Securitas AB

STO:SECU B

Earnings Call Transcript 2021-Q1

[Magnus Ahlqvist, President & CEO]

Good afternoon, everyone, and a warm welcome to our Q1 2021 call. Our CFO, Bart Adam; and I are doing this call today, as in the previous quarters, from Stockholm and Brussels.We are still living in challenging times, but from a Securitas perspective, we keep working with clear direction and priorities, and we've had a good start of 2021.If we're looking at the highlights from a group perspective. Organic sales growth was flat in the quarter, but we recorded positive growth in all divisions in the month of March. The operating margin improved to 4.9%, and this was a substantial improvement versus last year but also an improvement versus the same period in 2019. The operating margin was supported by strong performance improvement in all business segments. And we took a number of initiatives to sharpen the business and reduce costs in 2020 and these actions contribute to the positive margin development, but at this point in time, we have 4,000 people on temporary unemployment. But government grants help offset the negative impact, similar to previous quarters. We are driving a strong emphasis on portfolio management to ensure that we are coming out stronger and more profitable from some of the COVID-related challenges that we have been going through. And this is especially important in the aviation business, where this work is progressing well.From a cash perspective, we had solid performance in the first quarter with SEK 1.3 billion operating cash flow.And during the quarter, we acquired a fire and safety company in Denmark, Dansk Brandteknik, and we are excited about enhancing the offering to our clients in the Danish market. And more broadly, we are continuing to assess acquisition opportunities to strengthen our protective services offering in the years ahead.But switching now to the performance in the different segments, and we're starting with North America. So in North America, we recorded growth in guarding and Pinkerton that supported organic sales growth of 3%. And our electronic security team in North America are rebuilding momentum with clients after the pandemic and recorded positive growth in the month of March. And this was for the first time in quite a period since we had the negative impact starting a little bit more than a year ago from the pandemic, so this is a positive sign and positive direction and good work by the team. Extra sales have been stable at continued fairly high levels in the quarter even though a little bit lower percent of sales compared to the second half of 2020.If you're looking at the profitability perspective in North America. We [ had soft ] improvements in all business units that contributed to an operating margin of 5.9%. Guarding improved with margin support from the higher extra sales, but we also had a good support from earlier cost savings in critical infrastructure services and electronic security. So overall it's a very strong start of the year from our North America team.And turning then to Europe. We had 1% negative organic sales growth in the quarter but positive growth in the month of March. And as expected, the aviation business had a significant negative impact to the growth in Europe in Q1, and we continue to work through all the aviation contracts to ensure that we have a healthy portfolio with good profitability when the situation is normalizing. And as I said at the beginning, this is important work, but we are progressing well in these activities. And we continue the shift to an improved revenue mix. Security solutions, electronic security accounted for 24% of sales in Europe in the quarter.And we had good development from a margin perspective in Europe with an operating margin of 5.1%, and this represents an improvement also versus the first quarter of 2019. An improved business mix, benefit from the cost savings program and normal levels of provisioning supported the margin development, but similar to previous quarters, the negative impact and related idle time costs from the pandemic has to some extent been offset by the corona-related government grants in several countries. So it's still a challenging situation in many parts of Europe, and looking at the Q1 performance, this is a good achievement by our European team.Let us now then shift the focus to Ibero-America. And we had negative 2% growth in the quarter, and this was primarily related to impact from the corona pandemic and proactive portfolio refinement activities in Argentina and Peru. And on a divisional level, we recorded positive growth in the month of March. This was also the case in the important business that we have in Spain. Security solutions and electronic security represented 30% of sales in the quarter and supported by the Techco acquisition that we closed a little bit more than a year ago.And the operating margin development in Ibero-America is also positive with solid 5.2%. And the operating margin in Spain was supported by improving revenue mix and efficiency gains from the integration of Techco Security, but we are taking further actions to improve performance in Argentina and Peru and the portfolio refinement activities are starting to help to achieve a better-quality portfolio and positive impact on our margins.So all in all, it's a good start from a performance perspective of the year.And that concludes the overview of the divisional highlights. And now handing over to you, Bart, for some more details related to our financials.

[Bart Adam, Chief Financial Officer]

