Securitas AB (publ) (OTCPK:SCTBF) Q4 2022 Earnings Conference Call February 7, 2023 8:30 AM ET
Company Participants
Magnus Ahlqvist – President & Chief Executive Officer
Andreas Lindback – Chief Financial Officer
Conference Call Participants
Anvesh Agrawal – Morgan Stanley
Johan Eliason – Kepler Cheuvreux
Stefan Knutsson – ABG
Allen Wells – Jefferies
Andy Grobler – Exane
Raymond Ke – Nordea.
Kate Carpenter – Bank of America
Viktor Lindeberg – Carnegie
Karl-Johan Bonnevier – DNB Markets
Sylvia Barker – JPMorgan
Magnus Ahlqvist
Good afternoon, everyone, and welcome to our Q4 2022 Conference Call. We finished the year with good continued momentum and also solid results. But 2022 is not only a year of significantly improved performance, it’s also been a year when we have shed some very significant strategic milestones and important steps in shaping a more technology and solutions focused business and a stronger than ever offering to our clients.
We are on a good path as a company. I’m glad to present the Q4 results today together with our CFO, Andreas. And if we go on then to the results, on a group level we have good momentum across all parts of the business and increased the organic sales growth to 9% in the quarter.
Technology & Solutions growth, together with high price increases are the two main drivers. And our growth in North America, I want to highlight increased to 5%, strong momentum across the North American business, and also then the previously announced contract expansion will positively impact the growth in Q1, 2023. We had double-digit organic growth in Solutions & Technology also when excluding the positive contribution from Stanley Security and Technology & Solutions now represent 42% of our total sales.
The operating margin increased to 6.5%, thanks to Stanley Security and good development in the legacy business. The Stanley Security business improved as a result of pricing recovery, cost control and leverage and initial execution on the value creation plan. And importantly, we have maintained a positive price wage balance, but the labor scarcity is an ongoing challenge, especially in Europe.
Operating cash flow in the quarter was solid at 83%, and we have reduced the net debt-to-EBITDA ratio to 3.7 at year-end. So in summary, we are delivering on our plan. Looking at the dividend, our Board has proposed a dividend of SEK3.45 for 2022.
And with that, let us shift to the performance in the different segments. And as I mentioned, our momentum is really improving in North America. During the first half of the year, we faced top line headwinds related to terminations of some large, low-margin contracts and comparatives that also included COVID related extra sales. But that is now behind us, and we have good momentum going into 2023.
Good commercial activity with healthy new sales together with price increases contributed to strong growth in our garden business. And looking at the technology installations business, that also improved in Q4, but there is still some negative impact related to components and labor shortages.
But we now have a really strong Technology & Solutions offering to our clients, and when you look at Technology & Solutions, this now represents 31% of total sales in North America. And the profitability development is continuously very strong. And we set a new record with 8.1% operating margin in North America in the quarter. The main driver of the improvement is the technology business with strong contribution from Stanley Security, as well as good development in the legacy technology business. And the integration work that we are doing together with our colleagues from Stanley is progressing at a solid pace. So we are currently ahead of plan in terms of synergy realization in the North American technology business.
A very strong performance in our Pinkerton business also contributed to the positive margin development. The Guardian business development was good with positive impact from active portfolio management and increase in value realization from the transformation investments, but with some negative impact related to year end reconciliations.
But to conclude, looking at the momentum on a top-line perspective, it’s really good in North America now. And I just want to highlight as well, terrific work done by the team, record level margin for the first time above 8%.
And if we shift then to Europe, where we also had a historically high organic sales growth of 11% and we have been successful with high price increases to offset wage inflation. This is a major driver of the growth, but obviously also some impact from the inflationary environment in Turkey.
Our European team is doing a very good job working with our clients to address their technology and solutions needs. And the investments that we have done here in recent years in terms of leadership, solution support, technical support has resulted in strong double-digit solutions growth in the quarter and also the full year.
So we’re actively shifting the business mix and Technology & Solutions now represent 35% of total sales in the division. But due to labor shortages, we do have to decline work in a few markets in Europe and that obviously has an impact as well on profitability.
So when you’re looking at the margin in Europe, we had a similar margin compared with the same period last year. Stanley Security, active portfolio management and solutions are contributing positively to the margin. And we’ve had good progress balancing historically high wage increases with price increases in key markets such as Germany, but having said that, various effects related to the labor shortage negatively impacted the margin in Europe such as higher costs for subcontracting, reduced capacity for high-margin extra sales.
Looking at absenteeism or sickness. It’s still at an elevated level like the fourth quarter in 2021 and we have not seen a significant improvement in terms of the labor availability in the quarter. So when you look at the totality from a profitability standpoint and how we ended the year, we are not satisfied with the profit performance in Europe at the end of 2022.
It’s important then to highlight a few of the actions that we are taking under our European leadership to improve. And first of all, given the labor scarcity, we are now increasing the margin requirements also for new contracts, while also working actively to terminate or renegotiate low-margin contracts in order for us to be able to focus our employees on clients prepared to pay for the value that we deliver.
And as part of this strategy, integrated security solutions where we’re combining people and technology is an important lever. And here, we have seen an increased momentum in 2022 in terms of how we’re working with clients and also converting significantly more clients to integrated solutions, which is very important.
The acquisition of Stanley is, of course, an important part to strengthen the integrated solutions offer. And here, we’re now increasing the speed of the important integration work to be done in the coming months and quarters in our technology business in Europe.
Moving then to Ibero-America where we recorded 17% organic sales growth in the quarter. The inflation-driven increase in Argentina is the main driver of the high growth number. Spain continued at a good pace with 4% organic sales growth, but the growth was somewhat impacted by active portfolio management. So that essentially means that we’re terminating contracts that are not economically sustainable or in line with our profitability requirements.
Our team is driving solid focus and momentum with Technology & Solutions, and these sales now represent 31% of total sales in the quarter. And if we shift then to the profitability, our team delivered a stable margin of 6.3% and continued improvement with a margin of 6% on a full year basis.
Spain and Portugal are the main drivers, looking at the quarter, but also the full year with year-on-year improvements also coming in Peru, where we have been driving significant turnaround efforts over the last two years. The operating conditions in Argentina remain challenging. So all-in-all, when I look at this, solid performance and improvement by our Ibero-America team in 2022.
And with that, handing over to you, Andreas, for some more details related to the financials and then I will make a few comments also related to the strategic journey before we open up for the Q&A.
Andreas Lindback
Thank you, Magnus, and hello, everyone. As always, we start by having a look at our income statement. So as Mangnus mentioned, we have a strong top line growth with 9% organic sales growth in the quarter, and our operating margin was 6.5%, where the Stanley acquisition was a strong contributor to the result.
Stanley sales was approximately SEK 4.4 billion in the quarter and SEK 7.7 billion year-to-date, with continued mid-single-digit organic growth. Year-to-date, North America represents close to 65% of Stanley sales and Europe around 35%.
And from a profitability point of view, Stanley supported the margin positively in both segments, while the North American business had higher margins than in Europe. The difference in profitability increased in the fourth quarter after we had strong synergy takeout and development in North America.
If we then have a look at the items below operating results. Here, the amortization of acquisition-related intangibles was SEK 155 million in the quarter, now with the full quarterly effect for the first time from the Stanley acquisition and as we have said earlier, we have allocated approximately SEK 5.5 billion to intangibles in the Stanley PPA and we expect to have an annual amortization rate of around SEK 375 million per year going forward.
