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-19. Bart is 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-19. Let us start with the performance on a group level and some of the highlights. We had a decent start in January and 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 COVID-19.
We had a negative impact in all business segments, but the largest impact in Continental Europe. When I say that's prevalent within the European Division, but also in Spain and Portugal. We had an operating margin of 3.8%, compared with 4.8% last year. In terms of the important price wage balance, we were on par in the quarter. As previously communicated, the board has withdrawn the earlier dividend proposal, and a new proposal may be revisited later this year. Looking ahead, due to COVID-19, we face significant uncertainty regarding the coming three-12 months. We are continuously taking actions to manage and to be prepared. I would like to share just a few points related to COVID-19, related to the impact in the first quarter.
After Bart's financial details, I come back and talk a little bit more about where are we right now and also the focus as we go forward. 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. In light of the developments 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, close to our people and close to our clients. From the beginning, we identified a few main priorities. First and foremost, the health and safety of our employees.
Second one is about ensuring business continuity, and there, of course, most important to secure that we can continue and deliver services to our clients. The third area of priority was to protect and is to protect our strong financial position. In the light of COVID-19 development, one important question now, of course, is where have we seen the most significant impact in terms of our business? 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. 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. The protective services that we provide are generally regarded as essential or mission-critical services, and this is important, something we are proud of.
We have also seen areas with increased demand. That has been primarily for temporary services coming from sectors such as healthcare, retail, protection of assets that have been idle or that are idle, such as offices or factories. Apart from the above factors, the rest of the portfolio has been fairly stable up until this point. 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. When I say temporarily unemployed, that means that they are then on one of the different temporary unemployment schemes, primarily then in Europe. 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&A.
Let's now then have a quick look at our progress in the strategically important solutions and electronic security. We had 10% real sales growth in the first quarter, and we concluded two important acquisition, Techco in Spain and Fredon in Australia. These are two strategic acquisitions that greatly enhance our electronic security competence and capability in two very important countries. 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-19 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 to 92% in North America, and this is a great improvement compared to where we were one year ago. In terms of profitability, we had 5.2% operating profit margin in the quarter, and this decline was primarily related to Securitas Critical Infrastructure Services that we abbreviate SCIS.
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 what we had anticipated. From a COVID-19 perspective, there was a clear negative impact related to electronic security installation sales, also on the margin. Our guarding 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. Turning to Europe, we had a decent growth the first two months with 2%, but experienced a negative 3% in the month of March. Based on this, we had zero organic sales growth in the quarter.
We had an expected negative impact on the growth related to the previously announced contract losses in the U.K. and France, and the aviation-related contract that we have previously also announced in Norway. 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, and the decline was primarily related to the negative impact from COVID-19, but also from the previously referenced contract losses in Europe. From a COVID-19 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 protective equipment for our employees. I think this will be an important part also as we go forward.
Looking at Ibero-America, we recorded 9% growth in the quarter. After 10% growth in January and February, we had 7% growth in the month of March, for a quarterly organic growth of 9%. This development is mostly related to Spain. We had some continued reduction in a few short-term security solutions contracts, a negative impact from the COVID-19 pandemic in Spain and Portugal. When you're looking 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%, the decline was primarily related to the previously explained impact in Spain and Portugal and weak performance in Peru.
Related to COVID-19, we have seen a very challenging situation for Spain as a country during March and April, and we are monitoring this situation closely, and like in all the other countries we operate, taking actions continuously to manage the situation. With that, I will now hand over to you, Bart, in Belgium.
Okay, many thanks, Magnus. Let's look at the financial information then to the first quarter of this year. I shall say that we were quite happy when we saw the January and February operating numbers coming in. 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%. Magnus has commented on the different effects here. I shall say or confirm also what Magnus said, that in the start of the COVID-19, we have really focused on the four key matters, our people, our clients, cost control, and cash flow control.
