Earnings Call: Q4 2020

Feb 25, 2021

Good morning, everyone, and welcome to ISS Conference Calls for the Full Year Results of 2020. My name is Michael Bjorgui, and today, I'm sitting at the ISS headquarter in Zuippur with our Group CEO, Jacob O'Barrnarson our Group CFO, Casper Fangen as well as my IR colleagues. Before handing over to Jakob, please pay notice to the disclaimer in the appendix. And Otherwise, I'll move to Slide number 3. Jakob, please go ahead. Thank you, Mikael, and good morning, everyone. As you're all aware, I joined ISS in September last year. And together with my leadership team, we conducted a full and comprehensive strategy and market review. That review led to the 1 ISS strategy announcement on 16 December 2020. Since the announcement, we have forcefully executed on the strategic agenda. We've both been ensuring long term enhanced execution through an aligned global operating model That has entailed heavy work in the countries and global functions to get us off to a good start. At the same time, we've been focusing on improving the short term financial performance by turning around the specific well known underperforming countries and contracts. On COVID-nineteen, The development of global government restrictions continues to be uncertain and unpredictable, with vaccine rollouts slower than originally expected in many countries and continued changes in local restrictions. Revenue in Q4 and Q1 is heavily impacted by the continued lockdowns, and those effects will continue to an extent in Q2. We cannot control these external factors, but what we can firmly manage is our cost base. The restructuring program is developing according to plan and the underlying margin has improved quarterly since Q2 2020. All in all, we closed a turbulent 2020 in line with the expectations given in August and reiterated in November and again in December. Our 2020 results are well within the guidance, and we are confirming our preliminary guidance for 2021. Please move to Slide 5 for a strategic update. So let's just recap the key elements of 1 ISS. First of all, we are implementing the new operating model in countries and group functions. The idea here is to create a more balanced global Global versus local decision making. It is to strengthen the global function so they can support the local execution because this business is all about executing in the countries. And it's about creating aligned processes, products and service development at global standards, Not at local standards, but at global standards to give us scalability. In the end, this is all about basically driving towards utilizing better our global scale and creating scalability in the functions. In terms of the turnaround, Danish Defense has now committed to enter negotiations for a potential exit. We're very pleased with that development, and we are looking forward to the negotiations, The restructuring in France and U. K. Is progressing according to plan. And on DTAC, so Deutsche Telekom, we have a dedicated structure and action plan in place, and we are executing on that on track. On technology, we are creating the ISS Hub in Warsaw that is progressing with more than 30 positions recruited. Strategically, it's a key important it's a key component for our long term performance, and it has to give us the scale to invest to become a tech leader. The IT security incident is officially behind us. We've closed with success, and we've also built a more solid and secure platform on top. On people and culture, our culture program is building, and it's building on global alignment and a performance mindset. We have updated incentive structures and new KPIs have already been implemented. And on the additional key hires that have been announced, I will come back on that. So let's move to Slide 6. Let me deep dive on one of the key elements of the new strategy, which is the newly enhanced operations performance function. It will sit both as a core group function and a country function with a seat in the country leadership team. A successful operations performance function is critical to leverage our global scale and to use our scale and global presence as a competitive advantage. The operations performance function will own the business systems and processes for continuous operational performance improvements. That means standardized and improved methods for benchmarking, productivity, quality and compliance for cleaning, food and technical services. Initially, we will initiate a rollout with cleaning focus as this is where we will get most bang for the buck. We will be allocating resources dynamically to the contracts with the largest potential, and we are increasing our investments into teams that are transitioning large key accounts from bid to operations. As you will recall, when we looked at risk management in December, this was a key component from our side. This will improve initial performance when we go live with the customer, And it will reduce the risk of new contracts significantly. Next slide, please. As you recall at the December announcement, we announced a revamped EGM, but also a broader senior leadership team to drive the next leg of the ISS journey. Since that update, we have continued to add additional key senior hires to our organization. 2 latest named additions are Marcus Sonnheimer, with an impressive track record joining EGM in a crucial role as Chief Information and Digital Officer. Eva Wehmas is joining us as new Country Manager of Germany. Eva is an experienced leader and has core competencies within IT. She is also the former Head of Group Procurement at Deutsche Telekom. We have also created a new Global Diversity and Inclusion Director position, who we will be able to announce shortly and the person is starting May 1. ISS is all about people. It's all about diversity and inclusion as a core of everything we do. With our new Global Directors' passionate involvement in promoting diversity and inclusion internally and externally, We will be accelerating the power of our people focus and integrate it into our day to day operations, which is incredibly important to me. In addition to these profiles, we've also hired a number of senior commercial colleagues, several new CFOs a new Country Manager of U. K. And member of the EGM with a name to be announced shortly in March. Next slide, please. So I'll make the update on our divestment program very short. We are on track. We have achieved DKK1.4 billion during 2019 2020 as planned. We have targeted additional $2,000,000,000 in 'twenty one and 'twenty two. The program delivers the desired strategic refocus and it aids our deleveraging process. And it's on track, as I said. With this, let