Looking then at items affecting comparability. Here, we had SEK 312 million of cost in the fourth quarter, SEK 158 million of this is related to the Stanley acquisition and SEK 154 million is related to the ongoing European and Ibero-America transformation programs. And as usual, I will come back with more details here shortly.
If we then move to the financial net. Here, the cost was SEK 336 million in the quarter. And the main reason for the material increase compared to last year is the financing of the Stanley acquisition, where we had SEK 243 million of costs in Q4 related to the bridge financing in place. And remember here, that in Q3, we did not have a full quarter of cost in.
Of the SEK 243 million, SEK 16 million is related to the bridge to equity and this bridge was fully repaid in October after the finalization of the rights issue. So there will be no further cost here going into 2023. The remaining SEK 226 million related to Stanley is then the cost for the bridge to debt.
If we then look at the finance net, excluding the Stanley bridge cost, this was then SEK 93 million in Q4, around SEK 10 million higher than last year. However, we do see an underlying increase in interest cost of around SEK 50 million, with the net amount between the SEK 10 million and SEK 50 million mainly is related to positive impact from IAS 29 hyperinflation in Turkey and Argentina.
Going into the first quarter of 2023, we estimate the finance net to be in the range of SEK 400 million to SEK 450 million. While this is, of course, also subject to movement in interest currencies and so on.
Moving on then and having a look at our tax. Here, the forecasted full year tax rate was 27.2% in Q3. And as you can see, we are coming in quite a bit lower at SEK 24.6 million. The main reason here is that we have won several old tax cases in Spain from 2006 and 2007 related to the Niscayah spin-off and acquisition interest rate deductions. This means we can now reverse provisions of around SEK 150 million, which impacts the tax rate positively 2.6% on a full year basis.
Note that these reversals are non-cash and non-recurring although the wins are, of course, important as it reduces our potential financial exposure. And this then explains the main difference between the forecast and the full year tax rate, and there is more information around these cases also in the report.
Before moving on, I just want to remind everyone, as we did in Q3 as well, that the number of shares we used for calculating earnings per shares are adjusted for the bonus element of the rights issue in line with IAS 33 and then here, you also find more information on Page 22 in the report.
If we then move on to the next slide, where we have some more information related to the different programs under items affecting comparability. Here, as you know, we closed down three programs at the end of 2021 and the two remaining ones are the transformation program in Europe and Ibero-America and the acquisition-related costs related to Stanley.
Looking first at the European and Ibero-America transformation programs, here we had SEK 154 million of cost in Q4 and for the full year, the number was around SEK 630 million, which is in line with our estimate we gave in the third quarter.
The Ibero-America program is running well on track, and so is most of the activities in the European transformation program related to accelerating the Technology and Solutions business and driving cost efficiencies by professionalizing our approach to procurement.
We are temporarily executing with a somewhat lower pace right now related to the core EFP platform activities that we are running and we do that to ensure we calibrate the program with the Stanley integration to ensure that we maximize the benefit realization and cost efficiency.
Since the program start, we have invested SEK 942 million in IAC, and the remaining amount of the program is around SEK 700 million. In line with the original amount announced when we also consider the accounting changes related to cloud computing that we communicated earlier as well.
Moving on to the IAC related to the Stanley transaction. Here, we announced total cost of approximately US$ 135 million, and the integration progress is progressing well with a good start of the value creation and synergy takeout in North America, where we are also ahead of plans.
Here now in the fourth quarter, we had SEK 158 million of cost. And what is coming in so far is mainly transaction costs and costs related to the synergy takeout. Since the announcement, we have spent SEK 516 million in this program, and we estimate the 2023 spend to be in the range of SEK 500 million to SEK 600 million.
All in all, looking at the full year on the left-hand side, we have a total of around SEK 1.1 billion of IAC in the operating income after amortization from these two programs. Then we have the cost related to the equity bridge and the positive impact from the Spanish tax cases. They are not reported on the IAC line in the income statement, but in the financial net and tax line. However, given the non-recurring nature of these items, they are then adjusted when we report our EPS, excluding items affecting comparability, as should then be seen as IAC when looking at net income.
If we then move on to the next slide, where we have an overview of the FX impact. Here, we had a material positive impact in our income statement from FX, although it was less than in the third quarter due to a weakening US dollar throughout the fourth quarter. The US dollar appreciated 16% year-on-year and the euro 9%. And the total FX impact on sales was 11% in Q4, mainly then driven by the US dollar development, but also depreciating euro.
Looking at the operating results. The FX impact was slightly higher at 12% due to the higher profitability we have in the North American business, and the impact was even a bit higher looking at EPS, mainly due to the impact from IAS 29 hyperinflation.
The EPS real change, excluding items affecting comparability was minus 5% in the quarter, with negative impact from the adjusted number of shares from IAS 33. On a constant share basis, the real change, excluding IAC was 20% in the quarter. And this is derived from the re-change on operating income in the quarter being strong at 28%, positively impacted by the Stanley contribution, while the increase of amortization of intangibles and financial net impacted negatively leading them to the 20%.
If we then move on and then go to cash flow. As you know, this is a prioritized area for us as we have said before, due to the increased macroeconomic uncertainty and also as we have a strong focus on deleverage our balance sheet after the standard transaction.
So after a strong third quarter, we also delivered solid operating cash flow now in the fourth quarter of 83% or SEK 2.1 billion. If we go into some details here, first, looking at CapEx. Here, we spent around SEK 1 billion in the quarter, an increase of around SEK 150 million compared to last year. And we continue to see an increase in our investments into solution contracts, which confirms the positive momentum in the high-margin solutions business. And we also saw investments into our existing transformation programs according to plan.
The CapEx to sales was 2.7% in Q4, and we are coming in below 3% for the full year, as we have also previously guided on. And this includes Stanley and IFRS 16 as well. The strong price-driven growth we have seen throughout the year and in the fourth quarter had a negative impact on the account receivables, both in Q4 and for the full year. However, this was also compensated by good DSO development and good working capital management in the fourth quarter, where our focus on cash flow is paying off and also support cash generation well.
I should also say that, there are no major payroll timing related cash flow impacts in Q4 nor for the full year. However, as highlighted in the previous quarters, we have now in Q4, paid out close to SEK 700 million of the corona-related timing relief measures we benefited from in 2020 in North America. This has a material impact when you compare Q4 to Q4 last year, but it has no significant impact when comparing the full year, as we did on similar payment in Q3 2021. Important to say is that this was the final payment we have to do. So we have no further C-19 related payments remaining, which will also cater for a stronger cash generation into 2023.
Free cash flow is coming in at SEK 1.2 billion, where increased interest costs, increased taxable earnings and some reduced tax losses carried forward, had a negative impact on the cash flow from the financial net and taxes.
Year-to-date, we are at SEK 3.4 billion of free cash flow, after a strong second half of the year. All in all, we are reasonably satisfied with the cash flow for the year where we delivered 71% operating cash flow in an inflationary environment.
Adjusted for the SEK 700 million corona-related, payment in the U.S., we are at 80% cash flow, which is at the upper end of our cash flow target. And cash flow will continue to be in focus throughout 2023 to ensure we see solid deleveraging.
But you should also remember, that we have some seasonality in the cash flow with the first half year is a bit weaker than the second half. We then move on and have a look at our net debt. Our net debt throughout the year has increased around SEK 26 billion, ending at SEK 40.5 billion in December.
And the main reason for the increase is, of course, the Stanley acquisition, which is impacting the net debt to SEK 32 billion. We initially financed the acquisition fully with debt throughout our bridge facility and have since partly refinanced that via the rights issue of SEK 9.5 billion in October, as you know.
