, we have quite a substantial business now in the UK, and we have built through those acquisitions, so we will have a market share in the range of 18, we think 18, in the range of 18-19%, maybe even 20% market share in the security industry in the UK, so that gives us a very strong position, and we will be a totally focused security company in the UK as well, which is a bit different to many of our competitors which have also more of a diversified focus in the UK. Okay.
Is it possible to come back on what the nine-month revenue figure was?
Yeah, no, I prefer not to give you any specific number, but we are, it represents, yeah, yeah, I mean, roughly speaking, I would say in the range of SEK 2.5 billion, SEK 2.5 billion, including our aviation business there, just looking at my colleague here, so where we are, yeah, it is about close to 15% of revenue in the European business, that is more or less the rate we are, that is more or less the level we are running. In the static or in aviation?
Yeah, but if we put those together, so, and then on top of that, we have a mobile business, of course, which is in a separate division, but that is still, it is big for mobile, but it is in numbers, it is relatively small from a group point of view, but that gives you at least a rough range of the size of the business.
Okay. And then in terms of putting the businesses together, milestones, things that are going to move the dial, you know, as far as the cost base or the margin is concerned, back office, branch network changes, etc., where are you in that process?
Yeah, basically, all that, most of that work is done, and whatever remains to be done will be done before the end of the year. Yeah.
So do you see meaningful upside in terms of sort of cost down 2012 versus 2011?
I mean, clearly, clearly that the UK business should make a major difference to the earnings per share next year, both because the operating result will be different. Okay, remember that it is a low-margin market still, but I mean, the cost synergies will come out, and we have seen very little of that this year, and secondly, we will have no restructuring costs or acquisition-related costs for the UK businesses next year, which we have had quite a lot this year. Yeah,
And just to remind me, I don't think at any stage you quantified that, have you? Either in terms of the one-off cost you have taken this year or the benefit thereof?
We have disclosed in the report. I mean, the numbers are in the report, and I don't have, there are no other numbers that we have disclosed anywhere else but those which are already in the Q3 report, so you have not missed anything. If you just check, there are some details in the Q3 report and there is nothing else anywhere else than those. Yeah.
Okay. Thank you.
Thank you.
Next question comes from Kean Marden from RBS. Please go ahead.
Good morning. I wondered if the five-year contract that you signed with General Motors in 2006 had come up for the renewal stage yet?
Well, that contract expires by the end of this year, and it is too early to say definitely, but where it is in the end phase, we are in the end of that work and that process, and it is still not 100% clear what is going to be the outcome of that, and when we know that for sure, we will communicate that.
Okay. And just more generally in terms of automotive, which is quite a focus area in industrials at the moment, what sort of behaviour are you seeing from automotive customers currently?
Yeah, it is hard to give any. I mean, there is a lot of, always with large clients, professional purchasing departments. It is always a tricky customer where to get any margins. And I mean, the GM contract, we don't make a lot of money on that, so even if we will lose this contract in the, now when we come to the end of it, by the end of this year, it will have almost no effect on the bottom line or very minimal effect. So it will, of course, have an effect on the top line, but the effect on the operating margin is negligible, I would say. So it is not a very profitable contract. I would say, I mean, the situation has been basically the same.
I mean, if we look on the European side, we do quite a lot of work with many of the big automotive companies, and that situation is basically the same as it has been in the past years with very tough negotiations, relatively low margins, and very professional purchasing departments trying to, of course, optimize from their side the security costs of theirs, so yeah, I cannot pinpoint that it has changed in any dramatic sense during this year compared to last year.
In North America, is GM your only customer in the automotive segment, or do you operate elsewhere as well?
I mean, between, I mean, the large free ones, so to say, the American one, GM, Ford, Chrysler, yes, GM is the only one, but we do work for other automotive companies, Toyota being one, and for also other, so to say, non, let us call it non, if you understand what I mean, non-US automotive companies. Well, they are US in a way, but still, I mean, they are not headquarter-based in that sense in US as the three big ones, the three I first mentioned, so we do work for others from that, and we also do work for companies which are not maybe automotive as such, but close to the automotive segment, such as, for example, Caterpillar is a client of ours, so yeah, that is, I guess, the answer.
Great. Thank you so much .
Next question comes from Mr. Mikael Löfdahl from Carnegie.