As Magnus said, we have seen tremendous efforts from the team, our 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 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. 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. Everything is quite stable and in line with expectations. I'm sorry, I have a little of a technical glitch here. Sorry for that. In line with previous year as well
When we look at items affecting comparability, we accounted for minus SEK 45 million in the first quarter. These items affecting comparability relate entirely to the two transformation programs we talked about before. We had last year minus SEK 209 million for the full year. We continue more or less with the average speed from 2019. We referred earlier to a total of SEK 650 million as items affecting comparability. That shall be accounted for related to the two programs, during the period of 2019, 2020, and some part in 2021. The SEK 650 million is still the relevant amount to consider. For 2020, we have said before, we could see an amount of around SEK 250 million. As also said before, everything depends a bit on the speed of the different implementations.
By this, we can confirm that our ambition with the programs has not changed. Broadly speaking, also the two 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 going to be 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 rates in Swedish krona measured at quarter end. Both the USD and the EUR strengthened during the quarter, especially during the month of March, compared to 12 months before, ending then stronger at the quarter and compared to 12 months before.
U.S. dollar ended 9.977% 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, still meaning that is 27% lower than where it was 12 months ago. Due to the combined effects from the different currencies, our 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%-3%. We turn to the next page where we consider the cash flow and the balance sheet. There we had a 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 SEK 57 million. That then results from investments of SEK 753 million and a reversal of depreciation of SEK 696 million. As you know, with IFRS 16, our CapEx gets inflated, and that is from around SEK 2 billion per year to an amount now of SEK 3 billion. Capital expenditures, including IFRS 16, is around 2% of group annual sales, including IFRS 16, more around 3%. We have a positive impact on the free cash flow in the quarter of around SEK 350 million, and that comes from government relief measures, basically VAT payments and Social Security payments that we are able to delay. And that has been the case in Germany, France, and the U.K. predominantly.
Important to mention is that we also in U.S., we expect a quite significant payroll tax deferral spread over the remaining quarters for 2020, which shall then be paid back in 2021 and 2022. Current taxes paid then, that includes an earlier mentioned amount and planned payment related to Argentina. The final amount for that was SEK 139 million. I shall also mention that we are very closely monitoring and working with our cash and liquidity. We have implemented further measures with the COVID-19. We are very closely monitoring accounts receivable with 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. We are also postponing certain discretionary projects and spending. Then, of course, we are also closely monitoring and following cash relief programs from any government.
We move to the net debt. We are already on that slide. The net debt ended at SEK 19.3 billion, up from SEK 17.5 billion at the end of last year. You should remember the jump in net debt between 2018 and 2019 as a result of the implementation of IFRS 16, which made the net debt increase with SEK 3.3 billion. We had in the cash flow there, when we look back at the cash flow, we had a negative free cash flow of SEK 324 million, and a bit larger amount of SEK 354 million spent on acquisitions in the beginning of 2020. We had also quite important effect from translation, actually. You see the SEK 850 million as translation difference, which is, of course, an effect from the strengthened USD and EUR mainly.
When you move back to the graph, the net debt in relation to EBITDA is on 2.4 currently, and that is after IFRS 16. I would also like to mention what Magnus mentioned before, that normally we would have paid a dividend now in May, actually on these days, and that was going to be about SEK 1.8 billion, 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.
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. We move to the next slide, 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. Then came the COVID-19, which was from that perspective, not very welcoming way. From many other perspectives as well, of course. I can assure you that we are happy to confirm we have renewed the RCF.
It's a facility now with nine core banks. They are listed here on the slides, for a total of SEK 9.3 billion. It is for five years with the possibility to extend that to 2027. 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, by that, so expanding the facility. Standard & Poor's confirmed our rating here on April 30th on BBB. It changed the outlook from positive to neutral. I believe that is inspired or, I shall say, a consequence of the more general uncertain environment rather than a specific Securitas matter. We continue to have ample headroom in our rating.