Outside the acquisition financing, the net debt was also negatively impacted by the annual dividend that we paid out in the second quarter, SEK 1.2 billion of spend related to items affecting comparability.
A material SEK 2.5 billion translation impact due to major currency movements over the year, although, I should say, that it was actually now reduced in the fourth quarter. And approximately SEK 1.3 billion related to IFRS 16 lease liabilities where most of this is related to Stanley. And finally, we have a positive impact from the free cash flow generation of SEK 3.4 billion for the year.
If we then look at the net debt to EBITDA, the reported number was 4.0 times in the quarter. However, as we also mentioned in Q3, this is not taking into account the full 12 months EBITDA from Stanley. So more relevant is to look at this on an adjusted basis, taking this into account and the ratio is then 3.7%.
Here, we saw solid deleverage from 4.0 that we reported in Q3. And as you know, we have said that we will be below our target of 3% in 2024. So here, we are also on a good track. If we further adjust for the items affecting comparability, the ratio is 3.3 times. And this also gives a good indication of the deleverage effect we will see after the IAC programs are being finalized.
If we then move on and have finally then a look at our financial position and debt maturity chart. And here, as you know, we have a solid financial position today. None of our facilities have any financial covenants and the liquidity position was continued strong in the fourth quarter at SEK 6.3 billion. We also have our RCF of more than €1 billion in place until 2027, and it is fully undrawn as per the end of the year.
If we then look at the bridge facilities in place related to the acquisition of Stanley, as you already know, we have successfully completed our SEK 9.6 billion rights issue in October and fully paid down that part of the bridge, which was approximately $915 million. This left us with the remaining $2.4 billion bridge to debt facility where the maturity is in July 2024. $2.4 billion was also the balance at the end of the year. However, in the beginning of this year, we have refinanced a major part of the facility.
We first did a $75 million private placement for six years, taking effect in the beginning of the year. Then as you have seen, we have since quarter end also signed a long-term term loan with nine of our relationship banks. The term loan is four years where we, together with the banks can decide to extend one more year and the facility amount is €1.1 billion.
As I mentioned before, we have decided to go for a mix of different debt instruments in our takeout to make sure we get this cost-effective funding as possible, and we feel we have achieved a good competitive terms in this term loan.
Another important point just to highlight here as well is that the term loan can be refinanced in advance of maturity, which is another benefit of this facility as it gives us good flexibility if the market terms would move on in a good direction going forward.
The remaining amount of the bridge to debt facility after these takeouts is now around $1.15 billion. Given we have now taken out a major part of the bridge, we are in a good position here moving forward for the remaining takeout, and you can expect further activity to close most of the bridge out in 2023.
Going then to rating and rating-wise, there is no change in the quarter, and we, of course, remain with our commitment to remain investment-grade. And as I have emphasized earlier, we have a strong focus on cash flow and to deleverage our balance sheet going forward.
So with that, I hand back over to you, Magnus.
Magnus Ahlqvist
Many thanks, Andreas. So, let us now shift the perspective a little bit beyond 2022. And here, I just wanted to share a few reflections and comments regarding the journey that we are on.
And if you’re going a few months back, we announced new targets in August with our ambition to reflect what the future Securitas will look like. And here, we’re really focusing on two main financial targets. First one to emphasize the shift in revenue and margin mix with an ambition to grow Technology & Solutions with 8% to 10% per year.
And with the Stanley acquisition, we are accelerating this shift. We are differentiating and strengthening our value proposition and I will provide also some client feedback in a few minutes to illustrate a little more what this actually means.
And with the sharp solutions and technology profile of the company, we’ve also shared the target to reach 8% operating margin by the end of 2025 and the longer term double-digits operating margin ambition.
And when you’re looking at the development and the results in 2022, we feel confident that we are on the right path with healthy Technology & Solutions momentum as well as the real step-up in terms of the margin profile of the company.
And together with the team, we’re working with a clear focus in four main areas to deliver on our ambition. And the first area here, taking the lead within Technology. So, we’re joining forces with Stanley, we’re building a very strong local and global technology capability. And as commented earlier, the integration and value creation work is progressing according to plan, but we have a lot of important work still ahead of us during 2023.
The transformation programs and digitalization are fundamentally important to sharpen our guarding services for our clients and for our employees. And to enhance value, we have a very strong focus on quality over quantity. So that means, profitability over volume, and we are changing our incentive systems as well, across the organization to align with our strategy.
And with what we have as well, the strongest people and technology offering, we’re also uniquely positioned to deliver integrated solutions to our clients, and that’s obviously the third category when you look at this illustration of the picture here. And with this as well, and I was going to talk more about that in detail today, also an incredibly strong platform to drive innovation, where we have now millions of connected sites that we are serving our clients with.
And when you look at these four focus areas and our strategic ambition, it’s all based on our view in terms of what it will take to be the winner in the security services industry in the future. And I think some of you have heard me talk about this now for quite a while. These three circles, but I come back to them because they are fundamentally important to shaping our view in terms of why we believe that Securitas is now really becoming a unique company with a stronger offering to the clients than anyone else is able to offer.
And these three main capabilities then. First one, it’s about presence. So our leading presence that we have with our people, security and safety focused. Second one is connected technology. And there, as you know, we have a significantly larger footprint now more than doubled our business and also capability and competence together with Stanley in the technology space.
And obviously, the more presence you have, the stronger the capability in terms of technology, you’re also really well positioned to leverage data in an intelligent way. And the ability to leverage the combination of these capabilities to deliver the strongest integrated solutions to our clients.
So what are then the clients saying? Well, let me just share some feedback, that we have received from our clients in the last six months. And we are proud to count many of the world’s most recognized brands as our clients. And many of these brands are looking at Securitas as their main security partner today and for the future.
And since we closed the Stanley acquisition, we’ve had a lot of interaction with local, as well as with global clients. And some of the perspectives that you can see here, I really just wanted to share. Because when you look at this from a client perspective, ensuring a resilient operation is becoming increasingly challenging for many of our clients, and as anticipated, the combination with standard security is very well received.
Because when you look at this context, an increase in the complex future, they are looking for a high-quality partner that is capable of delivering solutions that address their needs. And we can see an increasing need, leveraging the presence, leveraging the technology capabilities of Securitas. And we’re also now driving digitization and digitalization across the operations, together with our clients to generate better insights and also to innovate more with the data that we’re generating.
So when you look at commercial perspective, because this is obviously also important once we are doing the integration work, et cetera, to unlock also the opportunity in terms of commercial synergies, as we are going forward. And here, it’s still obviously early days, but we have already now won back some business and expanded some contracts. Thanks to the strength of our combined capabilities. And our team is doing really good work stepping up the interaction with a number of clients, and the pipeline is looking really strong.
And when I say that, that is obviously then very much reflecting as well what we have done on the guarding side. There is significant opportunity now in the technology space, but also to leverage this to more integrated solutions.
And delivering on our commitment is always the first priority. We are facing this work in line with our capabilities. But based on the progress in the first six months since the close, I feel really good about the opportunities ahead when we can drive the commercial synergies at scale. So I hope that is useful just to give some further flavor.
But if we are then looking to sum up the results presentation here, we are executing on the strategy. It is generating results, 39% increase of the operating result and a 6.5% margin in the fourth quarter. Momentum and growth, Technology and Solutions, maintaining a positive price wage balance in an inflationary environment are two things that we have been able to successfully do. And from a strategic perspective, 2022 has been a year of significant milestones. Obviously, the main one being the acquisition of STANLEY Security and now joining forces to create an incredibly strong company, which is more Technology and Solutions oriented going forward.