Please go ahead, sir. Yes, most of my questions have actually been answered, but a few follow-ups. First of all, the contract losses in Europe, I think you mentioned, at least regarding the EU Commission contract, that there was an overhead function for that contract which was going to be dismantled or downsized, so there was some sort of dynamic effect also from that contract loss besides the pure gross profit loss. Is that correct? And if so, have you adjusted your indirect workforce for these contracts now?
Yes, we did that in basically already in Q1.
So we see the effect in this quarter at least?
Yeah, now you have seen that. That was already done, definitely in the first six months, so there will be no further cost related to that, no, absolutely not. That we do immediately, so we did that.
We knew that we lost that contract early this year, and then it came effective April 1st, and then we took the actions basically in Q1, so that was one of our explanations in Q1, that we took those costs in February, March.
Because I think that also in Q2, when you look at your guidance for volume and earnings loss from those contracts, the sort of EBITDA margin on those contracts seems to be extremely high, so one would assume that there were some indirect costs related to those, but that is how it looked at that.
But there were indirect costs related to those, absolutely, and those costs we have taken out during Q1 and Q2, yes. Yeah.
Okay. In the U.S., regarding SUI costs, and you were a bit behind passing that through during the first half, I think, any news on that now in Q3?
We have no big change. We are covering 80%, something like that, in that range, yeah, 75%-80% is what we have covered, and we will not cover much more than that, actually, so we will be in that, maybe 80%-85% by the end of the year, roughly speaking, so no big, not really much of a different message than we had in Q2.
But some sequential effect on the margin in the U.S.?
It still doesn't have a major impact. It makes, I mean, yeah, I mean, there are lots of bits and pieces of this being one, yeah, but the answer to the question is the one I gave you.
Okay. And the big aviation contract then in Canada, the startup costs for that contract, will we see that in Q4, or did we see some of that already in Q3?
And some already in Q3 because there has been a lot of people working on that in September, October, well, September, and we will continue to see that now in October, and then, of course, when you start a large contract like that, you don't make money on it in the beginning of the contract because you have to calibrate, get all the efficiencies in place, and so forth, so don't expect any major contribution from that when we start that contract up. It is a huge contract. It is the largest one in North America we have, actually, in the group, and we have startup costs related to that, so yeah, that is the situation.
Okay. And in terms of organic growth, I don't think we got the answer.
I think the question was raised, but on the price versus volume component here in organic growth, could you say something about that in the different regions?
Price versus volume, how do you mean?
Well, of the organic growth. I mean, you obviously have volume growth existing on new contracts and contract losses, and then you have the price component, so.
No, that we never disclose that because then it gets really complicated because then, so you have different components of that because then you, if you should make that really in a good way, you should say first how much is inflation, how much is price, and then how much is the net change, so to say, in your portfolio, and then we prefer to make our life easy and don't stick to organic growth, and we never split that, and I don't even have those numbers in front of me right now, so I can not even give you the numbers, but we prefer not to give you even the numbers to split that.
I mean, it has an impact still as I have given you some guidance throughout this telephone conversation where it has a big impact, for example, in Latin America where when you have a very high inflation, it brings up organic growth, but even so, we do have a real growth in most countries in Latin America, even so.
In France, you have spoken a lot about France, but how are these, I mean, I guess there is more than one competitor which are in a bit of a financial distress or losing money. How are they acting right now, and what is your potential to gain contracts from these competitors because they are in trouble and not only on France?
After a while, I mean, everybody, first of all, everybody has the same play on the same playground. Everybody has the same collective bargaining agreement.
Everybody has the same cost structure. Well, not necessarily, but they have the same, we have to follow the same rules and the same legislation and the same collective bargaining agreement, etc., and when 90% of your cost is related to wages, which it is in our case, it means that there is very little to play with, so if a market, if you have a market situation where competitor after competitor either file for Chapter 11 or go bankrupt or go out of business, which is the case, has been the case more and more in France, sooner or later, the market has to get sober and realize that they are working on totally wrong conditions, and the one who needs to take the lead in that is the market leader, and that is us.
We have over 20% market share in France, and if we don't lead that work, if we don't take that initiative in all possible respects, no one will ever do it, and that is exactly where we are, and we have done that for quite some time, and I think the market gradually and the players in the market understand and realize that this cannot continue.
We have to, it has to change, and we are now making 2 price increases in France in one year, which we never, ever did before, which is unheard of and brave, but catches a lot of people by surprise, and now we are making a third one or the first one, you can call it for 2012, by the end of this year, and on we go again, and there is no other way, and I think sooner or later, that will pay off. We need to do that, and we will take the hits. Even if we do that, we still flat top line.
