Earnings Call: Q1 2020

May 7, 2020

Good afternoon, everyone, and warm welcome to our Q1 conference call. I'm here today. I should highlight virtually, with our CFO, Bart Adam, due to the current circumstances, with COVID-nineteen Bartis dialing in from home in Belgium and I am in Stockholm at the location where we have our annual general meeting after this session. Today, we'll go through the Q1 performance as usual, but we will also share more information and context related to COVID nineteen. So let us start with the performance on a group level and some of the highlights. We had a decent start in January February from a growth perspective, but after lower growth in the month of March, our organic sales growth landed at 2% in the quarter. The operating income and margin were impacted by COVID19. And we had a negative impact in all business segments, but the largest impact in Continental Europe. And when I say that, that's prevented within the European division, but also in Spain and Portugal. We had an operating margin of 3.8% compared with 4.8% last year. But in terms of the important price wage balance, we were on par in the quarter. And as previously communicated, the board has withdrawn the earlier dividend proposal and a new proposal may be revisited later this year. But looking ahead, due to COVID-nineteen, we face significant uncertainty regarding the coming 3 to 12 months. But we are continuously taking actions to manage and to be prepared. So I would like to share just a few points related to COVID-nineteen related to the impact in the first quarter. And after Bart's financial details, I come back and talk a little bit more about where are we right now and also the focus areas as we go forward. And first, I would like to highlight the tremendous strength in response by the Securitas team who have been working relentlessly and in close partnership with our clients during this very challenging time. And in light of the developments, that we that started in China, we initiated a crisis response team towards the end of January on a group level But we have also activated numerous crisis response teams across all divisions and most importantly, in our countries closed our people and close to our clients. And from the beginning, we identified a few main priorities. 1st and foremost, the health and safety of our employees. 2nd one is about ensuring business continuity. And there, of course, most important to secure that we can continue and deliver services to our clients. And the 3rd area of priority was to protect and is to protect our strong financial position. And in the light of COVID-nineteen development, one important question now of course is, where have we seen the most significant impact in terms of our business? And we see differences in terms of the impact. And this differs between divisions, between countries, and segments, but I should also say even within countries. So in terms of demand, our Aviation business is the most severely hit but we also see a significant negative impact on our electronic security related installations business. But the protective services that we provide are generally regarded as essential or mission critical services, and this is important, something we are proud of. And we've also seen areas with increased demand. And that has been primarily for temporary services, coming from sectors such as health care, retail, protection of assets that have been idle or that are idle, such as offices or factories. But apart from the above factors, the rest of the portfolio has been fairly stable up until this point. But due to the sudden changes in demand and the need to also manage costs, we currently have around 10,000 employees who are temporarily unemployed primarily in Europe. And when I say temporary unemployed, that means that they are then on one of the different temporary unemployment schemes promoted then in Europe. And like I mentioned earlier, we come back with more details and context related to COVID 19, a little bit later in the presentation before the Q and A. But let's now then have a quick look at our progress in the strategically important solutions and electronic security. We had 10% free sales goals in the 1st quarter, and we concluded 2 important acquisition. Teco in Spain and Fridigm in Australia. And these are 2 strategic acquisitions that greatly enhance our electronic security competence and capability in 2 very important countries. And we are very glad to welcome the teams to securitas. Shifting now then the focus to the performance in our segments, and we're starting with North America. We had stable organic sales growth development during the quarter and with growth organically of 2% where our guarding business contributed, but where we had a slight negative impact from our Critical Infrastructure Services business. From a COVID nineteen perspective, extra sales in guarding helped offset some relatively small service reductions but we had a negative impact from lower installation sales in electronic security. Retention improved significantly in the quarter, 92% in North America, and this is a great improvement compared to where we were 1 year ago. Terms of profitability, we had 5.2 percent operating profit margin in the quarter, and this decline was primarily related to secured us critical infrastructure services that we abbreviate SCIS. And after the transition that we had in Q4, the performance improved during the quarter, but the recovery was slower than expected or I should say happened later in the quarter than security installation sales, also on the margin. But our Garden business supported the operating margin in the quarter, thanks to strong performance and ability to mobilize and help a number of clients with a temporary increase in demand. And turning then to Europe, we had a decent growth the 1st 2 months with 2% but experienced a negative 3% in the month of March. So based on this, we had 0 organic sales growth in the quarter. We had an expected negative impact on the growth related to the previously announced contract losses in the UK and France. And the aviation related contract that we have previously also announced in Norway. And from a COVID 19 perspective, there was a clear negative impact from the declines, primarily in the aviation segment and also from electronic security installations. From a profitability perspective, we had an operating profit margin of 3.6% in Q1. The decline was primarily related to the negative impacts from COVID-nineteen, but also from the previously referenced contract losses in Europe. And from a COVID nineteen perspective, it is important to highlight some increased costs. And these costs are related to higher idle time, and sickness costs, but also from purchases of protecting equipment for our employees. And I think this will be an important part also as we go forward. Looking then at Ibera America, we recorded 9% growth in the quarter After 10% growth in January February, we had 7% growth in the month of March, so for a quarterly organic growth of 9%. And this development is mostly related to Spain. We had some continued reduction in a few short term security solutions contract and then a negative impact from the corona pandemic in Spain and Portugal. And when you're looking at at these countries, the service reductions are primarily related to certain retail segments, tourism and hospitality. The operating margin in the quarter was 4.4% and the decline was primarily related to the previously explained impact in Spain and Portugal and weak performance in Peru. And related to COVID 19, we have seen a very challenging situation for Spain, as a country during March April, and we are monitoring this situation closely. And like in all the other countries we operate, taking actions continuously to