But we’ve also demonstrated our leadership in the industry by being the first major company to commit to the science-based target initiative. And we’ve driven solid progress in terms of digitalization, modernizing our systems and applications and while these are multiyear investments, they are now firmly starting to generate a positive impact by enhancing our client value proposition and profitability.
And then obviously, just to reiterate that as well, when I looking back at 2022, I announced our new financial targets a few months ago with the performance and the progress in 2022, we are confident that we are on the right path. So I think with that, happy to open up the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Anvesh from Agrawal. Please go ahead.
Anvesh Agrawal
Hi. This is Anvesh from Morgan Stanley. I have three questions, please. First, if you can give a bit more color around the price volume split and the hyperinflation impact on your total organic growth that would be great?
Second, you talked about some changes that you’re implementing in Europe to improve the margins. I mean, when do we expect the benefits to start flowing through? And also, have you already finalized some contracts that you’re looking to exit and therefore, any sort of guide around the impact on the organic growth?
And then finally, just around the refinancing and the interest cost. If you can give any color around the rates at which you are refinancing the debt, that would be great. Or I mean, the 400 million to 450 million of interest cost guidance that you’ve given for Q1, I mean does that include some benefit of the hyperinflation as well. And therefore, the underlying sort of run rate is probably even higher at this stage. So any comments around that would be really useful?
Magnus Ahlqvist
Thank you, Anvesh. So maybe just to start on price volume, it is, as you have noted, a higher increase when you’re looking at the growth rate. If I start from a business perspective, most important is solutions and technology where volume growth is fairly significant, looking at North America and Europe. And when I referenced 15% organic sales growth in Technology & Solutions, a significant part of that is volume and then obviously, still a very meaningful part is also price increase. So I think that is important in terms of — okay, the areas that we focus on in terms of driving the strategy, how are there performing?
Looking then obviously, price increases are very significant — is the main driver of the growth. And — and that is nothing negative. I mean, we enjoy and we like to be able to pay our people. It is important to attract and retain quality people in terms of protecting the quality offering from Securitas.
Looking at the inflationary, out of the total organic sales growth, I would say, a bit less than one-third approximately. In terms of the – all the inflation impact we’re looking at Argentina and Turkey, specifically. But then the — another major part is price increase related.
And there, obviously, if you then ask the question, okay, how does it then look? Solutions and Technology, very positive, strong volume, strong price increase — looking at the Guardian business, that is more stable from a volume perspective. And that’s a simple consequence of the fact that we’re continuously stepping up and increasing our requirements on new business that we are taking in but we also work actively with portfolio management to make sure that we can, if we cannot improve pricing on underperforming contracts. If we cannot convert them and increase the price, then we would terminate those contracts. And I think that is just really responsible management especially given the tight labor markets that we’re facing.
And that — I would also say, coming to your second question is the main point. The labor market is really, really tight in Europe still. We haven’t seen that much relief, even though you’re looking and listening to a lot of news about the pending recession, et cetera, general availability of people is still limited in Europe. And that is the reason that we also then — having to say no to quite a lot of business, having to say no to quite a lot of extra sales, which is typically a higher margin profile.
But if you look at what we are doing in terms of improving, it is really about stepping up an increase in the requirements in terms of what business we are taking on at which type of price levels, is actively working with portfolio management, but then it’s also continuing to really drive conversion and sales of integrated solutions.
And because that is the best solution as well from a client perspective when they say that what we have a problem in terms of accepting the price increase as well, we can always optimize the security equation when we are integrating technology and people offering into an integrated solution. So I would say also the main points. And there, well, if that’s going to cost us some of the growth in Europe in terms of on-site Guarding yes, that might be the case. But we also have really good commercial activity.
We have good margins on the business that we are bringing in. So I think that is also a situation that we feel fairly comfortable with, but it is important that we take a really disciplined approach in terms of pricing. And I think that is the only sensible way to drive the business but also to make sure that we are recovering from a Q4, which from a profitability standpoint in Europe was not satisfactory. Andreas, do you want to comment on the interest cost of the last question.
Andreas Lindback
Yes. I can give a little bit more flavor on the pricing cost there as well as Magnus said around one-third is related then to Turkey and Argentina with the hyperinflation cuts. That’s actually a bit less than in previous quarters, given that we see now good growth in the North American business, but we also have continued price increases also in Europe as well. So, going down from that perspective due to those reasons.
And then to give you some more flavor, given the question will likely come here as well, it is if you look at Europe, it is also approximately one-third there. And if you look at the Iberia America division, it’s around two-third impact from Argentina there.
So if we then go to the refinancing, there is the guidance on the total financial net is between SEK 400 million to SEK 450 million, correct on that. And then I think I referenced in the previous quarters as well to give you some guidance also on the cost base here that we have our euro bond, for example, 2028, trading in the secondary market.
And I think that is a good sort of reference when you want to get a feel of what kind of interest rates that we are paying. And as an example there, that one is right now on a yield of 4.7% the 2028 bond that we have outstanding, which is implying a margin of 180 basis points.
Just to give you a flavor and the benchmark, but you also need to remember, of course, that we have a significant portion of our debt also in USD, where, of course, you need — you, of course, need to use the US LIBOR rates as a base rather than the European LIBOR rates as well. So I think if you take that on, you will be able to get a good grasp here and a good benchmark.
Anvesh Agrawal
Just sort of to clarify on that. So SEK 400 million to SEK 450 million that you’re guiding for Q1, does that have some hyperinflation expected benefit? And therefore, just trying to get a sense of where the underlying interest cost on a quarterly basis is? And then obviously, you can multiply before to get the annual run rate?
Andreas Lindback
Fully understand that. I mean, we haven’t broken out the exact assumptions that we are doing, but the SEK 400 million to SEK 450 million is all included financial net what we expect to come in. And our financial net is including DIS impact as well, but we’re not breaking out the specific assumption around that.
Anvesh Agrawal
Cool. That is useful. Thank you.
Operator
The next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.
Johan Eliason
Yes. Hi. This is Johan at Kepler Cheuvreux. Just a question on this active portfolio management, obviously, you have a growth target for the technology side, but not for the traditional guarding business. Can you sort of indicate what sort of sales impact this active portfolio management had in the quarter? I noticed I think your retention rates overall, was sort of down 1 percentage point or so. Is that a fair assumption to look at when you consider the sort of your active portfolio management where you are not successfully hiking prices or moving it to an integrated solution? Thank you.
Magnus Ahlqvist
Thank you, Johan. Well, the important thing here is this is something that we have been putting increasing emphasis on over the last year and 1.5 years, correctly pointed out. If you look at North America a year ago, I mean there, we obviously terminated some large low-margin contracts. We are through that. We are also improving consistently the margin despite some of that kind of negative leverage from a top line perspective.
So from my perspective, it just proves that the strategy is the right one. If you’re looking on the totality, there is some impact, it’s not very substantial, I would say. But we do have a very active and important dialogue going on in all the key markets with our clients in terms of the positioning. And that positioning, it’s typically three potential outcomes to be clear about that, that we increased the price to a sustainable level that we convert to an integrated solution, which is always better for the clients because we address their needs in a more customized way. And if that — if one or two fails, I mean, then we would terminate those contracts.
And the good thing now is that we have good visibility. There is really strong alignment as well, what we have done in terms of incentive systems, et cetera, that we’re also extending as of 1st of January this year within countries down to area and branch level, just to make sure that everyone is driving in the same direction. And I think that when you look at that within this environment, it is responsible thing for us to do that.
