Welcome to ISS Annual Report 2023 conference call. Today's call is being recorded. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question, please press 5 star on your telephone keypad. I will now hand it over to Jacob Johansen. Please begin.
Good morning, ladies and gentlemen, and welcome to the ISS full year 2023 conference call. As said, my name is Jacob Johansen, Head of Investor Relations, and I'm here at our global headquarter in Søborg, Copenhagen. With me in the room today is our Group CEO, Kasper Fangel, as well as Kristian, my IR colleague. Before we start, I will ask you to pay a close attention to the disclaimer on slide 33. With this short introduction, I will hand over the word to Kasper, and slide 3, please.
Thank you, Jacob, and good morning, everyone. 2023 was another positive chapter in ISS's journey towards building a company that is growth-oriented, people-centric, and performance-focused. We've executed well, both strategically and operationally. Not only have we delivered financial results in line with the expectations in 2023, but we move into 2024 with strong operating momentum, clarity of strategic focus, customers that value what we do, and a market that will continue to provide favorable conditions for growth. This year, we delivered the highest growth rate in the history of ISS. Our strategic direction is unchanged, and we have, in fact, further strengthened our ability to deliver through a focus on fewer strategic initiatives. In essence, doing less things but doing them better and with the right level of investment and scale.
The strong organic growth momentum was maintained throughout the year and ended at 9.7% for the full year. It's also encouraging to see that we delivered the expected improvement in profitability. Both margin and free cash flow are in line with outlook. This also means that we have significantly deleveraged the business, and we're now within our targeted gearing range. We'll therefore initiate a share buyback program of DKK 1 billion to be executed over the next 12 months. Before we move on, I want to highlight another item impacting 2024. As previously mentioned, ISS and Deutsche Telekom have certain contractual disagreements, and in late 2022, we have initiated an arbitration process towards Deutsche Telekom to get a binding ruling on these disagreements. It's expected that the process will be completed mid-2025 at the latest.
The disagreements concerns remuneration for services delivered, and Deutsche Telekom is currently holding back payments. We're obviously working with both local and global experts and legal advisors, and let me be very clear, we are confident in our case. At the end of the presentation, I'll come back on how this impact our outlook for the full year. Let me provide you with an update on our main strategic initiatives. In Q3, we refocused and prioritized the One ISS strategy and the many initiatives behind it. Although a process that includes people matters is always tough from an emotional point of view, I'm satisfied with the execution of the program. It has not created any interruptions with customers, and I can already now see the strengthened internal focus on fewer things with higher quality will benefit the business going forward.
I'll come back to this on the next slide, where I'll provide some additional color. Also, during Q4, we have completed a comprehensive customer survey to gain additional insights to our customers' priorities. The results are promising, and I will later in the presentation go further into the details. We've been able to maintain our customer retention rate at 95%, in line with our midterm target, and in the beginning of 2024, we've successfully extended two global key account contracts. All in all, the pipeline of commercial opportunities remains solid, and we're in a good position regarding the largest contracts up for renewal this year. We've also made solid progress on M&A. The process of finalizing the divestment of our French business is progressing as planned, and we expect to be able to close the transaction in the first half of this year.
The integration of Grupo Fissa in Spain is completed, and benefits are on track to be realized here in 2024. Lastly, Livit FM in Switzerland has achieved synergies that exceed the initial business plan. These are important data points as they underpin our ability to generate value through simple bolt-on acquisitions. Please go to the next slide for a closer look at the One ISS review. I'm pleased to see that review of the One ISS initiatives is completed. I'll not spend time on the strategic purpose of the review, as you've heard me talk about that several times before. Post the completion of the review, the company is operating with strengthened focus, and let me give you an example of that. Everything we do at corporate level needs to be justified as a benefit to our business.
The assessment of that justification is simple: Does it create value at site level? The value at site level can be a visible and a direct benefit to the customer, or it can be something that makes our staff work more efficient. That can be a technology solution, innovation, process improvement, or something else. And as you will hear later on when I present the results from our customer survey, this adjustment aligns well with what is appealing to our customers. This review has provided that mindset to our leaders across the organization, and we've improved the link between cost and value at site level significantly, which I'm very pleased with. From a financial point of view, the summary is as following: Fully as expected, we have incurred one-off costs, where you can see the split of DKK 233 million on the slide.