The RCF was then renewed, as I said, and this provides us then with committed funding, and in that RCF, we do not have any covenants. We have no financial covenants. I think with this, I can hand back to Magnus.
Very good. Thank you, Bart. Let me now share some more context related to COVID-19. 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. As I commented at the beginning, we have been working with a few clear priorities starting in January this year. 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 very positive feedback in terms of the value that Securitas is delivering and the strength we are showing also at a significantly more challenging time.
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. 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. Let us now shift then to focus areas related to our financial position. Bart touched upon a number of these, but we felt it's important to also spell them out to give you a good understanding of some of the key measures that we have implemented, but also where is the focus area right now. Starting with cost.
These are very challenging conditions, and we are also facing quite some uncertainty regarding the development in the coming months and quarters. 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, it's very important for us now to closely monitor and handle the government relief programs because this is obviously providing some relief related to the challenge of idle time. This is one important part also then as we are looking at some point in the future, when these programs will start to be scaled down. It's also very important to manage the sickness costs.
We are also spending significant amount of time on scenario planning. This is all about ensuring readiness. We need to be prepared to initiate further actions depending on the development during the coming three, six, 12 months. To protect cash, we've also initiated a number of activities. 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 receivable in the coming months and quarters. We also took the decision to pause all acquisitions at the beginning of March, and that was for two reasons.
One was to be prudent, and the other one as well, when we are acquiring, we are also acquiring competence and teams, and with the travel restrictions, et cetera, it would be very difficult to do effective integration work. We're continuously monitoring and taking all these actions to protect our financial position. 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 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-19 is normalizing.
To sum some of this up related to COVID-19, 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. I am convinced that through all the actions, we're showing the quality and the strength of Securitas as a company at a challenging time. This is something which is important now to our clients, people and society. I'm also sure will put us in an even stronger position when the situation is normalizing. As we've highlighted, we continue with full focus on these four main priorities while maintaining our investments in the strategic transformation programs.
To sum up the quarter, we had organic sales growth of 2%, but 19% negative real change in operating income. This is a challenging situation, significant amount of uncertainty regarding 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. With that, we are now concluding the presentation part. Before we open up for the Q&A, just like to mention a few points, 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, of course, to respond and to give you as correct of an understanding as possible.
When you look at the situation 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 there are a number of moving parts. We will try to give you as much clarity as possible and context, but I don't think it makes sense to go into too much detail. I hope that this is something that you also understand. With that, now then happy to hand over to the moderator and we open up for the Q&A.
Thank you. We will now start the question and answer session. 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 Ibero-LATAM division, you say that Spain was growing by not as much because of tough comps. Peru was negative, in which case it sounds like Argentina and the price pass-through must have been very, very large indeed. I was hoping to get some thoughts around that. The second question, you say that you've got to focus on receivables and collections, and there's been no negative patterns, but receivables were SEK 650 odd versus SEK 133 last year. It's quite a material step up. I'm just wondering what's happened there if there have been no negative changes. The final question is around the margin. 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 relief schemes, or is there any risk that some of these technology contracts that you're signing are coming at incrementally lower margins, please?
Yeah. Thank you, Edward. I will start with the first question. Maybe Bart you want to comment on the accounts receivables. 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 Argentina. To give some flavor in terms of the third 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 two thirds of the margin drop is related to COVID-19. Two thirds of the 1% margin decline that we had. There are also a few other factors. One of those factors is the delayed or the later than anticipated recovery in our critical infrastructure services business in North America.
We had also not anticipated to have a very strong quarter in Europe due to the already expected impact from some of the lost contracts that we had in the first half last year. 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 very quick changes, and that has been in terms of the client demand, especially in areas such as aviation, that we highlighted, also electronic security. There has also been a period where when you look at Europe and the different relief programs that all have their different flavors and all are quite different in terms of how they have been implemented and what terms, et cetera. There is a significant cost still related to the idle time.