So yes, some impact on the client retention, but nothing which is alarming. I think this is just important work. And then I just want to highlight as well. When I look at the commercial activity and the new sales, the business we are winning, it is more volume and it’s at higher margins than in previous years on average. And I think that is also important proof that clients value the differentiated proposition that we bring. And that is where we then put a lot of the emphasis as well if you’re looking at the new business and how we are driving growth, but still really good profitability development in the coming years.
Johan Eliason
Excellent. Thank you very much. Just some minor details here. Coming back to the guidance on financial net. You obviously had some refinance during the quarter, and sometimes that includes some extra temporary costs. Is that the case, including in this SEK 400 million to SEK 450 million as well?
Magnus Ahlqvist
No, there is no non-recurring costs, so to say, assumption in that. I think the first SEK 400 million to SEK 450 million is on a fairly, how should you say, run rate basis there.
Johan Eliason
Excellent. And then finally, just to remind us a little bit now with Stanley part of your number. Should we think about different seasonality in terms of margins over the year in North America and Europe?
Magnus Ahlqvist
Yeah. I think we are going into kind of a new run rate. So that is something that we will comment more on that. We will also provide more transparency in terms of performance in terms of Technology Solutions in the first half — or starting in the first half of 2023. So I won’t really call that out. And I think what is important as well is that, we’ve also had related — I mean, number one, sales in terms of technology have been strong. So order entry has been strong, very record high back order, but we’ve also then had component shortages, which has also meant that we haven’t been able to complete quite a lot of the work.
So I wouldn’t read too much into this when you’re looking at the numbers, but generally speaking, the integration work is going well. Client feedback is really, really positive, as I mentioned before, in terms of the capability that we are building and we’re entering 2023 also with a strong order book on that side. So I think there are more to follow in 2023 as we are finalizing the integration and then also creating clean run rates throughout the year.
Johan Eliason
Okay. Many thanks.
Operator
The next question comes from Stefan Knutsson from ABG. Please go ahead.
Stefan Knutsson
Hi and congratulations on a good quarter four report. I have two questions. First, have you seen any improvements in the job market in Europe so far in 2023?
Magnus Ahlqvist
Thank you, Stefan. Taking the question immediately. There hasn’t been much improvement. And I know I mentioned that also after the end of Q3, because we’re following quite closely as well in the market, where do we stand. There is still significant shortage, maybe some relief in some areas, but nothing that to emphasize too much.
So I think in that environment, the most important thing that we need to do is ask to them, say, okay, we need to manage regardless of that situation. And there, obviously, the price wage balance that we are really succeeding within 2022 is important, but also important focus area going forward.
Stefan Knutsson
Okay. Perfect. And then my second question is regarding the reconciliations you mentioned in Q4 and that it impacted margins. Can you specify if it was a loss, or, yeah, give any more flavor on that?
Magnus Ahlqvist
Yeah, we can say these are normal reconciliation here and in the business. So it has an impact. It’s not the major impact, and it’s mainly related to employee related items, et cetera, for year-end. So we mentioned it, because it has an impact, but it’s not major.
Stefan Knutsson
Okay, perfect. Thank you.
Operator
The next question comes from Allen Wells from Jefferies. Please go ahead.
Allen Wells
Hey, good afternoon guys. Just a couple from me as well. One thing I want you to dig into a similar question, I think you had at the 3Q numbers. But if we look at the underlying margins, so we strip out the assumed benefits of Stanley synergies FX contract. It looks like there’s not a great deal of underlying margin improvement in the core business actually saw a slight decline on my estimates. And this comes despite the stated positive impact of price wage balance and a strong tech growth.
I guess, there’s 2 questions. First of all, is my math are correct. And then secondly, how do we think about the trend from here? Do you — would you expect to see some underlying improvement as we move forward? Thank you.
Magnus Ahlqvist
Yeah. So when you’re looking at that — thank you, Allen. Correctly stated, I think if you’re looking at the full year, definitely improvement on a full year basis if you’re excluding the impact from Stanley.
So, yeah, referencing the underlying margin. In Q4, a couple of different effects basically. And if you look at North America progressing in a good way with the net positive underlying development, and hence, also some of my earlier comments in terms of strong performance. That is offset by a weaker Q4 from a profitability standpoint in Europe.
And then if you’re looking at the Ibero-America, I mean their underlying — and there is no Stanley impact. I mean, that margin is stable when you look at Q4, but clear positive progression during 2022. And we, obviously, don’t give guidance, but we have been very clear in terms of the shape for the future security of the new securitas that we are shaping. And they’re obviously important improvement part of the plan in what — you could call the business also excluding Stanley in 2023, 2024 and 2025.
Allen Wells
Okay. Thank you. And then just on the synergies, I think, you commented that they’re running slightly ahead of plan. Is there any way you can maybe provide indication or quantify the kind of run rate versus the SEK 50 million [indiscernible] target that you had just to help us with our map and the phasing over the next 12 months?
A – Andreas Lindback
That is something we will bring along here into the next year. We were not doing that this quarter. We just want to make sure, we get good traction initially on the synergy takeout here, get everything with the integration in order. So we have not provided the number there. But we should say, I mean what we have said is that we see that we will execute most of the synergies over 2023 – 2024 and in light of that, we feel we actually have better progress in North America than the plan.
And one of the main reasons for that is because we had quite a long time, as you remember, between signing and closing. So we really came off the closing came in rolling and managed to execute on the cost synergies in a really good way in North America. Still more work to be done, but positive here at the end of the year in terms of synergies.
Allen Wells
Okay. And then just a follow-up question just on — I think you talked about obviously strategically assessing the footprint and business mix to further sharpen the performance and positioning. What do we read into that? Is that just this kind of portfolio rationalization, getting rid of some of the lower-margin contracts, or should we think about this as more around further restructuring or even divestments within the business is that kind of sharpening performance and the positioning comment in there?
Magnus Ahlqvist
Yes. So important here, if you’re looking at the last couple of years, I mean, we have done quite a lot to make sure that we are sharpening the business. And some of those are, kind of, investments like driving digitization, for example, really strengthening the business. We’ve also divested 13 markets that were, kind of, the yes, you can call them non-strategic from a global client perspective, typically — lower margin profile and where we also felt that it’s difficult to make a really meaningful impact in terms of driving the strategy.
So that statement, I mean, this is what we are working on continuously is to make sure, and we’ve done that for the last couple of years. We continue to do that for the coming years as well to make sure that all the business that we have is really in line with the strategy that is going to support the journey with the Technology and Solutions growth, but also then our operating margin profile to get to 8% by 2025.
Allen Wells
Thank you. And then very final question. Just the price wage balance has obviously been pretty positive all year for you guys, as you highlight. As we think about 2023, do we think about that price wage balance has been continued positive, stable? Is this as good as it gets basically is what I’m saying? How do we think about planning for next year because as I think about inflation coming down as well?
Magnus Ahlqvist
Yes. So we have many years and many quarters of successful track record. I think, I mean that, as you know, is fundamentally important for our type of business. That ambition has not changed. It’s fundamentally important that we do that. We’ve also changed quite actively how we are working with price wage balance. So take much more of what we call a dynamic price wage approach where it’s not only kind of waiting for some type of an annual cycle of cadence, but doing it when it is required to protect the quality of our services and to ensure that we can pay our people well, but also defend reasonable margins.