manage the situation. And with that, I will now hand over to you Bart in Belgium. Okay. And many times, Magnus so let's look at the financial information then to the first quarter of this year. I shall say that we were quite happy when saw the January and February operating numbers coming in, but then came in March with the COVID 19 impact generating then in the quarter, 2% of organic sales growth and an operating margin of 3.8 and Magnus has commented on the different effects here. I shall say or confirm most of what Magnus says, that's in the start of the COVID nineteen We are really focused on the 4 key matters, or people, or clients, cost control, and cash flow control. And as Magnus said, we have seen tremendous efforts from the team or officers and branch managers and our business leaders And I would say many thanks to all of you, and I would also like to thank also of our all of our people that work with the back office and infrastructure. I can confirm that all of this works well. Thanks to good business continuity planning and thanks to very strong commitment from the teams. Then when we move back to the income statement, as to then the lines below the operating income, I would actually say that there is not so much to say. Actually, everything is quite stable and in line with expectations, I'm sorry. I have a little technical glitch here. Sorry for that. And in line with previous year as well. When we look at items affecting compatibility, we accounted for, minus 45,000,000 stack in the first quarter, and these items affect the compatibility relate entirely to the 2 transformation programs we talked about before. We had last year minus 209,000,000 for the full year, So we continue, more or less with the average speed from 2019. We referred earlier to a total of 650,000,000 as items affecting comparability that shall be accounted for related to the 2 programs, and that during the period of 2019, 2020 and some part in 2021. The 650,000,000 to consider. And for 2020, we have said before, we could see an amount of around, And as also said before, everything depends a bit on the speed of the different implementations. And by this, we can confirm that our ambition with the program has not changed, and broadly speaking, also, the 2 programs are on track. There might be some delay as a result of the COVID 19 depending also a bit on how the entire situation further develops. Nothing really to mention on financial income and then moving to the tax line where the estimated full year 2020 tax rate actually is currently the same as for 2019. That is 27.2%. Moving to the next slide. We consider here the effects from the different currencies and the numbers to the right are the foreign exchange and trades in Swedish kroner measured at quarter end. Both the US dollar and euro strengthened during the quarter, especially during the month of March, compared to 12 months before, ending them stronger, at the quarter and compared to 12 months before. US dollar ended 9.97, 7 percent stronger, and the euro on 11.04, and that is 5.5% stronger. The Argentina peso stayed more or less where it was around 0.15 as still meaning that it's 27% lower than where it was 12 months ago. And then due to the combined effects from the different currencies, or quarterly consolidated income statement was somewhat positively affected when comparing to last year. Our total numbers got some tailwind from the currency in the quarter, on the different levels than around 2 to 3%. We turn to the next page where we consider the cash flow and the balance sheet, And there, we had a good, good cash flow coming in during the quarter, also compared again to the same quarter last year. We see in the quarter net investments of, minus 57,000,000 Swedish kroner, and that then results from investments 753,000,000, and a reversal of depreciation of 696. As you know, with IFRS 16 or CapEx gets inflated and that is from around SEK 2,000,000,000 per year to an amount now of SEK 3,000,000,000. So capital expenditures including IFRS 16 is around 2% of group annual sales, including IFRS 16, more around 3%. Then we have a positive impact on the free cash flow in the quarter of around 350,000,000 and that comes from government relief measures. Basically, VAT payments and Social Security payments that we are able to deal to to delay. And that has been the case in Germany, France, and the UK, predominantly. Important to mention is that we also in the US, in the US, we expect a quite significant payroll tax deferral spread over the remaining quarters for 2020, which shall then be paid back in 2021 2022. Current taxes paid then, that includes, an earlier mentioned amount and plans payment related to Argentina and the final amount for that was 139,000,000. I shall also mention that we are very closely monitoring and working with our cash and liquidity and we have implemented further measures with the COVID 19. We are very closely monitoring accounts receivable with stricter stricter collection procedures, We have also paused the acquisitions since early March. Of course, the ambition remains once everything has stabilized to come back to acquisitions. And we are also postponing certain discretionary projects and spending. And then, of course, we are also closely monitoring and following cash relief programs from any government. Then we move to the net debt. We are already on this slide. And the net debt ended at 19.3000000000 Swedish, up from 17.5 at the end of last year. You should remember the jump in net debt, between 2018 2019 as a result of implementation of IFRS Six team, which made a net debt increase with SEK3.3 1,000,000,000. Then we had a, a, in the cash flow there, and we look back cash flow. We have the negative free cash flow of 324 and then a bit larger amount of 354 spend on acquisitions in the beginning of 2020. Then we had also quite important effect from translation actually. You see that the 850,000,000, as translation difference, which is, of course, an effect from the strengthened dollar and euro mainly. When you then move back to the graph, the net debt in relation to EBITDA is on 2.4 currently, and that is after IFRS 16. Then, I would also like to mention what Mike has mentioned before that, normally, we would have paid a dividend now in May. Actually on these days. And that was going to be about 1.8000000000, but that proposal has been withdrawn by the board. I shall say that Securitas has a strong financial position, and the board believes it is appropriate to take a prudent approach at this point in time. Our priority is to ensure business continuity and to look after the health and safety of our people. While we shall also continue, of course, to drive the strategic transformation. And as Magnus has also said, the board may consider later to resolve on a new dividend proposal when, things would have been stabilized in the general environment. Then we moved we moved to the next slide, and and here we have our debt maturity chart. We had plans it was in our planning to renew the RCF or backup facility well ahead of its maturity, and we would do that during the month of March, April then. This year. And then came the COVID 19, which was from that perspective, not not very welcoming way. But I can assure you, and from many other perspectives, as well course. But I can assure you that we are happy to confirm we have renewed your RCF. It's a facility now with 9 core banks, and they are listed here on the slides. For a total of SEK9.3 billion and is for 5 years with the possibility to extend that to 2027. So actually quite a long term. We have also what is called an accordion built into the facility, which makes it possible that one or the other bank can join, at a later point in time. And by that, so expanding the facility. Standard and Porsche