I should also highlight that the relief programs are obviously also very much helping because we are not facing the entire cost ourselves. I think that is one important part. You also mentioned a question about or a comment about electronic security or contracts, and I would not highlight any significant difference there in terms of that part of the business in this first quarter. With that, turning over to you, Bart, maybe then on the accounts receivable, question number two.
Yes. You are very right to say that accounts receivable had a negative impact increase compared to year-end. There are two things to be mentioned about that. First of all is that traditionally we see a little bit of an increase in receivables in the first quarter of the year compared to year-end. Year-end is normally one of our best DSOs, so to say. The number of days sales are standing is at best, normally at year-end within Securitas. The second thing to mention is that you should also look at the line changes in other operating capital employed. That one was quite negative last year. Now it was just around well, actually very just break even in a way compared to there was no development actually.
That is also because it is some baskets in between accounts receivable and other operating capital employed, which are balancing out each other in the sense that it depends on how fast we are invoicing. If we have some services rendered which have not been invoiced yet, then they sit in other operating capital employed. It's also to some extent a fact that DSO has increased a little bit compared to year-end, but also actually we have invoiced faster than this year compared to last year because the changes in other operating capital employed have reduced. That moves into the basket of accounts receivable. We monitor our cash flow very closely daily, globally, and we can say that we follow so far a very good pattern.
Thank you. Can I follow up quickly on the first point you made on Argentina? Are you able to give what the 9% organic growth number would have been excluding the inflation impact? Put another way, has the inflation impact or pass-through impact increased sequentially versus last year or versus last quarter? Which direction is that going in?
If I could take that, Magnus, I can confirm that the price increase, price change in Argentina this year, Q1, is exactly on the same level as last year. There is no impact compared to last year, so to say, in that perspective. It's exactly on the same level. Argentina more or less has also remained on the same level then as its percentage of total sales within that division.
Thank you.
Does that answer your question?
Yeah, it does. Thank you very much.
Thank you.
The next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead.
Yes, thank you for taking my question. I just wonder if you could give an estimation of roughly how big share of your revenues are sort of from aviation, hospitality, and events, and maybe by geography?
You want me to take that one, Magnus?
No, I can take that. Thank you. When you look at aviation is roughly 7% of our group sales. We don't break out event business, but those are typically included in what we define as extra sales. Those are roughly 14% of our overall business. Some more granularity in terms of aviation than if you look at the different divisions, make up around 12% of sales in Europe, 4% about in North America, around 5% in Ibero-America and our EMEA division. That is the rough split.
Okay. Just maybe a comment on I saw that G4S say 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. That's a number of different factors, but one positive aspect from this situation is that we have seen a clear increase in demand for temporary services. We've had higher than normal activity when you look also at hiring to be able to mobilize and to meet this demand. You make a reference to one of the competitors. My simple view is that there is clearly a temporary demand increase in the market. I would more relate it to that part.
Okay.
I would also add, Magnus, that some numbers have been flying around for ourselves as well. We should also say that that includes the normal attrition. The staff churn that we have is included in there. When it comes to staff churn, we have seen a small decline in our business actually in the U.S. when it comes to staff churn.
Yeah. Correct.
The next question comes from the.
Go ahead.
Sorry. Continue.
No, you can go ahead.
Okay. The next question comes from the line of Chirag Vadhia 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?
You almost have to divide. There are some things that we just have to accept, but we cannot really influence, of course, in this situation. One area that we can really influence is ensuring that readiness that I talked about earlier. 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. What we are doing there is then looking at what do we believe best reflects the outlook now for the remainder of this year. We're also stress testing with a few what if scenarios. That is then primarily driven by assumptions around an economic recovery that might take longer time, and depending also then on the severity of the economic development from this point onwards.
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 at a few different scenarios to also make sure that we understand completely where are the biggest exposures, 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. Some of the exposures, just to give some more flavor to that we highlighted earlier. One, of course, is the temporary unemployment schemes. When you're looking at people there, we have 10,000 people, which is a few % 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.