So that ambition doesn’t change. Obviously, the picture when you’re looking at where we are 12 months to 18 months, there was very significant wage inflation in North America. When you’re looking at Europe, it’s kind of lagging behind that, but it’s also more of a CLA influenced market. They collect labor agreements, et cetera then have a significantly bigger impact. There, we had a high double double-digit increase is 14%, 15%. In Germany, for example, in October last year that we have successfully handled. Beginning of this year, we’re looking at Netherlands is one other market where there is similar type of increases that we are now currently managing.
So I think the simple answer here is that here, we just have to be agile and nimble also as we go forward. If you’re looking at the job data that came out in the US last week, for example, I mean, there was more than 0.5 million new jobs in the US labor market, which took a lot of people by surprise. I think we have kept on saying that, we see a fairly hot labor market. So, maybe not as big of a surprise to us, what’s important there, obviously, from our perspective, is that we can also start to see and maybe because some of the more negative news are coming out that there is also tendencies from our perspective of increased increases in the participation in the labor market.
So there is a number of these different factors, but I think the ambition for us, we always have to balance – and we have also then – when you look at the inflationary environment, there is also a number of other indirect cost drivers. So when we look at price and total production costs also beyond wage – it is also important that we are creating a positive balance here so that we can also cover some of those other kind of cost pressures that we are facing in this type of environment. And so I think this one, Allen being one month into 2023 is as important of a focus area today as it’s been over the last 6, 12, 18 months.
Allen Wells
Great. Thank you. It’s really helpful.
Magnus Ahlqvist
Thank you.
Operator
The question comes from Andy Grobler from Exane. Please go ahead.
Andy Grobler
Hi. Good afternoon. Just a couple from me, if I may. Firstly, on the dividend, that was down year-on-year and split into two segments. Can you kind of talk us through the thinking, therefore, for both the reduction below your long-term target and for the split? And then secondly, a bit more niche, just in Spain, where growth was 4%. You talked about portfolio management. What was if you stripped out that portfolio management or the underlying growth rates in Spain, please?
Magnus Ahlqvist
Yeah. Thank you, Andy. And so when you look at the dividend, it is a few percent below our range that we have between 50% and 60% of net income. There is nothing dramatic in that. I mean, it’s why a few percent below. Well, we do have, as Andreas highlighted, important financing commitments that we need to drive over 2023 in terms of the bridge financing that we have in place until the summer of 2024. So we felt that, this is a responsible approach.
Obviously, in absolute terms, it’s a very significant increase. But there is no change. I mean, the range that we have between 50% and 60%. There is a very strong commitment to that from our Board and also from myself and the management team, but we felt that it’s a prudent approach in these circumstances and also given some of the important work that we have ahead of us over the next six, 12 months.
And then looking at Spain, yes, we made a reference because, we have there also terminated some lower-margin business. And yes, we would only highlight it, if there is some impact. So low single digits, maybe around one or something like that, I don’t know the exact number, but I think it was in that type of a range. But once again, it’s the only responsible thing to do. Labor market decides. We’re winning quite a lot of new business, and we need to make sure we allocate our effort, our people to business which is sound from a profitability standpoint.
Andreas Lindback
I think, if I can just add on related to the dividend, just important, of course, to adjust for the rights issue as well when you look at the dividend compared to last year there as well, one comment. And there was also this comment about paying out two times. And this is something that is getting more and more common in the Swedish markets. I mean for those of you outside while you know this is even more common there. But it’s been a trend — and it’s — so we decided now to make it for two times. Also, the main reason is to align it with our cash flow generation and our cash management cycle as well, where we have a stronger second year, half year cash flow as well. So, that will be the key reason for that.
Andy Grobler
Okay. Thank you. So, should we assume that it’s going to be bi-annual payments from now on?
Magnus Ahlqvist
We normally don’t do anything for the short term only, I would say, but of course, that’s a Board decision every year. So — but yes, I think — so that will be a reasonable assumption, I think.
Andy Grobler
Okay. Thank you, very much.
Operator
The next question comes from Raymond Ke from Nordea. Please go ahead.
Raymond Ke
Sorry. Yes. Hi. Three questions for me, starting with the interest rate one. I’m just trying to see if I’m misunderstanding. But you had an attractive interest rate in the bridge down that ran until July 2024. Why is it that you would not secure financing that would start from after that day rather than refinance a part of the bridge loan, starting from January already?
Magnus Ahlqvist
It’s — that one is fairly easy. It is because, of course, this is also related to our liquidity position. And also, of course, our rating as well, as this step becomes current after 12 months, instead of long term as well. So that — and that impacts our liquidity ratios. And if you get too close to it as well, of course, you have an increased risk if the market would not be there either. So it’s a risk perspective on it. That is also why we’re not taking out everything. At the same time, now we only do part, but it’s also to make sure we have good liquidity also going forward. Those would be the two key ratios, the two key reasons. And that’s why where we’re also finding a balance here with this staggered takeout as well throughout the year.
Raymond Ke
All right. That makes sense. And the remaining part of the bridge loan, if you refinance that, I assume, it would also lead to immediate changes to the interest rate rather than from July 2024.
Magnus Ahlqvist
Correct.
Raymond Ke
Great. And just one last one. Regarding the — with the new labor union negotiated wages around European countries starting to kick in H1, do you still feel you’re ahead of the curve in terms of price hikes today?
Magnus Ahlqvist
Yes. So we are — I mean, we’re not commenting on the current quarter. But like we said, I mean, we have done a solid job in 2022. The ambition is to continue that in ’23. This is a high area of focus for us. We have a number of markets that referenced Germany [ph] from October, 14%, 15% type of range on average in way to increase Netherlands, similar numbers right now Belgium when I look at indexation, et cetera, taking kind of a 12 to 18 month perspective going back probably approaching similar numbers. So, there is a number of markets, and that is something that it remains a very important focus area. The ambition, very important is to balance, but also ideally to try to create some positive net between those two as well, because we also have other production costs that are impacting the results in this inflationary environment.
Raymond Ke
Great. Thank you. I’ll get back in line.
Operator
Please state your name and company. Please go ahead.
Kate Carpenter
Hi. Thanks for taking my question. This is Kate Carpenter from Bank of America. So just
going back to the financing. You mentioned that there’s a mix of terms within the refinance portion of the bridge loan. But could you please clarify how much of the refinance loan is fixed versus floating. And then as you look to refinance the remaining portion of the bridge loan, how are you thinking about fixed versus floating there, if we are kind of at the peak of the rate hiking cycle. Thanks.
Andreas Lindback
Yes. I think we — overall here, when it comes to fixed floating, I mean we have a policy to have a mix of both in place, and we are within those – we are within those policies as well without getting into exact details there. So we normally have a mix of that. That’s something we plan to continue as well. And when it comes — I think your first question is related to what is the assumption there in the Q1 financial net forecast in terms of fixed floating, I mean we are within our policies where we have a mix. I think that’s the best I can say without giving more details there. I think I — please let me know if I misunderstood the first question there.
Kate Carpenter
No. I mean, I guess it just would be given that how elevated the leverage is at this point just would be quite helpful to get some understanding of the sensitivities as kind of interest rates either move higher or lower from here?
Andreas Lindback
Yes. But the best guidance that I can give here is that it’s a mix of both right now in the portfolio of debt that we are having here, as we’re speaking. So it’s not tilted – it’s not tilted 100% in any direction, I would say, without getting into further details.
Kate Carpenter
Okay. Understood.
Operator
The next question comes from Viktor Lindeberg from Carnegie. Please go ahead.