Okay. And many thanks, Magnus.Well, while this was another quarter of -- while this was another quarter during which the impact from the corona was still important, we continued to manage along the same track as in previous quarters. That is with 4 clear priorities on people, clients, costs and cash. And I could say that we have become better and better at managing any impacts while continuing also at full force or transformation journey as well. And as Magnus also said, I believe we can say that this is a strong start of the year. When we look at the organic sales growth here of 0%, what we should understand actually was that it in January was slightly positive. Then it -- in February, it was negative but a little bit affected from the leap day, of course, comparison where we had a leap day in 2020. And it was good to see that March was then again positive actually around 2%, so then averaging out to 0% organic sales growth for the quarter, but actually that was a slightly positive number if you would look behind the digit.The operating margin on 4.9%, well over ahead of the 3.8% from 2020, which had been affected from the COVID-19 back then from the month of March. Back in Q1 2020, we already had a substantial negative impact there from C-19, but as Magnus also mentioned, the operating margin of 4.9% is actually also ahead of Q1 2019, where it was 4.8%. And that, we see as a confirmation of a good start to the year.The operating income then here and -- has been supported by around SEK 205 million in corona-related government grants and support measures in the quarter, but of course, we shall remember that these government grants and supports serve to offset the increased cost levels from idle time. So they are compensating to some extent -- most of it is compensation then for idle time cost. This amount of SEK 205 million was affecting all segments but with 3/4 of the total amount within Security Services Europe, where we also have the most people on temporary unemployment. In earlier quarters, this amount of corona-related government grants and support was, in Q2 of 2020, approximately SEK 350 million; then in Q3, SEK 200 million; Q4, SEK 230 million, so a continuation here of around SEK 200 million per quarter but slightly lowering than versus Q4. And this goes largely hand-in-hand with the development of the number of people that we have on these temporary unemployment schemes. We started with around 10,000 employees in April 2020. And this reduced to 7,000 mid-July, further reduced to 3,000 mid-October but then resurged somewhat to 4,000 mid-January. And we basically continued on that level to mid-April. We have seen that there was a little bit more effect from the lockdown measures again in Q1, maybe as compared to Q4. Actually some countries have been again on a resurgence of the COVID-19, meaning that there were some further lockdown measures in place.On the amortization of acquisition-related intangibles, that was SEK 65 million. The cost level, you could say, returned to the level of the third quarter and the quarters before that. And we saw a bit of a higher number in Q4, but we shall remember there was a small one-off adjustment in Q4. Then the line of acquisition-related costs included some of the transaction costs related to the recent acquisitions as made during 2020 and the recent acquisition also of Brandteknik in Denmark.Turning to the line of items affecting comparability. We accounted for minus SEK 136 million in the quarter, and of this amount then, there was a positive amount actually of SEK 36 million relating to the exit from the 11 countries. So that was a net gain compared to our quarter 4 pre-closing calculations and accounting, and this net gain was also accounted now under items affecting comparability. Then also we had cost of negative SEK 68 million relating to the corona-related cost-saving programs as we announced back in Q2 of last year and then another SEK 104 million negative relating to the transformation programs, and that adds up then. All of that adds up to the SEK 136 million for the quarter, as can be found also in Note 7 to the report. I will come back in a second actually on some further detail for the full year on items affecting comparability.We turn to the financial income and expenses; and you can see redevelopment from SEK 144 million in the first quarter last year to SEK 94 million now, minus SEK 94 million in this quarter. And this was positively impacted by the favorable net debt development, as we have seen; lower interest rates; and lower exchange rates compared to the first quarter last year.Moving to the tax line, where the full year tax rate is estimated at 27.0% versus 27.4% for the full year in 2020, so pretty much in-line. The 27.4% from last year was affected by nondeductible expenses from the exit from 11 countries. And I shall say also that the entire tax environment is a bit more fluid, making all calculations and forecasts a bit more difficult. And this then relates to some changes in tax regimes as well as the changes and distribution of our taxable results. And we will further follow up in next quarters on the tax calculation, but we believe that the 27.0% should be on the safe side.Moving then to the next slide here; and that is the items affecting comparability, as mentioned here. We have, of course -- in the quarter now, we have accounted for the SEK 136 million, as I mentioned on the previous page, but for the full year 2021, one can expect a range of items affecting comparability between SEK 750 million and SEK 950 million. And I will not go into all of the details here of these different programs, but we have, of course, on the top the transformation programs as announced in Q4 from 2018. And there [ readout ] will be closed by year-end, and we expect there for 2021 a total of approximately SEK 250 million. Then related to the COVID-19 and the 11 exits, that should also be closed normally by end of this year, of course. And for the full year, we expect there a range of SEK 150 million to SEK 300 million. The final outcome of that will be highly depending on the C-19 development and also the continuation of grants. And it's likely that this will remain open after Q2 2021, as of course COVID-19 is also lasting longer than we probably had expected in Q3 and Q4 of last year.And then the 2 recent announced programs, the transformation programs there in the bottom, for those programs, we had announced a total of SEK 1,400 million for the period 2021 to 2023. And we are now basically gearing up these projects further and go into execution mode. And of course, we -- in the first quarter here, we had SEK 26 million. And that will start to grow as we are further executing and further moving from start-up to further execution and gearing up these programs.Then we move to the foreign exchange development, and here we can see that there have been considerable effects actually from the different currencies on the quarter. There has been a relevant negative effect that is a headwind from the foreign exchange during the quarter of around minus 10% on the sales level, as you can see here from the difference between total change and real change on the line of sales. There is a total change of minus 9%, but then when taking out the effects from the foreign exchange, we have actually a positive real change of plus 1%. And then there are even higher significant effects on the lower lines in the income statement. And then if we move to the EPS before items affecting comparability, that one improved actually in real terms with 36% compared to the first quarter last year. One can say that both the U.S. dollar and the euro actually stabilized or even strengthened a bit during the quarter but, of course, dropped significantly compared to the same quarter last year.Moving then to the cash flow. And here in Q1, we really had a good cash flow coming in during the quarter of close to SEK 1.3 billion as cash flow from operating activities. The first quarter is traditionally a bit of a slower cash flow quarter, but now also here we can say that this was really a strong start to the year. Capital expenditures by itself was SEK 638 million, and then it's trending to around 3% of group annual sales for 2021. And that also is including all effects from the transformation programs and including also leases for IFRS 16.The operating cash flow was positively impacted by collections. We had good collections, but we shall also add that operating cash flow was held by lower organic sales growth. There was no real impact from any corona payment relief measures in the quarter, no positive and no negative. We shall just remember that, by year-end 2021, we will have to pay about half of the SEK 1.3 billion we got as net support in 2020. We will have to repay half of that. So we end the quarter then with almost SEK 800 million in free cash flow. And that is a strong number, we believe, definitely for a first quarter.Moving now to the net debt, which ended on SEK 14.5 billion, pretty much on the same level as the SEK 14.3 billion from the opening. Positive free cash flow of SEK 796 million, as we just commented on the previous page; and then an amount of minus SEK 179 million paid for acquisitions; and minus SEK 170 million in items affecting comparability. All in all, this combined effect reduced net debt with SEK 442 million, but then there is a negative effect of SEK 545 million in translation, ending then the net debt on SEK 14.5 billion.The net debt in relation to EBITDA, as we can see here, is on 2.1x; and that is compared to the 2.1x also at the end of 2020. We had actually 2.4x at the end of the same quarter last year. So a strong number leaving a lot of headroom here for further -- for instance, any further acquisitions.And then we can say that we are backed up with solid financing. We have good liquidity at the quarter end of SEK 5.4 billion in liquid funds. We have, as said earlier, renewed RCF facility with 10 core banks for a total amount of close to SEK 10 billion. And the original facility was for 5 years. And we have now in Q1 extended with 1 year to 2026, with option to extend for another year to -- at the end of 2027 actually. And the RCF is fully undrawn. And we had a Eurobond maturing in February of EUR 350 million, and we have refinanced for a similar amount actually through Eurobond. And I can say that the facility was almost 10x oversubscribed, so we were attracting a lot of interest with that [ order book ]. We continue to have ample headroom in our rating, and we have no financial covenants in any of our facilities. And based on the strong balance sheet, with net debt-to-EBITDA, and with our solid financing in place, I think we are very well positioned for the future and in a strong position to accelerate our transformation.And with that, I hand back to Magnus.