me leave the strategic update and let's jump to Slide 10 for an update on the business performance. COVID-nineteen has had a very diverse impact on our business during 2020, depending on industry segments and service lines. From this illustration, it's quite clear how large the differences we are we've seen across industries, something which is also relevant in terms of considering the long term implications. We do have a large part of our business which are specialized and production based industries. Those industries have indeed been very resilient during COVID-nineteen, And this business environment is unlikely to change materially due to COVID-nineteen. For office based industries, the workspace will change materially, as we also discussed in our strategy review in December, but not necessarily to the negative in the long term for ISS. For the service lines, food services have clearly seen a significant adverse impact, while cleaning has been very resilient despite many global workplaces having been locked down. Here, our global leadership position shines through. And the remaining service lines also did not experience significant negative growth during the period beyond food. Summarizing, we have a large part of the business which is resilient by nature and where long term implications of COVID will be limited. And then we have a smaller part of our business which has been hard hit and will recover to some extent, but most likely not 100%. Next slide, please. If we focus on the performance in Q4, We saw exactly as expected and implied from our guidance, a weakening of the organic growth compared to Q3. The lockdowns in U. K. And Germany were the main drivers of the weakening Q4 over Q3. However, I am very pleased with our performance. We cannot control lockdowns and government reactions, and we are seeing many different developments country by country. But we are successfully scaling our cost base. This relates naturally mostly to our food services that has been hit hard. To give you some color on that, if you look at our top 12 markets, which is 90% -plus of our food exposure, We've been able to renegotiate more than 70% of our food contracts, and that means we are broadly where we want to be on renegotiations. As an example, in the U. S, we have renegotiated 70% of our contracts and the remaining 30% is attractive in the current form. These are examples of how we are moving fast to make our business model attractive even in difficult environments, which is also illustrated in how margins improved sequentially from Q2 to Q4 despite not having any seasonality. Please move to Slide 12, My last slide on the business update before handing over to Casper and the financials. If we turn to our commercial development, It's clear that the bidding environment slowed down in early 2020, but has gradually picked up again. We've extended a number of contracts expiring in 2021 and therefore have low exposure of 4% this year. We are in strong renewal talks on a number of the 2022 contracts as well and are confident about prolonging a number of these. Since Q3, we won a new contract in energy in Spain, extended and expanded a key account in Norway and loss post NOAR in Scandinavia on price. Combined, there is a small net increase in revenue from this. Let me hand over to Kasper and a deeper review of the financials. And with that, let's move to Slide 14. Thank you very much, Jacob, and good morning to everybody on the call. I have to say it's nice to be in touch again. We're closing an unusual and challenging year. And as a general statement, the financial results for 2020 were not satisfactory and clearly below what I say should be operating at. However, as Jacob also mentioned, our results are in line with our recent guidance. Organic growth of negative 6.5 percent, Operating margin before exceptionals at 0.5 percent and free cash flow of negative SEK 1,800,000,000. The amount of restructuring costs and one offs ended in the high end of our guidance, just around DKK 3,500,000,000 And this is, of course, a large number, and I'll come back to that shortly. But I also believe that this is a moment where we are drawing a line in the sand and are looking forward fully focused on the execution of One ISS. Let's move to the next slide. As you can see from the realized results and recent guidance, Q4 developed in line with our expectations. Jacob went through the quarterly development and growth. The key driver of the quarter over quarter development is the lockdowns in November December, particularly in Germany and the UK. The growth per Service Line was also a result of the geographical mix. Growth in Americas, where Food Service are large, were roughly unchanged Q4 over Q3. Projects and above base continues to grow and absolute revenue is actually higher in Q4 2020 compared Q3. Q4 is normally the largest quarter for Project and above base due to year end tidying up and use of customer budgets. Let's move to the next slide. I do not want to spend a lot of time on the margin development in 2020, we are all very aware. Our underlying margin has been suffering from the loss of revenue during COVID-nineteen and the underperforming countries and contracts. Now let me spend a bit of time to give details on the restructuring and the one offs, the SEK 3,500,000,000. Half of these costs are non cash write downs, assets that have been written off, which you will never hear about again. Then we have $1,800,000,000 which is cash, dollars 1,200,000,000 restructuring costs and around $550,000,000 cash one offs. A part of that has already been paid in 2020. The underlying margin for the full year was 0.5 and 0.8% for the second half of twenty twenty. There are 2 key things that need to be true for this year. 1, we need to gradually improve the underperforming entities and 2, we need to achieve payback on our COVID-nineteen restructuring efforts. This leads to a margin above 2% for the full year this year with a trajectory towards our turnaround target. Please turn to the next slide for a deep dive of the drivers until end of 2022. On this slide, we have quantified the drivers of the margin recovery until end of 2022. In short, we want to get the underperforming countries back to positive margin and to improve Deutsche Telekom and Danish Defense significantly. Finally, we need to see expected payback on our restructuring efforts and recover some lost revenue from COVID-nineteen. These drivers combined will make us reach our turnaround target, but all of them also represents a further potential in the longer term. Will we achieve the targets exactly as we have outlined it here? Of course not. There will be ups and there will be downs, but the target