confirmed our rating here on April 30th on BBB, but changed the outlook from positive to neutral. And I believe that is inspired, or or I shall say, a consequence of the more general uncertain environment rather than a specific security task method. And we continue to have ample headroom in our rating the RCF was then renewed, as I said, and, this provides us with committed funding. And in that RCF, we do not have any covenants. So we have no financial covenants. And I think with this, I can hand back to mad music. Very good. And thank you, Bart. And so let me now share some more context related to COVID-nineteen. And now then not so much about the Q1 impact, but rather focusing on what is most important right now and where do we focus our actions and priorities. So as I commented at the beginning, we have been working with a few clear priorities starting in January this year. And one of those is related, of course, to our clients. We've had a strong focus in terms of securing the business continuity and safeguarding the delivery of our services since the start of the corona pandemic. I've also spent a lot of time with clients, but over video in this period and have received a very positive feedback in terms of the value that Securitas is delivering and the strength we are showing also at the significantly more challenging time? But while we're still facing a challenging situation in many countries and many locations, we are now increasingly working with our clients to support them in the important process of restarting, resuming their operations. But this is a new situation and we are actively leveraging our knowledge and our leading offering and competence that we have in terms of our protective services to address the client needs in what will be a new situation or what some people refer to as the next or a new normal? But let us now shift in some of the to focus areas related to our financial position. And Bart touched upon a number of this, but we felt it's important to also spell them out to give you a good understanding of the some of the key measures that have implemented, but also where is the focus area right now? And starting with cost, these are very challenging conditions and we're also facing quite some uncertainty regarding the development in the coming months and quarters. But we have initiated a number of activities to manage costs, and we have outlined a few of those on this slide. One important consequence, like I mentioned earlier, is that roughly 10,000 people are now on some form of temporary unemployment scheme. By looking then at the current situation and the focus areas going forward, is very important for us now to closely monitor and handle the government related programs because this is obviously providing some relief related to, to the challenge of idle time. So this is one important part also then as we're looking at some point in the future when these programs will start to be scaled down. But it's also very important to manage the sickness costs. We're also spending significant amount of time on scenario planning and this is all about ensuring Readiness. Will it need to be prepared to initiate further actions depending on the development during the coming 3, 6, 12 months. And then to protect cash, we've also initiated number of activities. And here reiterating one point that also Bart mentioned is the monitoring of accounts receivable. This is an area where we have not seen any significant negative impact on payment patterns up until now. But it is obviously important that we are also protecting our accounts receivables in the coming months and quarters. And we also took the decision to pause all acquisitions. At the beginning of March. And that was for 2 reasons. One was to be prudent and the other one as well when we are requiring we are also acquiring competence and teams and, with the travel restrictions, etcetera, it would be very difficult to do effective integration work. And we're continuously monitoring and taking all these actions to protect our financial position. But it's also important to mention that we continue to invest in the strategic transformation programs. These programs that we are not talking so much about today are very important to make sure that secured us, that we continue to drive the modernization and the digitization and that we are enhancing the offering and coming out stronger of this situation, when this situation with COVID nineteen is normalizing. So to sum some of this up related to COVID nineteen, I want to reiterate one very important point, and that is that we are all very proud of the Securitas team and the way that We have leaders and employees throughout the entire organization who have responded as individuals and as teams in an incredible way during the last couple of months. And I am convinced that through all the actions, we're showing the quality and the strength of Securitas as a company, at the challenging time. And this is something which is important now to our clients people and society, but I'm also sure will put us in an even stronger position when the situation is normalizing. And as we've highlighted, we continue with full focus on these 4 main priorities while maintaining our investments in the strategic transformation program. So to sum up the quarter, we had organic sales growth of 2%, but 19% negative real change in operating income. And this is a challenging situation. Significant amount of uncertainty the development in the near term, but we are actively managing the situation since end of January with clear priorities and focusing a lot of our effort on Readiness to take further actions as required. So with that we are now concluding the presentation part, but before we open up for the Q and A, just like to mention a few points and And and one of those is that I understand that you will have a number of questions, potentially a number of detailed questions. Bart and I always do our best course to respond and to give you a as corrective and understanding as possible. But when you look at the situation that that we've seen for the last few months and that we are in right now as well. A lot of things are happening quickly, and and there are a number of moving parts. So we will try to give you as much clarity as possible in context, but, I don't think it makes sense to go into too much detail And I hope that this is something that you also understand. So with that, now then happy to hand over to the moderator and we The first question comes from the line of Edward Stanley from Morgan Stanley. Please go ahead. Your line is open. Hi there. Thank you for taking my questions. I'll avoid COVID actually in that case and ask some other ones. In terms of the Abera Latam division, you say that Spain was growing by not as much because of tough comps Peru with negative in which case it sounds like Argentina and the price pass through must have been very, very large indeed. And I was hoping to get some some thoughts around that. The second question, you say that you've got to focus on receivables and collect and there's been no negative patterns, but receivables were 650 odd, versus 133 last year. So quite a material step up. So I'm just wondering what's happened there if there have been no negative changes. And then the final question is around the margin. I'm just the technology part of the group is obviously growing very strongly and that's great. I'm just trying to reconcile that against the margin given that the tech contract should be theoretically higher margins. Is all the negative drop through coming from these 10,000 staff who are on release schemes or is there any risk that some of these technology contracts that you're signing are coming at incrementally lower margins, please? Yes. Thank you, Edward. I will start with the