The exercise was a group-based exercise, where the decisions of which activities to scale down was made at central level, leading to countries aligning accordingly. With this, we've reduced the cost base, and operational benefits will also be generated. We therefore expect to achieve savings of around DKK 250 million annually, with around DKK 200 million to have effect here in 2024. Please turn to slide 8 and our commercial development. In the last quarter, we've seen good commercial activity on local and regional deals. In November, we were awarded the IFS contract as a part of the third outsourcing wave with the Danish Building and Property Agency. The contract will start up in May.
We've also seen good activity on the contract renewal front, and we've extended a long list of key account contracts, including the extension of two significant global partnerships with Nordea and an industry and manufacturing customer. In addition to the specific contracts mentioned on the slide, we've good traction on local deals. We have won several contracts across the whole group, and we continue to see customers expanding scope with us, both regarding service lines and geographies. When I look into the coming year, I'm also very pleased to see that we only have 4% of our larger contracts up for renewal. That is lower than what we have seen historically, and there are no single contracts above one percentage point of group revenue. The 2025 bucket has increased slightly to 10%, as we've seen a couple of short-term extensions.
It's still a good mix of different customer segments and countries. Please go to the next slide to look at the customer survey we have conducted. We have in Q4 2023 conducted our annual global customer engagement survey with over 2,000 respondents. It sheds important light on the key priorities that our customers are focused on as it relates to integrated facility services. When you cluster the many insights we have gained from the survey, we see three common overarching priorities that will shape the market's activity moving forward. First one is service efficiency and quality. Second one is more innovation and flexible service solutions. The third one is achievement of sustainability commitments. These priorities are important responses to key mega trends affecting all businesses globally.
Macro volatility requiring organizational resilience, hybrid work as the new normal, sustainability as an enabler to talent attraction, and finally, the overall redefining of the relationship between people and work or people and workplace. It's also interesting to note that the relative importance of these priorities can be different based on segments or even countries, and here we believe our One ISS strategy with the segment focus is well calibrated to the current context. We also believe that our ability to deploy placemakers who care, whose talents are supported by leading technology, and who are focused on delivering quality, flexibility, innovation, and sustainability is a winning formula. Please turn to slide 11, where I'll go through the financials. The financial results for 2023 are solid and in line with outlook. Our organic growth was almost 10% after several upgrades of the outlook during 2023.
In Q4, organic growth was 7%, which as expected, was lower than the previous quarters, as the comparison base grew during 2022, in line with customers' return to office. As expected, the underlying margin was 4.6%, and including the one-off cost related to the One ISS review, as I just spoke about earlier, the reported margin was 4.3%. Free cash flow for 2023 was also as expected, DKK 1.8 billion. Please go to the next slide for a deep dive on the drivers behind the organic growth. The organic growth in 2023 was driven by two factors: price increases and underlying volume growth. Price increases contributed with around two-thirds to the development, while the other one-third came from volume growth. Around half of the price increases were in Turkey.
Across our countries, we've seen high inflation, mainly driven by wages, where minimum wage and collective agreements have been adjusted. We have strong processes in place to mitigate these effects, and with the terms in our contracts, we can increase prices towards customers accordingly. Price increases are typically done in the beginning of the year, but we also made price increases in selected countries during the rest of the year. The underlying volume growth are driven by increased activity level at customer sites and continued higher office occupancy rates across the group. From a commercial perspective, 2023 has been a year with high retention rates, but also lower than historically win rates. Instead, we've seen growth from expanding our services with current customers and price increases.
Of course, I'm fully aware that what is crucial going forward is that the net new contract wins is a significant positive, and therefore, it's also pleasing to see that we have a number of significant contracts starting up early this year, therefore, in the U.K. being the biggest.... Organic growth from projects and above-base work was, as expected, negative with 2% in Q4. For 2023 as a whole, the negative contribution was marginal. Please turn to slide 13 and the margin. The operating margin developed as expected in 2023, and the underlying margin improved to 4.6% from the 4.0% reported in 2022. The increase was driven by efficiencies and cost initiatives across the group, continued improvement in the U.K. and on the Deutsche Telekom contract, as well as operating leverage from the higher revenue.