in total is clearly achievable. This also gives you some granularity on which drivers are important in order for you to follow the margin recovery and progress, and we will of course give you a status on each of the drivers on an ongoing basis. Please notice that some of the restructuring payback is included under France, DTAC and UK and hence taken out of the COVID-nineteen box to avoid double counting. Also notice that the negative 20 bps in the last box represent what I will call recurring restructuring, which are always required when operating a business with more than 400,000 employees. In addition, it includes a whole range of other drivers related to the rest of the business, including our investments to implement the ONE ISS strategy. Let's go to the next slide. This is a simple overview of the free cash flow development, where we try to take the complexity out of the many moving parts this year, moving from EBIT before exceptionals to the free cash flow, cleaned for all the non cash write downs. Underlying operating profit was CHF 400,000,000 including dollars 70,000,000 from discontinued operations. All cash out from the one offs, restructuring and malware was $1,100,000,000 The next box is showing working capital, which I have to say I'm quite satisfied with, and I'll come back to that in a second. Then we had interest and tax payments combined of just above SEK 1,000,000,000. Finally, the net amount of D and A and CapEx, including IFRS 16, which gave a positive impact of CHF 400,000,000. This last bucket should, of course, net to 0 in the long run. This gives us a negative free cash flow of SEK 1,800,000,000 and adjusted for factoring, negative SEK 1,500,000,000. And I think it's worth to mention that 2020 tax payments are higher than it will normally be in a year with negative profit before tax. Let's go to the next slide for a deep dive on working capital. I put in a slide Focusing on working capital because there are some very large movements, but generally covers a development that I'm pleased about. The decrease of trade receivables and other receivables is underpinned by significant noncash write downs such as transition and mobilization costs on Deutsche Telekom and an underlying positive development. I'm pleased to see that our efforts in reducing overdue receivables have paid off, and it's a good example of what a more globally aligned operating model can deliver. The underlying improvement in the receivables is offset by a reduction in payables, as you can see in the right hand chart. It is driven by lower activity, higher share of sales delivery services and of course, we also want it to be relative accommodative on payment terms to some suppliers during this challenging COVID-nineteen period. Next slide, please. I'm not going to spend too much time on this slide. The leverage ratio ended at 7.3 times by the end of 2020, primarily driven by lower EBITDA. Debt increased by SEK 1,100,000,000 during 2020. And with this, I will leave the financial view, and I will move to the outlook for this year. As Jacob also mentioned, we are confirming the preliminary outlook For this year, as announced in December, this is confirmed based on the progress on the underperforming countries and contracts and the general business development since our 1 ISS launch. There is, of course, one very big uncertainty, and that is COVID-nineteen. The lockdowns and restrictions continue to develop in an unpredictable manner and creates uncertainty for this year and our financial performance. We are specifically assuming that the restrictive environment will ease from Q2 this year. We assume that we will start to regain lost revenue from COVID-nineteen from the Q2 and onwards. And this is, of course, a key assumption and an external factor that we have no control over. As already mentioned, The main drivers of the margin improvement from 2020 to 2021 are 2 things: payback on restructuring, We're already seeing progress on this and 2, continued improvement from the underperforming countries and contracts. We do not see COVID-nineteen revenue recovery As a margin driver, because the negative impact from lockdowns in Q1 will be roughly offset by the positive effects from impacts from this in Q2 to Q4. Let's move to the next slide for more details. We are guiding for positive organic growth this year. We will still see underlying growth coming through as outsourcing trends continue and may likely accelerate after COVID-nineteen. We also see that we can continue to grow with our customers, especially in the industries where our business has been less impacted by COVID-nineteen. In Q1, we will still be significantly impacted by lockdowns and restrictions. So Q1 will, from a growth perspective, most likely look similar to Q3 and Q4 last year. And as I said, and that's important, We see COVID-nineteen easing from Q2 this year, and this means that the COVID-nineteen effects may roughly be a wash for the whole year combined. Please move to the next slide. And that's my final slide before I will hand back to Jacob. This gives you a simple overview of the drivers of the free cash flow this year. The chart is clearly meant to be indicative, And the buckets of free cash flow are by nature difficult to exactly predict and manage. We will generate an operating profit with a margin above 2%, as seen on the left side. I see a roughly stable working capital development this year, With a small positive impact from factoring as we ramp up our new large customer in Americas, Cash outflow from tax will most likely be lower than in 2020, mainly driven by tax losses carried forward from last year. The net amount of CapEx, D and A and additions to leases will most likely have limited to a small positive impact on the cash flow. And this gives you an underlying positive free cash flow with a cash conversion that is clearly still healthy. Looking beyond 2021, the cash conversion ability will increase when the market increases as interest will be diluted with higher profit and lower net debt. The last light blue bucket of the chart are the payments of restructuring and one off costs recognized in 2020, which are non recurring and will decrease materially in 2022. I will now hand back to Jacob for some concluding remarks. Thank you, Casper. Let me end our presentation by confirming that we are on track. We are now putting 2020 behind us, and we look forward while confirming our turnaround targets. There are a number of challenges and difficulties that we have to overcome which will take time to solve. But we see a clear way forward. The potential and the underlying health of the business model is intact. Is an exciting journey in front of us, and we