It's also in some of the areas where we've seen the most severe impact, such as in aviation. It's also then about how do we see the kind of the normalization or demand also resuming over time. There, different parts of our business also have a slightly different nature in that sense. The aviation business, we're then looking at scenarios. Some of the installation projects that we've now had to delay, et cetera, they're obviously looking at in more of a normalized situation, how quickly are we able to resume those types of activities. Those are the main themes that we are looking at, but always then as well about protecting the financial strength of the business. As Bart and I highlighted, we also continue with full force on driving our strategic transformation programs at this point in time.
Thanks. In terms of the idle time, how do you sort of see this evolving as temporary unemployment measures are relaxed?
Yeah. I can start and comment on that. It's a very much a country by country specific question. It's also a question related to what part of our business and which clients we are talking about. There we are taking much more of a local approach in terms of how we are addressing and understanding. First 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. We're also now starting to spend quite a lot of effort also thinking about, and also together with our clients, looking 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.
I would say those are the main questions that we are looking at and building as much insight as we can to once again ensure readiness.
Thanks. Just one final follow-up is if we move to a more social distancing normalized environment, do you see less guards perhaps being on the client side? 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 talking about or their expression was how do we make the environment COVID safe and kind of COVID compliant? It could also be to help the clients in that process. Obviously in the long term, we benefit from general good economic activity. When you look at the short term, there could be challenges as well as opportunities for us to also then help our clients in this process.
Thank you very much.
The next question comes from the line of Sylvia Barker from JP Morgan. Please go ahead.
Yes. 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, how many of them are in France and Germany? If we think about the Q1, it seems like companies were able to get people on short-term unemployment pretty quickly in France as soon as the lockdown was announced. Did you already have largely the full kind of run rate of the benefit in Q1? Do you think that there's more benefit that you're seeing from that in Q2? Secondly, on North America. Obviously you've announced many hires and so have G4S and Allied as well. If we think about the 10,000 that you spoke about, is it kind of half and half churn and new hires? Is there any way you can kind of quantify that?
Around that, what we've seen alongside the hiring announcements has been an increase in the hourly rate charged for guards. Do you see that fully passed through to customers? Is there any gross margin attrition on some of these kind of more emergency contracts? Finally, if we think about kind of the price wage balance maybe can you give us that excluding Ibero-America? If we look beyond to the second half, normally we 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 will start to see in the second half? Thank you.
Yeah, I hope I managed to capture I think five questions, but Bart you and I can help each other out here.
Technically three.
Yeah. When you look at 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 relief programs, et cetera. When you look at Q2, 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 U.S., yes, we are hiring at very high levels. It is driven then by a solid guarding operation overall that we have. Also as stated, a lot of temporary or significant, I should say, temporary demand.
If you look at the rates 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. We are also reflecting increased costs in this work, and one of those is related to protective services equipment. I would say that that is another important aspect that, yes, higher prices, but also then higher cost. Quite a lot of this is also about mobilizing and training, et cetera, in a fairly short period of time. Also then the protective equipment for our employees is very important. Bart, do you want to comment on. There was also price wage question as well.
On the price wage question, basically we are balancing everywhere. The average that we say that we are on par is valid for actually all divisions right now, for all segments. It's valid for all of them. I think that was your question, Sylvia, correct?
Yeah, that was it. Thank you. I'm just thinking about, I guess, the wage part of it. 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. What we would expect normally to happen 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?
No.
No.
It's two drivers there. As we said, we have seen actually reduction in our staff churn in the U.S., so people obviously don't want to lose their job either, I would say. At the same time, we are seeing increases in some parts of the market as well when it comes to hourly wages. We do not forecast how this exactly will go at this point in time. Coming maybe back also, Sylvia, to your first question, just to give you a rough idea there from the 10,000 we are talking about at this point in time, it's more around 3,000 in Germany and 1,500 in France. As Magnus said, these numbers are changing day by day as our clients are changing, as the environment is changing.