first question and maybe Bart, you want to comment on on the accounts receivables, then I can also comment a bit on the margin. Yes, correct, interpretation significant impact from price increases, which is also very much inflation related in in Argentina. And to give some flavor in terms of the 3rd question about the margin, a number of different dynamics. We estimate that if you look at the margin drop on a year on year basis, that roughly 2 thirds of the margin drop is related to COVID-nineteen. So 2 thirds of the 1% margin decline that we had. So there are also a few other factors. One of those factors is the the delayed or delayed to than anticipated recovery in our Critical Infrastructure Services business in North America. But we had also not anticipated to have a very strong quarter in Europe due to the already expected impact from some of those contracts that we had in the first half last year. And then you also asked about the people. One of the challenges that we have been facing in this situation, of course, is that there has been a very quick changes and, and that has been in terms of the the, the client demand, especially in areas such as aviation that we highlighted also electronic security. But there has also been a period where when you look at Europe and the different relief programs that have that are all, have their different flavors and all are quite different in terms of of, of how they have been implemented and what terms, etcetera. There is a significant cost still related to the idle time. But I should also highlight that the relief programs are obviously also very much helping because we are not facing the entire cost ourselves. So I think that is one important part. And you also mentioned a question about or a comment about electronic security or contracts and there is no, I would not highlight any significant difference there in terms of that part of the business in this first quarter. But with that, turning over to you, Bart, maybe then on the accounts receivable, question number 2. Yes. You are very right to say that the accounts receivable had a negative impacts the increase compared to year end. There are 2 things to be mentioned about that. First of all, is that it traditionally, we we see a little bit of an increase in receipt in the first quarter of the year compared to year end. Year end is normally, one of our best, DSO, so to say the the number of days sales outstanding is at best, normally, at year end, within security task. And then the second thing to mention is that you should also look at line changes in over operating capital employed. That one was, quite negative last year, and now it was just around, well, actually very, just breakeven in a way compared to there was no development actually. But that is also because it is some baskets in in between accounts receivable and other operating capital employed, which are balancing out each of in the sense that it depends on how fast we are invoicing. And if we have some, services ran that which have not been invoiced yet, then they said in all their operating capital employed. So it's also, to some extent, a fact that DSO has increased a little bit compared to year end, but also actually we have invoice faster than this year compared to last year. Because the changes in other operating capital employed have reduced. And that moves into the basket of accounts receivable. We monitor our cash flow very closely, daily, globally, and, and we can say that follow so far a very good pattern. Can I follow-up quickly on the first point you made on Argentina? Are you able to give what the 9 percent organic growth number would have been excluding the inflation impact or put another way as the inflation impact or pass through impact increased sequentially versus last year or versus last quarter? Which direction is that going in? If if I could take that magnitude, I can confirm that the price increase, price change in Argentina this year, your qqone is exactly is exactly the same level as last year. So there is no impact compared to last year, so to say, in, in, in that perspective, it's exactly on the same level. And Argentina more or less has also remained on the same level, then as a as a total of as a as of a its percentage of total sales within that division. Does that answer your question? Yes, it does. Thank you very much. The next question comes from the line of Johan Eliason from Kepler Cheuvreux. Taking my question. I just wonder if you could give an estimation of roughly a big share of your revenues or sort of from aviation, hospitality, and events, and by geography? Do you want me to take that one, Maggie? No, I can take that. That's, thank you. So when you look at at Aviation is roughly 7% of our group sales. We we don't break out, event business, but those are are typically including what we what we define as extra sales. Those are roughly 14% of our overall business. Some more granularity in terms of aviation. Then if you look at the different divisions, make up around 12% of sales in Europe, 4%, about in North America around 5% Ebera America and our EMEA division. So that is the rough split. Okay. And then just maybe a comment on, I saw that G4S says they will need to recruit 15,000 employees in the U. S. To meet increased demand on this virus outbreak. Is that some sort of push to take market share or how do you see it? From my perspective, we have commented also in the report that we have had strong performance in guarding in North America in the first quarter. And I mean, that's a number of different factors, but one positive aspect of this, from this situation is that we have seen or we have seen a clear increase in demand for temporary services. So we've had higher than normal activity when I look also at hiring to be able to mobilize and to meet this demand. So, you make a reference to one of the competitors, I I mean, my simple view is that there is clearly a temporary demand increase in the market. So I would more related to that part. Okay. I need to also add matches that I would also add that some numbers have been flying around for ourselves as well. But we should also say that that includes the normal attrition, the the staff churn that we have, is included in there. And when it comes to char staff churn, we have seen this small decline in our business, actually, in in in the US when it comes to staff staff churn. Yes, correct. Your next question comes from the go ahead. The next question comes from the line of Sharak Bardi from HSBC. Please go ahead. Hi, there. Thanks for taking my questions. Your release states that you're looking at different scenarios to ensure preparedness for COVID. And you touched upon it briefly just now. Could you give some color on how you see these scenarios in a world where people are moving towards being more cautious around social distancing. Yeah. So so the the important is because there is you almost have to divide, you you can you can there are some things that we just have to accept in that, but we cannot really influence, of course, in this situation. But one area that we can really influence is is ensuring that readiness that I talked about earlier. And that's the reason that we have started about a month ago, more extensive scenario planning. We have regular updates in terms of our forecasts, But obviously, now we're in a situation with significantly higher uncertainty. So what we are doing there is then looking at what do we believe best reflects the outlook now for the remainder of this year. But then we also stress testing with a few what if scenarios. And that is then primarily driven by assumptions around an economic recovery might take longer time. And depending also then on the severity of the economic development from this point onwards. And that work we have