[Magnus Ahlqvist, President & CEO]

Thank you very much, Bart.So we will open up for the Q&A very shortly, but I would like to provide just a few updates related to our transformation programs. When you look at the total picture: We've had a good start to the year, but we're also actively driving the transformation of Securitas. And one important event in the first quarter was the brand update that we announced at the beginning of March, and this was the first major update to our brand in 47 years. A more progressive, more digital while at the same time human and inclusive brand identity will support our position as the leading intelligent protective services partner. And we're really excited about this. And the new brand identity has been very well received by our partners and also internally, yes, but now let me just say a few words in terms of the transformation programs, yes. And this is building a little bit also on the updates from Bart in terms of the "items affecting comparability" overview.So we are on plan to complete the work with the first 2 programs, North America and global IT, towards the end of 2021. And in these programs we're now shifting the focus to optimization and benefit realization to ensure that we deliver the targeted impact in 2022. And the COVID-19 cost savings program, like Bart mentioned, it continues but still with some uncertainty regarding the timing of the end of this program. And this is primarily related to the fact that COVID-19 is still affecting economic activity in many countries. And there is uncertainty regarding the timing of the winding down of some of these government support programs and also then our progress in renegotiating contracts and especially then related to the aviation business, but with the programs in Europe and Ibero-America, we are completing now the modernization and transformation journey that we started back in 2019. And the European program, fundamentally important obviously to our ambition to improve performance and the value that we generate in Europe and hence also to the group.So I would just like to revisit some of the main objectives and also [ delivers ] that we have in terms of driving what are the focus areas but also what is driving the expected margin improvement to the 6.5% in 2024. And if you look at achieving that, we are focusing on a few key areas. First is building a common operating model for Europe that will enable us to drive the strategy at scale. And the second major component is the modernization of IT systems, focusing on improving HR systems, modernized ERP in a number of key markets. And the third important activity is to accelerate and drive solutions and electronic security. And we are achieving this now through dedicated organizations and leaders for solutions, electronic security and also related to the Securitas operation centers in the key countries.And another important enabler to this is to leverage frontline sales tools for solutions to enable the whole organization to sell in an easy way and to be able to do this with momentum. And improving the business mix through this shift to solutions and electronic security is the main driver behind the targeted margin improvement with the transformation program that we're driving in Europe, but last, we're also investing significant amounts in further digitization of our frontline people to enhance the work and the value that we're generating but also to enable more extensive digital client interaction. And this is, as we highlighted when we announced this 3 months ago, a multiyear program, but it will fundamentally strengthen our European business and generate these few critical benefits to drive our intelligent protective services strategy at scale, transform the guarding with improved margins, supporting our ambition to double solutions and electronic security that we have as a group target and enhancing client value. And we are at an early stage with this program and also with the program in Ibero-America, but we will provide regular updates as suitable in the next couple of quarters.So with that, we can summarize Q1. We've had a good start of the year. We've gone through a challenging period in 2020, but the entire Securitas team has worked with clear priorities on 2 levels: first one, taking short-term actions to make sure that we are sharpening the business and improving efficiency; and then strong commitment to driving and investing in the transformation programs. And looking at the key financials: a 30% real change of operating result in Q1 and a clear operating margin improvement versus 2020 and also 2019. And we are still facing significant uncertainty related to the pandemic, but we continue with clear priorities to ensure resilience in the short term, driving a high pace of transformation.So with that, now glad to open up the Q&A session. Operator?

[Operator]

First question comes from Andrew Grobler of Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Just 3, if I may. Firstly, you talked about the SEK 200-and-so million from government supports during the quarter but also comments around provisions and bad debt, particularly in Latin America. Could you give a bit more detail about the movements in those items, please? Secondly, from the transformation programs and particularly in North America, are you starting to see benefits come through to either the cost base or the business? I know you completed some major elements of that program at the end of last year, and so is that apparent? And if not, when do you expect that to begin to flow through?And then thirdly and slightly related to the first one. The weakness in aviation is part of the driver of the relatively low organic growth. Can you just talk us through the balance between the government schemes on one side and the lower organic from aviation? Are those 2 sides of the same coin?

[Magnus Ahlqvist, President & CEO]