We haven't lost, we still have zero organic growth, but I mean, it could have been a lot worse, and we will continue to push on in this direction, and even if we lose a bit of a top line, it is not a disaster. Then we would rather improve our margins and get a healthier portfolio, so that is the way we are going to do it. It is risky, but we think it will work, and the team is totally committed, and there is a lot of focus on that right now.
Okay. Final question then on Spain. If now that the old collective bargaining agreement holds or there is no changes to that, and we get some 4%-5% wage inflation, what can you do to avoid a sharp margin contraction in Spain?
I mean, what is your, you say you are planning for the worst, and what does that really mean?
It means that we will try to go to a market with as high price increase as we possibly can. That is one thing, and then we need to try to find ways of how to find solutions with those clients where you can maybe reduce the cost for the client by reorganizing the site, reorganizing the security, and then you reduce the total scope, so to say, so the cost will totally be lower. The total cost will be lower for the client, but at the same time, you try to get a little bit better margin by reorganizing the mix of your security solution for the client, and then, so to say, bake into that your wage increase, your price increase. So that is what we plan for.
We plan for that. We need to try to find a way to manage this high wage cost increase, but again, as I said, we hope that we can find a solution, but we are not certain about that, and that is why we are putting all the possible actions in place in order to try to manage it anyway, and that is why we plan for the worst and hope for the best.
Okay. Thank you.
Next question comes from Mr. Ed Steele from Citigroup. Please go ahead, sir.
Good morning, Alf. Good morning, everyone. Just one quick question for me, please, about the emerging markets guarding ambition, please. It has been a stated key focus of Securitas's acquisition policy the last few years to expand in emerging markets guarding. About 30-40 small acquisitions have been made in the last four years in emerging markets guarding.
In the last year to two years, UK and US have seen great acquisition spend, and now alarms and consulting seems to be the focus. So what is the ambition, please, for emerging markets guarding? It is still in a minority portion of the group. Is it a long-term ambition to make a substantial portion, or is it now put on the back burner, please?
No, it is definitely not in the back burner, on the contrary, but so we are continuing and actively looking for acquisitions in the countries where we are, and we continuously make acquisitions. There, we made recently one in Singapore where we had been since before, so we add on acquisitions, and those are quite attractive, those add-on, bolt-on acquisitions in those markets, and secondly, we are looking for further expansion into a number of countries.
For example, in Central America, we like to get established somehow in that region because it is required by many of our global clients. In Malaysia, Indonesia, South Korea, the Philippines are areas that we are looking carefully into to see if we can find ways to expand in those countries because it is also normally required by the global North American, US, and European clients that we are present in those countries, but those acquisitions are relatively small, and there are very few large ones available, and even if there are one or two of those large ones, it is quite risky to buy one of those, so we don't want to because we don't know the market. We are a newcomer to the market.
We are rookies in the market, so it is too dangerous to buy a very big player, so we prefer to come in through a mid-sized player, so that means that those acquisitions in numbers will be relatively small. The business is growing. I mean, it is growing pretty well. It is still a very, very minimal part of our business, but it is improving, and Latin America is now an important part of our business, and so will Southeast Asia and the Middle East be in years to come, and we are focused to do that, and resources available, but it still costs us money in Southeast Asia and Middle East. It is still a minus.
It hurts us from a profitability point of view, but step by step, it will contribute, and you have to start somewhere, and we started some years ago, and in the coming years, I think it will be a bigger and bigger part of our business, and it will also hopefully make money rather soon.
Thank you. So your comment earlier that the spend on acquisitions will be focused now on alarms and consulting rather than guarding, really only pertain to European and US acquisitions, not emerging market ones, which will continue to be in guarding as well as alarms. It will as well, but it will also be, we will also, I mean, primarily what I referred to before is that especially in Europe, we will be very restrictive on buying guarding companies.
In US and in Latin America, we will continue to look for guarding companies, and if we find good bolt-on acquisitions in those markets, we will probably do that anyway, and we can afford to do that, but in Europe, we will focus on what we have and with maybe one or two exceptions, but we will be a lot more focused on managing the business we already have and maybe add some technology consulting investigation business to enhance the content of our services in the European side, so when restricting guarding operations, I primarily refer to the European situation.
Thanks very much.