When it comes to the U.S. recruitment, I would still say that the vast majority of those numbers is also to replace churn. There is an extra element, of course, of the extra services.
Okay. That's very helpful. Thank you.
The next question comes from the line of James Winckler from Jefferies. Please go ahead.
Thanks, guys. I very much appreciate that 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 for Q1 is correct because you originally said, I believe it was 1%-2.5% expected growth headwind with your original COVID-19 update. Assuming that growth for Europe and Iberia would have been in line with January, February without COVID-19, 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. Then just if we assume all the headwinds came in the final two weeks when things started really ramping up, that sort of 8% headwind through those final two weeks. I guess, obviously that's the headwind.
That's not actually what you're growing at, wondering if that sort of math and thought process makes sense. Obviously if you're able to comment anything about April, that's very helpful. A smaller one on the VAT and the payroll deferrals. You mentioned that the incremental U.S. ones would be spread through the final three quarters and paid back in the year 2021. Wondering if you can give any magnitude of what to expect there. To just the SEK 350 million benefit from the European payroll, that deferral, is that expected to reverse by year-end or also fiscal year 2021? Thanks.
I can start there. If you look at 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. We saw more impact in terms of the margin than what we 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 VAT payroll and also the North America indication?
Yes. Absolutely. On the North America, the deferrals there that we can have when it comes to Social Security payments, we expect them to be more than SEK 100 million actually, but that is based on our current understanding of the whole regulation, which is a bit fluid by itself. I want to spell out that number because you asked for it, and that is our current understanding. I should also warn that the interpretation might still be a bit subject to how it's further detailed, so to say. Our understanding is also that it should pay back half of that by the end of 2021, and the other half by the end of 2022. When it comes to the SEK 350 million, to be honest, I don't know. 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's what to say we shall pay back in the next coming quarters on the top of my head. When it comes to your calculation there that you did on the 1.2%, I think that seems to be a reasonable calculation. Then as Magnus said, how much you 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. That is a speculation that I would refrain to commenting on.
Yeah. Thank you. Just if the 1.2 ish is correct, and it is correct to assume that most of the headwinds come in the back two weeks of March, just sort of dividing that by two over 13 and assuming about 8% headwind in about two weeks of March, are you able to comment on if that sounds about right?
As I said, the 1.2 got this as an effect on the month. If you should extrapolate that, I would be much more cautious with that. Things are just changing as we talk.
Okay, thanks.
The next question comes from the line of Steven Goulden from Deutsche Bank. Please go ahead.
Hi there. Thanks for taking my question. I just wanted to zone in on something you said on the European margins. I think you were saying part of the reason for the drop in margin was a drop in client contracts. I just wanted to get a bit of an understanding of exactly what you meant by that. Is this in the kind of 80% of the business that's in the fixed category that therefore implies a kind of ratcheting down of number of guards required for a one-year rolling contract? 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'd be great.
I guess, as your typically sort of one to two-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 renegotiation look like on that 80% of the business? Then I've got a couple of follow-ups, if that's all right.
Yeah. The client contracts, Steven, that I referenced earlier, two main categories there is related to the U.K. and to France. 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. 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-19. Not really anything to do specifically about price pass-through. Some contracts that we lost margin. Some of the contracts that we lost last year, we didn't want to lose, but this is reality of competition. 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 March, essentially a lower commercial activity. A number of customers have stayed more focused, significantly more focused on managing the current challenges as opposed to driving significant commercial activity. 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. 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 guarding, remote guarding, fire and safety, and then electronic security and the ability to integrate solutions.
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 adjust for a new situation. 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. Yeah, sorry, just one follow-up. I just wanted to dig into the furloughing issue again. 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 you've got, is it 350,000 staff? I suppose going forward, 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, et cetera? Would you be very willing to use those programs for as long as they last? Thanks.
