Good morning, ladies and gentlemen, and welcome to this C onference C all following the release of ISS Q1 2022 Trading Update. My name is Jacob Johansen from ISS Investor Relations, and I'm here at our group headquarters in Søborg, Copenhagen. With me in the room today is our group CEO, Jacob Aarup-Andersen, and Group CFO, Kasper Fangel, as well as Kristian Tangsig, my new IR colleague. Before beginning the presentation, I will ask every one of you to pay close attention to the disclaimer on page 25. With that, I'll hand over the word to Jacob and slide number three, please.
Thank you, Jacob, and good morning, everyone. Let me start out with the executive summary. First of all, Q1 was a good start to the year. The quarter showed a clear trend of increasing activity levels, and it's encouraging to see the strong demand for our core services. Our sustainable portfolio revenue increased by 7% in the quarter, and demand for non-portfolio work continued to be high. Customers are investing in their workplace to adapt to a post-COVID-19 environment, and they prefer higher flexibility in the FM services. A key theme is, of course, inflation. We have worked diligently in our management of price increases and are handling inflation well. As you would expect, we have also continued to work through the turnaround plans for our underperforming entities.
Today, we've reached a significant milestone in our turnaround, as the U.K. has reached its Turnaround Run Rate Target. We're therefore reducing the number of hotspots from originally four to now two. Only Deutsche Telekom and France are remaining. The underlying margin improved in the quarter according to plan, and we have successfully handled any margin impact from the cost inflation. On the back of the strong development in Q1, we are today able to upgrade our 2022 organic growth outlook. More on that later in the presentation. Let's turn to slide number five for an update on the strategic development. With the five refocused strategic priorities, we strive to improve our execution power. Within the commercial area, we've extended a large number of key account contracts, and our retention rates have increased, which is something I'm gonna come back to.
As part of our market leadership, we work a lot on data and insights. With the redesigned pulse surveys, we are gaining enhanced data behind the latest FM trends, and we're using that data internally and towards our customers to become a true business partner and utilize our global scale. I'll deep dive on some of the conclusions a little bit later. The brilliant operating basics are being implemented on multiple sites across the group, which allows us to drive an improvement of our operating model in the coming years. We can never, ever lose our focus on the basics that allows us to deliver excellent service levels at the most efficient cost at all of our sites every single day. On the turnaround, the fast improvements in the U.K. shows the structural strength of our customer base and competitive market edge.
Full focus is now on France and the Deutsche Telekom contract. Let's turn to slide number six for an update on the divestment program. Another milestone in our turnaround is that we, for all practical purposes, now consider our divestment program completed. This will be the last quarter with a separate slide on the program. DKK 1.9 billion of the expected proceeds are secured, and the smaller outstanding divestments will take us slightly above the DKK 2 billion target. Since the full-year announcement, the divestments of Taiwan and Russia have been completed, both finalizing processes that we initiated in December 2020. With that, I'll take a deeper look at the market and business development, and that will mean slide number eight, please. During the first quarter, the commercial activity level has been high.
As you can see from the slide, we've extended a very long list of key account contracts. For the last several quarters, we've had a relatively large share of our contracts up for renewal, and it's therefore encouraging to see that we've been able to retain the vast majority on all of the larger ones. This is a testimony to the investments we're doing to enhance our commercial capabilities. Retaining contracts is a focus area for us, and we aim to structurally improve our retention rate, and we see a strong potential improvement. There's no doubt that the best sale is to retain a good customer. It's encouraging to see that our retention rates are higher in Q1 than historically, which is evidence that our work to structurally improve retention is showing some initial results.
We now have 3% of group revenue outstanding for renewal for the remainder of 2022, and those are in good progress. One new contract with annual revenue above DKK 100 million has been won, and the pipeline is developing well. We see some commercial decisions among our customers are dragging out, which is not surprising given the current dynamic development of the workplace and the geopolitical volatility in recent months. It's not a concern, and we're comfortable. Please turn to slide number nine. Throughout our more than 120 years' history, we managed inflation. For a company in a low-margin industry with the vast majority of costs being wages, it's an integrated part of our business. In most of our contracts, we have clear legal clauses which allows us to pass on the cost inflation to the customers.