Thank you, Andrew, Andy. Well, if you -- starting with -- and I'll try to take them here. And Bart, please weigh in as well with any additional comments. On the first question, yes, government grants around SEK 200 million in the quarter, but we should also remember that this is obviously offsetting some of the costs that we have. The level is a little bit lower than what we had in the previous quarter but still fairly significant. And just to give some flavor behind that: I mean there are a few key countries that have experienced quite significant lockdown in the first quarter such as Germany and France, to some extent the U.K. And these are also some of the main markets, if you will, that account for quite a significant part of the SEK 200 million. In terms of provisions, I mean, when we go 1 year back, we obviously assess that there is significant uncertainty in terms of how is the pandemic going to affect our industry, us as a business but also our client's business, so we have taken a conservative and prudent approach. And when looking at a number of the quarters in 2020, then increased provisions related to potential bad debt. And I think we have also transparently been updating you on that kind of development and the approach as well in light of the uncertainty that we have been seeing. If you're looking at bad debt that has materialized, I would say that is lower than what we have provided for, by a wide margin. And that is obviously a positive thing. We are staying close to our clients. And we've done that for the last 12 months to also make sure that we are proactive in managing or minimizing any potential exposures, but this is something that -- yes. I mean we are now in May 2021. There is then still, from our perspective, uncertainty in terms of what happens with the economy and the state of our client's business, et cetera after COVID. So we've maintained a conservative approach related to these provisions even though, like I said, we haven't had significant amounts materializing in terms of bad debt.Moving to the second question, Andy, on North America. Yes, it's absolutely correct, what you said. So we have done and hit significant milestones in the transformation programs in the second half of 2020. We are now shifting a lot of the focus more towards optimization and benefit realization of the investments that we have made but also then, over the next 12, 18 months, also phasing out legacy-related costs when we are migrating fully over to modern systems and also tools that we are adding to be able to achieve the objectives. So when I look at the Q1 results, no material impact, but we are on a good path in terms of the work with this program. And we're going to start seeing gradual impact so that we can realize our targets by 2022.And then I think you had a third question, and that was related to aviation. And I will answer based on what I understood here, Andy, yes. And then please come back in if any follow-up question. We have gone through, when you look at the aviation space, most of the large contracts. And if you simplify the picture, you can say that we now have a situation where we have a number of contracts that were healthy and profitable before COVID-19. They will be healthy and profitable in a recovery scenario or when the market is recovering, but we have also been really diligent with our teams across especially Europe and Ibero-America in terms of going through all the major contracts. And the outcome of a lot of that work: I made the reference at the beginning that we've had good progress, yes. If you're looking at last 3 to 6 months, we have now gone through a number of the contracts where we've had real issues. And the outcome is 1 of 2 potential scenarios. Either we are renegotiating those so that they become profitable and healthy contracts in the near term, and that is obviously the desire from our side, yes. If we are not able to do that, then we're working actively to terminate those contracts. And we have also then proactively terminated, based on the situation, a number -- or some contracts, I should say, but we have also been successful in terms of working out a new contract and a new sustainable model together with the clients. But that work, we need to do to protect the value and the profitability and the margin because that is the only way that we can also reinvest in the services and also generate good returns on the business.And when you're then talking about the government support schemes. It is -- and I think that is what you are relating to. I mean there is a number of people who are idle at this point in time in the aviation-related business. And that's obviously where we are then receiving temporary unemployment support for those employees. When we are highlighting uncertainty, it's more than identifying the fact that we know in some of the countries, like in Germany, for example, they have said that these programs are going to run until the end of the year. Well, then obviously there is potential uncertainty if demand has not recovered and if programs are starting to be wind down. And that's something that -- we are obviously closely following that, related specifically to the aviation business. And that is also the main uncertainty that we are highlighting and that we're continuously working with to minimize impact, but it is like Bart said earlier. The entire presence of and impact of COVID on society has lasted longer than what we expected maybe 6 to 12 months ago, but we need to be careful. We need to protect the profitability. And for that reason, it is contract-by-contract, client-by-client essentially work. And we continue with that, but I think on the totality we have -- I feel pretty good about what we have achieved here in the last 3 to 6 months in terms of the aviation portfolio.

[Andrew Charles Grobler, Analyst]

And if I could just -- when do you think you'll have more -- I mean it's probably an impossible question, but when do you think you'll have more clarity about the aviation portfolio; and know what you're going to keep, what you're not going to keep and the kind of underlying profitability long term?

[Magnus Ahlqvist, President & CEO]

Yes. So 6 months ago, Andy, it was -- I would have been significantly more tentative in terms of the answer because we were just in the middle of that process. And I can also tell you it's not easy when we're sitting with clients, clients that are also suffering at this point in time, but we need to go through this because we -- I mean we are here to generate good quality and create good value for the clients but also Securitas. I think they all understand that, but it has been then, when you look at the entire portfolio, we have hundreds of contracts and the first focus was really on the top 100 contracts, yes. And that has been where the majority of the work has been done, but there are cases as well where we have contracts running until middle of 2022, for example, or even in some cases end of 2022. And we also have to be respectful of the contractual obligations that we have.So in a good scenario, to your question, I would say, if we have real stabilization, especially in Europe, in terms of vaccination programs and rollouts, et cetera and that we see that underlying demand is recovering, I mean, then we should have significantly better line of sight to this in the second half of the year. But that, I think, is the main driver. What I can say is, when I look at contrasting with North America just in the last 4 to 6 weeks, I mean, I'm perceiving significant increase in aviation-related activity overall. And there obviously they are also ahead of -- large parts of Europe, in terms of the vaccination program rollout, so -- but it is, I mean, we are on top of this and we're working closely with it and -- but I think that's as much as I can say, Andy, at this point in time.

[Operator]

Our next question comes from the line of Erik Paulsson of Nordea Markets.

[Erik Paulsson, Analyst]

Yes. So I was wondering about your installation within electronic security. Obviously this was burdened as well in the quarter, Q1, but is it possible here to give an indication at what level this is running at compared where you want to be? So let's say where you want to be is at index level of 100. Where are you now in terms of installations?

[Magnus Ahlqvist, President & CEO]

Yes. So thanks for the question. I think, if you're looking at the installation activity, significant negative impact in the second quarter, some improvement in Q3, a little bit tentative in Q4. And then what we're seeing is improvement especially in North America in March this year, when we are back at positive organic sales growth and -- but that's obviously then comparing now to March in 2020, which was where there was a negative impact. So I think that, this one, it's clearly going in the right direction, but -- and we're also seeing good indications in terms of commercial activity. And that is obviously very important because we have more clients now that are more active in terms of reaching out and saying now we can get back a little bit more to business as usual and looking at solutions and the type of security equation that we provide to them. That type of activity has increased quite significantly in the last couple of months, and I think that is obviously positive indication when you look at the data point with the month of March.To your question about an indexation. Yes, I would say that we are still below where we would like to be based on the development. We have more capacity and competence and capability to do significantly more with the great electronic security team that we have, but this one, we have to watch it carefully in terms of how it develops. But we are very active as ourselves for the last 6 months in terms of being commercially active but then also starting to see more response on the client side. So I feel more optimistic now in terms of where we are compared to 3 or 6 months ago.

[Erik Paulsson, Analyst]

So is it possible even to double or triple this from current state, so to say?

[Magnus Ahlqvist, President & CEO]

Double or triple in what sense?

[Erik Paulsson, Analyst]

The installation activity compared to what you saw in Q1.

[Magnus Ahlqvist, President & CEO]

No. That, I wouldn't say. I mean we've had -- if you're looking at positive organic sales growth in this space in the month of March. I mean that is still we are talking single digits in terms of increase still. So I mean this is still quite early. And I should also say, when I look at our installations business, this is not primarily a volume business for us. I mean we are fulfilling an important role in terms of technologies, design and integration for the clients, which is generating an installation revenue, but then we are also keen, and clients as well, that we then have a recurring relationship in terms of maintenance and service and support and so forth. And that kind of balance is always important for us. I mean this is not that -- volume recovery is not the primary driver, but obviously we have a lot of competence and capabilities, so we need to make sure that we have critical mass. And we are not really there yet.