have all the right elements to deliver on our plan. And with that, I think we should open up for the Q and A. Operator, please? The first question is from the line of Vilara Sys from UBS. Please go ahead. Your line may now be unmuted. Good morning, everyone. Thank you very much for taking my questions. Just 3 for me, please. Firstly, just on commercial momentum, please. A few of your peers have talked about more outsourcing opportunities, pipelines improving after the pandemic. And can you please comment on what you're seeing and some of the conversations you are having? Question number 2, just on the phasing of the margin improvement, You've clearly indicated an improvement sequentially since the Q2. How should we think about the first half versus second half split into 2021? And then lastly, just on working capital, you clearly mapped out what's been done In 2020, the improvement in overdue receivables was notable in the second half. Perhaps you could highlight some of the driving factors behind that and if you think That is sustainable going forward, please. Okay. Thank you, Bilal. Why don't I open On the commercial momentum and then Kasper can move into the details on margin and working capital. So I can only echo our colleagues the industry, in terms of the fact that we are seeing an increased pipeline emerging both in terms of Short term return of RFPs and tenders that have been put on hold or where people have prolonged Existing contracts by 6 months or 9 months or 12 months. So that is returning to the market gradually. And at the same time, we are seeing more fundamental structural debates around Outsourcing opportunities from players who had not been going down that line before. So I do agree, And we also said that in December that we do see the opportunity set as we emerge out of COVID to be attractive, And we are starting to see that emerge. Do also remember that in this industry, when we talk about larger contracts, which I know you are aware of, Bilal, Which is for the greater good here that there is obviously a clear delay from a Process starting until you start seeing it hit the accounts. So enhanced commercial activity here in the beginning of 2021 will not have a significant impact on the 2021 accounts. It's more of a 2022 and onwards thing. But we are seeing the right Momentum out there, and we obviously hope that, that is maintained given the outlook we have in front of us. But the volatility We've seen so far with COVID, I'm saying that with a cautious tone, but so far so good on the pipeline. Kasper, do you want to go into the margin? Yes. Thank you, and good morning, Bilal. You are indeed right that you should expect We see higher margins in the second half against the first half. So the margin recovery will be backloaded this year. And there are really three things that I would like to mention that underpins that. The first thing is that Clearly, it will be a gradual recovery where we will see the business recover during the year, And hence, the margins will be higher in the second half against the first half. Additionally, remember what I said in the presentation that we do expect A significant hit from COVID-nineteen in Q1, where we expect the same impact as we have seen in Q3 and Q4 last year, which obviously will impact the top line, but definitely also the bottom line. And the third element that I will mention is that You should also expect some normal seasonality in the margins this year, which obviously is helping second half's margin. So in summary, you're indeed right about what you assumed. In terms of working capital, I do expect the working capital, as I said in the presentation, to be sitting broadly at the same level at the end of this year compared to see a negative impact from expected growth this year, but that is expected to be offset by Continuing improvement on reducing our overdue receivables, and I'll come back to that here shortly. And then we also expect, as I said, the factoring to be slightly higher at the end of 2020 against 2020 on the back of the win that we have had in North Yes, where invoices are eligible for factoring according to our policy. And really, what has driven the overdue receivables down at the end of 2020 with the $800,000,000 that you can see in the chart is an increased focus. And additionally, we have changed the provisioning rules as a general rule of thumb, which is putting additional pressure on the business. So we are more aggressive in that, and that is clearly pushing the business to collect the cash faster. So very pleased with that, and we will continue that momentum this year as well. The next question is from the line of Mikael Rasmussen from Danske Bank. Please go ahead. Your line may now be unmuted. Okay, thank you very much. And Well done, guys, on at least the initial effects that we see here in the case. So three questions from my side. First of all, if you could add just a couple of more comments on the Danish defense contract here, Jacob. So just to understand it right, have All Univer's contract provisions have been taken in no matter what the outcome on this discussion is going to be. My second question goes on your very good Slide number 10 that you showed in your presentation, Well, you did show that organic growth was minus 30% for Food Services in 2020. Could you just remind us, all else equal, how much of Correct, on margins that industry did to your or that service line did to your numbers. As I recall it, food is Actually a higher margin than group. And just a final question, Jacob. Did I hear you saying that you won the post Has no deal on price? And if that's true, could you please explain why you're certainly being A little bit more aggressive on pricing, yes. Thank you. Okay. Thank you, Mikael. I'll do the Danish defense and your last question, and then Kasper can speak to the food margins. So first of all, on Danish defense, you are indeed right. We, a couple of weeks ago, announced that we are Now entered into exit negotiations together with the Danish Defense, and That is after the Minister of Defense gave the mandate to work for an exit. Both parties have agreed that this contract is not satisfactory for any parties, and both parties agree that the best outcome is likely an exit. So we've entered exit negotiations, and the expectation is that, that is what ends with. But let me just make it clear, of course, we will only Entertain and exit if we stay within the boundaries of reason. But everyone is committed on both sides To find a constructive solution here that works for everyone. You asked about what the what you say provision level, etcetera, there is around Danish defense. We said in Q3 that we have provided