The price increases that I just spoke about had an offsetting effect to cost inflation, and the margin was therefore unaffected. Including the one-off cost from the One ISS review, reported margin was 4.3%. Please go to the next slide. Since we launched the One ISS strategy in 2020, we have delivered steady margin improvements. 2023 was another step on this journey to reestablish margins at historical levels. With the improvements that we have achieved over the last years, and with the review and prioritization of the One ISS strategic initiatives, we are well on track to improve margins further in 2024 and achieve a margin above 5% in line with our financial targets. Please turn to slide 15 and the free cash flow. Free cash flow in 2023 amounted to DKK 1.8 billion as expected.
Changes in working capital generated a cash inflow, as the pressure on receivables from growing the business was more than offset by stronger than expected cash collection in December. The factoring balance increased from DKK 1.3 billion to DKK 1.4 billion in 2023, in line with organic growth. The balance was unchanged since the half year. The net effect of depreciations and CapEx was an outflow of DKK 200 million, as we have added CapEx additions related to contracts starting in the beginning of 2024, earlier than expected, and we have accelerated our investment in the electric car fleet. Please go to the next slide, where we take a closer look at the capital structure. Since 2020, we have deleveraged the business significantly. This has been achieved through a combination of increased earnings and lower net debt.
Going out of 2023, the leverage ratio was 2.2x, and we're now firmly within our leverage target of 2.0x-2.5x, which is the first priority in our capital allocation policy. Therefore, we propose a dividend payment of 20% of adjusted net profit, equal to 2.3 DKK per share at the annual general meeting in April. And in addition, we are today launching a share buyback program of DKK 1 billion, fully in line with the capital allocation policy. With this, I've concluded the financial part of the presentation, so let us go to slide 18 and the outlook. In 2024, we expect to continue the solid development from the previous years.
We expect organic growth to be in the range of 4%-6% and an operating margin above 5%, both fully in line with our financial targets. Our free cash flow is expected to be above DKK 2.4 billion underlying, corresponding to a cash conversion of above 60%. However, we have timing effects impacting our cash flow this year, and I've already mentioned the Deutsche Telekom situation. All in all, there could be a negative timing impact of up to DKK 600 million Danish, meaning our reported free cash flow would be above DKK 1.8 billion in 2024. But let me be crystal clear that this is purely timing. It's not a matter about if we get these payments, but a matter about when they will be paid.
I'll, on the following slide, go into the detail on each of the, the three, outlook KPIs. Slide 19, please. The drivers behind the organic growth in 2024 will be the same as we saw in 2023. As wage inflation is still running relatively high across the world, we'll implement price increases to offset the increase to our cost base, primarily from wage inflation. Here, we will follow exactly the same process as we have successfully done over the last years. For 2024, the contribution from price increases is expected to be 3-4 percentage points, slightly lower than in 2023. We're seeing a solid activity level at customer sites, and for 2024, we expect the underlying volume development to drive organic growth of 1%-2%.
We expect a slight positive contribution from net contract wins, as some of the positive effects from DEFRA and the Danish Building and Property Agency and local contract wins are offset by contract losses that demobilize in 2024. Organic growth from projects and above base is expected to be neutral to slightly negative. This adds up to an organic growth of 4%-6%. Please go to slide 20 and the margin building blocks. We expect continued margin improvement in 2024, and in line with our financial targets, we expect the margin to be above 5%. There are two main building blocks behind the improvement from the 4.6% underlying margin in 2023. First of all, we expect to execute on the detailed plans that will drive continued operational improvements across the group.
As communicated at the Capital Markets Day in 2022, we expect the margin in the U.K. to be in line with group average margins in 2024, while Deutsche Telekom will remain dilutive. As mentioned, the review of the One ISS initiatives will also be driving benefits, and we expect around DKK 200 million of cost savings and operational benefits here in 2024. Please go to the next slide for the free cash flow. We expect the strong underlying cash flow generation to be maintained in 2024. Further to the dynamics that I just mentioned regarding timing, we expect this year's free cash flow to be impacted by slightly higher interest and tax payments due to the higher profit and a slight negative contribution from working capital. CapEx is expected to normalize, with additions equaling the level of depreciations. Please turn to slide 22.
