A warm welcome, everyone, to Securitas Invest Today 2011. We have a full agenda this afternoon, a program that will give you a detailed update of the group strategy and the business segments. Our first presenter this afternoon is Securitas President and CEO, Mr. Alf Göransson.
Thank you. Thank you very much, Micaela. Very, very welcome to all of you, you who are here in London today, and also you who follow us on the webcast. This is the agenda for the day. The people here today, I have my three colleagues, Luis Posadas, Santiago Galaz, and Bart Adam, who will make a presentation of their respective business area, which then will cover 90%+ of our total operations in Securitas. You will get a pretty good overview of the business that we have and how we operate in the different the three large divisions of ours. But I will start, give you an introduction to our philosophy, our strategy, and then wrap it up by some numbers in the end of this afternoon. No reason to wait. We'll go straight to the presentation.
If we look at the development of the last we had this meeting two years ago, but if we look at the development of the last four years, what have we done? Have we executed on our strategy? And I and the strategy has, I think, we have in a good way during the period of 2007 up till 2010. And we have increased our business in the mobile and monitoring business. As we said, we have expanded our business globally. We have segmented our business to 1/3 of our business is in different segments. We have developed a lot of different tools of knowledge sharing, training, education, different ways of how we can operate our business, how we can improve our solutions, and so forth. All those things that we promised to do, we've actually done.
Today we are 295,000 people employed in this company, and we are in 49 countries. We have improved our margins, and we have improved our global presence. So, yes, we have done what we promised to do, and now we'll talk about what we're going to do going forward. The new era of this company will be the innovation and technology. We have focused on security during the period of time of the last four years. We have really tried to refocus the company in that respect and also to, of course, expand our global presence in order presence in order to serve our global clients.
And now it's a time for a new period in this company, and that is to be strong in technology, to be strong in innovations, and solutions to our clients in order to have a stronger value proposition to our clients. And that will be very much about that, how we do that in different ways with technology and without technology, and how we increase the added value to our clients and in that way improve our margins going forward. And my colleagues will explain that a bit more in detail. This is where we are, and the size of our business, the ones of you here and on the web who follow us closely, you know these numbers by heart.
Some of you might not follow us, us every day, and then this is a little bit of a repetition or learning that for you to understand the size of our business. North America, about 100,000 people employed, SEK 20 billion close to SEK 23 billion of sales. Europe, SEK 24+ billion in sales, about the same number of people. Ibero-America, SEK 8 billion, 58,000 employees. And then you have mobile monitoring and a small pro presence in the new markets. A lot of people but not a lot of revenue and certainly no profit because it costs us money to build this position. The earnings per share during the last years has developed. We have a target of improving our earnings per share 10% per year, and then have a dividend of about 50% of the free cash flow.
We have on the earnings per share delivered in real terms and Swedish kronor, it doesn't really matter which one you pick, is about 6% per annum, so we are behind, but still 6% is what we have delivered. We have given a yield delivering about the dividend that we promised of a cash flow, about 4% during this period of time. And the numbers, you know who follow us closely, these are the numbers and how they look like. Last year was a drop on earnings per share, but in real terms it was actually 5% up if we would use the same currency rate between 2009 and 2010. But the formula for improving 10% earnings per share, we have been behind and we like to be on the 10% year-on-year in average over time.
The formula for doing that consists of three ingredients: organic growth, acquisitions, and improved operating margin. I will speak briefly about the three pieces here. On organic growth, if we start with that one, this is the market and how it looks. We are in a business which is a rather mature business, and we are growing this business roughly 1%-2% faster than GDP, normally with a time lag of six to 12 months. These numbers from Freedonia and ours, some of that is our own numbers as well, expect that this will be the sustainable market growth over a longer period of time in the markets where we are active. 4%-6% in Europe and North America, and then, of course, a higher growth in many other parts of the world.
And especially Latin America and Asia is where we focus our acquisitions, which has a growth in 10%, maybe even higher than that, up to 15%. And we like to move more of our resources and our balance of our business into that kind of market with very high growth numbers. And we will show you some numbers later on in that respect as well. So how we performed? Well, if you look on our organic sales growth over the period of time, including the first six months of this year, we pretty much grow with the market, which is also our philosophy. We'll be great if we can grow faster than the market. We love to do that and take market share.
But when you are in a mature market with a mature product, in a fragmented market with a lot of competition, high price transparency, and a low added value, normally compared to many other mechanical industries and so forth, if you should take market share and improve your margin at the same time, it's really tough. It's not so easy to do that. So we say, "Let's try to grow basically with the market and along the line with the market. If we can do more, fine, we'll take it, but improve our margins." You have to make a choice. Profitability rather than chasing volume. And if you have to chase volume and you have to chase market share, you have only one weapon, and that's your price. And we don't want to use that weapon. So here you can see that we grow basically aligned, aligned with the marketplace.
So when it comes to the first box of the boxes we have, organic growth, we do well, and we still do well the first six months of this year. On acquisitions, we have made lots of acquisitions, roughly a little bit more than one a month. We've added about 80,000 people over the past four and a half years, 65-70 companies. And when you look at the numbers, we have really speeded up on the acquisition growth. In the first six months of this year, 8% of our 11% growth came actually from acquired growth, so 3% organic and 8% acquired growth. So when it comes to making acquisitions, we are doing well as well. We find companies that we can buy. The multiples we pay on EBIT varies.
Mature markets between 5% and 7%, 5% and 8%, and in higher growth markets between 6% and up to 9%, 10%. And that those multiples are fairly stable. Maybe they will come down a bit now due to the turbulence and revaluation of many assets on the stock exchange and so forth, so it might even be cheaper to buy companies going forward. But still, on acquisitions, we do well. These are the countries where we are in, the one more which are the dark gray ones and the blue ones are the ones we like to be in. The philosophy behind making acquisitions and growing our geographical presence is that we like to be in about 60-65 countries. Why not more?
Well, the reason is that these are the key countries where we need to be to be able to serve our global clients, and that's the philosophy behind it. We can be in many more other countries because of security markets there, but for the global clients, it's key to be in the 60-65 markets. Our North American primarily U.S. clients and European more and more so, European clients ask for us to be in the key markets with our own quality control, our own services, our own management in order to guarantee the quality of the service we deliver. And that is a competitive edge when we fight on the global contracts, and it's basically us and one other company in the world who can do that. And if we are behind on this, then we have a negative, and we don't want to have that.
We like to be in these countries, and we are step by step getting there. So now we are in 49 countries, and we will be in those 60-65 countries for sure in about three years' time. When we come into new countries, and Securitas has traditionally been working in Europe and North America, but when we enter new markets around the world, we are exposed to more and more of corporate social responsibility issues. And we've had some. Some of you might have read it in the press. It comes and goes, and sometimes it's correct and sometimes it's not correct, but we need to deal with that, and we need to be preventing that we get into trouble in these kind of situations. So that is why we are spending a lot more efforts in that.
We are updating our code of ethics, our code of conduct. We are introducing a new training schedule, an e-learning-based system that we will introduce now, in the end of this year, beginning of next year, in order to train all our management on what you what how we should be running our business and comply with the code of conduct. We are introducing a whistleblower system globally, which we don't have today, but we will have that, and many, many other things that we are doing in this respect in order for us to strengthen our position and the work we do in corporate social responsibility, not to expose our brand and ourselves to situations we don't want to have. We don't want to be in for good or bad reasons. So we do well. We tick the box on organic growth. We tick the box on acquisitions.
Now we have the third ingredient in the recipe of how to get to 10% earnings per share improvement, and that's improve your operating margin. And, when we look on that one, we did well up till the first six months this year. It doesn't look like a lot, but when you look 5.6%-6.1% in our business, that is a tremendous improvement, at least in my personal subjective opinion. It's a big improvement. And being in this kind of business that we are, it's every 0.1% that you improve, it's cake, it's champagne, it's a big party because you have actually improved your margin 0.1% because it's very difficult to improve your margins in this business. But when you achieve it, it's a success, and you sustain you can keep it for quite some time.
Unfortunately, we have a drop in the first six months this year, and it's primarily our European business that suffered, and we will come back to explanation for what that happened. We will recover. We'll fix this. We will get back on track eventually, but we have to struggle our way through this situation and take the actions and take the measures that we need to take in order to get back in a decent position. We'll talk more about that during this afternoon. How do you improve your operating margin? Well, the message to our organization is that it consists of two fundamental pieces. One, your management machine. We have a very efficient machine, an absolutely fantastic machine to manage, and we have to deal with that. I mean, remember we are almost 300,000 people. We have a turnover of about 35% personnel turnover in a year.
We employ 100,000 people every year. You cannot make a lot of mistakes when you employ, and you lose 100,000 people every year, and it will affect your margin. So that machine is working very well, but it has to be managed. And these are the key ingredients in that. You have to get in a booming economy, you get leverage, your unbillable is coming down, your pricing power improves, you lose a little bit of recruitment because it's harder to recruit people, inflation is normally a friend of ours, and in recession it's the other way around to a large extent. A key one of the keys in this is price-wage balance, and that is a fundamental in our business. You have to manage that, and it's difficult right now in Europe, in a few countries, but it has to be managed.
So management machine is what we expect all our units to do, but it's not good enough. It's not good enough. You've got to have to be able to develop the core of your business because to have a sustainable long-term position in your marketplace, to get stability in your portfolio, to keep your clients, to have good retention, to manage your price and wage situation, you have to develop your business. You cannot just go to the client and say, "Here's a price increase because we increased the wages so much." That's not good enough. It's not a credible story. You've got to have to work with your business. And this is the philosophy. If you're a manager in this company, you have to do both. It's not good enough to just manage the machine.
If you're going to manage, be a manager, and you're going to be successful in Securitas, you have to do both. Here it's a lot of a focus that we will explain this afternoon. How do we work with our clients? How do we improve the added value? And it's hard for you to touch because you have to put a number to it and give it an estimate and put it into the machine into the calculations of what do you expect this company to perform, and this is more difficult. How do you get that? When do you get it? How much is it? And so forth. We'll give you some examples. We'll give you some data. We'll give you some information that hopefully will add some value to your knowledge in this respect as well this afternoon.
But this is what we've got to work with. Here we are working. We're doing a lot of different things. We've done for years, and we continue to do that. We are pretty good in that, but we can be better than so than we have been. That is about how we specialize, how we segment our business, how we really become the security advisor and the expert to our clients, how we can bring more technology to our clients, and then in that way, of course, add more customer value. You'll get more examples. You will hear what I mean by this, but that is really the key of this day together with yourselves to understand how we work with this process because that is really what counts long-term to create that sustainability of our margins, of our business, and our retention of our portfolio.
So we are good. We are the leading in the world in the man-guarding part. We like to build a stronger position in consulting investigations. These are very sophisticated, very difficult investigations that need to take place within companies in order for them to advise on how to manage a very difficult situation where you normally will not like to go to the police or bring the police into the situation at an early stage, and many, many other more examples. And technology. I'll speak a little bit about that for good reasons. It's perfect timing to talk about that, and I'll come back to that in a few slides. And when you combine the three boxes here, the three circles, then you get a combined solution, a solution to your clients which normally will mean that you have a better margin.
So when it comes to specialization on the man-guarding side, we have done a lot, and you will hear examples about that, so I will not go into details about this part because my colleagues will explain. One important part that we have done is segment our business. 1/3 of our business is today in segments, and where we have specific branch offices focused on one or two segments only, and when they do that, they get really good in that, and then they bring value to the clients, and by doing that, we get a better margin. We call it the Greenhouse, the consulting investigation piece. We have the Pinkerton business which is not in the Greenhouse formally. It belongs to Santiago, the North American operation.
It's an integral part of the North American operation, and most of the business is there, but I put it here anyway because it belongs to this type of services. We have a leading company in the Scandinavian countries with a bit of activity in Poland, in the Baltic countries, and Russia called Seccredo. They are about 40 consultants with background from police, secret police, intelligence services, and so forth, being very efficient and very capable of doing that kind of special investigations. We have the same type of company with a little bit more people in the Netherlands, Interseco, and we recently bought a small company with 10 consultants in Belgium called Optimit. And we like to add to this.
We like to build a business which is an alternative to the big consultant houses like Control Risks, Kroll, and so forth, to be able to advise our clients on these issues because it is a part of their security needs, and it becomes more and more so a really important part for the top management, the board, the legal advisors of the company of how to manage these kind of situations, and they need help and advice, and it's a part of the security. We see more and more of that, and when you get some insight in this, it's quite amazing how big the need really is. Then on the technology side, we like to develop our position in the technology for a large number of reasons, and you can see the ones here. There is always an increasing demand from the clients to find solutions.
How can we improve? How can we get better security for less money, basically? And how can we contribute with that? And then it's a balance between technology and manpower, basically. And then to optimize this balance, you need to be good in the technology side. We see a growing importance for this kind of solutions, as I just said, to optimize the solutions, and we have to have that competence in-house, but people have to work for us. We have to be able to guide them and steer these people who are the experts in what to do and what are the priorities and not somebody else. So we like to have that competence in-house. We should be the single point of contact, so when the customer has an issue, call us.
We'll take care of it, and then we'll find the partners or the people who can help, but it comes through us, and that is mostly the case but not always the case, and that we can also improve in this respect. Yeah, and the other ones are self-explanatory, I think. So, our how do we do that now? Well, we can do it with partners, 100%. We can do it all in-house, or we can have a mixed approach, and our choice will be a mixed approach. I suppose I better be ahead of the game by answering the question, "What about Niscayah?" because I suppose that question could be asked possibly today. So, for the reason why we bid for public bid on Niscayah because we wanted to buy the company. We have talked for years and years, well, basically ever since Niscayah left Securitas.
We have discussed, "How do we improve our position in technology with or without Niscayah? How do we work with them, and how do we find the best solutions?" And that has been a long discussion for years and years and years and years. In the end of the day, we made the bid in the middle of May trying to buy Niscayah. We put a price which we thought was the best price we could ever offer, and then unfortunately there was a competing bid this summer, and as you might know, that has now been declared to be unconditional, and the deal is expected to take place this week. So we will not be able to buy Niscayah.
When we made the bid on Niscayah, we didn't expect that's the wrong word, but we were at least contemplating that somebody could bid for Niscayah and put a higher offer, a better offer to the shareholders during the process. So we at least mentally prepared for that, and then we discussed, "What do we do then?" And so during the process, we didn't spend too much time on that in the beginning of the process because our focus was, and we were the only bidder on Niscayah, but as the competing bid came, we had to develop a Plan B. So we had a Plan A, buy Niscayah. Plan B, when competition came with a bid, "What is Plan B?" And Plan B is to build a position in technology anyway because we have no other choice for the reasons I just explained.
We will do that in two ways. We will do it organically by hiring and recruiting people, engineers, system engineers, system integrators into our company. Every operation of ours in the major countries where we have a strong position in guarding, the ones where we are small or we are insignificant, we don't spend too much energy on that right now. It's the countries where we have a strong position, a market-leading position in guarding. In those countries, every one of us is right now identifying who and what type of who should we employ, what type of resources do we need, and what kind of position should they have in our company.
And that is a part of our budget business plan process going on presently, August, September, October, in our company, so that is being now mapped, identified, and a plan made for when, who, where, and what we're going to do. That's option one, and that we will do in all those major countries. That's presently ongoing, and we will start to execute on that as we approve those plans. And the second option is to acquire technology companies. We will not buy a large group. The only and the best solution for us was to buy Niscayah. We know that company very well. It used to be part of our company, so that was our only and best choice to fast in a fast way get the position in technology. So there is no other one like that that we can acquire on a more international scale, let's say.
So we'll have to do it country by country. So we have now central resources but also the country resources, divisional resources identifying what companies are there that we can acquire, but we cannot count on that because we don't know if we can buy these companies. First of all, we don't even know if they're for sale, and the owners might decide differently. And secondly, we might not agree on the price. We might not agree on the terms and conditions. We didn't like the portfolio. We didn't like whatever. So we cannot count on that. We need to act on employing those people so we can support our guarding business in a good way with technology resources and then make acquisitions when those acquisitions are the right one for us in that specific country and then integrate it with our services business, security services business.