for what we believe are all likely outcomes, whether we maintain The contract at the current level or we exit with a certain exit cost, I think your question was, no matter what, I cannot guarantee you that I cannot make up a scenario where there isn't a cost. But All plausible scenarios that we have in front of us, we are covered. So we consider it to be covered with the provision that we've made. On the Postnoa, I have to correct you on that one. Sorry, Michael, but we didn't win it. We lost it On price. So don't worry. We are not suddenly advertising that we're winning on price. No, we lost it on price, which is hopefully also a sign that there is a commercial discipline focus here in terms of making sure that we enter with the right terms. And I'll hand it over to Kasper on the food and margin impact. Yes. Thank you. Good morning, Mikael. We do not disclose our margins per service line. So I'm not going to tell you the margins for Catering. And what I will say in general around the drop rate, I thought it was a very good indicator in the beginning of the pandemic, but it's very hard to separate The cold and hot water now with government grants, margin accretive project work, etcetera, etcetera. So very hard to use a drop rate as a good indicator. Instead, the way we're looking at it is to look at the run rate. And going out of 2020, the run rate is sitting approximately at 1%. So that's where the recovery journey is starting from. The next question is from the line of Dan Hockton from Credit Suisse. Please go ahead. Your line will now be unmuted. Cheers, guys, and thanks for taking my questions. Just 2, if I may. One was around the corporate costs, which And Natis were significantly higher in the second half of the year compared to the second half of twenty nineteen. I was wondering if you could just provide a bit more color as to How much of that increase was one off, which I think was noted in the text? The second question is around the Contract maturity, I know, as you mentioned, 4% expires or matures, I should say, in 2021, with 9% in 2022. I was just wondering around the timings of that. Is that 4% heavily weighted towards the back end of the year? And the 9% in 2022, obviously, bit of a larger number there. Is there any comments you can give around what makes up that bucket? Thanks, Dan. Good questions. Let me start on the contract maturity part, and then Casper can speak to the corporate cost. So on contract maturity, you're right, it's 4% in 2021% and 9% in 2022. Do recall that if you look at the current sorry, the composition of our customer base, A normal year, given that the typical length of a large contract is 4 to 5 years, in a normal year, you would expect around 5% of contracts to be off of renewal. And with those stats, I guess 4% in 2021 is not Particularly concerning and as you will recall from the last update, it was clearly a higher number. It was 6% at that point. When we look at 2021 2022, there are 2 big tickets. There's 1 big ticket in 2021 and 1 big ticket in 2022. We are in very good dialogue and talks on both of those. And as you would expect, On all of these types of larger contracts, we start very early dialogues with the clients. It's often very strong partnerships, and it's more a question of making sure that We align the next phase of the contract to the strategic priorities of the client, etcetera. So I am I can't give you a SKU form, but most contracts in the 4% bucket, they it's the end of 2021 that they need to be renewed. And that means we are in talks on all of them. And as said, there are 2 big tickets that will also when renewed, bring down the numbers quite significantly. And the 2 big tickets are 22 tickets, just to be clear on that. So hopefully, that gives you a bit of color. I think this is business as usual. We do have around 5% In a normal year. Yes. And on the corporate cost, thanks for that question. It is really a combination that is driving the higher corporate costs. We did have some costs related to some assistance we got in the strategy work with 1 ISS, which is clearly one offs. We also have some costs associated with adjusting the cost base. So that is of a one off nature. But we're also starting to see The investments, predominantly, that we're doing into the new operating model and around IT, strengthening our commercial setup, which is impacting the cost base in the second half. So it's a combination of these two things. I have 3. The first one goes to the table that you have on Page 3 in your account. The one shown on the Harvey Bowles shows how far you are in progressing on the different pain points that you have impacting your margins. Maybe you can give some flavor to how fast I mean, this goes to 2022. And I guess not All of these issues will progress with the same pace. So maybe you could say something about how fast you expect the different issues to sort of Settle throughout 2021 2022. Second question is in terms of catering. Catering, I think you That is around 15% of business. But looking at how it's been progressed through 2020 due to COVID-nineteen, could you say how much catering was Of revenue in 2020? And the final question, I think that one of you said that the Recovered revenue from COVID-nineteen in 2021 would not be a margin driver. Did I hear you correct? And could you please Yes. Give some granularity to that. That was my question. Thank you. So thanks for that, Magnus. Let me just do the catering one. And on the catering is, as you rightly pointed out, it was 15% of our business in 2019. It's been a growing share, you know, especially post the Guggenheimer acquisition in the U. S. A couple of years ago, etcetera. In 2020, given the drop we saw, the significant drop we saw in volumes as with our peers, we are down to 11%, which is a combination of the strength of the cleaning business and the drop in the food business. So 11% and we would expect that share to come up as we go through 'twenty one and into 'twenty two. I'll hand over to Kasper on the margin bridge And the other question on margins? Yes. Thank you very much. So just generally, I will say that we are indeed increasing our transparency. And that's also why we can give you this It's a granularity that we have put forward in this table. But again, please Be very aware that there will be ups and downs. We're bringing you along on the journey here and are giving you how we are seeing the world right now. We're comfortable with the overall target, but each of the items can move up and down. Just to be concrete On the hotspots here, then you can see that the UK has progressed already. Well, there's a number of contracts that we have exited in the UK, which is improving the