Viktor Lindeberg
Thank you. Some questions on STANLEY. Maybe if you could give us some more color on the underlying performance, maybe from a geographical perspective now. I know you alluded to – to meet single growth and margins maybe trending up a bit, but could you maybe give us some flavor on where we are with at to year-over-year or sequential, but also going into, I guess, 2023 now, if there are a lot of upside in the first half year, maybe given how painful the first half was last year. I’ll start of on that question. Thank you.
Magnus Ahlqvist
Yes. Thank you, Victor. I mean if you are going back to the first half of 2022, and that was obviously a period when we didn’t own STANLEY Security, there was really a weakness. And those matters in North America have been addressed in terms of the price increase mechanism and also then having up-to-date pricing in terms of all the hardware and the software in the pricing model because that’s kind of been flowing through the business after they initiate the strong actions in the second quarter.
A few general comments. I mean, the mid single-digits, that is valid. That’s a little bit what we are seeing. Similar type of picture in North America and Europe from a growth perspective. When you’re looking at North America, that has a higher operating margin profile going in. So I mean that’s something that we have seen when we acquired, when we closed the business compared to Europe. Europe is a little bit more mixed profitability in terms of different markets. And not intended to go into specifics here, but there are a few markets in Europe that are low-performing and those markets, we are now actively working over the next three, six months, essentially in terms of the next phase of the integration work.
To make sure that we’re integrating successfully, we’re building a stable platform and then leveraging this platform focused team a leadership to start to drive those improvements. And the good thing here is that we are — some of that work is going to take a bit of time. But when we do that, it also means that we are greatly enhancing capability competence and also then securing critical mass in a number of the key Western European markets. So that is an important focus area.
If you asked the question then, which you might ask next, okay, why is the profitability higher in North America than in Europe? Well, on the Stanley side, there is a certain argument, which is just related to scale. So there is a really good scale even more so now with the combination that we are driving through the integration work, so I think that, that is clearly an important one. But then I should also highlight, I mean, we closed the transaction with more than six months ago now and we have leadership mostly in place, priorities are clear, integration plans, et cetera.
And we are building this to create something really, really strong for the mid and the long-term. And we have done that. And I know we referenced also some previous cases before Stanley we look at Spain, for example, where we had a similar situation of two relatively low-performing technology businesses that we acquired one of them, and then we started to create something really strong.
So I think the playbook in terms of what we’re going to do that is clear to us. It’s more now a matter of really driving that work over the next three, six months or the coming first three, six months, but then also through 2023. I hope that gives some understanding, but that’s pretty much as much detail as we can provide at this point in time. But generally speaking, when you look at the totality, we as but with differences between the different geographies.
Viktor Lindeberg
Fair enough. Thank you, Magnus. Maybe on a related question there. You mentioned your European transformation program how you’ve sort of put it on a bit of a pause. But how should we think maybe combined Stanley but also stand-alone in 2023. Should we also put this on a pause and a hold until going into maybe 2024, given what you see right now, or will there be benefits coming outside of the scope of Stanley here as well, so can you give some pieces on that transformation progress?
Magnus Ahlqvist
Yeah. There is not really any significant change in terms of our communication that we did three months ago. Looking at — and for everyone or everyone’s benefit on the call here, we decided deliberately to pause some of the integration work to cater for the Stanley integration because that is really a high priority, and it’s also to avoid us doing work twice in terms of system integration modernization, which is an important part.
That work with our integration and value creation work, we are assessing and concluding fairly soon in terms of what’s the sequence going to be of that work when we have more news to share there, we will do that. But this is obviously about being fiscally responsible as well with the work and also making sure that we are aligning resources in a sensible way.
What I would highlight as well is that when we talk about the European transformation program, one significant part of that is not only the modernization to modern systems to support the business to operate at a different level. It’s also very much the shift in the revenue mix. And there we have good momentum when looking at solutions and technology growth. Stood up a focused solutions organization team and leaders that are working on now driving that type of conversion and the growth of the Solutions business.
And there, Europe have done a really good job. If I look at the last 12 months in terms of really building that for the benefit of the clients, but also for the benefit of Securitas. So, there is different aspects. We will share more details once we have come a little bit further along. But doing that in a responsible manner is very, very important because we’re building all of this to really have strong platforms and really strong delivery capabilities in the years to come.
Viktor Lindeberg
Thank you.
Operator
The next question comes from Karl-Johan Bonnevier from DNB Markets. Please go ahead.
Karl-Johan Bonnevier
Yes. Good afternoon Magnus and Andreas. Lots of good answers already to most of my questions, but one that I would like to hear your thinking about a little more. Looking at customer retention, how — do you see technology really driving that as well? So, most of the downside we have seen in that number of late has really been related to Guarding?
Magnus Ahlqvist
Yes. So, I mean, those retention numbers, they are based, Karl-Johan, on the portfolio. So, the kind of the going in portfolio that we would have in a specific period. Portfolio work that is — the vast majority of that is on-site guarding, some mobile guarding portfolio. So, that is more relating to those numbers.
When I look at the Technology part of the business, like I highlighted in the presentation, we’re having a lot of really good discussions now with clients in terms of how we can partner and do more on the Technology side.
I’ve had a couple of meetings as late as last week with a few of our key global clients, and that is now an area where I would say that if anything, it’s going to help retention because we’re becoming strategically even more relevant in terms of a partner on the entire security equation and the services that we bring to them. So, I think over time, it’s going to have a very positive impact.
But when you look at the retention, I mean, this is nothing that we are that concerned about. Most important, we need to be really disciplined. I think that’s the own responsible way to manage the business at this point in time, tight labor markets, the inflationary environment. And that’s — and it’s not only that we are pushing price increases on our clients, we also offer them always an option with integrated solutions. And I think therein lies a lot of the strength as well and that also enables us to be firm. So that is clearly priority number one for us when you’re looking at client retention and once again, also really healthy new sales coming in.
Karl-Johan Bonnevier
Couldn’t agree with you more. Just looking at Stanley Security as well. I guess now you have probably been in renegotiation kind of discussion with a big part of their client base. Have you say managed to resign and retain the kind of base there looking at the larger clients that you were looking for?
A – Magnus Ahlqvist
Yes. There hasn’t been much movement on that. I think there is rather — if I were to portray a little bit, what does that discussion look like? Well, it’s essentially that all the clients are seeing with this. First of all, for standard security perspective, they are now at the center. So in the sweet spot of the Securitas strategy going forward. I mean the colleagues who’ve joined us. And I think that is fundamentally important because that also I mean, all the clients know that when we are doing this, we are building and driving this for the long-term. So we become really focused, very solid partner, but with significant advantage also in terms of the scale of the competence and the capability that we’re building up So I think that, that is really a big part of the kind of the feedback that there is more, okay.
Let us now discuss what this means for us and what we can do going forward. And here, like I mentioned earlier, we have a growing and really attractive pipeline when I look at the technology-related part of the business as well. And I mean I say that related to global clients, but there obviously as well. And those discussions are more actively part of myself. But — that is also the feedback that we are picking up locally as well, is that there is really, really a positive response from our clients in terms of us making this investment because — they know — they all know the importance of technology. And I think everyone is also looking to have a really credible partner locally or be it on a global level.
Karl-Johan Bonnevier
I get the feeling that you have, say, what you can call, derisk the portfolio or something like that. Is that what you would feel as well because I guess these problems normally turned up early and a big integration process.
A – Magnus Ahlqvist
And I mean Stanley Security have — if you look at the business also before being owned by Securitas really starting to build and to drive better stability in the business. So I don’t think there’s been anything that has been really burning. But obviously, when there is a change like this, it’s also a good reason and a trigger also to look at the relationships. And this has been overall a very, very positive engagement when I listen to our colleagues who are leading this business or in this business locally or in some of our global client teams.