The people we're looking for are primarily the brains, system engineers, system integrators, project management, people who can join our guarding teams, our guarding people, our guarding experts to the clients, identify what is the need, how do we configure a solution with a combination of manpower and technology, and then discuss that and find the best possible balance, optimize that between the two, and so the client gets the most security for the least money, and in that way find the best solution. That kind of system integrators, engineers, but those brains are the ones we are looking for, and primarily that is what we're going to recruit. That's Plan B, and that's now being executed. It's all about proving the difference. That's our agenda.
You will see more of that here this afternoon, and before we move on to the next speaker, I'd like to conclude if there are any questions. We have a session of questions in the end of this day as well when all of us will be on stage, but if you have any specific questions to me, I'll be happy to answer them. Yes, please. We need to have a mic so the webcast can hear the questions, so.
Lars Norrby from Erik Penser Bank. I have one or two questions regarding what you said about technology and your intention to grow partly organically. First question, does that go for all the countries you're present in right now, or is there a difference in the countries where Niscayah has a presence?
Well, it will go for the country we need to do this, for the reasons I mentioned. We need to be stronger in this position. I think you got that message by now. That will be primarily the countries where we have a strong position in the guarding business. Then how we will act in those countries will depend on a lot of different things: history, our relationship with Niscayah, our position, what kind of contracts we have, what kind of technology content do we already have, what resources do we already have, and so forth. We will continue to work with Niscayah, and I hope we can. We're professional, have a commercial relationship. It's good for us. It's good for Niscayah, and we will continue to develop that relationship. I think we can both enjoy the benefits of doing that, but we will also work with others.
And then we will have to make a choice country by country, exactly how do we go about to do that, and that is exactly what's happening right now in the Plan B preparation. Now every country is since the summer after vacations, now they're working on exactly how do you do that, preparation of Plan B and who to recruit, what we're going to do, how do we start, what portfolio are we going after, how do we get the resources we need, is it those or is it that, et cetera, et cetera. So that will depend on a lot of different things depending on our position and many others, what is the possibility in that country. So it will be one solution in Sweden, it will be a different one in Spain, and the third one in France, I'm sure.
There is no black and white answer to the question, really. I certainly hope very yeah, I think I answered the question.
Okay, quick second model. So just how is your relationship with Niscayah affected by the acquisition by Stanley Black & Decker?
We have had very little contact on the high level with Niscayah for obvious reasons during this process because we're not allowed to. The commercial relationship has been identical throughout the process, and we have no intention to mess with that. We will continue to work with Niscayah. In some areas, we will need to move on and maybe improve our position and take a step forward. In others, we continue as is, and others it will be a different solution. This is not a process between Securitas against Niscayah. That is not the situation. This is a process of how Securitas improve its position in technology in order to be able to discuss added value with our clients. That's what it's about, and we will find the best solution, the solution which is best for us.
Robert Plant from JP Morgan. What proportion of your electronic revenue is dependent upon Niscayah?
It's about just over 5%-7%. It's in the range of 5%-7% of the Niscayah revenue that goes to Securitas. At least that's my view.
Do you have the reverse figure, what proportion of your electronic?
Well, it's the majority of our business of the technology that we buy, and it's very much in service and maintenance on the existing portfolio of our contracts that we have with the client. It's serviced by the Niscayah organization. And then on the other hand, what's so our major technology supplier is Niscayah, yes, and primarily on the service and maintenance part. Now, on the other hand, they are important customers to us on all our callouts because most of the callouts that they buy, we do, our mobile business do the callouts to them, and that is also quite a significant business for us. So again, we need to be professional, commercial, do what is best for us, and that's what we're going to do.
Who would be other companies, the main other electronic companies that you use that you could turn to if Niscayah cuts?
There are plenty. There are plenty of those. I mean, there are small ones, big ones in different countries. They have different names. Some are global, like Siemens would be one example. We have a UTC organization in some countries that they could service us, which we have been buying companies from, actually. There are many companies in that respect. And then there are lots of smaller ones or medium-sized ones country by country who we could team up and work with, and we do this already. We should not exaggerate this picture. We work with many different suppliers in many different ways when it comes to buying equipment, to buy service, to buy knowledge, and so forth. So it's not a big drama, but we will now finally come to the end of this process, and now we can act. We gave it a try. Didn't work out.
Now we have to move on and build this position by ourselves and do what is best for us. All right, plenty of questions. We need a lot of session here. Please go ahead. Hand the mic to somebody here.
Yeah, afternoon. It's Andrew Ripper from Merrill Lynch. It's only a few years ago since the previous management team of Securitas decided to do the breakup, and I wonder whether you can elaborate what has changed in terms of your or in terms of the group's thinking about procurement and electronic versus manned and that's driving your desire to sort of rebuild capability. I mean, is it that through time, manned costs tend to go up and technology costs tend to go down? What's changing from the customer perspective that leads you to believe that you need to have electronic capability to add value, grow faster, et cetera?
There is an increase, we should not overdramatize the situation. In this situation, there has been a need for technology for years, decades, and this balance changes faster or slower in different countries depending on many different things. In some countries around the world, it's too expensive to put a camera up because manpower is cheaper, so it's not an issue. And developing solutions is not only a matter between manpower and technology. Within only the physical guarding side, you can do a lot of different things. With small changes, you can improve the service and the added value to your clients.
But long term, I think, we think that technology will be a more and more important part of the total security solution to our clients and for us to not be, so to say, stuck on a level. You can take your business to a certain level if you only sell hours, and then you don't get much further than that. My colleagues will explain how they work in that, and they will prove, and they can show how you get away from selling hours to selling solutions but still delivering basically manpower service. You can improve a lot, and adding technology to that, you can improve even further, and that's the idea. If you try to turn the clock back, it doesn't help you a lot. It's no point spending too much energy on that. In my perspective, we should have kept Niscayah five years ago. That's history now.
It was the right decision at the time on good reasons at that time. Now, I would have preferred to still have had it in the company. The other two spin-offs, Loomis and Securitas Direct, no question, was absolutely the right decision. No regrets on that. Yeah, I think also my colleagues will answer your question throughout the day, so maybe we can come back to the pieces that I'm missing on that answer.
Ed Steele from Citi. Of those early days, could you perhaps give us some idea of the scale of your organic investments, please? Building a large business from scratch will take time because the installed base gives you the higher margin maintenance fees. So what should we be thinking about the drag on the margin next couple of years, please?
On the technology side, you mean?
Yeah, the drag for the group margin from the investments you're going to put in.
I mean, if you look on technology company, you would expect that to be a higher margin business. When you look on technology companies, generally speaking, they have a higher margin.
My understanding is that the margin comes up with your installed base, but the installation fee tends to be quite low margin.
Installation, we are not too keen on that. It doesn't make very much sense for us to build a big installation capability. And it would also be in conflict in a way with our monitoring business. We have a lot of third-party sales. I mean, installers who are connected when they install an alarm, the small private installers, when they install an alarm, then they give the connection to us. So we monitor that alarm connection. So we will compete with them if we would build an installation business. So we will not be too keen on building an installation business. What we'd like to do, again, is to build the brains to system integration. Now, when it comes to our, if I understand your question also from acquisitions, the fastest way to build a position was to acquire Niscayah.
Didn't work out. Okay, so now we have to do it one by one, country by country. That we will have to do by our cash flow, use our cash flow but we were paying with our shares. And we need to we had a poor cash flow the first six months, so we need to be restricted on acquisitions in the near future, we will slow down, and we will slow down in the sense because in the following sense. We have a couple of acquisitions that we are working on, and we'd like to complete those, so if we can do that, we will do that.
But we'll not initiate a lot of new ones, and we will spend more focus on well, but at least we need to allow for capital in order acquisition capacity in order for us to buy technology companies down the road. So if we need to prioritize, we would like to build and we have two equals, then we'll probably prioritize for building a position in technology.
Okay, so I mean, you said initially you're going to hire some systems engineers and integrators. I mean, that's more on the installation side, right? Or have I misunderstood that?
Well, I mean, we're not going to organically build. Organically, we'll just employ the right people, the brains, I guess. If we buy companies, they will normally have a piece of installation as well. That is not the reason we buy them.
So my question was about the organic investments. You said there were a couple of stages to your growth through your large business, one of them being the organic part. So I was just really questioning what the sort of cost drag will be as you build out that business, please, before the higher margin installed goes on?
What cost it will be?
Yeah.
That's too early to answer because that is exactly what we're planning right now. We are now country by country identifying what cost do we need to add, what business can it generate, when can it generate this business, and that work is ongoing August, September, October. And then we'll make a choice, decision, and then we start moving. In some cases, we'll start moving earlier than that because we're already ready to go. But basically, it's the next two months that we will decide what is the cost, what is the income, what is the revenue, what is the margin it will bring us, how long it's going to take, and who's going to do it, and et cetera, et cetera. That is exactly what's going on right now.
Understood. Thank you very much.
Okay, sorry. Took a while to answer, took a while to understand fully the question. Sorry.
Afternoon. It's Jaime Brandwood from UBS. Just so I understand the revenue flows that you have with Niscayah more precisely, so you're saying that 5%-7% of Niscayah's revenue is royalties to you. Is that correct?
No, it's sales to us.
Sales as in the guarding-related business that you're doing on their behalf?
No, 5%-7% of the Niscayah revenue is sold to Securitas in the sense of equipment, technology, service, and maintenance.
Okay, and the other way around in terms of where you're doing callouts for them and that kind of stuff, how much kind of revenue are we talking about?
That is to give you a rough number, it's in the range of we do basically in the range of SEK 100 million per year to Niscayah, just to give you a feel, plus minus, but just to give you the ballpark number.
Okay, and then just from an M&A point of view, if the focus now shifts a little bit more towards doing systems-related M&A, does that take you a little bit away from doing emerging market M&A for a while?
No, because no, because there the growth is high. It's still very attractive multiples. I mean, in Latin America, we had 24% organic growth the first months this year, 23%-24%. Multiples we pay are between 5% and 7%. It's hard to resist to buy companies on those conditions. So if we find the right companies and we have, we found a couple of good companies this as you have seen this year. We bought one in Chile, one in Argentina. We entered the Ecuador market, for example. So we will continue to do that, and normally the amount of money that you need to allocate for acquisitions in Latin America and in Southeast Asia is rather small still. Okay, small, we respect that, but in relation to many other acquisitions in Europe and North America.
So we'll make the best choice, but we have to be a little bit more restrictive. First, we have to catch up on the cash flow, and we also have to allow for us to be able to buy companies to strengthen our position in technology because it's crucial. It's vital for our existence and for our development of our margin in the longer perspective. We cannot have a strategy without having the ability to execute on that strategy.
Okay, thank you.
Okay, we had one. Stephan had a question up here. We have one there. Yes, thank you.
Stefan should answer it. A question again on your investment in technology. I guess you do have quite a few monitoring stations yourselves, and you use Niscayah for some countries. Is the intention and ambition to have your own monitoring stations in all countries? Is the first part of the question?
Sorry, what sessions?
Monitoring. Monitoring.
Stations.
Yeah, and the second part of the question is on the banking side, Niscayah has the highest security monitoring stations. Is that an area you'd also like to go into and thereby competing with Niscayah on the banking customers?
No, the answer to the second question is basically no. I mean, we do not intend to build a new Niscayah. We intend to get the resources we need to support our business and to develop the solutions for our clients. And for that, we need some competence that we don't have, and we need to strengthen from that. So we are not going to build a technology company and to be self-sufficient and compete in the total technology we cannot afford that. We don't have resources to do that, and it's not our intention. It's to build resources to support our business that we have today. It's a whole different situation. The fastest way to do that was to acquire Niscayah, but now we have to do it in a different way. Okay, so we'll do it in this way.
It will be more step by step. The risk is lower because it's always a risk to buy a big company, but now the risk is lower, but it will take a longer time. Monitoring, so the answer to the competition in the bank sector, monitoring high risks and no, that is not. I don't think it's on the agenda in the planning that we are doing now in the near future on plan B. No, it's not. Monitoring, we have in 11, 12 countries. We have in more countries than that because even if we don't put it in the monitoring business division, the business segment of monitoring, we still have it, and we are building that step by step in most of our countries. Luis is investing in monitoring stations in his countries in Latin America.
It's not part of monitoring, but we still do it, and we build that because he has technology. He has support resources for us to be able to have the solution capability, and monitoring is a crucial part of that. So monitoring stations, yes, we need, and you can do it by buying a small one or a medium-sized one company, or you do it by simply investing, building that, use the brains we have in Europe, and support on how you build this monitoring station in your country. And that's what we do in Latin America, that we have been doing that, and we continue to do that because it's an important part of the service offering to our clients.
We had one here on the table over there.
A short question. Johan Grönberg, Nordea, is there anything that would prevent you from recruiting people from Niscayah?
No.
There's no agreement or anything that you can chase their people?
No.
Okay, thanks.
Yeah, Tom Bennett from RBS. I just wanted to ask you about the employee turnover, the 30%+, and how that compares to other players in this space and what the impact is on the margin if you could reduce that by 5% or in steps of that. I'm sure it impacts your margin quite a bit.
This is a part of the machinery. So, I think we compare very well with our peers. We are probably not a lot better, not a lot worse than anybody else. So, we are probably fairly, on a global basis, we are probably comparable to our peers, at least with my knowledge, but we are so. Now, of course, yes, if you reduce the personnel turnover, which happened during a recession, we had a dramatic drop in the personnel turnover during a recession, which was helpful for our margin because we have less training, we have less unbilled time, and so forth.
So that was good for the margin, but there is a limit to how far you want to go because if you have too low personnel turnover, then you have a difficulty to adapt your structure because we lose and we lose 10% of our portfolio every year, and we gain 10%. So we need to be able to adapt, and it's also a balance of the wage and the wages and the inflation, so to say, of the cost side. So what is the healthy level? It's hard to say. That depends on a million different things. 35% is very high. I love to have it lower, but the main reason to the main way to get a lower personnel turnover is to substantially or at least to start having a higher wage increase than we've had.
At least that is one of the main solutions, and you can never justify that equation. It's impossible financially to do that. Our ambition is to run the industry, and running the industry is to try to improve the status of the guard in society, of the security industry in society. And when you do that, you can live eventually; you can live on being a guard. You can live on your salary, and in many countries, you can't do that. You have to have a second job, or you have to work a lot of overtime or bad hours or et cetera, et cetera, et cetera. So the part of being the market leader, responsibility of being that, is to improve the status of the guard in the country and then by legislation, by the rules and the trainings and many other things.
By doing that, you raise the level, and we like to do that, but we have to justify this level in front of our clients so we are able to maintain or improve our margins. It's not a simple question. It's not a simple answer to that one.
Hi, it's David Hancock from Morgan Stanley. Two questions, please. One about global reach and one about the specialization. So on global reach, what proportion of your business would be multicountry business? And particularly, I'm thinking in Europe where you have a presence that some of your bigger competitors don't have. How much of the European business is multicountry, and how much of a competitive advantage is that? And do you see global contracts as being a higher growth area than national contracts? Then the second is on specialization. Do you have a target of where you want to get to in terms of proportion of the business that's specialized from the current sort of 1/3? And can you give us a sense of how much of a higher margin you get on the specialized business, please?
Well, when it comes to the global contracts, we have been very successful for many years in North America to retain and improve our position in the global clients base and to get those contracts. And now, by our global presence, we have been able to enjoy that relationship and those contracts to also get the business in India or wherever it is. So that has been beneficial for us, and it is beneficial for us when we enter new countries because then we can say, "Look, we have the Honeywell contract in North America," and then maybe that could also be a possibility that we can move that business to us, General Motors or whoever. So in North America, that is a very important competitive edge when you compete for the North American contract that you also can serve the North American clients on a global basis.
We were weak in that four, five years ago. We are a lot stronger today, and we like to improve it even further, and that will further improve our competitiveness in that respect. Now we are okay right now. In Europe, there is a clear trend that you see more and more of companies sourcing for global contracts. At least they talk about it. They not always do it. You meet them in the central meeting in the headquarters and say, "We have this great idea. We're going to do that," but then when it rubber hits the road, it doesn't really happen. We see at least more and more from a pan-European perspective that and we have won a number of large contracts in that respect.