In terms of the impact, there is quite a lot of difference between the different countries and even within countries with these different programs. I think most important is to look then at the number that we shared earlier. Roughly 2/3 of the operating margin decline in Q1 is then related to COVID-19. That is really a combination then of cost 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. There is also a sickness cost impact, which is also important. You have to look at the different factors there, and I think that is as much as we can share right now.
You look at the other question in terms of other geographies, we are people intensive, as you highlighted. This is one very important part for us, and we are looking at those continuously, of course, to be able to manage. This is for the protection of our employees, but it's also for protection of our financial position. This is very important. We will always have situations that are more challenging as well. 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 the near to maybe to the midterm, for example. That is also very much related to that scenario planning work and also ensuring the readiness.
I hope that gives you at least some more flavor in terms of how we think and how we are managing those aspects.
Yeah, great. Thank you very much.
If I could add, Magnus, I think the keyword is also agility from all of our teams in reactions to what our customers demand, in reactions to what the governments decide, and that has been tremendous throughout this period now, the agility that we have seen from our teams.
Absolutely.
The next question comes from the line of Karl-Johan Bonnevier 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 we all are interested in. If you look at, for the moment, having about 3% of your employees on these kind of short-term employment programs, how good a proxy is that for, say, the organic challenge you are seeing top line? How good is the balance, so to say, between the two?
Is your question, KJ, how much of the 3% is an indication for the top-line impact? Is that your question?
Yeah, no. Looking at all the things you now try to mitigate through temporary unemployment programs and similar things, how good a proxy is this for, say, the challenge that you are facing and you're trying to monitor at this point of the COVID-19 cycle?
I think the challenge is actually a little bit bigger, to be honest, than the 3%, because we have some people also that are on holiday. Some people are on a bit reduced staff or on reduced contracts. Some people are, of course, not on the programs either because the program does not exist. We have now mentioned the people that are in such a program. The challenge is a bit bigger than what you see from this naked number. Of course, also, some people where we have reduced contracts, we use then some of these people to fulfill positions in all of the extra sales that we have right now connected to crowd control, connected to social distancing measures. The challenge is bigger than the 3%, let me put it like that. Then again, it's very fluid day by day.
I appreciate it. Keep the good work up.
We will.
I remind you that if you want to register for a question, please press zero one on your telephone keypad now. The next question comes from the line of Mikael Löfdahl from Carnegie. Please go ahead.
Yes. Hi, guys. I'm just trying to figuring out the impact from your aviation exposure and also the impact on your margin in general in Europe. First, if 12% of your sales is aviation contracts in Europe, I had this in my mind that some 60%-70% of those contracts are, in one way or the other, linked to passenger traffic, which is basically zero for the moment. Given that it has been so throughout at least 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. Am I wrong in terms of how these aviation contracts work?
Yeah. The 12% is the right number. If you look at the passenger traffic related, I think roughly speaking, your estimate is okay. The nature of the contracts differ. In some cases, if we start with the before COVID-19, we would have had a mix of some contracts where there is more of a fixed amount, and then we deliver based on specific service level agreement. Other contracts, which is a smaller part, proportion of the total business, will then be on more of a price per passenger basis. When we moved into this situation, it's obviously a near term perspective. There is a number of different aspects of this.
When I look at how the business is impacted, a number of the clients that we have, be them airports, airlines, other associated services, we are also then having very close dialogue with them also in terms of how do we maintain capacity also to start recovering. 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. That is also part of one of the critical focus areas in the next couple of weeks and 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?
It's a highly relevant question, but that is the kind of the situation that we are in at this point in time.
Of course, we shall add.
Would you say there is a lag in the impact on your revenues perhaps from the collapse in passenger traffic that we saw in March?
Based on where we are right now, yes. There, obviously, a lot also depends on how do things develop from now on, in terms of economic activity restarting and travel resuming and at what pace, et cetera. The general conclusion you draw is correct.