This slide shows an illustration of a specific real-life manufacturing key account contract. It highlights the relationship to our customers, and this also shows our opportunities to work with the customer on an ongoing basis and develop the contract. Besides wage inflation, we also faced with increasing food prices, which we, through a close dialogue with the customer, are managing through a combination of adjusting the offering and operational efficiencies. This also goes for the annual glide path and efficiencies promised as part of the contract, which you know is the usual business. All in all, adjusting prices toward customers is a key parameter to manage inflation, but there are, of course, several additional opportunities to offset the effect. Please turn to the next slide for status on COVID-19 recovery.
For the first time since the outbreak of the pandemic, our quarterly revenue is now organically above the pre-COVID-19 level, i.e., above Q1 2019. The development is also helped by the start-up of the Deutsche Telekom contract and the different seasonality of above base work, but it's a very clear proof point of the structural demand for our core services also in a post-COVID-19 environment. On a group level, organic revenue in Q1 2021 is 3% higher, as revenue for both cleaning and technical services are well above the level in 2019. The return to office trend is an important driver, most visibly within our food services. They improve from index 72 to 80 in the quarter. Please turn to the next slide for a look at our pulse survey.
We have redesigned our ISS Pulse survey as part of our work to enhance our data-driven insights. With this enhanced survey, we gain valuable in-depth insights into the latest trends in the facilities management industry. The data here covers 1 million office workers all over the world, and therefore it gives quite unique insights. The focus is on the office-based segment, which accounts for around half of our business, as you know. For the non-office-based customers, we continue to see structural growth. Healthcare and production revenue is not exposed in any material sense to potential changes in the workplace environment. From the survey, it's clear to see that a majority of our customers are investing more in their workplace and not planning to reduce real estate footprint. We have previously communicated that the office footprint could reduce by 10%-15% based on our best estimates.
Based on the development in recent quarters, customers continue to focus on the workplace and data from this survey. We're now confident that that will be less. If we are assuming that the net 16% that you're seeing up here of office-based customers that are reducing footprint are reducing, let's say, on average, 20% of their footprint, then that translates into maybe 3%-4% reduction in total square meters for us, and that's only in half of our business. That will easily be more than offset by higher quality and content per square meters, as we've also talked about in the past. The conclusion is that even though square meters are reduced slightly, demand for high-quality services have increased. With our self-delivery model, several opportunities arise, and we can support our customers in creating the workplace of the future.
The priorities and demands for facilities management has also changed, and let's look at the next slide to deep dive on that. Because another highlight from our Pulse survey reveals that the customers' priorities have changed. Before the pandemic, the main priority was operational efficiency, but now focus is on bringing employees together and back to the offices. Employee engagement is now top priority and improving sustainability and talent attraction is more important than pre-COVID. Furthermore, it's interesting to see that cost savings is no longer a top five priority. This concludes my part of the presentation, and I hand over the floor to Kasper to go through more details on the financials, and I think that means slide number 14, please.
Thank you, Jacob, and good morning all. Our growth momentum from Q4 last year did not slow down in Q1 as organic growth was 5.4% in the first quarter of 2022. The growth was driven by accelerated return to office trends in several large countries and price increases implemented globally. The price increases implemented in Turkey contributed with around 1 percentage point to the group's organic growth. It is encouraging to see that the portfolio revenue, the sticky and sustainable part of our revenue, grew organically by around 7%. The demand for projects and above-base services was also maintained at a high level as increased demand for workplace investments and regular project work almost offset the decrease in deep cleaning and disinfection. Non-portfolio organic growth was -1%, having a minimal negative impact on the group's organic growth.
Please turn to the next slide for a review of the regional development. Despite very different developments, not least from COVID-19, all regions reported positive organic growth in Q1. In Europe, the improving return to office trend, combined with price increases, were the main drivers of the growth. Specifically in Norway, due to the ramp-up of the contract with Equinor and Turkey with underlying growth and price increases. In Asia-Pacific, the development was very different from country to country. Australia reported strong organic growth with increased activity across customers. In contrast, some countries in Southeast Asia reported negative organic growth due to reinforced COVID-19 restrictions. The improved return to office trend had a significant effect in the Americas region due to our relatively higher exposure to food and the office segment.