I would prefer to mention the names, but I cannot do that for the reasons that we are not allowed to do that. But we have won a number in the last couple of years; we won a number of contracts in Europe because we are the only pan-European security company in Europe having a presence in all the key countries with the exception of Italy, which nobody else has either of our main competitors. So it is a growing trend. It's still a very small part of our business. I can't tell you the number, but it's definitely under 5%, but it's still a small part. But it's a growing, more and more important part, and as we develop it, it has a competitive edge for us. On the specialization question, segmentation, 1/3 roughly today, we can probably stretch it to 40%.
It's not going to get much further than that, but there are still some possibilities. As we enter a new we have, for example, in North America, what is it, a year, year and a half ago, we were successful getting into the healthcare segment, so we created that as a vertical in North America. So that became a new vertical, a segment in North America, has a very good development, a good potential. But I would guess that we could take it a little bit further but not a lot, so from 1/3 to maybe 40%. Margins improve, yes. How much? I cannot give you a specific number, but they certainly do improve, and yeah, they improve.
Okay, thank you.
I prefer not to give a number because we don't even have an aggregate number of the whole 1/3. So we do it segment by segment and look country by country, so we don't aggregate it on a company group level, but the answer is for certain, it does improve.
Introduced to you, Luis Posadas, who is the Divisional President of Security Services Ibero-America.
Hello. Hello. I'm the new in this position and the new divisional president for Ibero-America, but I'm very old in the sector, you can imagine. I'm 15-16 years in Securitas and 30 years in the security industry, but right now it's the first time I present my new division as Ibero-America in order to show you what is our idea in the to build a strong platform for the businesses in security in Ibero-America. Okay? We are a specialized company, provide services in eight countries right now: Spain, Portugal, Argentina, Chile, Colombia, Ecuador, Peru, and Uruguay, Portugal and Uruguay, eight countries with around 58,000 employees, full-time employees in these countries, and we are market leaders in Argentina, Chile, Portugal, Spain, and Uruguay.
We try to explain this as market leader in our businesses related with the guarding, but it's not included system or cash handling in this picture. It's guarding, specialized guarding. It's related with our competitors. Okay? Our strategy was starting with the acquisition and organic growth was the strategy. The first step we put in Latin America in this organization was a small company in Argentina with 600 employees in 2001 and was part of the European organization. It's related with Spain for the language reasons and for the cultural reasons. After this test, finally, we decided in 2006 to start with the growth in the market in Latin America. We decided to create the new markets, and we started with our strategy to improve our presence in Latin America. The decision was starting in Uruguay, close to Argentina, of course, but it's very simple.
It's close to Rio de la Plata. In 2007, we was entering in Colombia and in Peru, two different countries and different markets, very, very active markets in the security point of view. In 2008, we entered in Chile and another market with the needs of security, and finally, in 2011, we entered in Ecuador. At the moment, this is our footprint in Latin America. Of course, the key for the growth was the implementation for our model. Latin America is a very fragmented market with not very clear leaders in this moment, but we started with our strategy into acquire companies, organic growth, and implement our model. Our model was implemented in every country, but one important issue is to respect the individual character for each country. This is so important. It's part of our model in Securitas, but it's very successful in Latin America.
Ibero-America is our presence right now. It's 58,000 employees, number one in Argentina, Chile, Portugal, Spain, and Uruguay, and number two in Peru. This is Spain. We are the market share around 23% of the market with a market with more than 700 companies. In Portugal, we have the market share 24%, more than 100 companies. If we define this market like a mature market, it's very close to the European market in general. It's very close to the philosophy of the idea of the market. It's a very mature market. Argentina, we have 15%. It was the first country when we started in Latin America. We have more than 14,000 employees in this area. This is an extremely fragmented market, but it's managed by us right now in all the national footprint in all the country. It's a huge country with a lot of companies.
Uruguay, the small country, we had a very nice market with 15% of our market share. We are the number one in the market, but it's in a market that's so very easy and very specialized too. Colombia was the next step, and this is where we have only 2% of the market share, but this is one of our targets to improve our presence in Colombia. Colombia is very developing, developing very fast right now. This is a local market with no presence of international companies in the last few years, but right now starting with the implementation of new companies like us or other international companies, but it's starting in Colombia, but it's developing very fast. Ecuador, small country but profitable, but with a lot of good industries in the petroleum area and mining area, but it's starting to need specialized solutions.
Peru, it is a very active market in security, huge market. A lot of numbers of guards are personnel of security with a huge investment and developments in mining and commodity activities. And finally, Chile, it's the most stable maybe of the area, but it's a huge country with huge industries in the mining area and in bank sector too, but this is important for us. We have 11% of the presence in this country. Well, what is the reason for we create Ibero-America? We have two important reasons. One is to be very close to our customers. And our customers, important part of the customers from Europe is Spanish and Portuguese customers. It's like Telefónica or Banco Santander, BBVA, or Portuguese is working in Brazil. In fact, we have a lot of customers from Europe working in Latin America.
In the same way, we have a lot of U.S. customers with investment in Latin America, and they have our services in the U.S., and they want the same supplier in Latin America. It's just to put our organization in line with our customers. It's the idea, the main idea, to create that Ibero-America division. The other, of course, is the common language. It is more easy to develop businesses with the common language, the same culture, the same values. Our style of life is very similar. This is very important for to integrate training systems. We use the training system developed by our colleague in the U.S., but it's so easy to move to Latin America, to the rest of the division. And of course, the Spanish is the platform. It's very, very, very simple. Another important issue is to create the common platform, technology platform.
In the system management, this is a Vision. It's one of our tools developed by the U.S., included in a customer portal. It is so important. This is very easy to move to the rest of the region with the culture of the U.S. and to move to the region with the same platform, the same language, and the same ideas for the developed area. And of course, in the alarm monitoring, we have businesses in monitoring in all the Latin American countries, and we use the same platform. And of course, we try to move the platform for Europe in Portugal and in Spain. What is our offer in this division? Of course, we are very traditional but very specialized. It's security, of course: mobile services, beat patrol, alarm incident response, callouts, technical solutions. We provide installation, monitoring, and maintenance in Latin America.
But I'll say it: we provide every kind of services to our customers. Of course, specialized guarding, extremely specialized in mining, of course. It's so important in Latin America: airports, Spain and Argentina. Retail, this is a huge part of our businesses in Europe and Spain and Portugal. Of course, we're starting in Latin America. Combined solutions, this is an important part. The best in the class in this area is Portugal. Portugal is a fantastic example to develop combined solutions in our portfolio, but this is a good example to move to the rest of Latin America and, of course, in Spain. What is our differentiation in Ibero-America? Of course, we are leaders. We are leaders with trying to develop the security services in the area. We are leaders in Spain and Portugal, and we are leaders in some countries in Latin America.
But our idea is to continue to develop in the industry. Of course, it's so important to increase the condition for our guards. Spain and Portugal are an example to develop the condition for the guards. In the 1990s, in the beginning of the year 2000, we started with improving the condition for the guards. So this is a good moment to move into Latin America to improve the condition and the status of the guards. This is part of our philosophy. Our model generated, of course, added value, and we want to show to our customers in Ibero-America, in Latin America. Our training facilities, of course, is one of the we discovered, not discovered. We test again. This is a good idea to develop the training for the guards or for the people in general.
The training method is extremely highly valued in Latin America, but it's part of our strategy. Of course, our footprint is so important to provide services to the customers, and we have the teams in place working with a very good expert in every single country where we work. Of course, the global solution for the customer is mandatory for a strategy in Securitas for the future. The training is a key for the success in Latin America. The picture is our Instituto Securitas in Buenos Aires. It's a pioneering facility in Latin America to fully dedicate it to the training, for the training, for the people, for the security people. No competitor, nobody believes like us in a training is the key in these countries.
This is an important investment made by us, and where we use more than 11,000 people in 2010 receive training in different kinds of trainings in this installation. In the same way, we create the Instituto Securitas in all the countries in Latin America. Of course, in Spain and Portugal, it's a more mature market, but it's included in the network for the training centers connected with our e-learning platform related with the U.S. It's to create a network for to increase the condition for our guards or our security people. The common platform is fantastic to use. The Spanish and the Spanish and Portuguese is very easy to connect it. Of course, to the U.S., a lot of U.S. guards speak Spanish. This is a reality, but it's so important for us to improve the status for these people.
Our idea is to ensure the standards for the people. This is an example in Argentina. In Argentina, we complement the official education. If the secondary is mandatory for the people, for example, if our guards don't complete the secondary, we provide the center to increase your position and to take the secondary training for personal reasons. It was important, very important for us. OK? We optimize our security solution with our customers with this segmentation idea in Securitas. We have two cases to show you. One, this is a mining sector, important in Peru. This is a picture for Minera Yanacocha. Minera Yanacocha is the biggest of the largest mining gold in the world. This is a huge installation. When we provide with the local people, we create a very good platform for specialized services, really specialized services, with the procedures, with the training methods, with the teams.
It is extremely specialized, created by the Peruvian people. Right now, we have a center for knowledge in Peru to share the knowledge to the rest of the region. It's so important. The commodities are an important issue in Latin America, but the mining is so important for to spread our experience to Chile, Colombia, Argentina, where the mining is a very important sector in the economy. In this case, with the specialized solution, we make not only guarding. We are a lot of things. We protect the environment. We control with the GPAs, we track and tracing, we control access. We make every single question related with the physical security in the mining. But it's so important to develop, to take care of the environment, but it's so important the safety. We are partners for our customers in this case. It's so important.
And another example: this is retail. Retail is a segment extremely important in Spain and Portugal. We have more than 100 shopping centers working with the extremely well-developed market in Europe, and starting with the shopping centers in Latin America. But we mix both ideas and new ideas. The procedures for Europe come to Latin America, and the new ideas from Latin America come to Europe. But this is an example for the picture. It's handicapped people working in our company in Colombia and in Peru. This is where the traditional procedures or the procedures in retail move into Latin America. And the Latin American people are starting to be creative and starting to prepare extremely committed people to working with us in this case of services. It's so strange to look at this in Spain or in Portugal, but with this idea, it's possible to move to Europe.
But I don't know. I don't know. I don't know what is the reason for not to do this. It's OK. Why not? And in fact, the people, when they start with our uniform working in a and to feel respect by the society in the shopping center, it's extremely good. Extremely good. It's a good idea. And I try to export to the U.S. And of course, it's a good idea, and we are very proud for this. This is a Latin American idea mixes together with the procedures in Europe. OK? In the figures, this is our organic sales growth. In 2010, we grew 1%, and in half a year, 9% together: Europe and Iberia and Latin America. Latin America grew 24% in the first semester. And Spain and Portugal have organic growth, including Portugal.
Portugal has 1.1% organic growth, and Spain in line for 4%. During the second quarter of the first semester, we had organic growth in all the areas. Of course, in Latin America, it's an emerging market, but our growth was 24%. In a margin: 6.6% in the full-year 2010, 6% half a year during the year. But we believe we start in the good way to achieve the very similar figure to the previous year. And of course, depends: two realities, Spain and Portugal. But Spain and Portugal are very close to the margins in Latin America. What is our acquisition strategy in Ibero-America? We continue with expansion in the selective markets, with acquisition in the countries where we are right now. But of course, we are extremely selective. We have a very good footprint right now. But it is possible to be selective.
We know exactly what is the method to acquire companies in Latin America. We make a lot of acquisitions, but we know. Our next step is entering Central America. Our customers want our partner, corporate partner, in Central America. We decide it's a good idea to enter in a country in Central America to provide services for our customers. It's not a huge market, but it's necessary to provide a global solution. Of course, we continue with the target to enter in Brazil as soon as possible. OK? Different acquisitions with different reasons. One made in March-April 2010 was Videco in Buenos Aires, in Argentina. It's a specialized company mainly focused on gated communities with very good prestige, very good footprint in the area, where around 70% of the total market in Argentina is in Buenos Aires.
But it is strong, our position, related with the gated community. That's very, very prestigious. And right now, the opportunity was fantastic: a very stable portfolio, profitable, in line with our plans, very well integrated, very simple, the same philosophy, fully integrated. This is an example for selective acquisition. And that's very easy to add to our model. And another example is Seguricorp in Chile, but for different reasons. We acquired Seguricorp , but this is one of our competitors. In fact, the number two when we acquired Seguricorp , we are the number three. And right now, together, we are the number one. But Seguricorp was a company very similar in our businesses, but it's specialized in the mining sector too, with a very good portfolio, stable portfolio, and of course, very attractive for us to merge it with our portfolio.
In fact, the two companies, both number one in Chile, have more than 8,000 employees and stand in a very good position to increase the businesses in the future in an economy with a growing wealth. Our forecast is still continuing to grow well. OK? In order to summarize: the division, the Ibero-America division, is a very good opportunity to grow in using the customer bases in both parts of the European, the European, and of course, Latin America and U.S. This is a good idea to have very close to our customers. The best practice and the new ideas to share in both lines, including, of course, U.S., it's so important for us to create a region and to share best practices. Focusing innovation and technology in these kinds of countries is so important. It's a mature market for obvious reasons to keep our presence.
In the emerging market, to show to the market our leadership, the people who want to implement new ideas, technology, innovation, training system. Efficiency and high standard on the common training platform is absolutely necessary in our businesses in Latin America. The structure and the teams are so important. We are now a strong structure in every country. We have the footprint in every country where we work with the correct teams put in place, motivated, are absolutely focused to increase our presence, our brand in the area. And our geographical footprint provides local and global customers. And of course, we continue with the idea to be selective in acquisitions and to increase our presence in the market. OK? This is our new division. And I'm open to your questions.
First of all, in Brazil, as you have had, if I remember, not a lawsuit but a problem with the company you acquired, what is the status there time-wise? And then secondly, could you maybe mention why you have the seasonality margins?
Well, Brazil, first one. Of course, we want to start in Brazil as soon as possible. But right now, you know, we tried to acquire a company in 2006. It was 2006, starting the idea. And finally, we decided not to acquire this company. And of course, we start with the process, legal process. This is Brazil, very peculiar. And the timing is totally different from the rest of the world in general. But of course, we need to protect our brand. And before to solve all the problems, we need to be very careful with starting in Brazil. But of course, the situation is changing. We are in line to solve the problem. My feeling is we need one year, two years more to solve the problem. No month, unfortunately. But the question is very simple. We want to start in Brazil.
Depending on the legal processes, continue and finish in the correct way. But of course, one of the main issues in this case is to protect our brand and to still continue providing services for our customers. We have partners in Brazil right now to provide services when we need, when our customers need. But our brand is so important to start in the correct way in Brazil. The second question was around the margins.
You have seasonality margins, yes?
Yeah. OK. The margins, we are in line to achieve. We achieved 6% in the second quarter. But we still continue with our projection to achieve the same margin, or similar margin, to the previous year. Do you remember 6.6%? This is our margin in our division.
OK. Thank you.
Your 24% growth in Latin America, can you say how much of that is Argentinian wage inflation?
Well, the Argentine inflation, we have two realities. One is official inflation. It's around 11%-12%. Real inflation is around 30%. This is the reality. Our wages, of course, are related with this. We are, in 2011, increased the salaries in two periods: July, October, and finally in line to 33% this year. And of course, it's a very good opportunity to increase the position for our guards, but another opportunity to increase the status for the people. But in reality, our salary increased 33%. Official inflation, 12%. But the official figures are not extremely.
If I do a simple back-of-the-envelope calculation based on some of those market share numbers that you gave and everything else, is it probably fair to say that of that 24%, more than 14% of that is Argentinian wage inflation? So your underlying volume growth is probably 1%.
No, no, no, no, not too much. It is related, of course, with inflation in the last years, of course. But we increased not only by inflation. We increased by the acquisition, of course, but increased by the organic. But the inflation is so important, yes, really.
OK. And then if you split your business between Iberia and Latam, I think you give the churn rate for the whole division. But I presume the churn rate is incredibly low in Iberia right now because people are just happy to have a job. And presumably, the churn rate is incredibly high in Latam. Is that fair?
The reality now is Iberia has better margins than Latin America.
The churn rate, sorry. Employee churn?
Right. Other employees' turnover, sorry. But employee turnover is two different realities in different countries. In Spain, we have a turnover right now close to 12%.
12%?