Let me put a few words on phasing of our free cash flow. As things have normalized post-COVID-19, you should continue to expect seasonality within our cash flow, with H1 being structurally lower than H2. This is consistent with the development in the first half of 2023, where free cash flow was negative DKK 1.1 billion in the first half and positive DKK 2.9 billion in the second half. I will not guide specifically for the first half, but it's important for me to highlight the structural drivers behind the development. First of all, we have seasonality in our earnings. Our absolute profit is therefore lower in the first half than in the second half. In addition, we have certain payments that only occurs in the first half, like bonuses and normal prepayments of different items like licenses and rents.
All in all, this means that you should expect the free cash flow to be negative in the first half of 2024, at ballpark the same level as in 2023. Please turn to slide 23, where I will provide some closing remarks. 2023 was an eventful year for ISS. As mentioned in my opening remarks, another positive chapter in ISS' journey towards building a company that is growth-oriented, people-centric, and performance-focused. We delivered solid financial results, including one of the highest organic growth rates in the history of the company. We continue to execute well, both strategically and operationally, and we move into 2024 with strong operating momentum, clear focus, customers who likes us, and a market that wants and needs what we sell. We continue to build on the solid foundation for the future through a focus on fewer strategic initiatives.
In essence, doing less things, but doing them better and the right level of investment and scale. Lastly, I would like to extend a couple of thank yous. First, to our more than 350,000 Placemakers, who are the true magic of ISS. And although I have the privilege of communicating these results, these outcomes belong to them and are a testament to their hard work, dedication, and unwavering commitment to serving customers with excellence in every interaction, every day. Finally, to our customers, thank you for placing your trust in us and allowing us the opportunity to earn your business. Our commitment is to continue to work with you in creating workplaces that fosters belonging, community, creativity, sustainability, and impact. With this, I've concluded the presentation, and we will open up for Q&A, where I will be supported by IR.
Thank you. If you do wish to ask a question, please press five star on your telephone keypad. If you wish to withdraw it again, please press five star. There will be a brief pause while questions are being registered. The first question is from Michael Rasmussen, Danske Bank. Please go ahead. Your line will now be unmuted.
Yeah, thank you very much. Three questions from my side. First of all, Kasper, if you could talk a little bit about the 2024 guidance of a small positive impact from net contract wins. Can you talk a little bit more in detail about the potential pipeline and also which regions we should see these wins coming in? So that's my first question. Second question, also on the guidance, in terms of the net working capital impact, and of course, this is excluding the Deutsche Telekom one-offs. Why is that going to be a drag in 2024?
Are you seeing customers asking for longer payment terms, i.e., that we see a bit of a reversal of what we saw in 2023? And then my final question is also on cash flow 2024 and taking into account the leverage. So assuming that you find no bolt-on acquisitions, should one either see ISS consider interim dividends or maybe adjusting the share buyback? Thank you.
Yeah, good morning. Thank you so much, Michael. Let me just put a few words on your commercial questions here as the first one. I mean, we do have a solid pipeline, and I would like to put a few words on that. I think the good distinction to make here is between local and global customers. From a local perspective, we're really seeing the things that we have worked with the One ISS strategy is coming through. And we can see that we have value propositions that is beating the local commodity players. We're coming to customers with a value proposition that really resonates with them.
We're coming with pieces of technology that local players cannot compete with, and we're also more effective on price, because we work in a more efficient way. And that's exactly what we are seeing with the many contract wins that we have launched locally, and I expect that to continue. So these are not big-ticket items, but it's solid prospects that we are landing locally in a number of local markets, and that we have visibility will continue over the course of 2024. Then from a global perspective, I mean, I'll not shy away from the fact that, of course, I'm disappointed that we haven't won a global contract in the last 12 months.
But there's nothing structurally that has changed there, and I'm still optimistic about that. The same continues as we have seen, and I've exchanged with the many last time, that the decision-making process are taking longer, because there's simply more importance on the customer side of this decision, so more people are involved. But certainly, we're getting traction when we are coming with our value proposition, and what matters to customers is that we can deliver services. Of course, as I mentioned, when I went through the survey, in a effective way, but also with consistency across the global portfolio, and we can do that.