been doing on a group level, but we're also doing it within the divisions and also then the main countries. Looking then at the few different scenarios to also make sure that we understand completely where are the biggest exposures And those are, and then also, I should say, depending on how things develop that we are quick and that we are ready to also then take actions and measures as appropriate. And And some of the exposures, just to give some more flavor to that, we highlighted earlier, one of course is the temporary unemployment skills. And when you're looking at people there, we have 10,000 people, which is a few percent of our total workforce, sickness rates is another one at this time of uncertainty, which is also, at this point or when you look at the month of March, we saw a significant increase But then it's also in in some of the areas where we've seen the most severe impact such as in aviation. It's also then about how how do we see the kind of the normalization or demand also resuming over time? And there, different parts of our business also have a slightly different nature in that sense. So so the aviation business, we're then looking at scenarios. Some of the installation projects that we've now had today, etcetera, they're obviously looking at, in more of a normalized situation, how quickly are we able to resume, those types of activities. So that is, those are the main themes that we are looking at, but always then as well about protecting the financial strength of the business. And as part and I highlighted, we also continue with full force on driving our strategic transformation programs at this point in time. Thanks. And in terms of the idle time, How do you sort of see this evolving as temporary unemployment measures are relaxed? Yeah. I think it will, I can start and comment on that. It's it's a very much a country by country specific question. And it's also a question related to what part of our business and which clients we are talking about. And so, there we are taking much more of a local approach in terms of how we are addressing and under standing. 1st of all, of course, how can we leverage the programs to provide some of the relief and to be able to keep employees employed during a temporary period, but then we also now starting to spend quite a lot of effort also thinking about and also together with our clients, looking at at restarting operations and also then how do we handle then the transition from being on those temporary unemployment schemes to not being on those or enjoying that support, if you will. So I would say those are the main main questions that we are looking at and, building as much insight as we can to once again ensure Readiness. Thanks. And just one final follow-up is if we move to a more social distancing normal life environment, Do you see less gut perhaps being on the client side or do you see any changes in the structural way that you interact with clients? Yeah, that will also differ, because we also have in a number of the kind of the restart discussions that we have with clients, it's also then to support them, with social distancing with crowd control. One of the clients that I talked to last week also then talk about or their expression was how do we make the environment COVID safe and kind of COVID compliance. And so it could also be to help the clients, in that process. So so there are, but but obviously in the long term, we benefit from a general good economic activity, but when you look at the short term, there could be challenges as well as opportunities for us to also then help our clients The next question comes from the line of Silvia Barker from JP Morgan. Please go ahead. Hi, good afternoon. A few questions from me. If I can check, kind of on the 10,000 people that you currently have on short term unemployment. Kind of how many of them are in France and Germany? And if we think about the Q1, I mean, it seems like companies were able to get people on short term unemployment pretty quickly in France as soon as the lockdown was announced. So do you already have did you already have largely the full kind of run rate of the benefit in Q1 or do you think that there's more benefit that you're seeing from that in Q2? And secondly, on North America, So obviously you've announced many hires and so have defrost and allied as well. If we think about the 10,000 that you spoke about, does is it kind of half and half churn into new hires or is there any way you can kind of quantify that? And then around that, what we've seen alongside the hiring announcement has been an increase in the hourly rate charge for guards. Do you see that fully pass through to customers? Or is there any gross margin attrition on some of these kind of more emergency contracts? And then finally, if we think about kind of the price wage balance. Maybe can you give us that excluding Ibero America? And then if we look beyond to the second half, normally would expect kind of wage to become less of an issue, as the labor market obviously becomes a lot less tight. Is that something that maybe we'll start to see in the second half? Thank you. But part of you and I can help each other out here. And Yeah. I think it's for you. Yeah. So when you look at the the first question, Sylvia, in terms of temporary unemployment. It's difficult to talk about the run rate, in March because it was a lot of changes, a lot of activities and actions in the market, but also then with government related programs, etcetera. So When you look at Q2, I mean, if you're really looking for a run rate now is probably more relevant time to look at when there is at least some stability in comparison with the situation that we had in March. In terms of the hirings in the US, yes, we we are hiring at at very high levels, and and it is driven then by a solid guarding operation overall that we have, but also as stated, a lot of temporary or significant, I should say, temporary demand. If you look at the rate and the margin question, the nature of our business, is typically that when we have more short term work that there is, usually a certain premium reflected in that pricing, and that is also the case now. But we are also reflecting increased costs in this work. And one of those is related to, protective services equipment. So I would say that that is another, important aspect that, yes, higher prices, but also then, higher cost and quite a lot of this is also about mobilizing and trading, etcetera, in a fairly short period of time, but also then the protective equipment for our employees is very important. Bart, did you want to comment on there was also price wage question as well? On the price wage question, basically, we are balancing everywhere. I mean, the average that we say, that we are on par is valid for actually all divisions right now for all the segments. So, it's valid for for all of them. I think that was your question, Sylvia. Correct? Yes, that was it. Thank you. And just thinking about, I guess, the wage part of it, I mean, it's quite unusual times at the moment because people just don't want to show up to work and I guess rates are going up. But what we would expect normally to happen in this in such circumstances is that wage pressure will be a lot lower. Do you have a view on how that might play out during the rest of 2020? Don't help him to feel as well. It's it's it's 2, drivers there. As we said, we have seen actually reduction in our staff churn in the US, and at the same time, so people obviously don't want to lose their job either, I would say, But at the same time, we are seeing increases in some parts of the market as well when it comes to hourly wages. So it's and and we do not kind of forecast how this exactly will go at this point in time. Coming back also, Cynthia, to your first