Even though organic growth for food services was above 70%, revenue is still at index 60 compared to before the pandemic, and that obviously means that there's still more upside from the continued return to office in the U.S. Please turn to slide number 16 for the status of the turnaround. In 2022, we are still in a turnaround mode. We continue to have a strong focus on improving the underlying margin further from the just above 3% level at the end of 2021. Here in Q1, the margin improvement is developing according to plan. As we continue to improve the underlying margin, we have seen no setbacks from the elevated cost inflation. On a group level, the operating margin is unaffected. Nine months ahead of plan, the U.K. has reached the turnaround target of a low single-digit run rate margin.
Focus is therefore on the two remaining underperforming areas, France and the Deutsche Telekom contract. In both areas, the gradual improvements continued, but needless to say, there's still a lot of hard work ahead of us. Please turn to the next slide for comments on the upgraded 2022 outlook. The organic growth in the quarter was stronger than expected, and we have also experienced a more encouraging development of key factors, such as the pace of return to office, as well as the continued strong project and above-base work. We are therefore comfortable in upgrading the 2022 outlook relatively early in the year. Organic growth is now expected to be above 4% compared to previously above 2%. The underlying margin improvement is on track, and with the implemented price increases, we expect a negligible effect on margin from inflation.
We're therefore confirming the outlook for operating margin to be above 3.5%. The outlook for free cash flow is also confirmed at above DKK 1.3 billion. Please turn to the next slide, where I will go through the main building blocks behind the outlook for organic growth. In a very simplified illustration, we see four main building blocks behind the outlook for organic growth of above 4%. Firstly, we expect a positive contribution from price increases, net of efficiencies of approximately two percentage points. We've already seen a positive effect in that ballpark here in Q1. A large part of this year's expected price increases has already been implemented. Secondly, we expect the gradual return to office trend to continue, and we expect this to contribute with two to three percentage points, mainly driven by food services. This was slightly more in this quarter.
Thirdly, we expect a positive effect from net contract wins and losses. We still expect this to contribute with up to one percentage points, including the exit of the Danish Defence contract, which is expected to be fully exited in May. Finally, we expect a negative contribution from lower projects and above-base work. In 2021, demand was high, driven by deep cleaning and disinfecting during the pandemic. In Q1, demand continued to be strong, but we do not expect it to continue to the same extent throughout the year. With that, I've covered the financial part of the presentation, and I hand the word back to Jacob for some closing remarks on slide 19, please.
Thank you, Kasper. Just to round this off, Q1 was a good start to the year. When we look at the demand for our services, it clearly continued and price increases were implemented. We're therefore able today to upgrade our outlook for organic growth and with confidence confirm the margin and cash flow guidance. We are well on track to deliver on our turnaround targets by the end of this year, and we will continue our laser focus on delivering on our recovery. As employees are getting back to the offices, the importance of the workplace becomes even clearer. Customers are increasing spend on quality and facilities management, and we can help our customers form the workplace of the future, which clearly creates several opportunities for us.
Finally, I wanna give a heartfelt thank you to all of our more than 350,000 employees around the world. Your contribution to ISS and support to our customers really, really make a difference every single day. People truly do make places. With that, I will open up for the Q&A session.
Ladies and gentlemen, to ask a question, please press five star on your telephone keypad. To withdraw your question, please press five star again. We will have a brief pause while questions are being registered. The first question is from the line of Bilal Aziz from UBS. Please go ahead. Your line will now be unmuted.
Good morning, everyone. Thanks for taking my questions. Three for me, please. Firstly, Jacob, you talked about, you know, a bigger focus on retention rate. Perhaps we could pin you down to some numbers over there. What do you think is a reasonable target for a retention rate? You know, some of your peers operate somewhere between 93%-96%. Keen to hear your views on that side and particularly around commercial momentum. Number two, you've upgraded the organic growth today. Can you perhaps help us with the phasing of that for the rest of the year with respect to above base and contract ramp up? Lastly, clearly the organic growth upgrade all reads quite positively for margins and free cash flows. You've left that unchanged.
Perhaps you can help us with the thinking, on that side, too. Thank you very much.
Thank you, Bilal. I'll start with the first one. You addressed that directly to me. Just on the commercial side, your first question within that question was on retention. If you look at it, historically, we've been averaging 92-93% retention. The last couple of years, it's more been 91-92. We're now back last twelve months at 93%, and we're seeing that continue to improve. I'm not gonna give you a target. I'm not gonna announce a retention target here, but the aim is that we improve on the historic 92-93. We improve that.