It's nothing. If we look at 2006, in 2006, it was 60% in Spain. But it's, of course, related with the economy. It is in Portugal, it's the same. In Portugal, it's less than 10%, personnel turnover, in Portugal. But in Latin America, we have different realities. In Argentina, where the markets are not too bad, we are 25%. It's very good figures in Latin America. And of course, we have another reality: Chile, 100%, close to 100%. But depending on the economy, we are very related with the economy. If the economy grows very fast, we are natural enemies, like construction, agriculture, where the people pay more salaries, or the work conditions are better than the guarding. But of course, our idea is to reduce the turnover. And we reduced dramatically the turnover in Latin America.
With the implementation with our model, implementation with our training system, and of course, increased the salary condition for the guards, we reduced. If you look at the figures in Chile, it was 200% in 2009. And right now, we are in the half. And we expect to reduce. But we increased the condition, and our company is more attractive to work in security. But it's different realities in Europe and Latin America.
And then, just final question: why did Mexico not go into this division?
Mexico is a Spanish world. Speaking Spanish but thinking in the U.S. They are absolutely American, North American. The business point of view? 70%? 70% are American companies. It is another idea to start close to the customers. The customer is from the U.S. But the logic is we are close to the customers in the U.S. and speak Spanish. That's good. But in California, speak Spanish too. It's a simple way.
So that statistic you gave: 70% of your Mexican revenue is from U.S. customers?
Yes. Yes.
Thanks.
Hi. Andy Grobler from Credit Suisse. Just on your Spanish business, which is still the vast majority of the division, you said margins are better there than they are in Latin America, right?
Yes. Right now, yes. Similar, very similar.
Or similar. As you look into 2012 and the potential for pretty big wage increases in Spain, how do you see that?
Yeah. You are very well informed. Yes. In Spain, we signed a collective agreement in November 2010 in order to increase the salary two points more than inflation. It's the reality in 2012. But of course, it increases the salary, very high, increased salary. And of course, we are working or we started to work with the present to our customers solution to minimize the impact for increasing the cost. We increase the cost. Our customers need solutions, and we provide solutions. What happened with these increases in this year? It still continues with the collective agreement. Of course, we want or we start with talk with the unions in order to find another solution for the next not only 2012, not only 2012. The collective agreement finalized at the end of 2012. And we tried to create another platform for the next years.
Of course, the impact on the cost is too high. We are absolutely ready. We started to create solutions for our customers. In order to manage not only ours is solutions so important for us. Spain is a good example. It is a good opportunity to put in place the correct strategy for security right now.
Does that collective labor agreement, does that affect all?
What?
Will that collective labor agreement, as it stands now, will that affect all security companies across Spain?
Yes. Yes, yes.
Sort of official and unofficial ones?
It's mandatory for all the companies in Spain. I know what happened in our company. I don't know if the rest of the company are ready to support the increases in the same way to put on the table the solution for the customers. We are in line. It's an opportunity. Of course, it's not a reality. We increase our cost if we don't change the condition before the end of the year. Of course, we are working with the unions in this way. The reality right now is increased cost. We signed this. I don't know.
OK. Thank you.
The next speaker is Santiago Galaz, Divisional President, Security Services, North America.
Hello, everyone. I'm very happy to be here two years later. We survived. And some of your questions. I'm very proud to be here representing my team, who, of course, cannot attend the meeting. Somebody had to be working today. And thank God they are taking good care of the business over there. I'm very proud to be here representing my team. I hope I did OK. And when I'm back to the States, they will give me a B. A B minus, B plus will be OK. But I hope you do the same. OK? And Spanish, I still speak Spanish like Luis. So I had a hard time to stay here. They told me I cannot cross that line. But somebody tried to follow us from the webcast, which is always a challenge with me. But I like to move around.
So they already told me three times today, try to stay in this area. And I will try to, I promise. But if I move too much, somebody in the back says, hey, please, go to the other side. OK, guys? I know from Sweden like them. They are pretty good with these things. OK. We start with an overview of our division. As you can see here, we represent 100,000 employees. We are organized in 19 different business units. 12 of them are geographical and seven are specialized. And I can elaborate a little bit more on that later on. We have 97 area managers and 600 branch managers. That's the overall. We are not the largest. We are not the smallest. We are in the middle of the division right now. How the market and securities have developed in the last years is something you saw before.
We used this slide many times in the annual report. I think you can see the market is growing around the GDP, well, ahead of the GDP, to be more precise, historically. We have two tough years from the economy point of view, from the industry point of view, and from the security point of view. As you can see here, we were performing ahead of the market, ahead of the GDP. Except for the last two years, when you see a drop, we were in the negative range. The market is flat right now. 2011, of course, an estimate. And we tried to calculate what happened in the first half of the year. You see that the market is flat. The GDP is positive, but not much. And you are better doing this kind of estimate about how much the GDP in the U.S.
or North America can go. That's the number we have at that time. And Securitas overperformed the market. It's nice for us to be a recovery for being underperforming for the last two years, to be a little bit ahead of the curve, recovering some of the ground we lost in the previous two years. It's nice to see there. How you see the industry moving forward? We use Freedonia. Alf uses his presentations and data. But this is not our estimate. This is not our forecast. This is Freedonia's view about the industry coming from the report in 2010. We see still a very fragmented market. And it's always relative. You can see it's not, or it is. Five companies represent 33%. For us, it's TC for C consolidation opportunities in the industry. Another very good news for us right now, where we are, is we call the reservoirs.
43% of the market is still in-house. If we are able to present the right solution for the clients in the right way, it's an untapped opportunity. We can create more growth if we are able to move this in-house market to our share of the graph, right, of the picture. The contract security estimate for the next five years, according to Freedonia, is around 4.6%. Alf said 4%-6%. Of course, you have the GDP. You have the price index every year. And you are able to convince the clients to outsource more. You will get the number. So you can have the 2%-3% GDP. You have the price increase. Historically, it's always around 2%, 0.5%-2%. You are already in 4%-5%. Of course, you put a little bit of the outsourcing could really happen. You remember the number we saw before?
The 43 was not 43. It was 47 to up to 45. Now it's 43. That's BLS data. You can check yourself. If you don't believe me or Freedonia, I'm analyzing that for a while. It's a trend, but a modest trend. It's not a dramatic shift or change from in-house to outsource. But it's little by little. Of course, in tough times, the clients have more motivation to reduce their costs. They see opportunity to go to companies like us and outsource security and have more efficiencies there. We don't see a lack of opportunity for growth in our industry. We see growth in our existing contra-security. We see still the in-house opportunity to create more growth. We were performing in this 4%-5% range.
As you can see in the graph, we had two tough years, 2009 and 2010, when we were in the negative side, like we saw in the graph. Now it's nice to see back to the four. That's the, you can say, the run rate and how much this machine, normally, we think can produce in a regular way. From the margin point of view, I think you were asking me questions during the breaks. I tried to have all the secrets and all the answers. And we don't have any specific one single secret. You try, in some cases, to find one answer or one question that can give you the answer for this. It's a lot of things moving in the right direction, a lot of work, a lot of plan and program putting in place to accomplish that.
And I'm very proud to stand in front of you and see the increase from the 5% in 2006 and over 6% last year. That is more than maybe anybody can expect years ago. Some of you recognize me already, right? That is good. I hope we can keep that credit moving forward. Even this year, with some of the dilution for some of the federal government companies, like Paragon SCG, is taking some of the margin up. But I think we will continue moving in that direction. How far, how quick, we will see. Never we can promise. Never we can guarantee anything. But we still believe we can improve our margin moving forward. And I will try to convince you, with some of the things we are doing today, give you the hope that we will do it. OK. It's a similar slide.
You didn't use that before, right? No. We used a similar one. We started to use a few months ago. Internally in the U.S., we presented to the group. They are using it as well. We are very proud of that. This is a picture of the industry and the picture, in many cases, you see of all of us. You say, OK. You look here. When everything looks the same, we simplify it in one way. Price is the only difference. Nobody would like to pay more for the same, right? You never would pay more for this kind of mineral water or water you have in front of you. You would never pay $10 or double the price of the other one. It's exactly the same. In our business, it's not different like that.
We need to be sure we find the way to look different and be perceived different from the client. That is nothing new here. Many industries and many companies fight very hard to free and save themselves for their offering from the offering of the competitors. But that's the key of the success. And it's important, first, to keep this in mind. Second, try to implement something that can accomplish that. We did that as an exercise months ago and years ago. We started even further than that. But now we are more specific geared to that direction. And our people and our team, and some of them will watch this webcast, they will recognize all the messages I'm presenting to you today. The key is how we can put this, how we can make this dot brighter and different. That's the key.
It's not that you are trapped in the equation, trapped in the price. The price erosion and the margin erosion, all the things you try to forecast here will become a reality. You have to avoid that, presenting a different face to the client who can create value for them. I tried to summarize this for you in this three-minute presentation, tried to summarize in the four key areas we are putting in place to make this dot brighter. I will elaborate a little bit more later on all of this: flat organization, specialization, expertise, and innovation. Some of you, and we start from the first one, the flat organization, some of you are following this company for many, many years. You met with the previous regime, with the actual regime. Maybe you will meet with the future regime.
One of the keys in our genes is the branch. Branch is part of the basics of Securitas. It was many years ago. It's still there. What does it mean to have a branch? Branch is not a physical location. Who cares if you have one facility, two facilities? We are not the Starbucks. So when we talk branch, it's not facilities. It's not rooftops, right? A branch, for us, is a manager who has a P&L, who has an incentive, who has accountability, who has the motivation, the responsibility, an area who can be a geography of vertical market, a segment of what he's responsible for. That's a branch. And that is a modular thing. This can go up and down in the number depending on your volume. They create your company in a modular way. That's the base.
That's the only way for us to be close to the clients. I really like the bottom sentence here, where you say we had to be close to the clients and the officers. We had to manage by name, not by number. One of the problems we have, companies like us, we can be too far away from the clients or the officers and treat all of them, officers and clients, like numbers. That doesn't work in our industry. The first thing you have to be is close and know the maximum you can of your officers, not by name, but it's the important one, the way they leave, when you schedule the post, and what is important or not important for each and single client. We are pushing in that direction.
We are reviewing all the portfolios to be sure, all the branches, branches, not the physical location, branch, the manager, have an area of responsibility who can manage their portfolio by name. That's an exercise we are putting in place in the U.S. We are reinforcing something maybe we soon forget. But in some cases, you forget. You need to recap and go back to the previous basic things you already said and be sure they are still in place. That's the exercise we're doing. We think this is one of the best ways to make your dot a little bit brighter: know your clients, know your officers. We have 600 of those organized in these 19 business units. Some of them are specialized, as we saw before. We tried to put this, so we have close, how far we can go.
Some of the questions before were about the specialization, how much we have already specialized. I can tell you, and I'm not playing with the numbers, these bars on the left side represent 33% of our North American business. We already have a specialization in these bars, seven bars, representing 33%. But we have more specialization that is not divisional. It's more regional. It's these white bars. In some cases, it's not easy to perceive. That is the specialization that is run at the regional level. We have entertainment in Southern California. You have the port, for example, Petrochemicals. We have in the whole Houston, Gulf of Mexico area, where we have a specialization. But it's run locally. We don't have a national program or divisional program running or overseeing this business in that way. Accounting for that, they will be more in the 40% range.
So you have 33, but it's another 7%, I would say, who is in that market. That's the opportunity. How far we can go? Alf answered before. We don't know. It depends on the opportunity. It depends if the critical mass is there. And we see the growing opportunities. One of the key factors for us, and we sought to be very strong in manufacturing, in banking in the past, is to target the growing market, the growing segments. It was the reason in 2009, we opened health care, which was very successful and growing fast. Health care is growing more than the average in the U.S. So to have nice organic growth, you need to be active in the vertical markets that grow the most, right? That's one of the ideas. We opened. We bought Paragon in 2010. We bought SCG in 2011.
So this allowed us to open another strong bar and position ourselves in the federal government industry. We were not present there in the past. We think it's still a solid market. You can speculate how much or how little the federal government will spend. We think in the areas we are playing and in the security budget, there will not be a lot of cost budget reduction for the government. We think in the area we are playing, which is not exactly the defense sector, the DOD, will be a stable market for us moving forward. And we are still small. We have significant players. There are still growth opportunities there. We opened new bars in areas we think could be good potential growth for us. You already are aware of the aviation contract we won together with the European team, the aviation division over there.
It will be starting in November, very significant, in Canada. That will create us or give us the opportunity to put another bar here. So we will open aviation in the North American division starting in Canada. And we will see how open or how quick the U.S. market opens. We are working in that direction. And we expect not too late. Almost more sooner than later can be open for us. And we can play a serious role in that market. So we see more opportunities there. So we believe in the branch. We believe in the specialization. But we think to do this right, you need to take advantage of your size. And we always—you saw this slide before. It's still valid. But to me, it's still very clear and explained pretty well the thing we try to do.
We try to specialize the maximum we can, in our opinion, makes sense. We try to leverage not just the traditional back office, not the admin, purchasing, payroll, billing function. We try to leverage the operational, the network, the branches who are around the countries we are working for. We provide back office operational support to these specialties as well. This division can help them to hire, license, uniform some of the officers. They don't need to open a facility just for that. We provide that operational back office support as well. Of course, we provide the more traditional one. We try to share and to learn from all the best practices in the division. That's the idea with the knowledge sharing and this idea about the bottom line here. We believe in the specialization. We believe it leverages as well.
The specialization, I have said before, is defined by the critical mass. So you are close. You try to be specialized. Specialize in a very dynamic society with the economy, the situation, the demands for the client are changing that much and that quick. It's not easy to keep in line your operation and you try to cover everything. It's why the reason it's really needed for you to narrow yourself to be able to be following the speed of the market. We believe we can create a stronger relation with the clients. We will increase our knowledge. We will become the trusted advisor. That's one of the things we see through the specialization. Of course, your service offering becomes more efficient and more effective as well. That's the experience we have. You are close. You have to be specialized.
The third for us will be the innovation. Oh. I looked the wrong. I asked for you to have the next slide on the screen. I was looking to the wrong one. Expertise. That was my fault. Let me go backwards, OK? Be local. Be close. You have to be specialized the maximum you can. You have to develop the right expertise. You have the first two components. It will be easier to go deeper in the expertise. I highlight four areas for us, how you can become an expert, how you can become more and better in the different areas. The first is the security. You have to be an all-around manager. You have to be a security professional. We're talking about technology, Niscayah, all these things.
Of course, you don't have a 600 branch manager understanding the job and being a security manager, a security professional in the front line. You are not prepared to do anything further. We are doing a good job in that area. We have developed three levels of security management training in the last years. We have 1,400 people licensed in the level one. The level two, we have already 800 managers in Securitas in North America licensed. The level two is security systems. They are people who understand systems, not just the staffing or the guarding side of our equation. They are more prepared. The idea is to keep the machine prepared for the future and what will be needed and be a little bit ahead of the game. We continue with the level three. We have 300 already licensed.
We have to the end of the year. Level four, we come this year. The idea is you need to continue fitting your team with the right security knowledge to be able to perform the work. So when they go to the client, they need to be able to produce a comprehensive operational analysis. They need to be able to evaluate what security needs are for that facility or for that client or for the other. That's the base of everything. Everything starts first to be a security professional. You are not. You don't understand your business. You cannot do the rest of the things. When you know enough about security, the next step for us is to understand the clients. You are close, like I said before.
You have 14 clients, 16 clients, 12 clients, which may be the magic number for us to shoot for. You are able to know almost everything about these clients. You had to run 50 clients. No way. Nobody can understand and know detail enough or well enough 50 clients. What's the reason? To develop the right expertise, you cannot just forget the first one. You cannot forget the size to be close to us as well. The service, where you have knowledge in security, where you know your clients, you have to build the optimal service for the client. And the optimal service, in the way we're using more and more, in the way we see in the future, is not just the staffing. It's not just the people. You cannot provide an optimal solution for the clients if you don't include technology.
Technology, in many different ways, can be guarding tools or can be security assistant tools, like CCTVs, access control, or things like that. But we have other tools, in some cases, that we maybe forgot in the past. We can introduce and improve the productivity of our offices as well. And at the end of the day, dollars and budget are important. You have to have a team in place who are able to build something that is affordable for both sides, for the clients and for us. You cannot add costs and costs and costs. At the end of the day, you are out of the scope of the client budget.