We have a number of prospects that I'm positive on, but I have stopped giving guidance on that they're just around the corner, because then it will sound ridiculous, because I've done that several times before, but the pipeline definitely is lucrative. Then I'm pleased on the commercial side. I'm pleased to see that we continue the high retention rate at 95%. I also fully get that the competition is also higher than where they've been historically, but this is something that we have worked with structurally, and it's good to see that it's coming through, and we are closer to the customers today compared to what was the case two, three years ago.
In terms of net working capital and the small drag in that expected to be a small drag in this year, there's no structural changes on payment terms at all. This is fully consistent with what we have mentioned several times before, and also what we had in the Capital Markets Day. As we grow, there will be a small drag on working capital, but this year is not expected to be more than what we've seen historically. We are super close to the business in terms of making sure that we are not giving up on getting favorable payment terms from our customers.
And, the last thing on capital allocation, we have the capital allocation policy, and that's exactly what I've mentioned on the last two conference calls. When we have excess capital, yeah, then we stick to the policy, and that's what's behind the DKK 1 billion share buyback program that we are launching today. And of course, we'll continue to look at where the business is from a leverage perspective and continue to have that dialogue with the board, but we are fully committed to the capital allocation policy.
Great. Thank you. Thank you very much, Kasper.
The next question is from Annelies Verme ulen, from Morgan Stanley. Please go ahead. Your line will now be unmuted.
Hi, good morning, Kasper. I have three questions as well. So just firstly, on the Deutsche Telekom arbitration process, as you say, you initiated this in late 2022. You expect it could run until mid-2025. So I'm curious as to what your assumptions are internally around that process, and therefore, what, if anything, is included in the full year 2024 guidance. And, you know, three years for this kind of process, is that typical? Or would you say this is quite an extended process? And also on the payments that they're withholding, is that for services that they've already received, and therefore, are you 100% confident that you will get those payments? Or is that something that could, in effect, be written off as part of the arbitration process? That's the first question.
Then, secondly, on just coming back on capital allocation as well, you know, I think you're authorized to do a buyback of up to 10% of the share capital. I think the billion is about 4% or 5%. You know, given where the share price is, and given that I think you could do the full 10% and still be within your leverage range, on my calculations, is there a reason why you, you're only doing DKK 1 billion? Or is it because, you know, you expect to do more acquisitions or anything else that we should be aware of for 2024? And then lastly, just on the margin guide,
... you know, as you say, you gave that margin guide of over 5% at the end of 2022. But since then, we've had the sale of France, we've had the review of the strategic initiatives, which, as you say, will come with cost benefits. So, given what's behind that decision to keep that margin guidance unchanged? Is there anything else in there that actually is dragging on margins, that is offsetting the benefits you're getting from France and the, and the strategic review? Or is it just a case of, you know, we say over 5%, but that could be anything from 5.1%-5.5% or higher? How should we think about that? Thank you.
Good morning, and thank you, Elise. Three very good questions, so thanks for that. Let me take the first one on margin. Clearly, when we are guiding above 5% on operating margin, then as I'm sure you would expect, it's not saying - it's the same as saying that we have a forecast of 5.01%. Of course, we have an internal forecast that is significantly better than that. But what is important for us on the margin side is that we're doing the right things for the business. And it's early in the year, and we want to make sure that we have the flexibility to do what is right for the business throughout this year.
There's nothing off track, and you're exactly right. We got an uplift from selling France of 10 bips. We got an uplift of 30 bips from the One ISS review, DKK 200 million that is kicking in this year, and the rest of the business is trending in line with expectations. But because it's early in the year, we think this is the right guidance to come out with, to make sure that we have the maneuver room to do the right thing for ISS. In terms of capital allocation, I mean, your back of an envelope calculation is totally right.