Let's, when we get back and also talk about longer term aspirations, it would be natural for us to give you more firm views on where retention should be. It is a big focus for us, and we're seeing it paying off. As I say, it has an arrow upwards now, having hit the 93% again, being back at that level and expecting it to increase from here. I said it in my speaking notes. I think we all understand how much better a retained sale is versus a new sale in terms of risk profile, in terms of ongoing cost management, et cetera. Then you said broader commercial momentum. We're not seeing a negative change in commercial momentum.
The only thing we're seeing is there are some of the big processes that are just taking a bit longer. Some organizations just had to find themselves again with the recent geopolitical turmoil, which has led to some delay in some deadlines, et cetera. We're not seeing anyone pull processes or anything like that. It's more slight delays in some processes, and the pipeline is looking good like we also mentioned last time around, nothing has changed on that. We won one sizable key account in the quarter, as we reported. We have some very important negotiations going on at the moment, and we feel confident that we can be able to bring some of that news to you within the next quarter or two.
As always, I will not commit to anything that is in a process. I'll pass it over to you, Kasper, on the phasing of the revenue.
Yeah, absolutely. Good morning, Bilal. On the phasing on organic growth, we are guiding organic growth above 4% for the full year. With the reported 5.4% in Q1, we do not expect massive phasing throughout the remaining three quarters. As you will appreciate, we do not guide for the quarters in isolation, but I'm happy to provide more color on the phasing of the growth components that I mentioned in my presentation. We expect COVID-19 recovery, as I said, to be between 2% and 3%. Remember, comparison gets tougher in the second half of the year. On net price increases, approximately 2% growth contribution, broadly the same throughout the year. Net contract wins and losses, including the exit of Danish Defence, up to 1% positive growth contribution.
Danish Defence has started to demobilization, and we expect that to be fully out of the portfolio in May this year. The last part is above base and projects up to -1%. However, the key determining factor is the end of the year, where, as you know, we traditionally have seen a spike in project revenue in Q4. That is obviously still uncertain. However, it is pleasing to see that project work did not decline in Q1 against Q1 2021, which was a year where we saw a constant high level of project work. On the margin side, your third question. Of course, it is positive for margins when top line increases.
There are pluses and minuses for the margin this year compared to the initial expectations. On the pluses, the high level of project work is margin accretive, and we also expect to get more revenue and therefore also more profit from COVID-19 recovery. We've also managed to get price increases passed through without any margin hits. On the negative side, we have seen additional costs related to temporarily higher sickness rates in Q1. In summary, with Q1 margins secured, we are very well on track to deliver on the full year outlook of above 3.5%. It's too early to narrow the margin guidance at this point in time.
Brilliant. Thank you very much, guys.
The next question will come from the line of Michael Rasmussen from Danske Bank. Please go ahead. Your line will now be unmuted.
Yes, thank you very much, and very well done, both of you or all of you guys. Three questions from my side. First of all, on just thinking a bit on 2023. I know it's not just around the corner, but if you could just share how you think about the growth opportunities as such, now when 2022 looks to be a rather good year. Will the negative potential from above base, I think you've talked about 2.5 percentage points in the past, just be pushed into 2023? Do you think new contracts, first-time outsourcings, further food recovery, will mean that we'll get a 2023 also a rather solid year in terms of organic growth?
My second question is just on the turnarounds. First of all, any change in how you work with both Deutsche Telekom and the turnaround in France? Is there something you need to change now? Is there something that you need to accelerate? Or has your thinking been changed in the past few months? Then finally on the U.K. market. You've now reached the turnaround margins, and we know that from historical the U.K. market obviously was a very high margin market. What's next process on the U.K. just now? Because I guess that you're definitely not satisfied with what you've done so far. Thank you very much.
Thank you, Michael. Why don't I start out? On 2023, well, you prefaced it yourself. It is. We just delivered Q1 2022. There's a limit to how detailed I can be around how we see 2023 at this stage. I know you appreciate that. If we stay in the helicopter, and that's also what you're asking, we. As said, we're seeing good commercial momentum, and we would expect some good commercial wins this year. Those wins will, as you know, given that it takes time to mobilize and fully start up, et cetera, they will have an effect in 2023, a bigger effect in 2023 than in 2022.