You have to do something that can make sense from the security point of view, that can make sense for the client, the profile, the view of the security that their clients have, make sense for the combination between people, procedures, and technology, but at the end of the day, you have to make economical sense. If not, you will be out of the range. And you will be out of the game. So it's very important that you manage. And we are making big strides in that way with our people. The last piece in these four main points I tried to highlight to you to prove and to see to prove to you how we are trying to make the difference, how can we try to make this red dot brighter and different than the rest of the dots in the market, is the innovation.
Here, I have some examples of technology or base innovation. But innovation, we don't see just technology. We see processes. Changes, like we said before, are occurring every day, every week in the market. Clients are not demanding the same. You need to continue improving your processes all the time. You cannot just be sitting with your hands and be waiting or try to use things that were maybe valid years ago. You need to really review everything. I highlight some of the technology-based tools we are using in this area. two years ago, I presented to you the client portal. We have even built Bartholomew with a demo outside. At that time, we didn't have any clients. So we were launching it, I think, a month or two months later. You will see later. Now we have 600 clients. And we will see the economical impact in a second.
We have that in place. Now, we have version two coming at the beginning of the year, in January. And we see the client portal as a critical tool to connect with your clients. What the client will see, it's not the time to explain what is behind the portal. We did last year. And we will do later, if it is needed, to see how far we can go. But if we see, in the way you do banking right now, I'm sure all of you have the client portal, right? You don't go to the bank branches all the time. You check your balance. You check your activity. You follow your spend. You target different things. We see the same in the security point of view. We see the client portal as a critical tool to communicate and engage both ways with your clients.
They can talk with you. You can talk with them. They can access incidents. They can access tools. They can access IP cameras. They can access their access control. They can access procedures. They can access KPIs. That's where we have put a lot of money and a lot of effort there. Now we pay it back. We think it's not enough to be, again, with version 1. We have to build version 2. We have to run in tablet, in the PDAs. I'm sure in a year, it will be version 3. Or maybe it will be version 2.1 if we have smaller developments during the next year. I will elaborate a little bit more. But I really believe in that. For us, that's technology. That technology is not Niscayah.
It's a different kind of technology we can bring to the company who can create value for our services. We think the clients can perceive the value as well. We have other tools in the intelligence. We have some systems that can be very efficient and very low cost, like Intel Alert, that can provide alerts in our radio around the client facility, nine different kinds of incidents for almost no cost, and can create, with very little effort, something different to make this red dot a little bit brighter. We have Securitas Digital, a tool Luis referred, who is a security management system on site that can help to run more efficiently the guarding operations. We try to do all these things. At the same time, we try to improve the processes.
The final outcome of all these things will be, OK, I can summarize to you, will be, and I will explain some of the cases and solutions we have done in the past. First, we had to be close. You had to have the right organization in place where you are able to know your clients and your people. If you are not close enough, the process cannot start. Second, if you have the critical mass, and we try, almost 40% of our business is specialized, you have to narrow yourself and become the best-in-class specializing segments of vertical market. Third, when you have these two, you are able to develop some expertise, expertise in four different areas, like we discussed before, right? Security, the clients, the business, and the service in the whole conflict, not just the staffing.
You had to have all the more advanced technology innovation processes in place. You had to be sure you cannot have only off-the-shelf staff. You have something that meaningfully can make sense for the clients. That's the meaningful innovation we try to have here. When you have all that, you are able to build this solution for the client. The solution is the Luis referred a couple of times in his presentation, is the final package where you not just include the officers' hours. You offer other processes and technology in a package for the client. We have sold 600 of those. When we talked two years ago, we didn't have any. Now we have 600 that can have, in August, represent $20 million in monthly revenue for us in the division. And we have improved the margins 2 percentage points in all these 600, in average, right?
Some will be five. Some will be 10. Some will be one. Or some maybe not. But the average for us of these conversions has been, in an average, two percentage points. This 600 solution contract, you can say 60% of those are conversions. Before, it was 50/50. Now it's more 60/40. So 60 of those are conversions. 16 clients in our portfolio converted through solution. And the other 40 is new sales. The mix is changing. So we see more and more conversion than sales. And the reason is more confidence in our team to offer this to their portfolio. They believe more. This is a reality. And it's possible to do in the right way. At the beginning, it was afraid of the new. But I think now we are getting traction. And we see more moving forward. I will give you three examples.
I will come back a little bit more to this point. We have three examples. Excuse me. We have too many letters here. We tried. I was criticized this morning for that. But I think this could be OK. We tried to give you three different cases: one, small, medium, and large, to try to prove the point that this can work in any size, not just for the big ones, not just for the small, can work in all the sizes. You have three different cases. One is a new client. Other is an existing client. The other is a new facility of an existing client, OK? I tried to cover all the spectrum. I tried to select only three. I cannot present the 600. This is a mechanical contract for Facility Mississippi. I don't know how to read all these things.
But you see, this is a new location, an existing client who requires service in a very difficult neighborhood. And you see the solution proposed to the client after reviewing through the operational analysis. You see they had 118 hours for high-definition cameras. You had the remote monitoring in a patrol shift from our monitoring center in Parsippany. We have three years contract, SEK 124,000. You can say it's a small account. Everything in our terminology below SEK 168,000, we call it small. It's a decent size. But it's not huge. And you see the margins. After five months, this is reality. We checked the P&L. It's running 14% operating margin. The division finalized last year 6.1%. Not everything will be that good. But the average is 2 percentage points. But this is a good one in a small scale.
Of course, can prove that when you combine the right knowledge, when you have the right manager who is close to the client, who can perform the right operational analysis, and you have the right tools, in this case, the CCTV cameras here, and you can combine in a comprehensive package for the client for the right price, the client's happy. And you are happy with a very good margin. A second one is a big one. This is a new client who was unhappy with the previous vendor. It's a refinery in the Houston area, much larger. And you can see $5.3 million. And you can see here, it's not CCTV. It's not access control. It's very simple. We introduced some PCs. We ran the PC on software. We found efficiencies.
Here it was more through the e-learning, tried to save money for the client, with the needing to pay overtime for the people to do all the safety and all the courses they had to do, the mandatory to do in that industry and in this client as well. We found efficiency. They saved money. Didn't cost more for them. And we are happy as well for a client on that side over $5 million. We started with 5% the first year, last year. Now it's running in 7%, which is above our average. Before, it was behind. Now it's above. And, of course, with these three years, three to five years, but normally more three years, billing price increase, you have improved in all the cases we have analyzed so far.
The last one was an existing, unhappy client who was not very happy with us, was almost thinking to throw us out. In this facility in Florida, you see the situation there, 88 hours, really small. We, during the regular annual review, three months before to have the end of the contract or the renewal of the contract, we always, according with our procedure, we had to review all the facilities and proceed with operational analysis. Our branch manager, who was better trained at that time than before and had better knowledge, was able and brave enough to face the client and was an unhappy client and said, "The problem is we have the wrong profile of people. You have the wrong system with the cameras. Everything is wrong. So I understand you are unhappy. But we are unhappy as well.
We didn't make much money anyway at that time." He was brave enough to turn around, present the right picture with the right solution for the client. And now we have a happy client. And you can see we're 21% in operating margin, a fabulous margin. I would love to have the whole division like that. But I don't think it would be possible. But it's a dream. And you have a happy client paying more money for a better product, of course. He will not pay more money for the same product. That's the key. In some cases, you go with the price increase. And you're trapped yourself. Try to ask for more money for the same service. Any client will be happy to pay that. So the idea is how we can create more value for the client. That's the $1 million question here.
The key is you need to have managers in place who have the right knowledge, the right motivation, the right incentive, the right procedures to allow to create that value for the client. You will have your money back or even more. That's the three cases I have for you. We have more moving forward. This is the refinement process. I can advance you something more in parallel with the client portal version two. For the next two years, we already have planned to visit all the portfolio in North America and try to convert all the portfolio to solutions. I cannot guarantee you any success ratio there. But we will go for that.
We think we have good opportunities to convert a big percentage of those in the next two years, who always will have the opportunity to revisit all the contract and bring some value with the team and the procedure we have in place. So our ambition is to convert the maximum we can and try to enjoy better service with our client and better margins. This will be running in parallel with the version 2 of the portal. We will introduce the portal in a free way, a light version, three months before the renewal. We will try to convince, during these three months, that the benefit they will have enjoying this system, to introduce that to the client, for us, from our point of view, is not a minimal cost, you can say.
We try to convince the benefit they can bring to the table that we can introduce all the complete package with all the tools. That's the idea. We can come back later, if you like. I can give you more specifics. We try to build this solution. We see in our industry, the key for us to be successful is to be able to become this trusted advisor. Doing these four things, we will position ourselves to be able to really produce for the client comprehensive solutions that would make sense for them and allow us to make a little bit more money in that way. At the same time, we opened three, four years ago for acquisition. We are doing OK. Normally, we add the 4% organic growth. We add another 4% through acquisition. We see we can continue doing that. This is the target.
You never can forecast that. But we are open still, even with the restriction in cash flow, as mentioned this morning. But we're always looking for good business. And we see high synergy margin. We're normally very juicy and very easy to integrate. And we see some niche player. The federal government was more challenging for us. We opened a new vertical market in a new area. So we didn't have the right tools for that system. We had to refine, take a little bit longer. But the regular guarding company can be integrated very easily and have very high synergies. That's the idea. That's my ideas behind these two. So we have the more niche, specialized one, and the very juicy, very high synergy acquisition as well. But at the end of the day, the key for us is you have to be able to prove the difference.
All the questions, all the time you have, are you able to pass this course? Are you able to pass the SUI increases again next year to your clients? Are you able to create your margin? How far you can go? You have 6.1. Can you go to seven? Can you go to eight? To me, the sky is the limit. And the key is you are able to prove the difference. You are able to prove the value to your clients. You don't have any limit. But, of course, the day the client perceives you the same like the other, you are trapped. And you're under pressure. And you will suffer erosion in your margin. That's the way we see in a very simplified way, OK? Thank you. And maybe you will not have an answer question for me.
[inaudible] . Could you perhaps say a few words? In the margin improvement you have had, how much has come from improved gross margin versus lower SG&A? And also, where you see an opportunity.
Yeah. You will know. When you don't have growth, you don't have much leverage, right? Some of the years, we have more the first. I would say, it's more the C1 than the leverage. It's more the improvement in the C1 than the cost leverage. I mean, 2/3 would be more driven for the C1. 1/3 would be for the leverage, tiny new costs, and things like that. I don't know if I answered you or not. The phase looked like no.
Yeah. I guess the second phase improved gross margin due to that you are specializing.
The more value you bring to the client.
And then a second.
More efficiencies in the way you produce, less on bill, more basic stuff with reduced costs without touching the client price. In some cases, you can improve your gross margin as well in internal efficiencies without asking for more for the client. It's a mix of different things. Not one. It's many things. But I would say 2/3 of the improvement in the 1 percentage point you see there, I would say 2/3 to simplify my answer. Correct me if I'm wrong. Now, you're pretty good with these big numbers. And they will be coming from the gross margin improvement. And the other is the cost leverage, cost reduction, cost cutting exercise, all these things.
And then the second question. Could you perhaps talk about the opportunity you see in aviation in the U.S.? What has happened? Is there any prospects out there in the near term?
I think it's moving. But, of course, the government and the politicians have different priorities. I don't know how quick they move. But all the indication looks like this can be open for us in the next year or two. So they have some private airports already run by private companies. We tried to influence in Washington to allow foreign-owned companies like we are to provide these kinds of services. So we had to fix that first. And I think this fixable and all the indication we have, we will be allowed to do that. How quick that market, how much the TSA reduced versus the private security, that is unknown. But depends how the political people feel. It's hard to predict. But it's more news and more noise about it will be more outsourced, more moving to our side of the pie than continue with the TSA expanding.
So I think it's a good opportunity, 60,000, 70,000 TSA employees with these kinds of services. It's a big I don't know how big would be the size due to the $2. But it will be a big opportunity for our industry.
OK. Thank you.
Stefan Andersson, SEB. A question on the conversions that you make. We talked a bit about the higher margins. But if you look on the conversions you've done so far, would you say that you reduce top line a little bit, that you save money for your customers in general? Or what would the average be?
If the solution increases or reduces the total spend for the client?
Yeah. I mean, when you go for conversion, historically, have you lost top line? I mean, are you saving money for your clients and losing top line but increasing your margin? Or do you maintain your revenue stream from the clients after a conversion that you?
It's more increase of production. It's more increase. Normally, it's like the example I use. It's more that you discover that you were missing things than the other side. You can save some dollars, like it was in the training area here, in the refinery we use the case. The big majority, you expand. The clients spend a little bit more. It's possible both ways. The only way to reduce the total expense, you have to reduce the number of hours. In some cases, it's possible. My experience right now, we target both. We like both. We think it's better to reduce a little bit the size. You protect and improve the service and the price versus the hour, the cost for the efficiency of the dollars the client spends. We go for that.
But at the end of the day, it's more—I think you have more increase in the top line than reducing. But we go for both. It's a mental change for our people. But we try to educate them. It's good. It's good. And it's good for the client. It's good for us. So we don't try to enforce. And we don't measure and incentivize that for the number of hours you reduce your volume. We incentivize for the bottom line. And you have more loyal clients. The client retention on those solutions is 99%. So you had three years contract, and retention, we always say more than 90%. This has more than 99%. They have a lot of benefit. Even you reduce the size, it would be great. But normally, it's not.
Just a quick one regarding what we heard in the second quarter. I think that question may have been asked in connection with a telephone conference. But to ask it to you directly, it's about what was stated in that report about the negative margin impact from what was called the price competitive environment. Is that?
That's a question you didn't remember in the break.
Exactly. I asked you this question before. But now I have the exact quote here. So I'll rephrase it and see what your response is. Has there been a change during 2011 in terms of price competition? Has it gradually gotten a bit more difficult during the year? Or is it quite stable?
I will answer the same like you answered before, with a different way you phrased to me. I don't see. I don't know exactly what is behind those comments. Maybe Alf can answer that better than me. I don't see any change, dramatic change in the market. The price competition is there. I don't think it's tougher this year than last year. You always can isolate the picture in a quarter or two. And you have a misleading picture. You have to have more of a view. You cannot go for one single case or two single cases. And mathematically, maybe you are right. But from the business point of view, I don't see a change. I don't see any dramatic change. The price reduction, the client demanding in the rebate process, reduce the price, they're always there. It's the good news, bad news.
You need to find all the good news to compensate for that. I don't see any big changes in the quarter. Or I don't see any big changes in the first half of this year. That's my honest answer. I don't know. Al would like to phrase it a little bit different. I don't know exactly where this comment is coming from. But from my business point of view and my view from the U.S., the North America division, I don't see any change.
That also goes for pretty much the half of the third quarter as well. Is that correct?
This is the forecasting thing. I'm not allowed to promise anything to say.
I'm trying. I'm just asking questions. Thank you.
I think we are playing in a very stable environment. It's always, especially in North America and the U.S., it's very competitive, very aggressive. You always have people beating you. You are never the cheapest. The key is you prove the difference, you can survive. If you don't prove the difference, you will be attacked. Your margin will drop.
Yeah. Hi. It's Andrew Ripper again from Merrill Lynch. Just wanted to perhaps look at the federal business that you've built up with the two acquisitions. Can you say a little bit about what you're doing and which federal agencies you're serving, particularly?
In Paragon SCG.
Paragon and SCG, yeah. One or two other sort of not necessarily peers, but other companies have complained about delays in U.S. decision making as a result of all the uncertainties regarding the financial sort of situation and budgeting process. Have you noticed that affecting you in terms of your pipeline of prospects in the U.S.?
No. We don't see. We are not. We don't have a lot to our record in that vertical market. Other companies have 10 years to compare or 20 years to compare or maybe 50 years to compare. Or to our record, there is only a couple of years. But the people who join our team in that division, they don't see any big changes. And the federal government is a big, big concept who have many, many, many agencies, right? And depending where you are, you have more headaches or more slow process than others. We don't work with DOD. Or we don't go with DOE. So we work with the Federal Protective Service more. So depending where you are, we don't see any big changes or delays in the process. Of course, we would like to win more contracts and as soon as possible and things like that.