margins. Also, as Jacob said, the Danish defense, we are fully provided for. And then in Franz and Dieter, as Jacob also mentioned, we're entering into the final discussions with the unions. But one overall thing that I will say, and I'm not going to push us into a corner where we're going to commit to how this is developing quarter over quarter, is that It is not a quick fix, this one here. So it's hard work, and it's about being patient. We have the plans. We have the transparency. Now the execution starts for real, but it is going to take some time for sure. In terms of your question around COVID-nineteen being not being a margin kicker this year, Then what I meant about that was that we do see revenue from COVID-nineteen being neutral to the top line this year. So a significant hit in Q1, similar to what we have seen in Q3 and Q4 last year. And then that is being offset by expected recovery in Q2 to Q4 this year, but top line neutral and therefore also neutral to the bottom line. Okay. Thank you very much. The next question is from the line of James Winkler from Jefferies. Please go ahead. Your line will now be unmuted. Hi, thanks guys. A few from me. One, apologies if we touched on already, But wondering if you could give some comments on exit rate out of the quarter and how that sort of developed near the end of the year. Obviously, you've given guidance For sort of similar growth in Q1 to H2, but wondering if it's continuing to sort of trend in a positive direction as well Or year to date, if you can comment on that. 2, just regarding COVID related work, deep cleaning sanitization. The key debate, it seems, is the sustainability of that through this year. Wondering how you guys view the The ability of those COVID related services and if you're seeing any traction in rolling that into longer term work As well. And then lastly, I believe most of these contracts you're exiting are Weighted towards catering. And as some as touched on earlier, the biggest exposure to catering is Guggenheim in the U. S. I'm just wondering if you could comment How you see how comfortable you are still with Gluke and Hammer and how it fits in your overall strategy as well? Thanks. Sure. Thank you. Thanks, James. Let me just comment on a couple of these. I'll let Kasper speak to the first question, which I believe was on the exit rate going out of 2020 and what it looks like in the beginning of 2021. I can obviously just make it clear that we will not talk about how we have done so far in 2021, but we can talk about the exit rate In 2020 on the margin side, but I'll let Casper talk about that. On sustainability, on COVID Services, so This is obviously has been a massive factor in 2020. The above base, As we would refer to it here, above base, cleaning services and deep hygiene services. When you look at our numbers, then It's you also have to put take into context that a significant amount of other above base work has disappeared in 2020. So It's more replacing other above based services than just being a pure upside. So as an example, Services and Buildings have obviously been postponed due to buildings being closed. We are rightly so, as you said, working very hard on making sure that On many of the larger contracts where there's been big structural above base work on cleaning and hygiene that we convert that into the ongoing portfolio business contract base. That is an ongoing negotiation and discussion with our customers, and it really depends on the situation. So I have said before and we are very firm on that, we do believe that we will see an increased focus on cleaning and hygiene going forward structurally, That will convert into a higher base in cleaning going forward because it is there's no doubt when we talk to our clients, Especially our larger clients, it is a massive factor for them, and it has been a game changer. So we say if we look across The broad scope here, we talk about people having moved from 2 times a week to 2 times a day. And we do not expect people to move back to 2 times cleaning a week again In a year's time. So structurally, we see a higher base from this. It is too early to say how much of it converts in, but we would expect Above base, to continue as long as we also have COVID restrictions, those 2 go hand in hand. In terms of the exiting of the Food business and what our view is on Guggenheim. Guggenheim It's a fundamental part of our strategy in North America. It's a phenomenal franchise that has really added Significant franchise strength to our North American business, and we are very focused right now on developing and innovating and making sure that Guggenheim comes out even Stronger post COVID. Of course, we have done restructuring in all of our food businesses to reflect the Changed volume, but Guggenheim is a pivotal part of our future strategy. Let me just ask Casper to comment maybe on the exit rate. Yes, sure. So the way that we see the exit rate in 2020 is that it's sitting at 0.8%, slightly south of a percentage point. And we are seeing improvements in the margins From first half, which was, you remember, it's 0.8%, so 0.7%. And that is not driven by the normal seasonality. That is very much disrupted because of COVID-nineteen this year. So it is real improvements coming from the contract trimming, The restructurings that we have done in Q3 that is having an impact in Q4. And then generally, I will say that the business has improved the way to deal with COVID-nineteen. We're adjusting the cost much now. And generally, the control over how to deal with the pandemic is much better than what we saw when it hit us in the first half. Okay, very clear. Thank you. The next question is from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line will now be unmuted. Yes. Hi, this is Johan. I was just wondering about the Deutsche Telekom contract. Are you seeing that it can still sort of achieve and exceed your sort of Longer term group margin target? Or is it sort of with the provisioning you have done, It's breakeven type of development in the year, so yes, to make that clear. Yes. Thanks, Johan. Let me address that one. So on Deutsche Telekom, no doubt But last year was a tough year financially in terms of that contract as we've also been restructuring it, as you point out. In 2021, we have a very clear execution plan with Very, very stringent milestones and a lot of resources allocated to deliver on it. We see a significant improvement in 2021. And As we exit 2021, we expect that we enter 2022 with the contract moving towards breakeven. That is not where the journey ends. Deutsche Telekom is a great partnership. It's a great client. It's a complex contract, but also A great lighthouse contract