[Erik Paulsson, Analyst]

Understand. Just final question is on provisioning in the quarter. I don't think you gave a number in the actual report on that. Is -- what is that number in Q1?

[Magnus Ahlqvist, President & CEO]

Bart, do you want to comment?

[Bart Adam, Chief Financial Officer]

Do you mean the government grants and support that we received? Or do you mean...

[Erik Paulsson, Analyst]

No, your provision for...

[Bart Adam, Chief Financial Officer]

No. We have provisioned basically on the same business as usual. So well, in last year, we had in several quarters there, in Q2, Q3 and Q4, increased levels of provisioning compared to business as usual. We have now gone back to normal levels, so meaning that the provisions we created during 2020 are still basically sitting in our balance sheet. As Magnus also has commented, we have not seen any higher levels of actual bad debt coming in, so the provisions are untouched as we had them at year-end, but now we have basically returned to normal levels of provisioning, which means around 0.1%, 0.15% of sales. That is like -- if you look at a longer term, that is the normal level that we are basically year-after-year, 0.1%, 0.15% of sales. And so -- and that is the normal level that we have now again in Q1, while we have not commented as it is just business as usual.

[Operator]

Our next question comes from Rahul Chopra of HSBC.

[Rahul Chopra, Research Analyst]

I have 2 questions. First, in terms of your margin target for 2024, can you just give us a sense that how much of this is driven by technology within the mix? And how much of it is driven by underlying improvement due to the cost, transformation program which you are doing? Second, in terms of the wage inflation, can you just give a sense of what is the sense of wage inflation across geographies? And how difficult is it to pass wage inflation given the current cost environment for clients?

[Magnus Ahlqvist, President & CEO]

Thank you. In terms of the margin target, quite a significant part is business mix related. It's essentially that we are enhancing the offering, higher position in the value chain, higher value to the clients and also then higher operating margin for Securitas. So that is one significant part. With the transformation programs, there is obviously significant expected benefits in terms of modern systems and tools that will help us from an efficiency and productivity standpoint. And if you're looking at the North America program, where we have [ come the furthest ], there obviously when I say we're shifting more towards benefit realization after some of the heavy lifting on modernization that we have been doing now successfully last year -- I mean the main objective of the North America program was also then with better tools, more automated systems, better insights into the business to be able to free up more time for our branch or district managers in the front line to be able to more actively work with the clients and develop the business. So it is we are not breaking out the exact split, but I mean those two are the main 2 drivers behind the margin targets. And we are fully committed to achieve those.When looking at wage inflation. I mean this is an important time now. And here I would say, when you're looking at Europe, first of all, it's a different context due to COVID. And we are not through the COVID situation yet because there is a number of countries that are still on lockdown. There were, if you look 1 year ago going into the COVID period or going into 2020, then some expectations in terms of wage increase, et cetera. Then COVID hit us. And now obviously there has been a tremendous effort, I just want to highlight, with all of our employees and also clients in terms of managing COVID. And that was really the first priority. If you're looking at where we are right now, it's a different dynamic in terms of price/wage in the -- a little bit the aftermath of the COVID different initiatives that have been initiated. And also government programs, some of the negotiations, et cetera have been a little bit delayed. So while we are in balance now, we still have very important months ahead of us to make sure that we are on balance for the full year. And that's really, I think, to give flavor related to Europe. If you're looking at North America, we are similar to Europe with a good track record in terms of dynamically adjusting price/wage balance and then more so in North America even because it's a fast-moving labor market and more dynamic. But if you look at North America, I mean, this is one very important area that we're also watching because also in North America, with especially some of the federal programs, you're also seeing that there is quite a strong incentive for people in different states to enjoy some of the support program, as opposed to actively going out and applying for a new job. And that is something that we are seeing in the U.S. and also something that we are following and working very closely with across the full client base to make sure that we are managing that situation in a good way but with quite some differences as well when looking at the different states in the U.S.So yes. That's a long answer related to wage situation but, I think, also the 2 most important ones when I look at the overall state of the business for Securitas. And once again to highlight: We have a good track record. We are good at handling price/wage. And this is obviously very important work that we have now in the weeks and the months ahead.

[Rahul Chopra, Research Analyst]

Just a follow-up question. I mean, can you give a sense of how the churn has developed? I mean just in the wake of COVID. Like how much of decrease in churn are you seeing? Just some color on that.

[Magnus Ahlqvist, President & CEO]

Yes, in terms of employee turnover you mean.

[Rahul Chopra, Research Analyst]

Yes, yes.

[Magnus Ahlqvist, President & CEO]

Yes. So we saw some decrease in 2020, especially in the U.S. If you're looking at the situation right now, yes, it's more the kind of the application pool which is the main point of attention for us right now. And that is then to be able to recruit good people and to help deliver good services and drive the growth in North America. So yes, there was definitely some easening in terms of the churn or employee turnover during 2020 but no significant movements there if you look at the last couple of months.

[Operator]

Our next question comes from the line of David Roux at Bank of America.

[David Roux, Associate]

Magnus and Bart, just 2 questions from my side. I think, just starting with North America, I see that the client retention rates slipped a bit, I think, about -- by about 2 percentage points, which excludes the impact from COVID-19. I'd be interested in just getting a bit of color around these contracts that are falling off. Are these being taken up by other competitors? Or is it just a reduced share of wallet from some of your clients?And then my second and final question is just a follow-up from an earlier question. And my apologies if I did miss this, but could you quantify the benefits to operating profit from the bad debt recovery in Ibero-America? I just wanted to understand the mechanics here. Were these parts of the bad debt that were provisioned for last year or perhaps ones that had really been written off?

[Magnus Ahlqvist, President & CEO]

Yes. Thank you. I'll take the first one. And then Bart, maybe if you want to comment on bad debt and Latin America. If you're looking at the client retention rate, yes, it is a little bit lower, but if you go a few years back, I mean, it's happened from time to time that we have lost 1 or 2 significant contracts. This time, that is not really the case. I think it's more of a mix of a few different contract losses primarily -- as the primary driver, but if you look at that as a question to say is that a major concern, then I would say no because we have good commercial activity; a strong pipeline; and like I mentioned earlier, quite a lot of interest as well from clients. So this is something that I feel fairly comfortable with, with the work that we are doing and also the general state of the client relationships that we have. Bart, if you want to comment on the bad debt provisions and Latin America, please.