There should be a positive contribution from new wins in 2023 versus 2022. In 2023, we don't have the negative effect of Danish Defence falling out like we have this year. I think the net wins should be a positive. You're also right that the food business, we are not assuming in our guidance for this year that food goes back to index 100. There is an upside in 2023 from food continuing to return to normality, which is also a positive. Those two are the big positives. You mentioned above base.
Listen, at this stage, talking about above base in 2023, I think it's too early. You can have many schools of thoughts out there. You can have views that we will return to pre-COVID levels. You can also have views that there is a more permanent structural investment cycle now in the workplace in the coming years, and that will drive more above base. I'm not gonna comment on that here. What I can say is when I look at 2023, I don't see a reason why we shouldn't see good growth in 2023 versus in the same way as we've seen in 2022. You're not gonna get a number out of us, and I know you know that.
Just on the second one, which was on the turnaround, in terms of DTEK in France, we're not seeing any changes in our approach to them. If I take the two, they are different, as you know. On DTEK, there's a lot of work going into gap closing work, finalizing our approach to some of the bigger drivers within the DTEK account, such as the capital project side, et cetera. Making sure that the system implementations are yielding the benefits on an efficiency perspective that we expect, et cetera. The DTEK is very much around us driving a more efficient and effective operation. That plan is not changing. It's a
There's a very strong plan there that is being executed by the team. We said it many times, it's a big contract, and as you know, it's been quite loss-making. And therefore it is a big task. Of course, for every month that goes by where we execute on the plan, we move towards the target. Nothing has changed on that one. France, it's a different thing in France. You know that there it's not just about gap closure and driving a more efficient operation. There's also an element here that we are hit by the fact that we're more COVID hit in France than we are in other European countries due to our business mix.
You know, we have exposure to clients that are more hit from COVID than average. That means that there's also an element here that we need to see more volume growth in France to truly deliver a full turnaround in France. Therefore it's a mix of both focusing on the internal plans, but also focusing on driving top line in France. Those two elements. Overall, the conclusion is that we're not changing our approach to any of those two as such. Kasper, do you wanna speak about the U.K.?
Yeah, definitely. Good morning, Michael. I mean, indeed, we are happy with the acceleration and momentum in the U.K., but that does not mean that it stops here. It's clear that we have more potential in the U.K., and that's both in terms of commercial momentum, so on top line, but also on profit by driving, you know, further efficiencies on the direct cost, but also overhead facilities. Of course, we will keep pressing and push for that. The good thing about our U.K. business is that 90% of the revenue, actually more than 90% of the revenue is purely key accounts.
We have managed to get full transparency all the way down to site level in the U.K. business, which means that we can drive efficiencies very fast and very effectively. I think it's too early to commit to a new target. Again, you know, needless to say, we are pressing with full horsepower to squeeze further efficiencies out of our U.K. Business.
I'm glad to hear that. Really looking forward to some new plans perhaps later this year. Thank you.
The next question is from the line of Allen Wells from Jefferies. Please go ahead. Your line will now be unmuted.
Hey, good afternoon, gentlemen. Good morning, sorry. A couple extras from me.
I think the first half, second half split of profits, I think we were looking at 65-ish% of profits in the second half, due to stronger margins, et cetera. Would the above base work, I guess, above what we were expecting Q1? Does that change anything in terms of the first half, second half phasing of profits? That's my first question. Secondly, on the U.S. food side, I think you said it's still indexing at 60. You said it won't be back to 100. But based on the current expectations, the current guidance, what sort of level do you expect that to be at year-end, maybe 80 or 90? Just to try and get an understanding there.
Finally, just following on from that, on the catering side, some of the other listed peers have obviously talked about strong activity from first-gen outsourcing as customers struggle to manage complexities with flexible working and supply chain inflation, et cetera. Is that something you're also seeing in your food business as well, where there might be some upside, maybe if you're seeing something in the pipeline of contracts that are coming through as well? I'd be just interested to understand. Thank you.
Thank you, Allen. I will let Kasper talk about phasing of profits between H1 and H2 and the impact that the above base could have on that. Let me talk about the two others. On the U.S. food side, you're indeed correct that that's indexed 60 in the U.S. When we talk about food, I'm not gonna give you a target for where we see U.S. food end the year because that'll be too specific. We are assuming that we exit food in general at index 85 at the end of the year, yeah. Of course, you know, food is a food.