But from the integration point of view, I think we have some chance at the beginning to integrate a new operation who require different things with Paragon. We're now fully integrating our platform. SCG is moving much faster, of course. We have the dilution effect still for the SCG. But the Paragon dilution will be gone for the rest of the year, right? We bought a year ago. And the margins are better now than they were before. So that dilution will be gone for the Paragon. It will remain a little bit for the SCG.
OK. And then the second question. I wonder if you can give us some insight as to what's happening to non-wage costs in the U.S. I think you mentioned SUI again, which I appreciate. It's a sort of lagged effect.
Boring news. Nobody what you do is $10 million. Every year, $10 million. So we have faced two years in a row with $10 million in SUI increases. The mix we are using right now to plan for next year will be $6 million based on SUI increases and $4 million in increases for the FICA and FUI, more for the federal, all payroll taxes. So the total amount will be the third year with the same $10 million. No news. But the same.
Yeah. What's the latest thinking in terms of sort of health care issues further out and the Obama administration?
For the 2014 reform?
Yeah.
It's very hard to predict. It's a lot of speculation in the media. I'm sure you read the papers and follow the news like I do. We don't know much more than you. I think it's an election coming next year. It depends on the outcome of that election. Things can change. Nobody really can forecast. We are working and trying to be prepared for the 2014, who we can soon. It's even hard to quantify the effect of that reform, how much costs will bring to the industry. It's hard. We have to wait and see. Of course, we are introducing the right language and on the contract we signed to put this in consideration. We don't sign any contract who go beyond the 1st of January 2014 to have that, for sure.
But beyond that, not much more we can do with the information we have right now. They are still defining all the details. The only public information, the only certainty is the overall picture of the reform. But the devil is in the details, right? We don't have all the details to really understand how this can work and how it will affect us. We will continue watching very closely for all these reasons.
Nice.
Good afternoon. Rajesh Kumar from HSBC. If you could give us some sense on how difficult it is to find systems people in the U.S., that would be helpful. Systems people.
Are they like the technology partners? Yeah. Right now, everything we're doing is through partners. It's not a company. We have now our some target list. We have at least 10 companies we think can help us for the develop this strategy. And I think it's plenty of opportunities. And in our case, if we talk about Niscayah, I think that acquisition will not bring us anything, I would say, in the States. So for me, it's good news if Niscayah is not coming. They will catch too many people's attention. And now we have more opportunities in front to find the right partners who can create better synergies for us in the States. To have a big market share in the banking will not help that much in this plan.
To have somebody who has nice remote monitoring stations for video surveillance and things like that will help us a lot.
What I meant is, if you wanted to hire people who can do the systems analysis and projects.
My strategy is not to start to hire people and start from scratch. Al gave us some freedom in the way we can implement his strategy and fully his instruction. But I will go more geared to start creating buy something not too small, not too large, in a decent size, and build from there. I will not start to hire people one by one, if I fully understand you.
Yeah. OK. Thank you.
I answered you or not?
Yes.
OK. I will not go organically to start to hire one industries or one engineer. That's not my plan right now. I can change my mind if I see good experience in other places. But right now, I'm targeting 10 companies, try to buy the right one for us to buy, and start to build around that. And after that, I can do organically some acquisitions and speed up the process. But in the areas, it will be more interesting for us to develop. Thank you. OK. Thank you very much.
OK. So the next speaker is Bart Adam, Divisional President, Security Services Europe.
Thank you, Micaela. Welcome to Securitas in Europe. It's a pleasure for me to be here today together with all of you. Yes. When we look at the picture of Europe, this is the map. We have been traditionally strong in the axis that goes from the Nordics down to the southern part of Europe, where you have primarily number one and number two positions in the market. We had, I would say, some weak flanks, which was towards the east historically, where we were less present. We had weaker positions in each of the markets. That we have worked with over the past two, three years. We have either built stronger positions in the markets where we are. Or we have also and we have also gone into new territories. Another weak side was the U.K., where we also have worked with.
You know that we have made two important acquisitions there. Now we are working with that a lot to put that into one company. So overall, we have moved our position of number one or two. You know we want to be number one or two in each market in Europe. We have moved that from 15 countries in 2008 to 19 countries in 2011. The market where we operate in has seen a real growth of 0.4% in 2010. There is still 30% to be outsourced. So it's still a very sizable part of the business that is insourced. As you also know, Spain and Portugal now report to the division from Luis. So it is within this picture. But it is reported in the segment of Ibero-America. I'm representing Security Services in Europe.
We have sister divisions, Mobile and Alert, that are also working in Europe. But I'm not representing them. We are working in 25 countries, delivering specialized security and safety services. We are delivering airport services in 14 countries around Europe in more than 120 airports. We are doing this with more than 100,000 employees spread over 650 branches. On this slide, you see the GDP in Europe, which is the black line. You see that GDP in Europe has been hovering around the 2%-3% line since 2000, you could say, with then a dip in 2009 for known reasons. The market has been growing, which is the blue line, has been growing ahead of the GDP with traditionally 2%-3%. So you end up with a market that grows between 4%-6%.
Securitas, which is the green line, we have basically been growing in line with the market, sometimes a little bit more, sometimes a little bit less, but on average pretty much in line with the market. When we look at the more recent development then, the last quarters and I suspect you have some interest in that, we have in quarter one last year, quarter one, 2010, started to grow again. We were on the 2% organic growth. We actually managed to grow to 5% in quarter four of 2010. That was mainly driven by the portfolio, where we saw a positive total change in our portfolio of close to 4% last year. The other part was driven by extra sales. That is normally a good sign.
When your portfolio starts to move, when you see the extra sales moving on, that is a really good sign. Unfortunately, we lost 3 major contracts in the beginning of this year. This happens. It's part of our business. We lose and we win contracts. This was a little bit extraordinary. Extraordinary in the sense that the size of the contracts were really big. Altogether, this represents more than 4% or 5% of our sales, of our portfolio. It all happened in one quarter. That was really extraordinary for us. Still, as you can see, all of that affected fully quarter two. We managed to come out in quarter two with a zero organic growth. The first half year, we managed to come out with 1% compared to 4% last year as a full-year.
When we look at the operating margin development, in the green, you see also last year's margin development. First half year, we ended up at 4.8% last year. Now we compare that to 3.5% this year. As much as you probably don't like it, I don't like it either. This is not Securitas. This is not what we have been doing. We are determined to change this again to the positive. What has been causing this drop in the margin? When you simplify it, but it's pretty much accurate as well, 1/3 is directly related to these contract losses. These were contracts that we had for many years in our portfolio. We were running them at good margins, big contracts, so you can be very efficient also in your delivery.
That has an impact on our operating margin of 1/3, the drop there from 4.8%-3.5%. The other third is what we call in general price versus wage. It's the fact that when we negotiate prices with our customers, we cannot fully recover the wage at this point in time. We have been able to manage this equation for many years. And it's part of our habits and our culture as well. But this year was particularly difficult. One other third has been just because of a very conscious decision. We have made the acquisitions in the UK, Chubb and Reliance. We are putting them together now. And that is just adding a lot of volume at this point in time without any reasonable margin. And that is diluting this also the margin with 1/3. So that has been a very conscious decision.
And we will move on with that. I will come a little bit more later into detail on this issue. What is explaining this? You could say nothing is new, because there is always price pressure. There is always something going on here and there. But when you manage a portfolio of a number of countries or customers or whatever, you always have one or two not performing. You have some performing better and some really performing well. And this has been reality within Securitas as well for many years. Now, this year, what we see is from the customer side, you could say he is still a little bit in crisis attitude. He has been tempted to retender. I would say this is always a little bit the case like that. We have retenders. But it's a little bit more than average.
Purchasers are more in the front line of the decision compared to the security managers. Then, of course, the customer also seeks efficiencies. That is pretty much our opportunity to deliver these efficiencies to our customers, like also my colleagues have been explaining to you. This is a customer, and his behavior. We see the behavior from the security industry, which is, yes, we see a pressure for wage increases. Especially in Europe, we are impacted by collective labor agreements, which is different, for instance, from the U.S. market or from other markets around the world. What we see is that in 2009 and 2010, there have been moderate wage increases. But all of a sudden, there became a big pressure for bigger wage increases from the social partners.
At the same time, we also see that some of our competitors came out more difficult out of the crisis period compared to ourselves. We should not forget 2009 and 2010 have been our best years ever in Europe. So we were doing fine. Some other people in our market, in our industry, had some more difficulties. And they started to hunt more for volume. Again, is this totally new? No. But it's a little bit more than what it is normally. So yes, things are happening in the security industry. What we also see is that there is some technology coming to the market. There are many technology providers around. And also new technology is emerging into the marketplace. The strategy from Securitas, our reaction has been to focus on the customer, to focus on the customer segment, to create the added value.
Yes, we have been working with cost as well. Within Securitas, we have always been efficient. We have always worked on our costs. And also the last years, we have continued to work on our costs. But I must also say what we have saved in Europe, we have invested into the strategy over the last two, three years. So none of the margin development has been by leveraging the cost side over the last two, three years. We have invested that back into the strategy. And we are also working on creating partnerships with technology providers. The way forward, this is a slide, a picture you have seen also two years ago for the ones that were here. And this is what we are working with and what we will continue to work with. I would say I'm very proud to work with Securitas, extremely proud.
What has maybe been some of our weaker points is that we were focused too much internally with some things going on with the Sunflower Project. And we have said we need to be much more externally focused. And that is really where we put our focus, to be focused on the customer. And we have worked very hard over the last two, three years to implement this strategy, to be much closer to our customers and to deliver the solutions that they need. On the other side, we have seen a company I see a company on a daily basis that is really capable to deliver strong operational results to our customers. The operational delivery is very strong through our people, through our 650 branch managers on a day-by-day basis. And we should keep that.
We should keep that intact and make sure that we strengthen that even further going forward. The goal is to bring these cost-efficient solutions to our customers. One question from the audience was here before. When we say this to our people, their first reaction is also yes, but then we will reduce our top line. Actually, we are not. When you do that, you get awarded more business from the customer. That is my experience. When you are able to bring him to one side, an efficient solution, he will very fast say to you, well, I would like you to do this as well into my other side. That is the really good effect also from working with solutions with our customers. I asked for this water. Now at least I should use it.
One of the first things we have been doing when we said we need to focus on the customer is also to create an organization that is able to do that, an organization which is closer to the customer than we were before. This is the blueprint we have created. On the one side, you see we will have segmented branches that work purely on a segment. In Europe, we have now close to 40% of our business which is in segmented branches. You only work with one type of customer. The other part is geographical branches, where we work still in a geographical way, where we do not have the density, for instance, or when the specifications for the customer are not very specific. Then the third part of the organization is to work with key accounts.
This could be both local key accounts or international key accounts where we work with the customer throughout Europe or even with other continents around the globe. This is then an example of how this has been implemented in Germany. We have the segmented branches on the one side. In Germany, we are focusing on automotive, chemical, culture and science, document solutions, energy, fairs, which is a very big segment also in Germany, financial world, national security, and public transport. We complemented that with the geographical structure. Then we have key accounts which could be international and national. We have one back office, one support office that supports all of these operational entities. We leverage that cost base. Now, I would like to show you a little bit more as an illustration how we work in two segments in Germany. One of them is the chemical.
The other one will be the automotive industry. This is the chemical one. I don't need to tell you, the chemical industry in Germany is huge. It's big. It's a growing industry. It's a highly specialized industry. Now, we work with Securitas in Germany as one specialized company. There are nine branches with 1,100 guards who work throughout Germany as one company specialized in delivering security solutions to the chemical industry. It's a lot about in the chemical industry to combine safety and security into one solution. By doing that, you create efficiencies and synergies for the customers. The growth, the evolution from 2009 to 2011, we see sales growth of more than 10% per year, organic. We see stable margins. When we go to the second segment, which is automotive, here we also operate as one specialized entity throughout Germany.
Automotive in Germany, it's a huge industry. Everybody in the globe wants to drive German cars now. It's a growing industry. And we are looking, working very close to that segment now. Now, when you think about security, traditionally for automotive industry, automotive customers, most of the companies will focus on the production side security. And that is only one element in the whole chain of that customer where he needs security. Traditionally, we were also only looking at the production side security. Now, automotive industry, they have huge security needs during the development and prototype phase of their cars. Then they have, of course, the next step is the supply chain. It's not only the production side of the customer, but it's his entire supply chain which needs to be secured. Then we have a lot of events going on with the automotive industry.
Then also his entire sales and distribution channel needs to be secured together then also with the corporate security measures. So when we start to work with this in detail, with this segment, we discovered there is much more security needs than we ever have been thinking before. We deliver this know-how to customers, adapt it to their process chain. We also develop global solutions. To give you one example, there exists something which is called car clinics. When you run a car clinic, then you show your most recent model, actually the model that will come in one, two years from now. You show that to different spectators, potential interested customers around the globe. Then you will show another car from a competitor next to your own car and another car from another competitor. Then you will measure the reactions of those customers.
Of course, that needs really high security, because you don't want your prototype to be shown anywhere outside that audience. That is, for instance, something that we take care of for our customers. Around the world, we secure this type of events with our people. To give you the numbers here, we see an organic sales growth of more than 10% per year with improved margins. The improved margins come from the fact that we work with those elements in the process chain where there are higher security needs. When we talk about solutions, or traditionally, the view was pretty much limited on the manpower guarding. Our most sophisticated tool was to multiply the number of hours with the price per hour. Extremely difficult. That is a very traditional way to look at our industry. We are extending this view.
What we are looking at is to look at how is the organization of the customer, how is he organized in terms of security, how does his processes look like, what is his technical security looking like, his structural security, the infrastructure, what are the safety procedures, what type of investments are needed. And it's this type of consulting, you could say, analysis of the situation that we are performing before we are putting a tender into the customer. Multiplying just hours by with the rate per hour, that is really easy. But this is much more difficult. And we are training our people in this. We are specializing them in this. And we are working also with specific customer segments.
Because if you do this for one segment, then you know if I go to the next customer within the same segment, I will just exactly find the same things, more or less. So this is the extended view we are taking. And here are examples of recent contract wins. Based on a sales approach where we focus on the added value, where we make a security scan, where we make a risk assessment, and we propose a certain service mix to the customer. And you can see different segments there in energy, retail, finance, production, public, and some other segments. What we see the last 18 months is that the new sales have been stable and have been at good gross margins. And the average contract size of the contracts mentioned here is EUR 1.8 million sales per year.
This is how we have been managing this growth you have seen on one of the previous slides in 2010. This was coming from this type of activity with our customers. So we are selling, our new sales are at normal margins. We are selling the value to our customers. If I go move on to another example of a segment, which is the health care. Health care is a segment, industry, which is growing fast. The older we get, all of us, unfortunately, the more need for health care we have. This is an industry that will grow in Europe in the next couple of years as well. At the same time, it's growth, but it's also a lot of constraints. It's highly specialized. The budgets are also under focus connected to the health care industry. Here we can help. We can help.
Then at the same time, I should tell you one more thing. There's also an increased need for security. In the health care environments, there are conflicts with patients. Patients disappear. Goods disappear. Drugs disappear. The need for security in this segment is increasing. So we can help our customers by focusing again on this segment. A lot of this security, first of all, it's not always existing. There is no real security plan for a hospital. We can help the customer. In some cases, it is existing. But we can then outsource, or the customer can outsource a service to us. We help here with, again, integration of safety activities. And we also have experience in emergency plans to help the customer. Sales growth more than 20% per year of the 2010-2011. And then we see stable margins in this segment.
We try to focus on segments, on customers with specific needs, give them an answer. Another type of customer is the global customer. We have organized since three years now what we call SEGAT, which is the Securitas European and Global Accounts Department, where we have customers that have a need to work with one pan-European supplier or even a global supplier. What we can offer here to the customer is a consolidation of suppliers. In many cases, the customer has found out that there is a cost connected to managing suppliers, which is relevant. We consolidate. We can bring synergies and exchange also best practices from his own operations throughout Europe or even to other continents. We can also monitor the quality of his own processes, of his own security in an international way. In Europe today, we manage more than 60 accounts in this way.
We do that with 30 key account managers that have been each one dedicated one or more accounts to each of them. It is a lot about the size of a country now, you could say. The portfolio we manage in this way has the size of one country in Europe. This is growing. This is then one example of a customer that we handle in this way, where the customer, in this case, we have a coverage for his services. We cover 22 ports in Europe, spread over seven countries. We have built a solution there where we integrate technology and 180 guards into one solution for this customer. So it's a combined solution that we deliver to him. We deliver also a central information system. We monitor his operations, the security and safety aspects of his operation.