for us in terms of innovation and complexity. And the plans that we are working on It does not stop 31 December 2021, but the plan is to continue to drive profitability improvement on Deutsche Telekom to get it to the right margin levels. Whether or not that exceeds group levels, I don't think that's a debate to be had here. I think that would right now, the focus has to be on bringing the contract back into black numbers, and then we can have those types of conversations at that stage. Thank you. The next question is from the line of Annalise van Leeuwen from Morgan Stanley. Please go ahead. Your line will now be unmuted. Hi, good morning. Thank you for the presentation. Just three questions from me. So firstly, I mean, you've talked a lot about more out and opportunities and commercial activity and so on. But I was wondering if you could comment also on Competitive environment. I know in the past, you've lost some bigger contracts to the global property management companies like CBRE and so on. So I'm just wondering whether you're also seeing increased levels of competition and pricing pressure as a result of that. And then secondly, given the wage inflation being reported across several of your key geographies, I know that historically that has been Positive for the pricing of your contracts. But are you having any issues pushing that through in your renegotiations with customers, Particularly in a post pandemic world. Any comments on that would be helpful. And then lastly, just on your staff Currently on furlough, I think when we spoke last year, you had around 50,000 staff still not returned to work. Could you give an update on where that is today? Thank you. Okay. Let me start out Let me start out on the outsourcing opportunities and the commercial environment. So if you look at the competitive environment, I think it's If you look at the larger players that you will usually pit us against, I think the all players have obviously Not had a 2020 that they are particularly pleased with from a financial perspective, but everyone is in good health and is focusing on driving business. And we are not seeing a worsening of discipline from our main competitors. Then you can say in some regions and some There may be some players that are struggling more on the back of COVID-nineteen than The lockdowns and there we do see some people being a little bit more aggressive in specific situations. But it's not a concern we see across the group. This has always been a competitive industry. This has always been also about price pressure. Been like that for 119 years, and we don't think it is particularly different this time around. And yes, we have historically, over the last couple of years, Lost a couple of contracts to the CRE players. We have also won a couple of big contracts from them. And I think that's only natural as the market It's constantly expanding due to the outsourcing trends that you're referring to. There is enough wallet for everyone to approach from a commercial perspective. And then that will also once in a while entail that we take customers from each other, but we don't see a significant change in the competitive environment. On the inflation question, I think that's a very good question. There is actually a little bit more wage inflation now than there's been for a couple of years. In our 100 years plus history, we always manage minimum wage inflation and general wage inflation, and we continue to do so. You can say it's the bread and butter of the model. It's inflation is ultimately good for outsourcers as it helps drive the need for productivity improvements, which we are able to deliver through our integrated self delivery model. The prerequisite for inflation being a positive is that you have a strong contractual framework with the required flexibility and pass through mechanisms in place, which we have. So generally, it is not a particular concern. If there are specific jurisdictions where we see significant potential wage increases, Then there will be contracts where we need to go into more tough negotiations, and there may be a short term impact from that. But we're not seeing anything right now That we're not uncomfortable that we're not comfortable with. Maybe just on the furlough, Kasper, do you want to make a comment on that? Yes, you're right that we did say 50,000 at the end of August, and that That is a lower number now predominantly because of the restructuring. And then we hope it will come down significantly when large European countries, including the U. K, is hopefully opening up at least partly here soon. The next question comes from the line of Claus Kiehl from Incogni. Please go ahead. Your line may now be unmuted. Yes. Hello, everybody. It's Claus King from Libert. Jacob, you mentioned that you have Updated the KPIs. So without going into your personal KPIs and too many details, what are the main KPIs Going forward for the leadership team now and what has been changed compared to previously? That will be my question. Yes. Happy to take that. Thanks, Claus. So we're in the middle right now of cascading KPIs in the organization. And And they, as you say, I'm not going to give you all the details. I won't bore you with all the elements. But I think it's fair to say that they are Overall KPIs, if you look at the financial KPIs, we have focused more on cash flow versus Organic growth, that was one of the key changes that happened. But if you move away from the financial KPIs and look at the more structural KPIs, There we are focusing on 2 swim lanes. We are focusing on making sure that all leadership are focused on Delivering in the short term on the restructuring and the turnaround of our main hotspots and getting us through COVID with an even stronger Underlying business. That's the one swim lane. The other swim lane is building the ISS for the future. So we're making sure that We keep people focused on delivering on the turnaround, so clear KPIs around that, but also clear KPIs around making sure that we are building The future capabilities that we've been talking about, so especially on the technology, on the value propositions, etcetera. But it's very important for me, There is no future ISS to build if we don't deliver well on the short term turnaround and operational recovery. So that is a significant part of KPIs. So just to follow-up. So more focus on cash flow And less focused on growth. Was that correctly understood? It is correct that we have upgraded the focus on cash flow at the expense of organic growth, but it does not mean Let me just make that very clear that people are not incentivized to drive growth, but they are incentivized to drive growth that drives cash flow