U.S. is the biggest food market we have. We've said before that the U.S. is indexing a bit lower than the rest of our food business simply because it's been a later return to office, where you also know we are especially quite West Coast heavy, and there's just been a slower return there. We're seeing that return now as also described. That's good. 85% on the overall food business, which would entail that the U.S. is a bit lower. In terms of first-gen outsourcing, I think that's a great question. Actually, there's no doubt that we're seeing that in food. When you look at the...
If you put yourself in the shoes of a real estate head or a workplace owner, where have you seen the most volatility in the last two years in terms of the different service lines? Well, it's clearly been on the food side. There is a push for more outsourcing of food services, and that's also something that we see as quite an interesting opportunity in the coming years. As we see pipelines build at the moment, part of that is also on food business. When you look at growth beyond 2022, I think first-gen outsourcing food will have a larger proportion of that compared to what we've seen in the past, given the experiences here. I think you're spot on from that perspective.
Over to you, Kasper, on the phasing.
Yeah. On margin phasing. Good morning, Alan. So on margin, we are progressing according to plan, and we continue to see underlying improvements in Q1 against the exit position in 2021. We still expect that margins in the first half will be better than 2.5%, and in the second half, higher than 4.5%, which will give you a margin for the full year, which is better than 3.5%. Of course, it's pleasing to see that the Q1 is following the plan, as that obviously de-risks the margin outlook for the full year.
Specifically on the impact on project volume, we are not depending on the high level of project volume to continue throughout the year. We are expecting that to decrease and have a negative impact on top line, up to negative 1% for the full year.
Great. Thanks, guys.
The next question is from the line of Klaus Kehl from Nykredit Markets . Please go ahead. Your line will now be unmuted.
Yeah. Hello. Yes, good morning. A couple of questions from my side. First of all, if we start with the Danish Defence contract, you say that it will end here in May. What will that mean for your organic growth after May? Secondly, also in respect to this contract, you have made a provision. It's still your best guess that this provision is big enough to exit the contract. Another question about inflation. You have mentioned it a couple of times that you have raised prices in Q1. Just to be perfectly clear, is that across all geographies, and does it mean that the risk from margin pressure from rising inflation in the coming quarters is more or less eliminated? That would be my questions.
Thank you.
Thank you. Thank you, Klaus. Let me start on the inflation piece, and then Kasper can speak to Danish Defence in terms of the growth impact and whether the provision is adequate. On the inflation side, when we talk about the price increases that we put through in the quarter, we are broadly referring across geographies. It's not like that is exactly the same proportion across all geographies as you would appreciate. A large proportion of our contracts, in terms of the labor element, the yearly wage increases are coming through in the first half of the year, not in the second half of the year.
If we take step one, you know the large part of the vast majority of inflationary pressures in ISS, that's on wages too. 70% of our wage cost is in Europe, and in Europe, our employees are mainly on collective agreements, and that means that here in the beginning of the year, the largest proportion of wage changes happens. That is also why you can say we feel quite confident around the fact that we have de-risked this significantly because a large proportion of those yearly wage increases have now come through with associated price increases. There are some contracts where wage increases will come through later in the year, depending on the contract or the geography. On top of that, there is some food inflation that continues.
On the food, you also know that the majority of our food contracts are what we call cost-plus, which means we can pass on the food inflation to the customer with a margin on top. Therefore, you can say food inflation is also something that we are comfortable with. Of course, there are customer situations where it's tough conversations, and it's not always that the contract is 100% clear, and then we'll have a commercial discussion, et cetera. The mandate is very clear to our team, that is that margin has to be preserved in these negotiations. We've been through a large part of the inflationary pressures, but no one is letting down their guards for the rest of the year.
Let me hand over to Kasper on Danish Defence.
Good morning, Klaus. In isolation, the exit of the Danish Defence contract is going to give a growth impact of a little less than 1%. Remember that the exit is phased, and we're actually seeing a very small impact on revenue, very small volume in Q2 on top line from Danish Defence. It is starting to move out and fully exited in May. Combined, just wanna make the point that on the portfolio in totality, including the exit of Danish Defence, we do expect up to 1% positive growth contribution this year.
In terms of the provision on the balance sheet, we are comfortable with that, and we do not expect any adjustments going through the P&L as a consequence of us exiting with Danish Defence.
Okay, just a follow-up question. It means that your organic growth will improve by approximately one percentage point after May, when you have exited this Danish Defence contract?