Next question comes from Mr. Sven Sköld from Swedbank. Please go ahead, sir.
Yes, good morning. A question on taxation, actually. Have you seen any changes in Southern Europe regarding taxation? I mean, corporate tax, and I think you mentioned that the VAT was up in Spain.
How do you adapt to that? Do you move that over to the client, or?
The VAT is, I mentioned VAT as an inflation driver, and that happens in many countries. I mean, the VAT on all food, consumer goods, everything, so when VAT is increased for you and me and everybody else in society, that becomes normally part of the inflation index in that country, and that is what I meant, so that doesn't have any effect on us as a corporation, so I mean, so the VAT doesn't matter in that respect. It matters because it has an inflationary aspect to it, and that inflation becomes normally a demand for wage increases, which in that respect affect our business, but from a tax point of view, it doesn't matter, and then the corporate tax rates, they have not really changed anywhere, have they?
I am looking on my support here, but they came down for a while. Now, it has been relatively flat. It has been relatively flat, and our tax rate is the standard 29.9%, and that remains stable there, and we don't see any reason to expect anything else going forward either.
Okay. Now, I am asking because of the budget deficit in some of the countries.
Yeah, I mean, that you never know. I mean, you, but of course, tax authorities are maybe more active in some countries than they used to be and really looking for possibilities, but we don't expect any impact in our tax rate going forward, so we will be on those 29%-30% tax brackets, so to say, as a group going forward, and this is relatively predictable.
You have quite good visibility, at least for the near future, on what is going to happen in that respect.
Okay. Thank you.
Next question comes from Mr. Jamie Brandwood from UBS London. Please go ahead, sir.
Sorry, very, very quick follow-up, Alf, if I may. Just in terms of what you said about the UK turnaround and the restructuring costs dropping out in 2012, can I just confirm? Restructuring costs relating to acquisitions, you don't take those inside operating income before amortization, right? You take those below operating income before amortization. Is that correct?
That is correct. Okay. So in fact, this doesn't in any way help the operating income before amortization in 2012?
No, but it helps for your earnings per share.
The reported earnings per share, yep. Okay. Thanks very much. Thank you.
Next question comes from Ms. Davina Mendelsohn from Deutsche Bank. Please go ahead, ma'am.
Hi there. Two quick follow-up questions, please. I wondered if you haven't already said what the growth rate was actually in Spain in the third quarter, please, and then the second question I have is regarding any possible changes to or rumours of changes to the French low wage subsidy going forward in 2012, please.
Yeah, the organic growth rate in Spain for the first nine months, I prefer not to give you quarterly numbers because they jump up and down, but we have been growing in Spain the first nine months organically around 5%, but that growth, I should remind you that that is very much because of a few large contracts that we gained, and those are not very profitable contracts, so yeah.
I mean, if you look last year, we were losing 5% for the same period of time, and this year, we gained 5%, but yeah, it is nice to have it on the top line, but we prefer to have more profitable contracts, so some of these contracts we are actually reviewing now if we like to keep those in the longer perspective or try to get out of those because they are not bringing much of a contribution on the bottom line, and then what was your second question?
Sure. I wondered if you had any rumors or any feeling that there could be a potential cut to the French low wage subsidies.
No, not yet, but what would most likely happen is that there will be an increase in the minimum salaries in France next year, and then we are still not 100% clear, but there might also be increases in the social charges in France because of decisions made above our ability to influence those, so that will have an impact on the total wage cost in such a case. The subsidies introduced in France, mainly when the reduction from the working hour week down to 35-hour weeks, those still remain, and we have hopefully no, we have not seen any indications yet that they will be taken away. If they would, it will be the same for everybody.
Whatever change there is in France, I think the picture still is the same as I described before, but everyone has exactly the same collective bargaining agreement, the same rules, the same law, the same legislation to play with, and the main issue is the other one that I addressed before. Whether these percentages are one or two notches up or down, everybody still has the same problem, and everyone still has to do something about it, and that has to be us starting that process, and that is what we have decided to take that risk and take that courage and that peace on our shoulders and move ahead now and make it work, simply, and we are facing a lot of fights and resistance internally and externally, but we are moving down this.
We have to attack, and there is no other way, and this is what we are doing now, and I trust that the French team will be successful in doing that because there is no way back. Okay.
Thank you very much.
There are no further questions. Please go ahead, Mr. Göransson .
Thank you very much, everyone, for calling and asking the questions, and thank you very much. Goodbye.