So, I'm not pushing back on that in any way, shape, or form. Now we're getting started. ISS has not done a share buyback program before. Now we do DKK 1 billion. In an ISS context, DKK 1 billion is a lot of money, and then we will do that. And then we keep an eye on it, of course, we do. As I said, we have a policy for a reason, that is to follow it, otherwise, we shouldn't have a policy. And we will continue to do that, and the board is of the same opinion as I'm expressing here. So now we're getting started, and then we will evaluate along the way.
Last one on Deutsche Telekom, a couple of questions that you have had there. The first one, in terms of my comfort level. My comfort level is very high, and I'm basing that, of course, on the many detailed conversation and work that I've done also in my previous position as a Group CFO. I've really been in the details on this one here. But I'm also basing it on the comfort that we're getting from our experts, both the arbitration experts and the lawyers, and the other external advisors that we're having in here, and it's relatively simple. It is exactly as you were saying, DTAC is holding back payments for services that we are delivering.
Of course, you have to pay for services that are being delivered. So I don't see an impairment risk around this at all. It's a matter of when the cash is coming in, whether it's coming in in 2024 or 2025. And if there are some withholdings being done in 2024, then I'm confident that that is going to come in in 2025, because it's binding that this procedure needs to be completed over the course of the first half of 2025. And you are... I think you circle around your question around Deutsche Telekom and the relationship in general.
We, of course, it's our biggest customer, and we continue to work with them and continue to work with the improvement plans that we have from an operational point of view. We separate the two things, the arbitration case and the operational track. The operational track is going in line with expectations, and that's also why we have seen that the profitability on the contract has increased year-over-year, from 2022 to 2023, and we expect that to continue in over the course of this year. Then on the arbitration, just a quick word on that one. Is there anything that is extraordinary there?
I mean, luckily, I've never been involved in, in any other arbitration cases, but what I'm hearing is that, it's pretty normal that when you're getting close to the, the final, deadline, that things are getting more tense and are being, you know, a little bit more tense in the whole equation, and that's what we are, that's what we are seeing here. It's been important for us to go out and, and tell you, as soon as we, we knew that this has an could have an important, or significant impact for 2024, cash flow, and that's why we're laying it out with this transparency in the, in the reports.
That's great. Thank you very much.
The next question is from Kristian Godiksen , SEB. Please go ahead. Your line will now be unmuted.
Thank you. A number of questions from my side as well. So, maybe, Kasper, can you comment a bit on these DKK 200 million in additional improvements from the readjustment of the ISS, the initiatives? So that's equivalent to around the 25 basis points. So I was wondering, on, on slide 20, I guess you could have put the above 5%, you know, one, one step to the left, and the benefits from the one ISS to the right. So you should have reached the above 5%, even adjusting not, not for the, the, the benefits, as I guess that would have been in line when one, when, when you launched the one ISS, and, and, and the target of about 5% from 2024. So, that, that's the first question.
Maybe you can also comment a bit on the maneuver room you mentioned. Is that M&A or acceleration of certain investments or what does that pertain to? That was the first question.
Yeah, good morning, Kristian. I mean, I could have done many things. But the key point here is what I have already mentioned to analysts, that our business is running fast in the right direction. And it's not that I'm sitting and looking at a forecast of 5.01%. So it's coming through, and the One ISS adjustments are also coming through. I don't want to be specific. If I wanted to be specific, I would have been that in the guidance.
We will deliver above 5% on margin in 2024, and I don't have any specific in mind, other than the fact that we are in February now, and I think, together with my management team, that it's the right thing to come up with the guidance this early in the year that is above 5%. And then, of course, as we move on over the course of the year, we will socialize where we are, and most likely, the guidance will also be narrowed accordingly.
Okay. Then the second question would be on the size of the share buyback. So, mechanically, if you do not do any M&A, and even if, Deutsche Telekom, the payments there will withheld also in 2024, then you will be below the low end of your capital structure type. Can you maybe comment a bit on how you decided on the DKK 1 billion and, you know, how do you see that evolving throughout the year?
Yeah. What I can comment on is I can say the same as I mentioned earlier, Kristian, we have a capital allocation policy that clearly lays out the priorities. You should not think that anything has changed on the M&A arena. It's not that I'm sitting here thinking that we need to go out and do over the course of this year and make a significant transformational M&A. That's not where we're at. But I want to have the flexibility and the opportunities to do bolt-on acquisitions. It's coming through, you know, better than expected in Switzerland.