We monitor that for him on a European basis. We report each day to him everything which is going on in his network and every incident. The minute the security manager from the customer comes into his office, he knows the European status of his business. We have been able to manage most of the difficulties for him. It's not like that that he should be day and night build his own organization to manage the security. We manage the security for him. Then once or twice each year, we escalate some things to him. Then the customer gets involved into the daily operations. We manage and monitor for him. He manages us on a daily basis in this way. This was also a cost optimization for this customer, thanks to the concept we have put in, and also flexibility in delivering manpower.
Instead of that, he needs dedicated people to certain tasks. We can propose him the people when he needs the people that we then use and share with other customers. So this is a pan-European customer. And as I said, we are managing 60 customers like that in this way. Then I would like to mention a step we have taken as well in aviation. This has been a specialized division in Europe since 2006. And the specialization is in there that we can provide expertise in the sales, how do we sell this product, in the operations, how do we run the security at an airport, risk management. It's also a very specific legal environment that we operate in. And also the insurance matters are pretty much specific for this industry. We have seen a growth here of more than 10% per year during the period 2006 and 2010.
Actually, it has been closer to 20% annually. We have seen, of course, some contract losses in Helsinki and more recently in Brussels Airport. We have seen much more wins. We have seen wins in Madrid, Arlanda, some part of Schiphol, Paris, Antalya in Turkey, Hamburg, Germany, Porto, Rotterdam, Stuttgart, Liverpool. Now we have decided, together with our other colleagues from security services, that the aviation expertise we have built up will be used throughout the world. We have created what we call an Aviation Global Business Center. The first success of this is, as Santiago has mentioned, the cooperation between the Canadian operation, the North American operation, and this business center to win the CATSA contract in Canada, where we will deliver services to 32 airports for the next five years. This should benefit our customers, our existing customers and the new customers.
This is becoming more and more, or this is a really global business, where technology is also moving on. New technologies will come to this industry and to the security part of this industry. We want to be on the forefront of this. With this setup, we will have a global center that will accumulate this knowledge from around the globe. We are growing by working with our customers, new customers and existing customers. At the same time, we are also growing and working with acquisitions. I explained to you that we have worked towards the eastern part in Europe and towards, then, more specifically the western part, which is then the UK. We will have now a closer look at the UK.
Traditionally, we were, compared to the size of the market. It's a big market where we are in the UK. It's a big security market. We had a market share of 4%. That was a weak position. We served customers. We did that very well. But still, we could not make any difference. So then we have decided, and we worked with this project, and we could acquire Reliance and Chubb Security, which then brings us to, yeah, a market share of 4% and 10% and 5%, close to 20% market share. We have now a nationwide presence in the UK with 15,000 employees and 215 mobile teams. That brings us to a position of number two. Of course, at this point in time, we have a lot of integration work going on.
I must say, our people are doing a fantastic job here in the UK in this process. It's a lot of work. It's a lot of hard work. But the process they have put in, the procedures they are putting in, it's really great. And I'm looking forward to see the results of that. The integration is on track. The restructuring budget is respected. And then what we will achieve, of course, is that we will have a scale now to improve service and margins. I think this is also an important step for the market as such. We will, with this move, consolidate the market. And that will also help to bring some more rationale into the market when it comes to pricing. As I said, we expect the results to come as of 2012. 2011, we haven't basically seen any result out of this.
That is according to the plan. We have also worked with acquisitions towards the eastern part of Europe. We have been working traditionally in Poland, Czechia. There we were already present. But we have built up stronger positions there. In Czechia, we are number one today in the market. But we have also gone into new territories. We have added Serbia, Montenegro, Bosnia, Herzegovina, Croatia, Morocco to our list of countries where we are working. But the goal is not only to make the acquisition, because that is the easy part of the job. The goal is to make the company develop. And I would like to refer to an example here, an illustration of how we have been doing that. And that is Turkey. In Turkey, we have started there with 1,500 employees in 2006 to now, 2011, 9,500.
A tremendous journey, to a large extent done by what Luis commented as implementing the Securitas model, implementing the way we work with customers on a daily basis and the way we work with our people. At the same time, we have added consulting capability. We have acquired a consulting company two years ago in Turkey. We also see some important technology development. We have a customer portal to track service performance online. Turkey is a big country. We have national customers that want to track their services from wherever they are sitting throughout Turkey. That we can deliver to them. We have tracking tools for our guards, also with applications on PDAs, on BlackBerries, on iPhone, iPads for those customers that are interested in this. We are also working to add some technology capability, systems capability to this picture. Some recent contract wins: automotive, Mercedes.
They have a big bus factory in Turkey. I think it's the second biggest bus factory from around the world. We are delivering services there now. And also, we have won the contract for Coca-Cola in the food and beverage segment. So today, we are number one in this market. We have seen sales growth of more than 20% per year and also improved margins. This was pretty much about the first highway in our strategy, to fully focus on the customer, to become, in a way, a different type of company that we have been compared to where we were before. We put a lot of energy into this process. And we are making results out of that as well. The second leg is to strengthen our strong basics. And I will just show you one thing on that.
And that is also that we are working with our people strategy. We have introduced a new employer branding concept. I don't think you are pretty much into that. But we are calling that Everyday Heroes every day. Our people are making the difference every day, wherever they are working with any customer. They are making a difference, a small difference, a big difference. But they are making a difference. And that is how we are branding ourselves now as an employer. We have an employee survey also where we measure three things. We measure the leadership. We measure the people, how they are, the colleagues. And we measure the workplace in which we work or in which our people work. And if all of that is fine, then we should normally have loyal customers and engaged employees. It's a fully web-based employee service.
It's the second time we have running it now. It's 110,000 people invited with a response rate of 54%, run over 21 countries. And we see that we get out pretty high numbers, actually. For me, this is an important strongly recommend to work with Securitas. 83% of our people would strongly recommend their neighbors or friends to come and work with Securitas. Still, in Europe, in some of the countries, we see a turnover as well in our staff. You wonder, then, why do we have this turnover? Well, I must say, in some of the countries, we have a turnover of only 15% or even lower. But our people are also on the way to something better. They are committed. And they are satisfied with what we're doing. But they are on their way to something better.
They see this as an interest in their professional life, as a good step to work within a company, to take responsibility. But they also are on the way to something better because they want to move on also in their personal lives. And that is fine with us. This basically concludes my presentation. And I want to save some time for you also to raise questions. Try to make a summary. One leg of the strategy is to focus on the customer, really become a company that deals with the issues that our customers are facing. That is a service company. And that is what we are becoming more and more day after day. On the other side, strengthen our strong basics. The goal is to provide, together with that, good solutions to our customers.
At the end of the day, this should bring us loyal customers and engaged employees. This concludes my presentation. I'm happy to answer any question you have, of course.
Yes, Gostowski, Danske. If you're OK, we saw some margin pressure now in the first half of this year. But even if you haven't stated the longer pro forma figures, still, Europe has seen margins coming down. If you take on a bit critical view, is there something you could have done differently to defend your margins? And now I'm just talking about that 1/3 because you have done the acquisition. That's not much to do. The contract losses was one up. But where you haven't been fully able to compensate.
Well, maybe we should start with the first part of the picture. Actually, in Europe, we have not seen the last three, four years margins coming down. We had stable margins year after year or even a little bit up. So maybe that is a picture we need to be clear on. In Europe, we have not seen margin erosion for the last three, four y ears. So maybe that's the first thing. Coming to your question, the only thing we can do to make our margins grow again is to focus on the customer. No society in Europe can afford empty manpower. That is clear. We cannot afford anymore a guard sitting somewhere on a chair doing nothing. We need to bring solutions to our customers. And some people really think this is still the picture we have on our industry. We have some guards sitting doing nothing.
Well, I can assure you, we have a lot of specialized profiles, dedicated profiles to the customer needs. And we are pretty far away from this a little bit populist picture that some people put on our industry. So the margin stabilization now, we need to work up our margins again. And we will do that. We are really determined to do that in Europe. There is absolutely no reason why we should see this picture going forward. The need for security is there. And we will just bring solutions to those needs. I don't know if that answers your question.
Not fully, but partly.
At least, what part did I not answer, then?
As before, when you included mobile monitoring and also when we had Spain, Portugal included, if you looked at the margins in Europe, it has still been a downward trend for quite a long time. If you look at the last four, five years.
Well, I don't see that picture, actually, no. Both mobile and alert have been able to improve their margins, correct, Alf?
Pretty stable.
Pretty stable. We have not been improving. The U.S. has been able to improve their margins, absolutely. In Europe, we have been stable the last four or five years. OK.
OK, Lars Norrby from Erik Penser, again. You mentioned here you win some and you lose some. And you showed a long list of contract wins. But let me just quickly ask you about the three quite large contracts that you lost in Q4 and Q1, was it? And they all happened to land at one of your competitors. So what I'm trying to find out is, has there been a real change in behavior of G4S? That is a change in strategy. That's question number one. And if that is the case, how do you prepare to handle that going forward?
Yeah, I refrain to comment on a lot of competitor strategy. I think everyone should design their own strategy and implement their strategy. But I mean, we have been losing contracts and winning contracts from time to time. It's really extraordinary, the size of these contracts. And if I can comment anything, I would say G4S is more looking at bigger contracts. And they write that also in their reports, that they follow up on big contracts. And it's really nice. When you win a big contract, then you can have a lot of champagne. But when you lose it, then it's, of course, less nice. So that is how much I will comment on their strategy. These specific contracts in itself, these were mainly price-driven decisions from customers. So yeah, that is basically what it was, yeah.
Just, was the offering fewer guards with a total lower price? Or how was the structure of their contracts compared to what you were offering?
In two out of the three contracts, it was price per hour. In one other contract, it was more a type of a solution.
Thank you.
Hi, it's Rajesh Kumar from HSBC, again. In terms of, basically, new contract bidding, have you seen any increase in demand for technology or systems-based requirements?
So your question is if, for new contracts, if we see more of a trend that new technology should be included into the contract. Basically, this is a market you have to create. We are creating this market. It's like what Santiago explained with his one example. A customer cannot be happy with his present solution. Then often, you will get a tender. And it will be a price per hour tender. You need to be ahead of that game. You need to make your work upfront and analyze the customer, go there, look at his side, see what needs he has. Then you can bring the argument to the table of the solution. So it's a big part of to be done there by ourselves in educating also our customers and showing them this solution.
This is applicable to a large part of the market. Some customers have this trend by themselves. That is because they have seen it in other places where they can make savings by introducing technology. Then they go also when it comes to new tenders; they introduce that into their tendering.
Would it be fair to think that you don't urgently need systems people to keep winning business?
Could you please repeat that?
Would it be fair to think that you don't urgently need systems people to keep winning business?
We don't need them urgently. We need them to do this proactivity towards the customer. That is what we need. If we would have acquired Niscayah, that would have brought us a boost into that process, yes. As from the first step, we always had a Plan A and a Plan B. I mean, acquiring Niscayah would also have some reasonable disadvantages, which we do not have in Plan B. We will go now for Plan B. We are free to work with any company we can work with and to recruit anyone we want to recruit. Actually, we are already in this process of building this type of departments, engineering departments, to work on this side of our business. We will increase that.
Also on a different subject, in the U.K., some of the data seem to suggest very harsh price pressure more recently. Could you give us some sense of how much of that would be public sector versus private?
We are not very much active in the public sector in the U.K. We are much more focusing on the commercial sector. Yes, there has been price pressure there. The government sector in the U.K. is one of the most liberal governments throughout Europe when it comes to outsourcing. Of course, one of the reasons why we also want to have a bigger platform is also that we can build better answers there to the public needs. But our first aim is still to go for the commercial sector in this stage.
Thank you.
Just had two or three questions, if I may. Can you talk about Germany and whether you've been able to successfully pass on the minimum wage increase that happened there quite recently? And if I understand correctly, what you were saying about the UK is that you felt you'd be able to do better than break even in 2012. Is that correct? And then lastly, your aviation business, which has been growing quickly, can you remind us whether the margins there are still higher than the average for the division?
OK, I try to take them in the order as you have mentioned them. Germany, we have been able to pass on the wage increases to our customers thanks to an approach which had two important ingredients in it: determination. We were determined to make this work. But the second ingredient has been the solution part. We have also been helping our customers to respect their budget constraints by providing them the solutions they are looking for. So yes, we have been able to pass on the wage increases to our German customers. And I must say that, three, four years ago, Germany was a problem in Securitas in Europe, we have solved that problem. And Germany is now. It sometimes takes time to solve a problem. But Germany is now really going well in our structure. And that is really a good movement for us.
Your second question was about the U.K. Yes, next year, they will deliver to our results.
Which means better than break even.
Which means better than break even, yes, absolutely. And then on the aviation side, actually, those contracts we have been—these are huge contracts, most of them, compared to the traditional contracts we are working with in the security services market. These are big contracts. Those margins on those contracts have actually been lower compared to our traditional security services contracts in the other segment, so to say, over the last four, five years, actually. They have been permanently lower. But they have been coming closer to our margins.
Andy Grobler from Credit Suisse, three questions, if I may. You mentioned there's been an increase in the number of clients wanting to retender. How many or what proportion of your business is up for or potentially up for retender over the next 12 months? The second question, just on the technology buildout and the implementation of Plan B that's been discussed many times this afternoon, which route are you likely to focus on? Is it going to be acquisition, as it appears to be in North America, or organic? And then thirdly, if you could just help us with some of the wage increases, the collective labor agreements, wage increases across the major countries in Europe, what are you expecting next year?
First of all, on the retendering of our portfolio, this is something which we are permanently facing. We have been facing that year after year. On average, I would say it is like 20% of our portfolio which is being retendered all the time. Contracts last for five years on average, some longer, some shorter. Sometimes a customer does not retender his business. He just reconfirms the contract in a way. On average, it's 20% of our portfolio. What is critical is the size of the contracts. And then sometimes we have like we had now in Belgium. In one quarter, you have coinciding your two biggest contracts that are being tendered at the same point in time.
The fortunate thing with the security services part of our business is that we have lost. Actually, these contracts we have lost, these out of our top five, these were the three biggest ones. Well, out of our top five, they were in our top five contracts. I should say it like that. So yeah, when it comes to the technology question, then Plan B or in Plan B, the acquisitions or the organic, as you can see in our footprint, we have pretty much, in my opinion now, done what we wanted to do with our footprint. We are in the UK. And we have made our position much stronger in Eastern Europe. So we will not look we will still make some guarding acquisitions. But that will reduce going forward compared to the pace of the last two years. So we will have some capacity to make acquisitions.
And we will look more after technology acquisitions going forward. And we will also introduce not in every country we will be able to do that. We will also use the two parts of the strategy. And that will be pretty much a country-by-country decision, depending on how the situation looks like, the relationship with Niscayah. We want to continue to work with them. We want to have a healthy relationship with them. But that will be pretty much a strategy country by country. And then there was your question on the wage increases. Well, none of that I mean, those discussions will only start now, Q4 and Q1, with the unions or the partners in the unions. We will start that discussion now. In general, our aim is definitely to keep us on the lower side compared to this year. That is definitely our goal for next year.
Are any of those wage increases set in stone? Have the agreements been made in any of your major countries in a similar way to, say, Spain?
Yeah. In a very limited part of our business, they have been made. They have been made in Norway, Belgium to some extent. But that is from the top of my head, I could miss one here or there. But that is basically the situation. Most of them need to be discussed, actually.
Just one quick follow-up. The CATSA contract you mentioned earlier, where will that sit? Will that be one of your top?
The CATSA contract, just to avoid any confusion, will be reported under the North American business. I have mentioned it here as a success of the partnership between Europe, the commercial partnership between Europe, to work on this together. But that will be part of the U.S. North American income statement. And that will be a pretty big contract, I guess, in the U.S. Santiago, I don't know. Top five for you? Yes, top five contract.
OK, thank you.
I think we're running out of time here.
Squeeze, squeeze, Wellan. Just going back to the U.K., you didn't really say much about the integration plan. I just wonder if you can just sketch out for us briefly what the process is in terms of putting the three businesses together and also give us a sense of what the aggregate gross margin is now, please.