generation. Excellent. Thank you very much. The next question comes from the line of Bilal Ossins from UBS. Sorry, just a quick follow-up, please. Just on the margin guidance Of 2% for the year ahead. Clarification on that. Presumably, that's excluding Any restructuring and exceptionals you are taking. So tied to that, what exceptional charges should we be thinking about, Both restructuring or other one offs for 2021, please? Yes. Thank you, Bilal. So we have done a comprehensive review, and The output of that is the restructuring charge that you have seen being booked to the P and L in the second half of twenty twenty. So I do not expect a significant number in Restructuring in this year. Also on one offs, there will always be one offs, pluses and minuses, but the expectation is that it is it's a wash this year. Both and the restructuring, the small restructuring chart next year is factored into the guidance to the above 2%. Yes. Got it. That 2% is a clean number then? Yes. It's including all restructuring and one offs. Perfect. Thank you. The next question comes from the line of Simone Fati from Bank of America. Please go ahead. Your line will now be on mute. Yes. Good morning and thank you for the presentation. So a couple of questions from my side. So on Slide 12, you provide the maturity profile also For just for key accounts, but can you please also comment on the maturity profile for smaller key accounts, so 37 of your revenues as well as other customers, which is 33% of your revenues. And then a follow-up on your guidance For a margin above 2% in 2021, could you maybe give us a little bit more color on the bridge On the operating profit margin from minus 4.6 percent in 2020 to above 2% in 2021. Thank you. Thank you, Simona. Let me take the first question. So The reason why we don't the reason why we focus on the larger accounts is that those larger accounts are also where we have the longer term contracts. If you look at the industry, if you move into smaller accounts, it is usually shorter maturities. And that is that's the case for us and it's the case for our competitors as well. So It doesn't really make sense for us given that there are also the amount of contracts that flows in these two other buckets It's significant. As you know, we have around 100,000 contracts, and therefore, there is a constant flow in and out of these two other buckets. So It is we think the relevance for the investor community and why we wanted to highlight it is The big contracts, the big potential differentiators in terms of our growth profile, if we lose or win in those buckets, Those are the ones we highlight here. Classic, as I said, classic 4 to 5 year contracts, and that's what can move the needle for you. So we don't do it on the others. If you move down to small contracts, the usual duration of that type of contract would be a yearly contract that is renewed every year. And we don't think that makes sense in terms of disclosure to you. I'll hand over the bridge to Kasper. Thank you. And I think the helicopter view of that, so In that bridge is that to come back to the exit position end of 2020. So the run rate slightly south of 1% on operating margin, then we do expect a significant payback on restructuring, increasing margins this year, 1 percentage points approximately. And then as Remember from the strategy refresh presentation, mid December, we are doing investments, which is expected to increase corporate costs in this year due to the IT investments that we are doing, but also general investments to make sure that the new operating model is embedded all the way down to site level. So there's a negative coming from that. However, that is more than offset by expected margin improvements in the underperforming areas. So in summary, when you add that up, then we get to above 2% on operating margins for this year. And, Mora, just to add because you asked for the bridge to the operating margin after restructuring and one offs. So just to add to that, we expect very limited restructuring and no one offs to be reported at least in 2021. And that gives you almost 4 50 basis points compared to the number that you were looking at. Okay. Thank you very much. But then can I ask you for a clarification on your Cash flow in 2020, because I see that in the second half of the year, You had changes in provisions, pensions and similar obligations equivalent to DKK 1,400,000,000? I saw that this was potentially related to some restructuring provision that you took In 2020, but that which will have a cash impact in 2021. Am I wrong? Or what is that related to? Because you are saying that you are not going to have significant restructuring Outflow in 2021? Yes. So I think this makes sense, but that we probably have this in details afterwards. But what I can well, I think the link your question is that we have quite a lot of restructuring and one offs that will never have cash impact. So that is the SEK 1,775,000,000 approximately, so half of the full number. So what you're seeing in the change of provision and working capital is the noncash restructuring cost and one offs, of which we will have some cash going out next year, which is also outlined in the slide. And let me just clarify that one. So out of the total one offs and restructurings booked into the P and L in 2020, the SEK 3,500,000,000 Half of that is expected to have a cash impact. And approximately SEK 700,000,000 of that has already been cashed out in 2020. So there's $1,100,000,000 left, which will have a cash impact this year and next year, weighted towards this year. Thank you very much. That's clear. For the final question today, we have on the line Alan Wells from Exane. Please go ahead. Your line will now be unmuted. Just one very quick, where most of mine have been asked already. The customer rationalization, The minus 1% impact on growth, I think, you flagged in the release today. Is there a margin impact from that? Would you expect that to be margin accretive? A little bit background there, please. Thank you. Yes. That one is actually to prevent We're not getting a margin hit. So we are trimming these contracts because we don't expect the volumes to lose the government grants and not get your volumes back. So it is to prevent that we're not getting a margin hit. Can you quantify that at all? No, I don't want to I cannot give any concrete numbers on that. It is minimal compared to the guidance. Today, I will hand the word back to the speakers. All right. Great. Thank you all for listening in. I know that we will meet most of you guys on the road here, which is virtually on the road. Thank you very much for listening in, and thank you on behalf of the management team.