[Bart Adam, Chief Financial Officer]

Yes, yes. So just to remember or to remind ourselves: I mean, the provisions as they were at year-end on the group total, they are still intact as they were at year-end. So we haven't touched any of those. What then specifically happened to Ibero-America is that, well, the margin improved compared to last year with around 0.8. And I think we have mentioned 4 different reasons for that in the report. So you can just think that this is like 25% of the reasons as well, as it is one of the reasons. That is basically the impact. And it was bad debt that we had entirely reserved. Now we have been paid. We basically, as I said, kept the provisions on the same level, but this then has -- the result, the payment has fueled then the operating income for the quarter in Ibero-America. In all other divisions, it remained intact as it was at year-end.

[David Roux, Associate]

Okay, Bart. So if I understand you correctly. So the bad debt recovery accounted for 25% of the Ibero-America delta in margin. Is that correct?

[Bart Adam, Chief Financial Officer]

Roughly, yes, yes. It's 1 of the 4 reasons. And we improved 0.8, so then you can assume that it's like 0.2 as well.

[Operator]

Our next question comes from the line of Kate Somerville of UBS.

[Katherine Somerville, Analyst]

3 questions for me, please. So firstly, just on the U.S. The organic growth slowed down a little bit from last quarter, and I was just wondering what you think the main driver behind that was. [ And then so as kind of linked to that ], in terms of sort of extra COVID-related sales, how much did that impact to total organic growth? And how long do you expect that to continue? And then finally, just on those solutions-based contracts, you have -- what tends to be lag between the conversations that you're having at the moment and that coming through into growth?

[Magnus Ahlqvist, President & CEO]

Sorry. Can you repeat the second question? I missed that.

[Katherine Somerville, Analyst]

Yes. So through last year, you did sort of extra COVID-related sales, so parts of the business that you benefited from the pandemic. Are you able to break down how much of that was in growth for the quarter?

[Magnus Ahlqvist, President & CEO]

Okay, thank you. Bart, do you want to comment on the first one?

[Bart Adam, Chief Financial Officer]

Yes. And to be honest, Magnus, I missed on that one. I catch the second one, so I can comment on the second one. The COVID -- yes.

[Magnus Ahlqvist, President & CEO]

Yes. So maybe then on -- if I understood correctly, on North America organic sales growth in the quarter, yes. It is slightly lower compared to Q4, but generally speaking, we feel quite comfortable with where we are in terms of the organic sales growth overall there. I should also say that we are continuously working with portfolio management to make sure that all the profitability is in good, healthy shape. And yes, the -- we had a few contract losses, but we also have strong commercial activity and also indications, so we feel quite good. So nothing specific to comment beyond that related to the organic sales growth.On the second question, in terms of the COVID-related extra sales. They are still higher but a little bit less impact. I think we had a little bit more than 2% higher extra sales in Q1 compared to a year ago. So there is obviously still quite some activity. It has been fairly stable, but there obviously we should also highlight the fact that, those extra sales, there is also a lot of normal extra sales that we will typically have that we're not benefiting from. But we're continuously working with our clients, primarily in North America and in a few countries in Europe, in terms of helping clients addressing more COVID-specific needs. And that's obviously meaningful work temporary in nature, also slightly higher margin -- or higher margin, I should say, on that, but it is a little bit tempered compared to a few quarters ago when we had a higher delta compared to the revenue mix in kind of a normal situation.

[Bart Adam, Chief Financial Officer]

And the third question was on solution-based contracts, Magnus.

[Magnus Ahlqvist, President & CEO]

Yes. Sorry. I was -- can you just repeat that question, please?

[Katherine Somerville, Analyst]

Yes, yes. Sorry for being so unclear. So the question was, when you have your sort of -- you're having better conversations about those solutions-based contracts. I was just wondering what tends to be the lag between when you start discussing it and when that sort of comes into your organic growth and when those sort of get executed.

[Magnus Ahlqvist, President & CEO]

Understood. Thank you. Well, it depends quite a lot. If you're looking -- depending on client segment. If you're talking more kind of mid-size to large clients and client contracts, a solutions selling cycle could be significantly longer. And there we could be talking quarters rather than months. If we are looking at the other part or the other kind of solutions portfolio that we have and also actively developing more in the SME space, there I would say that the solutions selling cycle is significantly faster. So that is when we're making a reference in terms of commercial activity picking up and also then the important focus that we have on solutions because, this, I also have to emphasize. I mean we've had significant negative impact in the last 12 months. And this is one very important area that we're prioritizing to drive improvement across the entire company, but it does take some time as well from early dialogue until close contract and then rolling out the solution for the client. So it is longer-term work and longer cycle, especially then when you're looking more at the mid and the larger solutions that we are delivering for our clients.

[Operator]

Our next question comes from the line of Neil Tyler at Redburn.

[Neil Christopher Tyler, Research Analyst]

Three still from me, please. Firstly, the shorter-term one, back to the installations business in electronic security. In North America, are those installations running at or developing at the rate you would expect, as lockdowns ease, given the sorts of lead indicators that you monitor? Or is there any alteration in your view of the extent to which work has been canceled rather than simply postponed? That's the first question. Secondly, more broadly, again sticking with North America and the competitive landscape that -- and it's a sort of slightly tangential question, but now that the G4S takeover has been finalized, I would like to ask you whether, based on your experience, you would have expected a different competitive dynamic for larger contract-type work dependent on which of the 2 business had won. So I'm sort of leaving the question sufficiently open that you don't have to commit, all right, [ sort of ] your views on either competitors but whether you would have expected the competitive dynamic to be different.And then finally and back to your transformation program itself and the 3 drivers thereof. Am I right in thinking that these drivers are sort of sequential, as opposed to simultaneous, and therefore that the way you've described it is that the margin benefit really is probably more back-end loaded as the tools are put in place first? And then they translate to the business mix, which you seem to be inferring is the greater contributor to the margin development.