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. The airports closed down in different timings and sometimes actually a bit delayed almost to the general lockdown because there were still some flights going on to bring passengers home, so to say. Ships also account with that.
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 confirm so.
Yeah. Just a reminder also, I think the lost contracts, if I'm correct, I think the one in France was lost by 1st of April last year, so it impacted Q1 fully then. That was roughly 50 basis points, I think, on organic growth. 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. You should have been negatively impacted by 1.2% in terms of organic growth only from those contracts in Q1. If that goes for March as well, the minus three, actually, 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.
What I'm heading at is the margin drop that you say in Europe, you say in the report that the decline was 140 basis points, primarily due to the COVID-19 pandemic. I'm struggling to see how the impact could be so big coming from COVID-19 because you don't really see it in the sales numbers. Is it mainly to do with then the sickness costs and what is it?
Yes. That is something we have not so much talked about yet. The margin drop is larger, so to say, than what is explained from the sales drop. What we have seen is, of course, the cost from idle time. Not all people have been able to be put on these government schemes from day one. In some cases, these schemes do not exist in certain countries. Then secondly, there has been a quite increase in our sickness costs, for different reasons, of course. 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 from me, just in the U.S. where you have a lower exposure to aviation, for instance. You seem to be speaking quite positively about new call it opportunities arising from companies starting up and needing your services in that sense to keep employees safe and so on. Could it be even that there is a continued positive net effect from all of this in April? Was it a positive net effect already in March from some increased extra sales in the U.S.?
Sam, we saw a clear positive impact in March, as we have commented. 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. 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. We're also seeing some of that in Europe as well. 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.
Okay. Thank you.
The next question comes from the line of Peter Testa from One Investments. Please go ahead.
Hi, thank you for taking the questions. I have three. I'll go one at a time, please. Just on the electrical installation part that you described, you're not having the revenue, I guess you still have the people in your network would've been important. Can you give a sense as to how important that was? Given that installation work is probably deferred, do you think you just keep the people through to the other side and do the installation? Given pipelines and so on, do you think you'll have to make some adjustment to bring those two factors more in line?
Yeah. The assumption is correct there. A significant part of our electronic security business is installation related. We have, and we continue to invest because we see 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. 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, et cetera.
That is what then complicated the situation significantly 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 are undertaking to also be able to do installations in a safe way. That is also one important focus for us. To the question about backlog, et cetera, I do agree generally speaking. 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.
Yeah. Okay. 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?
If you look in, I think on the totality, we are quite even in terms of the positive impact offsetting the negative. That is where we are at this point in time and looking at Q1.
Yeah. The events business, I guess is more important in the summer, so it might be a bit more challenging later on, but you still expect substantial extra work to carry on?
Event business differs quite a lot. We had in Europe for example, there were some specific fairs and exhibitions, et cetera, some annual general meetings, so we have quite a strong engagement in a few countries that we are supporting. It does really differ. Obviously the nature of the events business in these extraordinary circumstances, many of the events have been canceled for this year and not then coming back until planned for next year.
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 comment as to how you think you'll be able to manage now that you're sort of into the crisis, your own labor cost through that? Obviously 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, but do you think you can also match the volume and wage and employment at the same time?
I think that's obviously the work that we are trying to carry out. When you look at the last two months in a few countries, for example, where we had declines in terms of aviation, we have tried to redeploy a number of qualified officers for other client categories. This is very much 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. No, thank you very much for the answers. Thank you.
Thank you.
There are no further questions registered. I hand back to the speakers for any closing remarks.
The beginning of the Q&A, I hope that we have been able to give you some better flavor in terms of these extraordinary circumstances that we're operating. Like we've highlighted, Bo 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 manage through this situation in the next three, six, 12 months. With that, thanks a lot everyone for calling in today.
This now concludes our conference call. Thank you all very much for attending. You may now disconnect.