question, just to give you a rough idea, the from, the the 10,000 we are talking about. At this point in time, it's more than around 3000 in Germany and 1500. In France. But as Magnus said, these numbers are changing day by day as our clients are changing as the environment is changing. And when it comes to the US recruitment, I would still say that the vast majority of those numbers is also to replace churn. And there is an extra element, of course, of the extra services. The next question comes from the line of James Winkler from Jefferies. Please go ahead. Hi, thanks guys. Just wanted to, I very much appreciate that you're you don't want to give too much guidance in terms of current trading or anything, but just wondering if the thought process of how to think about the headwinds per Q1 is correct because you originally said, I believe it was 1% to 2.5% expected growth headwind with your original COVID update. Assuming that growth for Europe and Iberia would have been in line with January, February, without COVID. I think the sort of weighted average of the headwinds imply about a 1.2% headwind to the group growth. Wondering if that makes sense. And then just if we assume all the headwinds came in the final 2 weeks when things started really ramping up as sort of 8% headwind through the final 2 weeks. And I guess, obviously, that's a headwind that's not actually what you're growing up, but wondering if that sort of math and thought process makes sense. And obviously if you're able to comment anything about April, that's very helpful. And then a smaller one on the VAT and the payroll deferrals. You mentioned that the incremental U. S. Ones would be spent through the final 3 quarters and paid back in fiscal year 'twenty one? Wondering if you can give any magnitude of what to expect there, and then to just the $350,000,000 benefit from the European payroll bad deferrals. So is that expected to reverse by year end or also fiscal year 'twenty one? Yeah. I can start there. And and if you if you look at, at your your first question, James, It is correct that the impact on the sales were lower than what we expressed in the profit warning statement that we issued in March. So we saw more impact in terms of the margin than what did in top line. If you look at April, we are not commenting or breaking out any specific comments there. Main focus for us is that we continuously manage the situation and ensure readiness like we highlighted. Bart, do you want to give some flavor on the payroll and also the North America indication? So on the North America, the the the deferrals there that we can have when it comes to social security payments, I mean, we expect that to be, more than 100,000,000 US dollar, actually, but that is based on our current understanding of the whole regulation, which is a bit fluid by itself. So I want to spell out that number because you asked for it, and that is our current understanding but I should also warn that the interpretation might still be a bit subject to to how it's served the details, so to say. And then our understanding is also that it should pay back half of debt by the end of 2021 and the other half by the end of 2022. When it comes to the SEK 350,000,000, to be honest, I haven't I don't know. I have that. I do not have the knowledge when we are supposed to pay that back. It's spread over different countries, so it will be probably different regimes to follow. And I do not have, the number that wants to say we shall pay back in the next coming quarters and on the top of my head. When it comes to your calculation there that you did, of the 1.2%. I think, that seems to be, to be a reasonable calculation. And then as Magnus said, how much he should extrapolate that to April, that is a much more difficult exercise because, some parts were already affected early March, some other parts during March. So that is a speculation that I would refrain from commenting on. Yes. Thank you. It was just so just if the 1.2 ish is correct, And it's correct to assume that most of the headwind coming back 2 weeks of March, just sort of dividing that by 2 over 13 would assume about an 8% headwind we file could be for March. And I'm just are you able to comment out that sounds about right? As I said, the 1.2 got this as an effect on on the month. But then if you should extrapolate that, I would be more much more cautious with that. Things are just changing as we talk. The next question comes from the line of Stephen Golden from Deutsche Bank. Please go ahead. Hi there. Thanks for taking my question. I just wanted to to, zone in on something you said on the European margins. I think you were saying you would part of the reason for the drop in margin was a drop in, a drop in client contracts. So, I just wanted to get a bit of an understanding of exactly what you meant by that. Are you assuming there, is this in the kind of 80% of the business that's in the fixed category that therefore implies kind of ratcheting down of number of guards required for a 1 year rolling contract? Or does it mean, slightly more challenging price pass through in some of those contracts. If you could give me a bit of a feel for that, that'd be great. And I just I guess as your typically sort of 1 to 2 year contracts are coming up for renewal at this point. What does the average contract renegotiation look like? Are customers asking for less guards? Are they asking for more flexibility? Are they willing to take price increases, what does the average kind of contract renegotiations look like on that 80% of the business? And then I've got a couple of follow ups if that's alright. Yeah. So so the client contracts, Steven, that that that I referenced earlier 2 main categories there is related to the UK and to France and also contracts that we lost during the first half of last year that now then have a negative impact in the year on year comparison. So primarily then focused on U. K. And France. We also lost an aviation contract in Norway. So that also has a negative impact now in terms of the lost contract sales, but also then exacerbated by the negative impact from COVID-nineteen. And those so not really anything to do specifically about price pass through some contracts that we lost, we lost margin, some of the contracts lost last year, we didn't want to lose, but this is reality of competition. But that was the situation. The other question that you asked, sorry, in terms of the, commercial activity, is that we have seen since beginning of of March, essentially a lower commercial activity. A number of customers have stayed more focused, significant, more focused on managing the current challenges as opposed to driving significant commercial activity. So it's difficult to comment beyond what we already commented on in terms of, some of the temporary, demand changes that we have had, also including the increases, difficult to comment on the questions that you raised now. But one important part of the discussion, and that I always emphasize as well in the client dialogue, and they appreciate as well. We have a strong portfolio of protective services in our offering, ranging from on-site guarding, mobile room guarding, remote guarding, fire and safety and then electronic security and the ability to integrate solutions. And that is something that we are and we will actively promote and also leverage in the discussions when a number of customers are now looking at how do we ingest for a new situation. This is, this is no secret in all the discussions we are having with our clients This is one important point that we are also bringing up. And I also hope and assume that most of the clients will also appreciate. Okay, great. Thanks. Yes, sorry, just one follow-up. I just wanted to dig into to the furloughing issue again. So, you've got 