And I'm only talking to the numbers here, but strategically, the fit is also excellent, and I expect the same, and there's no reason to believe that shouldn't be the same for Spain as well. So I want to have some capital to simple bolt-on acquisitions with low risk. And then, as I said, we continue to evaluate the capital allocation policy, and we'll follow that one of course also throughout this year.
Okay. Thank you. Then thirdly, so obviously the market, based on the share price reaction, is very worried about the Deutsche Telekom contract and how that could be interpreted. So maybe could you comment a bit on how dilutive the contract is to the group margin, and then obviously also maybe on the risk of these EUR 600 million in relation to the arbitration and how this can be translated into the relation to the claims that are made by Deutsche Telekom on the arbitration?
Yeah. Yeah, I mean, I totally appreciate that this is an important matter, and I'm happy to provide as much information and transparency to... But only to a degree where it doesn't hurt our current arbitration case, obviously. But I think, Kristian, in terms of my comfort level of this, that's the same as I mentioned before. This is what they are withholding is for services that we are providing. And I don't see any reason that they shouldn't pay that. And my comfort level is also backed by external advisors, as I mentioned before.
So, it's a matter of when the cash is coming in, whether it's this year or next year. And, in terms of the contract specifics, you know that the contract is around DKK 4 billion in annual turnover, and it is diluting to us, but it's running at a black number, so it's profitable, but it's still diluting to, dilutive to group average margins.
Okay. Okay, perfect. Thanks a lot.
Yeah. And your last question on, sorry, I just looking at my notes when you made the questions here. The last question around, well, is there a worst-case scenario? I think that's basically what you're asking about between the lines, where we will be sitting with the same costs and not having offsetting revenue. And the clear answer to that is absolutely not. Absolutely not. We are not going to sit with with cost providing services that we're not getting paid for. So, so that is not going to be the case.
The next question is from Nicole Manion from UBS. Please go ahead. Your line will now be unmuted.
Hi, good morning. First question, please, if you could give us an update on what you see as the wage inflation trends across the group, and whether you're confident that your pricing growth is still offsetting that. It looks as though there might have been an uptick in that regard in Q4. So if you comment on that specifically, that would be good. And also what you're seeing lately in terms of employee satisfaction, how you think that's kind of trending? That's the first question. Thanks.
Yeah. Thank you, and good morning. So, we're looking at a consolidated picture where wage inflation from a growth perspective is going to be around 5%. So lower than what we saw in 2023. And also remember in 2023, we had a number of countries where there were actually adjustments more than once during the year. But around 5% is what we're looking at in 2024. And I'm fully confident that we can pass that on to customers. We've done that, and now successfully the last two, three years. And the system has proven itself, and there's no danger signs that that will not be the case this year as well.
So I don't see that as a threat to margin in 2024.
Okay, thank you. And maybe just a follow-up on Deutsche Telekom, although I know you've sort of touched on this. But just looking at the consensus expectations for free cash flow in 2024, that number in consensus is obviously relatively close to the DKK 2.4 billion underlying that you're pointing to today. So maybe could you touch on what's changed recently in terms of that DKK 600 million variance? It looks like that might be somewhat new news to you, at least. So maybe if you could kind of touch on sort of what's happened there, you know, in recent weeks, I suppose, or months. Thanks.
Yeah. But this is simply what we have, what we've spoken about here, during the call. It is a worsening situation on D-Tech, and now it has a material impact in 2024, and that's exactly what I'm flagging. But I wanna be clear that if we land at a free cash flow of what I'm saying here and what it is converting to is, of course, if we land at a free cash flow of DKK 1.8 billion in 2024, you know, that means that the expectation for cash flow in 2025 will be DKK 600 million higher.
That's what I mean with phasing, that it's not that these money are gone. It's a matter about whether they are kicking in in 2024 or in 2025.
Okay, thank you.
We have Kristian Gordiksen back on the line for a follow-up. Please go ahead, Kristian, your line will now be unmuted.