[Magnus Ahlqvist, President & CEO]

Yes. Thank you, Neil. If you're looking at North America and the first question in terms of the installation business, I would not say that there is any pattern of cancellation. It's been more a tentative kind of approach and the fact that many of the clients essentially said that we cannot permit any people on our premises given the COVID situation. And that obviously put quite a negative impact on all general activity. That one is really improving, and I highlighted the organic sales growth we also have. When you're looking at the leading indicator -- I mean the order entry is then one of the key numbers for us. We are seeing really healthy numbers here now for the first time in a while. So that I think is really the situation looking at electronic security business in North America.In terms of the competitive landscape, I wasn't sure, Neil, if you were alluding to what would be the difference in terms of the competitive dynamics had 1 of the 2 contenders or interested parties in the G4S business -- was it more who would have gone successful out of that? Was that your question?

[Neil Christopher Tyler, Research Analyst]

Yes, It was more whether you were pleasantly surprised or otherwise to the eventual winner.

[Magnus Ahlqvist, President & CEO]

Yes. I mean that's a bit of a sensitive question to comment on, but I think, generally speaking, when you look at Securitas -- I mean we look at ourselves as a really high-quality company with a strong innovation agenda. And I think that is -- the clients that decide and that want to work with us, they typically share that vision, and that's the reason that they come to Securitas. And we keep investing in that. And we're staying humble, but I believe that we have consistently been developing our offering with our stand-alone protective services capabilities to become better and better but then also working to be able to integrate different protective services to our clients. And that, we continue to do. What -- I mean what I hope is that this is -- there is plenty of opportunity in this industry. I just hope that there is also going to be continued really positive development of the overall industry so that we can provide good client service; that we can continuously increase what we pay our employees, yes; and then also increasing our position in the value chain. And those are really the main focus areas that we are driving, and we will do that regardless of who the competitor is. And that we are also being really responsible in terms of the contract portfolio reviews that we're driving extensively across the entire business. I mean we do that to protect value but also to enable us to -- ourselves to invest but also to generate improving returns over time. And that's really the kind of the direction and the compass that we are driving and following as a team. We do that with full force in Securitas, yes.On the last question, on the transformation programs, yes. I mean we have -- I would say there is a benefit from the fact that we have come quite far in the North America program before we're starting to roll out some of the -- or going into more of an intense phase in terms of the transformation work in Europe and Ibero-America. And one is obviously that we are also learning quite a lot in the process. We are also looking at how can we make sure that we are maximizing synergies between the different programs in terms of knowledge or experience or even systems and applications. So that, I think, is quite good, but then obviously we are at a period when we are driving a very high pace of change within the company with these. And that period of transformation, we started at the beginning of '19; concluding that then at the end of '21 with the first 2 programs, like we highlighted; and now then shifting more of that emphasis over the next 24 months essentially to Europe and Ibero-America. And I think your question there, in terms of the benefit, yes: If you look at each individual program, yes, there is a certain back-end emphasis in terms of realizing the benefits because, just migrating over to modern systems and tools, et cetera, I mean, that doesn't give you all the return. It's a lot of the -- hard work, but the important work is in the optimization and then really driving legacy costs and complexity out so that you have better systems and also more efficient overall operating model and better tools for your employees who are working in the frontline. So I agree with your statement there that it is more kind of back loaded when looking at the benefit realization.

[Operator]

Our next question comes from the line of Ed Stanley at Morgan Stanley.

[Edward Stanley, Equity Analyst]

And a follow-up very quickly. You mentioned the application pool. Are the number of applicants you're seeing lower than you'd normally expect like other businesses are finding in Europe and the U.S.? Or have I misunderstand that? The second question and following up from wage inflation: I think at your Capital Markets Day you suggested that you don't necessarily go head to head on salaries with the likes of Amazon and Walmart just because they raise prices, but you tend to offer incentives of various kinds and rather than just matching salaries. Am I remembering that correctly? And are you having to be more generous there? Or is that some flexibility you have in the price/wage sort of discussion?And then finally, on government support. And sorry if you've already said this, but in April last year, you had 10,000 staff on furlough then went to 7,000 then 3,000 then back up to 4,000 in January. What is that number now? And roughly what proportion of those furloughed staff are aviation, please?

[Magnus Ahlqvist, President & CEO]

Yes. Thank you, Edward, yes. So if you're looking at the application pool, the comment that I made, it's specifically related to the U.S. And it is lower than what we have seen in recent times, and that is really consequence of my main conclusion and view of the federal programs. And I think that has also been visible when we speak also with some of our clients who are more in the service-related industries. They are seeing a similar situation and experience in that as we speak. I think when -- and I cannot give direct answer in terms of the visibility of when will that normalize because that depends a lot on the political decisions, especially on the federal level, in terms of how long they continue some of those programs. So I mean we are focusing on what we can influence. And that is obviously working actively to make sure that we are becoming as efficient as we possibly can in terms of the process, the recruitment process and also which people we target, et cetera, but it is an important point and that's the reason that we bring it up. If you're looking then at the Securitas model and looking at North America: We have and our team has continuously been refining the overall offer to our employees. And there obviously salary is one important component but where we have also put a lot more emphasis in terms of other benefits in terms of training and career development, health-related benefits and so forth. And I think that is important for the -- I mean the entire employee value proposition. That's something we believe we are definitely on the right path but that we need to continuously calibrate, of course, to make sure that we are successful in the market.In terms of the last question, on government support, yes. The number is around 4,000 right now. The majority of those 4,000 people are in Germany and France, and quite a large share of those are aviation related. So when I look at that -- I don't know, Bart, if you want to give any additional flavor to that, but I think that is -- it's a correct assumption, Edward, in terms of which are the main drivers there. And it's simply related to the fact that the number of -- especially some of the larger contracts. It's been quite a digital environment where there simply hasn't been any demand. And we then have a number of aviation-trained security experts who are then working normally on those sites and where we then have quite significant numbers then in anticipation then obviously of demand recovering.

[Bart Adam, Chief Financial Officer]

I mean that is entirely correct, Magnus. We had 4,000 people in January and now 4,000 mid-April as well, reflecting overall that aviation demand in Europe in the first quarter has been very low; even lower compared, I think, to Q4 last year. So that is the situation. And then majority of the people that are temporary unemployed are within aviation in our business. And for that then, we get support from the government in compensation then for most of the costs that we also incur with those idle-time employees.