10,000 employees furloughed at this point. I guess, firstly, can you give us any kind of estimate on what impact that might be having on margins As I understand, I think we've got 350,000 staff. And I suppose going forward, what kind of are there any is there anything holding you back from doing more furloughing, particularly in other geographies, any kind of hesitation you might have around, capital return issues, dividends, etcetera, or would you be very willing to use those programs for as long as they last? Thanks. Yes. So in terms of the impact, there is quite a lot of difference, between the different countries and even within countries with these, different programs. So so the, I think most important is to look then at at the number that we shared earlier. So roughly 2 thirds of the operating margin decline in Q1 is then related to COVID-nineteen. And that is really a combination then of costs related to idle time. And then the question that you mentioned in terms of people who are on temporary unemployment schemes because there is typically always a certain cost that we continue to carry, even if there is a clear relief from the government programs. But then there is also a sickness cost impact, which is also important. So You have to look at the different factors there. And I think that is as much as we can share right now. And when you then look at the other question in terms of other geographies. We are people intensive, as you highlighted. So this is one very important part for us. And we are then looking at, those continuously, of course, to be able to manage. And this is for the protection of our employees, but there's also protection of our financial position. So this is very important. We will always have situations that are more challenging as well. When we look at but but that comes back to the scenario planning, and that's one of the main reasons we do that. We will not let go of people permanently, for example, if we believe that there is a strong need and value and demand coming, in, in the near to maybe to the mid term, for example. So that is also very much related to that scenario planning work and also ensuring the readiness. But I think also the main, I hope that gives you at least some more flavor in term of how we're thinking and how we are managing those aspects. If I could add, Magnus, I think the the keyword is also agility, from all of our teams in reactions to what our customers' demands in reaction to what the governments decide and, and that has been tremendous throughout this period. Now, the agility that we have seen from our teams. The next question comes from the line of Karl Johan Bonnoli from DNB Markets. Please go ahead. Yes, good afternoon. I need to take another stab at this headwind question as I think it's somebody that the drill are interested in If you look at, for the moment, having about 3% of your employees on these kind of short term and employment programs, how good a proxy is that for, for, say, the organic challenge you are seeing in top line? How good is the balance, so to say, between the two? Is is your question, KG, how much is the 3% is an indication for the top line impact? Is that your question? Yes. I know you've been looking at all the things you now try to mitigate in through temporary unemployment programs and similar things. How good the proxy is this for per se the challenge that you are facing and you're trying to monitor at this point of the cycle of the COVID cycle? I think the I think the challenge is actually a little bit bigger, to be honest, than 3% because we have some people also that are on holiday. Some people are, a bit, reduced, staff, as I said, we're already on your juice contracts. Some people are, of course, not on the programs either because the program does not exist. So we have now mention the book to that or in such a program. So the challenge is a bit weaker than what you see from this naked number. But then, of course, also, I mean, some people have some where we have reduced contracts. We used that some of these people to fulfill positions in all the, in all the, of the extra sales that we have right now connect connected to crowd control, connected to to social distancing measures. So Yeah. But but the the 3% is the I mean, the challenge is bigger than the 3%. Let me put it like that. Then again, it's very fluid day by day. You. Next question comes from the line of Michal Eavedal from Carnegie. Please go ahead. Yes. Hi guys. Just, I just, trying to figuring out the impact from your aviation exposure and also impact on your margin in general in Europe. So first, if 12% of your sales retaliation contract in Europe, I had, at least in my mind, that some 60% to 70% of those contracts are in one way or the other linked to passenger traffic, which is basically 0, for the moment. And given that, it has been so throughout the a few weeks in March, I would have come up with a bigger negative number for March than what you actually reported. I guess that's good. But Am I wrong in terms of how these aviation contracts work? Yes. So, the 12% is the right number. If you look at the passenger traffic related, I think roughly speaking, your your estimate is okay. But then the nature of the contracts differ. So so in some cases, if we start with the kind of the before COVID-nineteen, we would have had a mix of some contracts, whether it's more of a over fixed amount and then we deliver, based on specific service level agreements. Other contracts, which is a smaller part proportion of the total business would then be on on more of a price per passenger basis. But when we moved into to this situation, It's it's obviously near term perspective. There is a number of different aspects of this. So so when I look at how how the businesses impacted a number of the clients that we have, be them airports, airlines, other associated services, We're also then having a very close dialogue with them also in terms of how do we maintain capacity also to to to start recovering. So so some of the contracts that we had before, we then also have to look at for the near term, how we manage. But then we also need to address that as well. And that is also part of one of the critical focus areas in the next couple of weeks months as well. Based on what we believe is going to be the recovery and the new normal, how do we then also address those contracts and handle those relationships? That is it's a highly relevant question, but that is, the kind of the situation that we are in at this point in time. And then of course, would you then lag in the impact would you say that there's a lag in the impact on your revenues perhaps from the a glass in passenger traffic that we saw in March. Based on what we know, right, or where we are right now, yes, but there obviously, a lot also depends on how do things developed from now on in terms of economic activity restarting and travel resuming and at what pace, etcetera. So, but the general conclusion you draw is correct? Yes. I was just going to add that. Sorry. I was just going to add that exactly that there is some lagging effect from the aviation. I mean, the airports, closed down in different in different timings and sometimes actually a little bit delayed almost to the general lockdown because there were still some flights going on. To to bring passengers home, so to say, yeah, ships also account with that. And I guess a lot of the furloughs that you have done should be related to the aviation part of your business. It is. I can't confirm, sir. Yes. Just a reminder also, I think the lost contracts, if I'm correct, I think the one in France was lost by 1st April last year, so it impacted Q1 fully. That was roughly 50 basis points, I think, on organic growth. And then you had the lost Norwegian aviation contract