So I think it’s rather a situation of a lot of positive anticipation in terms of what are the things that we are able to do as we go forward. And that is just a clear validation of how strategically good. It is an important for Securitas for the mid and the long term that we are now joining forces and really building this incredible technology capability in a solution which is undoubtedly much, much more dependent on technology for the overall security solution.
Andreas Lindback
Karl-Johan [ph], we haven’t seen anything negative when it comes to retendering of Stanley work since the closing. We have not seen any such tendencies whatsoever. And I just want to highlight as well, I mean, it’s not any big key dependence on your large clients, neither in that business as well. So it’s also a very broad portfolio of clients. So I hope that also gives some further color to your question here.
Karl-Johan Bonnevier
Thanks. Good. And very good extra color. Very good extra color. I need to try this one well with you, Andreas. So, obviously, you’re going to give us the new split on profitability here coming into Q1. But if you look at development during 2022, have you seen a positive kind of development in all the business lines? Are you looking at profit margin development?
Andreas Lindback
That’s the one that we are going to come back to in the first quarter, but it was a good attempt. I think, we’ll wait with that. But, overall, I mean, Technology & Solutions, very good growth, as Magnus said before. And then, I mean, there is — I mean, as Magnus is saying as well, on the garden side of things, I mean, there we have some challenges overall when it comes to shortage and so on impacting our business, which would mostly be then on the garden side of things to give you a bit of flavor. Technology & Solutions overall, going well sort of from both sides there, both the sort of organic growth side and on the margin side.
Karl-Johan Bonnevier
And I guess from the guarding side the positive price of wage cost balances that helped you during this year as well there?
Andreas Lindback
I agree.
Karl-Johan Bonnevier
Thank you very much. Looking forward to the new kind of disclosure in Q1.
Andreas Lindback
Likewise
Operator
The next question comes from Anvesh Agrawal. Please, go ahead.
Anvesh Agrawal
Hi, there. Sorry, I got one more follow-up. And, obviously, the technology part of the portfolio is growing quite strongly. And then if you sort of look in the disclosures in the in prospectus, the working capital of Stanley is around 18% of its revenue, which is very, very high compared to your legacy business.
So, first of all, why it is so high for Stanley, the working capital requirement? And then going forward, how are you thinking about the working capital and the free cash flow development given the dynamic?
Magnus Ahlqvist
Good. I think I can also reference back to the Investor Day here where we went through this in some detail and where our targets, including Stanley, is remaining to have a 70% to 80% cash flow generation as we’ve had before as well. So that answers your final piece, where Stanley will also be able to have strong cash flows.
When you look at this business, does it require more working capital than the Garden business, overall, yes. And I think we said around 15% to 20% of net working capital throughout the Investor Day.
Important in this business is that 40% of the Technology business is recurring revenue business. And this has a different net working capital profile compared to the other 60%. This is normally a highly profitable part of the business, where you also invoice the clients earlier or even in advance. So that 40% recurring business is normally also very cash generative as well.
And then you have the other 60% of the business, which is more — is then the installation piece of the business. And that is basically a project-based business, where the key to good working capital management is really solid project management that you’re making sure in your contracts that you have the right to build as often as possible throughout the cycle of the contract, not only at the very end and that you manage inventory as well.
So all-in-all, that installation business has a bit higher net working capital requirement than the RMR business. And the totality would be around the 15%, 20%, as we said here in — throughout the Investor Day.
Having that said, on the CapEx side, important to say there as well, low CapEx business very similar to our own sort of CapEx profile, as a business as well. And here I can recommend to, go back to the Investor Day for some more detail.
So low CapEx, a bit high net working capital, we should be able to generate good cash flow also from the Stanley business going forward. And I should say as well, we have really good best practices here on the technology side that we also together with the Stanley team now are working on implementing on the working capital side going forward.
Anvesh Agrawal
Yeah, that’s very clear. Thank you.
Operator
[Operator Instructions] Please state your name and company. Please go ahead.
Sylvia Barker
Hi. It’s Sylvia Barker from JPMorgan. I appreciate the time is running quite late, so maybe just three quick follow-ups. One on the margin impact of Stanley, could you give us a basis point impact benefit in North America and in Europe in Q4?
Secondly, on wage growth, what was your wage inflation at the group level in 2022? And what do you think that will be as a percentage year-on-year number in 2023? And then finally, out of the 15% growth in technology, how much is conversion from guarding contracts? Thank you.
Magnus Ahlqvist
Thank you. So thank you, Sylvia. We don’t break out the numbers, but there is a clear positive contribution from Stanley Security in North America to the positive development that we had in the quarter, but also as I highlighted earlier, positive underlying business also when excluding that positive impact.
The question on wage, can you just repeat that, please? Was that a question in terms of our general outlook, in terms of wage increases? Was that the right understanding?
Sylvia Barker
Yeah, I would just be interested, I guess, what was the level that or what was the percentage change year-on-year that you have from kind of wage increases in 2022? And then what’s your expectation for 2023, just at the group level?
Magnus Ahlqvist
Yeah. So it’s a bit difficult to kind of estimate that. And — but what I would broadly say, based on what we have seen over the last 12, 18 months, we had significantly higher because of more dynamic wage adjustments in North America 12, 18 months ago. So that’s kind of what we carried into 2022.
And then we continue there to also drive price wage balance throughout the year in 2022. That continues in 2023, but when we’re looking at the end of 2022 at a kind of a lower pace because most of those adjustments had already been made.
In Europe, when you look at that timing, I mean, there it’s been more significant towards the back end of 2022 and there, obviously, Germany very significant, because for us as well, that’s very important. It’s our largest market in Europe.
And then we have a few others. I referenced Netherlands, now at the beginning of 2023. But then it is a bit of a mixed picture, but I think those ones, today, they are the highest that we have seen. And that’s then due to legislative changes and other factors there in the bargaining agreements that you see those extremely high increases of 14%, 15%.
A lot of other meaningfully large markets and maybe more in the kind of the mid single-digits type of range. But that is something that we are continuously watching. Most important for us is just that we are really, really agile. So when there is a significant change that is something that we are then actively addressing. So I hope that gives a flavor, Sylvia, to where we are.
And then on the last question, I think you asked in terms of solutions conversion. Conversions are healthy. It is a very significant part in terms of the solutions growth. So when we are converting typically services with one — or client contracts with one service provider such as on-site guarding. That is a significant driver. But we are also with an enhanced technology offering starting to bring more and more packaged and really attractive technology solutions to our clients. And they’re also seeing more clients.
I mentioned Puma, for example, in one of the reference cases we shared externally where we are then also bringing more standardized technology solutions to our clients as kind of a new client relationship and business, helping them and addressing their needs. But the beauty there is that those would always also be connected to our SoC for monitoring, but also then with other guarding related services such as call-out, for example, as part of our mobile guarding business. So that share, I expect and I would also really like to see growing over time, because they were really leveraging our increasing strength in terms of technology.
Sylvia Barker
Okay. Thank you very much
Operator
There are no more questions at this time. So I hand the conference back to the President and CEO, Magnus Ahlqvist for any closing comments.
Magnus Ahlqvist
Yes. I think we are running full time here. So I just wanted to say, thank you for your interest. We are in a really, really promising journey. It’s a solid result overall. When I look at Q4, very clear progress throughout the year. So looking forward to continued interaction and taking on 2023, which is now the full focus creating the new Securitas. So many thanks to all of you for dialing in.
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