Could you please repeat your first question there?
Yeah, it's asking you about how are you going to integrate the three different businesses in the UK? Where are you in the plan? If you can just lay it out for us briefly. And then what is the aggregate gross margin, please?
On the first part of the question, we are, yes, really building a new company. It's integrating three companies into one new company. We are integrating them into one structure, one operational structure, one back office. It's a huge job, and into one company culture as well. Maybe that is even the biggest part of the job, to make sure that we are working in one company culture that we want to be in. That is according to plan. It's a tough job. It's a big job. It's according to plan. We have gone into detail to all the customers, to all the branches. We have looked at where should the people be, how should it be organized, what will the structure look like. We are really finalizing all of that. At the same time, I must say, our primary focus has been on servicing the customer.
Our primary focus in the entire process will be to make sure that we deliver the service continuously to what the customer expects from us. That has been the primary focus in the entire integration process. So that is where we are there. It's not finished, no. But it's according to plan. And we will see the income next year coming into our P&L. On your question of the gross margin, I don't know if we comment on that. I don't think we normally expose ourselves to comments on gross margin. So I will also not do that, if that is fine with you. It's probably not, but still.
I don't know whether it's just possible to squeeze one half of one in there. But I don't know whether you can make some comments about France, whether there's been particular pressure. And obviously, a number of your peers are in financial difficulty. How fluid is the situation in France? And when do you expect the competitive situation to sort of get resolved?
Yeah. France is a tricky market. It's a tricky situation. We should not forget we have 24 other markets we are working in. So that's the good news. But it's a difficult market where most of our competitors, or a big, I would say, 50% of the market, is in financial troubles today. I mean, the problem has not been there just the last six months. The problem has been there three, four years. And some people have also left this market. But still, a big market. It's a big country and a big market in Europe. So we want to be there. And we will continue to be there. And we will solve this problem one way or the other. Our biggest competitor is in bankruptcy, actually, a company called Neo, which is the ex-G4S company. It's in bankruptcy. And that should become clear now, on mid-September.
You can be in bankruptcy in France for six months, in Chapter 11, I should say. So that period ends now mid-September. I don't know what will happen on that day. It's a 10,000-person company. They have like 16%-17% of the market. But then if we look at the customers where we are competing, their market shares I mean, we are basically competing pretty much on the same customers. So in there, we have really been facing very, very low prices. So whatever happens, I would say, and whoever will take this over, they have to improve the gross margin. There is absolutely no other way to make this company survive or to make it healthy. The tariff structure is just completely wrong. And that affects our position as well. When you renew contracts, that affects our position.
If that will be solved, that will also solve our situation. That goes for any competitor in the market. There has been a very, very little focus on charging the right price to the customer. But at the end of the day, you cannot continue like that. We have survived all of this pretty well. I mean, we have made, I would say, decent margins in France. But we haven't seen any development till then. This year, a development in the wrong direction. We will fix this. There's no other option.
All right.
Yes?
Thank you very much. To wrap up in respect of time and traveling schedules and so forth, just a few slides on the financial update. I'm sure you already know the details. So I'm going to be very quick on this. Well, organic sales growth, including acquisitions, 11%, 3% without acquisitions. And the other things you have already heard about here during these sessions here. So I don't need to repeat that. If you look at the numbers, yeah, again, the 3% year to date and in the quarter and including sorry, oops. Here we go back. And then through the acquisition, we are really generating a lot of growth. Then you have a difficulty with the krona compared to last year. So in numbers, in Swedish krona, it looks like it's the same number. But in real terms, it's about 11% higher, actually.
The numbers down to the profit, we are not pleased with the first six months. We can do better. We will. You've heard that today. But there's lots of opportunities for us to improve the margins going forward. That is really our key challenge. We're doing well on the top line organically. We do well on acquisitions. We just need to improve the operating margins in the company. Yeah, North America, very well, good growth, and a good pace in North America, growing 4% in the first six months. Margins are stable. That is to comment on Lars who disappeared now. But he has a question about the price, so competitiveness.
I think for the others listening to that question, what we meant by that line in the Q2 comment was to try to gather a lot of small, different things, like, for example, that we had not fully recovered the SUI rates in the marketplace. We had some costs on risk, extra cost of risk in the business in the second quarter and the first six months and so forth. We gathered all those things under one headline, being the price competitiveness in the market. So that was the reason to that comment. I should just clarify that. But I agree with the answer Santiago gave you. The meaning was differently when we wrote that comment. OK, so North America, stable margins, and a very good development if we look back from a track record during the past five, six years. It has really developed well.
In Security Services Europe, we are still growing 1% in spite of the losses of those big contracts. We still grow 1%. We're a little bit behind the market. But still, it's growth. And we are winning contracts. We win contracts at good margins. But we have taken a beating on the margin. And that, as Bart has said, we're not happy with that. And we will fix it. We're just going to have to recover. The UK piece, we will manage. The price wage balance, we have a strategy. We will execute on that strategy. So eventually, we'll also recover on that part. And we have to be more aggressive. But we have to combine it with how we manage our customers. Because if we are too bullish on that in front of our clients, we're going to lose on the top line. So we need to be smart.
Then on the contract losses, that has also been commented. We haven't spoken very much about mobile and monitoring here. We are picking up a little bit of the growth, actually, in Q2. The margins are stable, flat and stable. We have a good margin in this business, as you know. We are discussing right now which gear to put in, if we should add more salespeople, because that's the way to generate more clients. In this business, there is basically no other way. You have to have more people on the street. But in this turbulence, this market situation, we are a bit prudent, a bit careful. So that we are discussing right now, are we going to add more people or not and to speed up the growth. But still, the trend is slightly upwards anyhow.
In Luis' business segment, Ibero-America, the growth is really doing well. We're growing in all the markets we are in. The margin is stable in Ibero-America. Cash flow, we are not happy with. This was negative in the first six months. We will recover. We haven't changed anything in the business. The business model is the same. The company works the same way it's always did. So we should have a very good cash flow now in the second half of the year so we can recover and reduce our net debt. We'd like to see that happen now in the coming months. We're putting an enormous focus on this, chasing the DSOs, chasing the receivables with our clients, and making sure that we get the cash flow that we always generate in this company. We are also making one strategic change to our business.
That is that in all bonus systems, everybody who has a bonus in this company as of January 1 next year, if they don't already have it, they will have cash flow in one way or the other, being a part of a bonus system. That will be different solutions in different countries. We will have it in all bonus systems. Cash flow will be included, which is not the case right now, in all cases. The net debt is too high. That's going to come down as we now improve the cash flow during the second half of the year. Finally, I conclude with this picture here. In my opinion, the more you know about this company, the more confident you feel about the future.
We have been trying to relate a little bit how we operate in this company, how we think, all the good things that are happening here. The more you understand and how we approach our business and really try to focus on security and deliver value to our clients, the more optimistic you are about the future. I am very optimistic about the future because we see all these things that we have been trying to relate to you over a couple of hours. We see all those things happening. They are really happening. This is not something we are dreaming of, something that we are expecting or planning. This is happening. This is going on in our company. That will bring the results. It's just a matter of the timing of how that's going to improve our margins. Actions are taken.
UK, for example, we are having a break-even, roughly, result this year. Next year, it will make money. It will contribute dramatically to the improvement of our profitability. So there's a number of actions, short-term actions, that will make a difference. And that will improve the situation next year. And then on technology, we've discussed that we will move by acquisitions and organically and in some places, a combination of the two. Now we are more free. We are more ready to move. We are planning. And we're going to move in a different pace in the technology phase than we had done in the past, where we have been more dependent on the relationship with Niscayah. Now we are more free. And we can work in a different way in order to improve our position. And that's going to bring margin, retention, and strength to this company.
So to conclude, thank you very much, everyone, for coming. I'm optimistic about the future. Thank you. All right, any questions? I'll be there.
Yes. One.
A question to Santiago. If I remember correctly, well, first of all, Petri Gostowski, Danske. If I remember from your last Capital Markets Day, you talked about looking into the mobile opportunity in the U.S. Has that started to create something? Or is that a no-go in the U.S.?
No, we are growing. We are expanding. But there's nothing big enough to highlight right now. I think we're expanding four new cities. But this number is still small. So we will start to commit more once it's a little bit more mature.
OK, is there something you could do to speed that up? Because looking at Europe, I guess, it is still a high-margin area.
Yeah, we were trying for many years to try to open that business in the U.S. We were not successful. We slowed down a little bit. It's my strategy I put in place maybe 3, 4 years ago, 3 years ago. Now the idea was to fine-tune the European strategy for the U.S. and be sure we find an opportunity big enough to develop that in the U.S. Now I think we have the model. We have the concept. We have the segment. We have the packages. We know the way to sell. We know the way to operate. So now we are better prepared. Your question is good, to speed up the process. It will be one of the things we will consider in the coming business plan.
But how much investment, how much of the result we will put to develop that in the next 2 years, we need to find the balance about invest in the future to open this opportunity or the results we have to put in the P&L every single year. We have to find the balance. But now the difference, we have the business model. We know the way to grow that market. And we didn't know 3 years ago. And now we're in a mode where we spend 2-4 new cities. How far we can go is a question we will discuss with the business plan. But the opportunity, I think, is there.
OK, thank you.
Yeah, hi, Tom Bennett, RBS. Just on your EPS growth rate target of 10% per annum, is that forward-looking from today? Or do you say you want to recoup the drag you've had over I think you had 6% historically. Are you saying you want to recoup that, bring it 10%? Or are you looking for 10% from today forward?
We have not been thinking that much in that respect. We have this target that we should grow in the 10%. Whether it's from one point or the other, it's an average over time as we operate. So I cannot say that we're going to recuperate what we lost. But we should grow 10% per annum. So I think that the strategy we have will allow us to grow faster than we have done in the past. So that we think we can do because that's what this strategy is about. But if it's going to recover the history or not, I cannot tell.
Just one quick follow-up question on the margin potential. I think you have had it in Europe, stable margin. You have some positive increases in margins in other markets. Can you say anything about where you think the potential margin, operating margin, can or should be in the future relative to where you are today?
I think that is very difficult to give a precise number. I mean, we don't put a specific number that we will be in the US at X% at a certain date and Europe and so forth. We don't operate like that. We like to see the trend, that we year-on-year improve. Our whole structure is built on that. Our bonus systems, our incentive systems are built that you improve your business, your profitability, your profits year-on-year basis. We don't put a specific target. We have countries where we have been very successful. We have a strong position, a high market share, well-developed market where we are 10%, 11% operating margins. On the low side, we are break-even. It's a wide span. It depends on a lot of different factors.
So trying to summarize that and put a target by division, we don't even have it ourselves. So I prefer not to say. But we have countries where we are 10%, 11% operating margin.
You want to improve it year on year, is what you're saying?
That's the whole idea.
Hi, Andy Grobler from Credit Suisse. Just a couple of questions, please. Just going back to the Kaiser contract, I mean, that's going to be a major boost to the US revenues, I guess, 2.5%-3% onto your revenues. When does that start? And where do margins sit relative to the rest of your division?
Yeah, the contract will start the 1st of November. That's his guarantee. Now we are working very hard to be sure we have everything in place for that day. From the margin point of view, we will see. We don't have any P&L yet. One thing we know is this year would be a negative effect in the margin. It would be a cost for us. The cost will exceed the income this year.
In 2011?
That's correct. It will be a positive impact for sure next year. But for the timing of the contract coming that late in the year, you only have two months of revenue. And you have all the startup costs up front, which is very substantial for this case. So this year will be a negative impact. That's his guarantee. And we try to do the right things to guarantee the success of this contract for the next five years and to have a happy client. And we think if we do the right things up front, we will enjoy better margin moving forward. I think this margin, when it's running at the right speed after we pass these first months, will be above the average we have in Canada.
Sorry, above the average you have in Canada?
Yes, the margin in Canada.
Where does Canada sit relative to North America?
You can ask my boss. Maybe he will.
It's a low margin. It's a low-margin country, Canada.
Canada is behind the division.
Yes.
It's positive, of course. It's not above our average. It's below the average. This will be something in between, I would say, where they are right now and our average. It's a large country. If we are efficient, I think the opportunity is it's a performance-based contract. We need to understand and be sure we perform enough to score high. I think it's more to win than to lose in that one. If we do the right things and we provide the right service to the client, performance-based contracts are always a challenge. But you are what you say you are. This is a good company. Normally, you have to perform well in that scenario. That's the ambition we have. It's one of the reasons we will do everything up front to be sure we will perform high for the next 4.5 years.
The beginning will be harder for the finance. You will see the effect for sure in the numbers. We don't have that number yet. We'll be positive. We try to score high in this performance-based.
OK, thank you. Then the second one was just kind of a broader macro question, given all of the uncertainty in equity markets, macro data pointing south in many cases. When you talk to your clients in Europe and North America, are they seeing, saying anything different to what was being said back in June or July?
It's a question to me?
Well.
Europe and North America.
North America.
I'll look into my boss. We have answered difficult questions. He's the high-paid person in this group. He came to take that one. I couldn't understand.
Now, what are the clients saying? What are the clients saying to us through the turbulence of the stock market?
The volatile market.
The volatile stock market. What does that mean? Does that affect?
For us, from the disagreement point of view, we don't know.
Does it change the behavior of our clients?
No, not in our day-to-day operation.
Part?
We don't see.
The same answer, basically. Yeah, I would also say, I mean, it's a very volatile climate there. Today it's good. The next day it's bad. I would say, on average, people are a little bit less focused on it, at least the people we are talking to.
And I think also to add to that is that when we had the Lehman situation, it was panic, a panic situation. And then it was given orders in that fall to many departments in many companies saying, "You have to cut your cost. Boom. No matter what, just cut your cost." Now it's a bit different this time. Now it's turbulence of the stock exchange. Companies are doing pretty well. And maybe some decisions are postponed and so forth. But still, there is no it's not the same drama. It's on the stock exchange, yes. But among the companies, it's a more stable, as it's called, situation right now, I think. So I agree. And also, what we depend on what makes a difference to us is what could make a difference to us because of this turbulence is that we see it dropping the GDP.
See it dropping GDP. It will affect us eventually. But right now, I agree with my colleagues here. No, we haven't seen anything yet.
OK, thank you.
Hi, Anders. Thank you, back to Handelsbanken. Taking a bit longer-term view, if you could comment on how you see things developing in China going forward and also the scope for security companies such as yourself to be able to operate in Russia in the future? Thanks.
China, we have 3,400 guards in China. We need to have a license. It takes a long time. We are getting there step by step. We get one piece. Then we have to wait for the next piece. It's a bureaucratic process. Unless you have that license fully, which is given to you by municipality by municipality or region by region, you cannot fully really work as a truly security company. So you have to work in different ways with different services and so forth. So we need that. We still haven't got that. The market is huge. I mean, the market is four million guards available. The market that we can is available for us, let's call it, the accessible market. So it's a huge market. 10% market share. You have 400,000 employees. So it's enormous. But the value in money is low.
The size of that four million that four million market in number of people is the size of Denmark and Sweden together, so the security market. So it's a lot of people, small numbers. So don't expect China to make a difference in security, not in the short term and not in the medium term, maybe long term, yes. We like to be there. It's crucial to be there. And we are working hard, putting in a lot of money and efforts to do that because it has a tremendous impact for our global clients that we are in China and can serve our clients in China. So we're really going to stick to China. We're going to be there. We're going to be around. And it's going to cost us money to get to the point where we want to be. But we're going to do it.
Russia, it's prohibited for foreign security companies to operate in Russia, a decision made about a year and a half ago. So it's not permitted. It's forbidden. But hopefully, that will eventually change. And then we're going to get back into we'd like not back. But then we'd like to get into Russia for the same reason that many of our clients, especially in Europe, ask us to serve them, to have our guarantees, our people, our controls of the security service that they require for their subsidiaries in Russia. So I hope that that's going to change. And I expect it to change. But when, I don't know. The big potential from our new markets is you have heard today, Latin America, very good potential. Eastern Europe, we have done a lot. But we still make acquisitions.
But primarily, it's going to be where we can really improve is in Southeast Asia, in all those countries where. And we're still missing in some countries where we like to be present and in the Middle East. That's where there's a big potential for us. Yeah, any more questions? No? Thank you very much for coming. Thank you very much.
Thank you.