Perfect. Thank you. Sorry, that was just on the wage inflation you mentioned, Kasper, that is around, expected to be around the 5%. But how does that translate into you expect price increases of 3%-4%? I assume there's also some inflation on the consumables. That will be the first question.
Yeah. So the 5% growth, I expect that to convert into a net contribution on top line of between 3% and 4%, with the same dynamics as we've seen historically, that we do help customers to get some synergies, which is easing the burden on their side. So it's not a straight pass-on with the 5%, but the net contribution is going to be slightly lower than the 5%.
Okay, that makes sense. Then the second question I have is on the U.K. You mentioned that that is in line, the margin. And just to be clear, is that in line, adjusting for the corporate cost, or is that... Yeah, basically, that's just the question.
It is obviously all in that that I'm looking at it. I'm not looking at it in with only local markets glasses on. I'm looking at all of our local markets from an enterprise perspective.
Okay, perfect. That's good. And then, thirdly, maybe could you comment a bit on the worry in the market that has been on reduction regarding reduction in square meters? Maybe can you comment a bit on, you know, how many clients have you seen that needs to do this rescope of the size of the office space, and maybe confirm whether it's still your expectation that they should have a net neutral impact on your revenue?
Yeah. So we are not seeing that customers' budgets are reducing. We are seeing that customers and business in general are investing into the workplace. And yes, we have a number of customers that has reduced square meters, but the level of spend per square meter has gone up accordingly. And then we have seen a number of customers that have initiated saving exercises, but we see that as an opportunity because we are working with them as a partner. So for us, an opport...
It is an opportunity to take over additional service lines from smaller companies that they're using, and bundling it with our scope and therefore help the customer achieve savings, but, but, but at the same time growing our business.
Perfect. Then, final question from my side. Maybe could you comment a bit on what you see as upside and downside potential for the UBS/Credit Suisse, which are both a client of, I am not sure if you can say both, but they were both a client of yours. I guess it's one company now.
Yes, I can comment on that. I mean, first of all, we are super happy that we are a trusted partner in that process. And as you said, they are lighthouse customers of ours. At the moment, it's business as usual, and we're not seeing material changes to our business. And we're working in a partnership with them, helping them to achieve what they need to achieve. At the moment, no impact, but without further disclosing anything, it's not something that we are worried about from a longer-term perspective.
...Is it something you're a bit optimistic about then, maybe?
The opposite of worried is optimistic, so yes, Kristian.
Okay. Well, that sounds good. Thanks a lot. That's all for me.
Thank you, Kristian.
The last question here on this call today is Klaus Khel from Nykredit. Please go ahead. Your line will now be unmuted.
Yeah, hello, Klaus Kehl from Nykredit. I guess it's pretty obvious that you're not best friends with Deutsche Telekom right now. And without going into a lot of contract details, which you obviously can't, could you just, from a very high level, talk about what kind of switching cost or exit cost would Deutsche Telekom have? And what would be a kind of realistic worst case scenario for ISS? And, yeah, please make it realistic that... And I don't assume that you will be stuck with all the cost and do nothing, but more realistic. Thank you.
Yeah. Yeah, thanks, Klaus. And I get and also follow your question, but that would be pure speculation. I don't see such a scenario, so I don't wanna start to speculate on that, Klaus.
Okay. But could you then just talk about switching costs or exit costs or?
But, but-
ISS, you both would be heard by-
Yeah, but we are in an arbitration process. We are there for a reason. That is, we want to draw a line in the sand, and then, of course, the target is from our side, I'm sure the same from DTech's side, is that then we've got to have a fruitful partnership. We're helping each other to do what really matters, which is to, for us to drive excellent services to Deutsche Telekom's staff and their customers. And we are not coming in with this as from an approach that we need to exit the contract, and that's why I'm saying it's a pure speculation.
I don't wanna start to quote numbers here on something that I don't see as a likely scenario.
Okay, great. Thank you very much.
I will now hand the word back to the speakers for any closing remarks.
Thank you very much. Thanks, everyone, for listening in, much appreciated. Obviously, IR are keeping themselves available over today, but also the coming days and next week. And please feel free to reach out to IR. And I will also keep myself available if there are certain things that needs my involvement. But with that, thanks for attending the call, and have a very good rest of your day.