and the one that you won in Germany, but the net of those were 70 basis points, I think. So you should have been negatively impacted by 1.2% in in terms of organic growth only from those contracts, in Q1. And if that goes for March as well, the minus 3, actually, I mean, these two contracts would then explain roughly half of that decline. Is that correct? In broad terms, the calculation is correct. I can confirm. Yes. So what I'm heading out is the margin drop that you say in Europe, you say in the report that the decline was primarily and the decline was 100 and 40 basis points, primarily due to the COVID-nineteen pandemic. I'm struggling to see the how the impact could be so big coming from COVID-nineteen because you don't really see it in the sales numbers. So is it is it mainly to do with the thickness costs and what is it? Yes. That is something we have not so much talked about yet. I mean, the the margin drop is largest, I would say, than what is explained from the sales drop, but what we have seen is, of course, the costs from idle time Not at all, people have been able to be put on, this, government schemes from day 1, and and in some cases, there is no, not not the gives a lot of existing, please, certain countries. And then secondly, there has been a quite increase in our sickness costs for different reasons, of course, and that has started pretty much, during the entire March, you could say, we have seen that effect, and it has been quite considerable as well. Very considerable, actually. Okay. A final question for me, just in the U. S, where you have a lower exposure to aviation, for instance, it seems to be speaking quite positively about new sort of call it opportunities arising from a company starting up and needing your services in that sense to keep employees safe and so on. If it could it be even that there's a continued positive net effect from all of this in, in April? And was it a positive net effect already in March from from some increased extra sales in the U. S? So, I mean, we saw a clear positive impact in March as we have commented. I mean, we don't comment on the month of April specifically. Important for us is that we're staying close to our clients and working very actively with them in supporting them on this. And this is obviously something that we are keen to do, and we're proud of the work that we are doing in the U. S, because our teams have and leaders have really been able to mobilize quickly. To be able to help out, related to a number of the sectors that I mentioned earlier. And we're also seeing some of that in Europe as well. And this is obviously one of the important focus areas for us now where we are and also in the next couple of months, as I commented earlier. The next question comes from the line of Peter Testa from One Investments. Please go ahead. Hi, and thank you for taking my questions. I have 3 ago, one at a time, please. Just on the electrical installation part that you described, not having the revenue, but I guess you still have the people in your network would have been important. Can you give a sense as to how important that was and given that installation work is probably deferred, do you think you just keep the people through to the other side and do the installation or given pipelines and so on? Do you think you'll have to make some adjustment to bring those 2 factors more in line? Yes. So the assumption is correct there. I mean, a significant part of our electronic security business is installation related. We have and we continue to invest because we see a strong or significant opportunities in the mid and the long term with a really strong electronic security capability. This is a balancing act that we need to manage right now. And also then in the next couple of months, I do agree with you that a number of installation projects, there should be a backlog and also then opportunity to be able to address some of that pent up demand. But the main issue that we faced very quickly was that at the pace that many companies were shutting down the offices and also then issued broad instructions for basically preventing anyone from entering offices, factories, etcetera. In terms of actually, carrying out the installation work. We are now working also in the last month, in the U. S. North America, but also in the other markets where we have strong electronic security presence in also then working out the protocols and also going through all the safety and security measures that we undertake in tools to be able to to do installations in a Safeway. So that is also one important focus for us. But to the question about backlog, etcetera, I do agree, generally speaking, but then on the capacity in terms of the resources, that is one of the areas that we need to manage closely and really follow this in the next weeks and months. Yes. Okay. And then the second question, you've mentioned extra work and obviously the events business will have some cancellation of events, which will make it more challenging. If you think about the balance between the extra work you're getting across your portfolio versus the events business, to what extent do you think you can balance that off? So if you look in, I think on the totality, we are quite even in terms of the positive impact offsetting the negative. And that is where we are at this point in time and looking at Q1. Yes. And the events business, I guess, is more important in the summer. So it might be a bit challenging later on, but you still expect substantial extra work to carry on? Vant business differs quite a lot I mean, we we had in in Europe, for example, there were some specific fares and and exhibitions, etcetera. Some annual general meetings. So we have quite a strong, engagement in a few countries that we're supporting So so, it it does really differ. But obviously the nature of the events business in these extraordinary circumstances many odd events have been canceled for this year and not then coming back until planned for next year. Okay. And the last question, please, is just as your customers across the bulk of your business in industrial and office work, has to flex their way through the balance of the year. Can you just give some comments as to how you think you'll be able to manage now that you're sort of into the crisis, your own labor costs through that? I mean, obviously, it's a you highlighted great flexibility from your teams and so on, but just the extent from a matching standpoint, you're obviously matching wage and price, do you think you can also match the volume and wage and employment at the same time? I think that that's, I mean, that that's obviously the work that we are trying to carry out. So so when you look at the last 2 months, in a few countries, for example, where we had declines in terms of aviation, we have tried to really deploy a number of qualified officers, for other client categories. This is very much a local work And I would suggest better for us to come back and comment once we have come a little bit further into 2020 on this topic. Okay. Thank you very much for the answers. As registered. So I hand back to the speakers for any closing remarks. The beginning the Q and A. I I hope that we have been able to give you, some better flavor, in terms of these, extraordinary circumstances that we're operating And, and, and like we've highlighted Bart and myself a number of times, we are proud of the work that, our teams and the entire organization is doing, but we also spend a lot of effort in terms of managing the short term, but also then the readiness to be able to managed through this situation in the next 3, 6, 12 months. So with that, thanks a lot, everyone, calling in today. This now concludes our conference call. Thank you all very much for attending. You may now disconnect.