For the full year, we expect, including the exit of Danish Defence, that we'll get up to 1% organic growth from net contract wins and losses.
Okay. Thank you.
The next question is from the line of Rahul Chopra from HSBC. Please go ahead. Your line will now be unmuted.
Hello, good morning, and thank you for taking my question. I have two, if I may. One is on the capital allocation and M&A. Now, given your disposal has largely been completed, how are you thinking in terms of capital allocation? Should we think in terms of M&A versus further divestments, or how should we think about those elements there? My second question is in terms of employee turnover has been quite beneficial for margins quite recently. Just wanted to understand the kind of wage labor scarcity you are seeing in Europe and North America. Just want to understand your thoughts on labor scarcity and what kind of inflation or wages are you looking at those numbers. Thank you.
Yeah. Thank you, Rahul. Let me start on the capital allocation and M&A. No change there. We have made it very clear that, as part of our turnaround until end of 2022, the focus is on de-leveraging our balance sheet below three times net the EBITDA and nothing has changed there. We are confident that we will deliver on that target, as you know, and so nothing has changed from that perspective. We are as we get to that level, we will then communicate around capital allocation. For now, the only capital allocation that we focus on is making sure that we deliver on the leverage targets that we have promised you.
On the turnover, employee turnover, I'm not sure that if I may just push back a little bit, I'm not sure turnover has been beneficial in terms of margins, et cetera. We are constantly working on reducing our turnover. It's a KPI for our management that we reduce our employee turnover in general. There's no doubt that when we look at the current market environment with the labor shortages, as you point out, it's generally a very, very tight market, and it is harder to recruit. That's also why we have stepped up our efforts quite massively. We've invested both on the system side.
I've previously on other calls, other quarterly calls, talked about how we use artificial intelligence in our large markets, et cetera. There is a lot of initiatives from our side in terms of making sure that we counter that tighter labor market. We have more vacant positions than we had pre-COVID. I think, unfortunately, most companies can make the same statement, but we are managing it. Due to the size of the company, with more than 300,000, 350,000 employees, we are able to be flexible and move our workforce around and deliver on the commitments to our clients. I will definitely agree to your statement that it is tough.
It requires a lot of work, and our very good P&C colleagues have been driving that very well. We don't see it as an increased risk factor going forward. You mentioned wages, wage increases. Well, the wage increases we are seeing, predominantly our workforce is under collective agreements. Hence it is multiyear agreements, and we know quite well in advance what increases will be, and therefore we can handle them. There are areas, of course, where there are high wage inflation in, where it's more temp labor and when it's more loosely affiliated labor, but we can also handle that. It's on the vast majority of contracts, we can pass it on.
We are, of course, also trying to be as intelligent and efficient around how we use those resources. Nothing new on that account. This is part of the overall inflation narrative I started out with today, and we are handling that, as you can see from the numbers.
Understood. Thank you so much.
As a reminder, to ask a question, please press five star on your telephone keypad. The next question is from the line of Madeleine Kerley from Morgan Stanley. Please go ahead. Your line will now be unmuted.
Hi. Thank you for taking my questions. Just a couple from me, please. I think they've been mostly already answered. On the above base work and the kind of continuity of it, would you be able to quantify what you think the kind of sticking rate will be going forward? I mean, are you really expecting to go back down to pre-COVID levels or kind of more realistically sustain this current run rate? Then secondly, on your ability to push further price increases through in case of further cost escalation, what kind of flexes do you have in your margin guidance potentially for higher inflation going forward? Just what kind of considerations are you taking into account there? Finally, on just the cash flow guidance is a small one. Is that including or excluding the exit costs from the Danish Defence contract?
Thank you.
All right. Thank you very much, Madeleine. Let me do the first two ones, and then Kasper will do the cash flow. That's his favorite topic anyway. On above base. I think you're asking definitely the right question there. You can say when you look at it, there's no doubt that above base and project work has been higher throughout the COVID years than the level pre-COVID. You know that we've been quite clear that we think this year the contribution will. That we will see a somewhat of a drop-off compared to last year. You are though raising a very very important debate. We will not be firm on that.
There's clear signs that there is an increased amount of investments in the workplace globally. There's also a sign that some of that will be structural for the coming years. Therefore you can make a case for why above base should not just fall back to the levels pre-COVID. We would like more data points. We would like to be further past COVID before we can conclude on that. There's no doubt that we're seeing a good activity level both on above base and projects. One element could also be that some clients do prefer the flexibility of moving some of the spend into above base and above base. I think you may have a point.
I think it's too early days for us to give an estimate on where what level we will be at permanently post-COVID. I also want to avoid the arrogance of talking post-COVID, given that we still have a number of countries that are suffering from COVID at the moment. I think you have a very fair point. On price increases, obviously, appreciate you asking for what flex we have in the guidance. I'll not go into that. We've said a number of times on this call today that we are confident with our margin guidance. When we do that, we obviously assess the inflationary risks to that margin guidance.
With a good deal of our inflationary pressures for the year having been dealt with already due to the timing of wage increases, et cetera, I think that confidence is at the right place. If we do get unexpected further inflationary pressures later in the year, we will be using the same mechanisms that we've been using so far. Nothing will change there. No one here has suddenly stopped focusing on inflation. It will continue to be, we'll continue to be very vigilant around the theme to make sure we don't see any setbacks. I'm quite confident around that margin guidance, also in an inflationary environment.
Yeah, real quick on your question on cash flow. In the above DKK 1.3 billion, so the full year free cash flow guidance for this year, we do have the DKK 500 million of one-off cash exceptions included. A part of that DKK 500 million is the exit fee to Danish Defence. It is included as an exceptional in the above DKK 1.3 billion. That of course also means that the underlying free cash flow is above DKK 1.8 billion.
Great. Thank you.
The next question is from the line of Peter Siesbye from PVG. Please go ahead. Your line will now be unmuted.
Thank you. It's Peter Siesbye from PVG, and thanks for taking my question. It pertains to your ISS Pulse survey, and I have a bit of difficult time reconciling the results here with your guidance for above base work to actually decline, because what you're noting is a change after COVID. Unless those changes have been implemented in portfolio contracts, they should actually come from above base work. So could you-
Put some color on that one. Also, with respect to these changes that you are seeing here, are you fully capable to deliver on those? What are those? Are investments needed to deliver on these changes at the client side? Thank you very much.
Thank you, Peter. Glad to see you're reading the survey. We think it's a very good survey. We have to be careful to draw a conclusion. It's not a business plan or a budget from our side. It's a survey among a number of customers, and there's no doubt that it's encouraging to see that there is a high proportion of those customers that will invest more in workplaces. We cannot pin that down to when they will invest. All we can do is that we can look at what we have in our pipelines and take a perspective on that.
I'm not gonna make a direct one-to-one link between the survey and how our guidance is formed. It is one of the elements or one of the data points that comes into our work as we put together the guidance. Of course it gives some comfort that above base is not about to drop significantly. I think that comfort we get out of the survey, but we don't wanna be too specific around it. I think then we would risk over-interpreting the data, but of course it's a positive sign around potential above base spending. You asked whether we have the capacity and whether we need investments. No, we don't need investments. We do have the capacity to deal with this.
As you know, the vast majority of above base and project work is being done by existing employees that we deploy into these situations, whether above base is ranging from customer events, where we are providing additional catering and such as extra services to a customer event, to us doing HVAC system repairs and plumbing and heating, et cetera. Project work is typically smaller office refurbishments and other types of changes in the workplace, et cetera. It ranges across a number of issues of topics, but all of it is something that we predominantly do with our own workforce, our own technicians, our own catering staff, et cetera. That capacity we have.
Okay. Thank you.
The next question is a follow-up from Klaus from Nykredit . Please go ahead. Your line will be unmuted.
Yeah. Just a little bit nerdy question perhaps. On the currency side, you say that you still expect a negative impact of between 0% and -1%. According to my currency model, it indicates a positive impact of slightly above 1%. Is it me and my model that is wrong, or are you just being a little bit conservative on the currency side?
I think, Klaus, why don't we reconcile our models after the call? You know, we're indicating between 0 and 1% we're using the forward rates. I'm not sure whether you're using anything else, but of course we can connect through IR and reconcile after the call.
Okay. Okay, great. Thank you.
As there are no more questions, I'll now hand it back to the speakers for any closing remarks.
Okay. Thank you very much. Thank you, as always for great questions and good dialogue. Our very competent IR team is sitting ready at the phones to continue the dialogue with many of you. Looking forward to seeing and speaking to many of you in the coming days. With that, we wish you a great day. Thank you.
Thank you.