[Magnus Ahlqvist, President & CEO]

And to the operator and everyone on the call. We have approximately 5 minutes more, so if -- the remaining questions, please be fairly quick. And Bart and I try to be quick in our answers as well so we can, hopefully, get through as many questions as possible before we have to round off.

[Operator]

Okay. Our next question comes from the line of James Winckler with Jefferies.

[James Peter Winckler, Equity Analyst]

[indiscernible] just wondering if I get to -- one, just hopefully you can expand more on the receivables specifically because just, as you mentioned, most of the distortion and impacts to the free cash flow came last year. And in a typical sort of pre-COVID year, you'd expect a large outflow from the working capital side of things. So wondering what the progress was that you made here. And then just from the support packages, for the European margins, it's could you remind us any sort of end of time line for [ some of your core ] markets for those support [ works ].

[Bart Adam, Chief Financial Officer]

Should I start with receivables?

[Magnus Ahlqvist, President & CEO]

You can do that, Bart.

[Bart Adam, Chief Financial Officer]

Very good. So on the receivables, I mean, we have had a very good focus with the whole company. As I said there, one of our key focus areas was on cash. We -- and our biggest cash impact comes from receivables, so we had a big focus on that with our clients. And that has resulted into very good payments coming in during all of last year and also now continued in Q1. As also said before, we have increased then the provision levels for potential bad debt during Q2, Q3, Q4 last year. Those provisions are still there at year-end and we haven't touched any of those. The provision levels now in Q1 are at the same level as they were in Q1 last year. Then I mean the effect on the income statement, but on the balance sheet, they are there basically as we have provided them through 2020. On the support packages, there I can say that the biggest support package where we benefit most from is from Germany. And that is now confirmed till end of year, as a minimum. The second biggest one is France. That is at least also confirmed for Q2. That is more like a rolling schedule, but if anything, in France you could, of course, expect that they will continue as well if the situation continues with the aviation, low demand.

[Magnus Ahlqvist, President & CEO]

I hope that answers your question -- or your questions, James.

[Operator]

Our next question comes from the line of Karl-Johan Bonnevier of DNB Markets.

[Karl-Johan Bonnevier]

I noticed the extra disclaimers you put on the client retention excluding the effects of COVID-19. Maybe if you -- could you just elaborate a little what kind -- how big was that impact? Just to get a feel for, say, the fluid situation that you have needed to manage during the last 12 months.

[Magnus Ahlqvist, President & CEO]

Yes. I mean there has been -- when -- well, it's a little bit difficult to be very specific on that one. If you look at 2020, I mean, we had some temporary reductions of portfolio, but when we define those as temporary, with -- that's with the expectation that, when demand is normalizing, the revenue and the business will also come back. I would not put too much emphasis in terms of the client retention-related questions. If you look broadly speaking, I mean, number one, on the one hand, we need to protect profitability of our contracts. So I think, the contract reviews that we are doing, we're putting more emphasis on that. And I think that is just a healthy approach to ensure that we have a good, healthy portfolio when the economic situation is and the world is stabilizing after COVID. So that is really the first one. And then the second one is that we do have healthy commercial activity and pipeline, and looking at that, we feel quite good about where we are on the totality. So I won't go into more details in terms of trying to break down the numbers in any other way.

[Karl-Johan Bonnevier]

Excellent. And when you look at looking at client retention for electronic security contracts irrespective guarding contracts, is there any meaningful deviations compared to the historical patterns there?

[Magnus Ahlqvist, President & CEO]

No. I mean the -- if you look at integrated solutions contracts, we typically have higher retention rates. And that's typically a function of we have built a more integrated solution for the clients based on their risk and their need and typically then higher customer satisfaction and retention as the main kind of expected benefits for the clients and also for Securitas. And that has not changed.

[Karl-Johan Bonnevier]

Excellent. And then finally, Bart, just all my best wishes for your next ventures in life.

[Bart Adam, Chief Financial Officer]

Thank you so much, JK -- KJ. Thank you so much, but you will meet me as well at the Q2 meeting.

[Karl-Johan Bonnevier]

Look forward to that.

[Magnus Ahlqvist, President & CEO]

So I think we have time for one more question and then we have to round off.

[Operator]

Okay. And our next question comes from the line of Viktor Lindeberg of [ Carnegie ].

[Viktor Lindeberg, Research Analyst]

I'm following up on the transformation program and, well, the margin ambitions that you've set out. And maybe I missed this, but to my understanding, the business mix change with higher electronics and technology content is one of the drivers you mentioned for realizing the margins that you're targeting, but when thinking about the growth in the electronics and technology business, have you in that penciled in an expectation of M&A if you -- that growth will sort of contribute to that business mix and margin equation? So that's my first question. And secondly, relating to this, is maybe that -- the SEK 40 billion of revenue by 2023. Obviously, looking at growth now, you would need to balance this by adding M&A. And how should we think about that in light of the transformation programs? And of course, M&A could add complexity and risk -- take away management [ attention ] and potentially then, of course, dilute transformation, so how should we think about the M&A in light of the transformation and sort of growth ambition?

[Magnus Ahlqvist, President & CEO]

Thank you, Viktor, yes. So if you look at the transformation programs, I mean, they -- we are putting them in place also and investing in this to be able to achieve our targets. The ambition of doubling by 2023, is it -- I mean that is very significant change in terms of the revenue composition, the business mix of Securitas. So a lot of the transformation-related work, we are driving to enable us to become sharper and better and then to grow organically but also adding some through acquisitions. And I mean we have a strong balance sheet and also a good track record in terms of the acquisitions that we have been able to realize. This is one important part of the agenda. And I should also say that, when you look at the SEK 40 billion, this is a mix of organic sales growth in electronic security, of organic sales growth in integrated solutions or security solutions but then also depending on successful M&A activity. So that plays an important part, but it is really a combination of the two.And that's also the -- I mean that's also with the perspective you should look at the acquisitions that we finalized at the beginning of 2020 with Techco and Fredon, for example, Techco in Spain and Fredon in Australia as 2 significant ones; but also then with the 5 properties that we carried from Stanley towards the end of the year; and also the FE Moran acquisition that we did in the U.S. I mean, even if we had fairly difficult circumstances, we were able to keep driving this acquisition agenda. And here the teams, to your last point there, have been doing a really good job in terms of driving the integration work. And those are already benefiting in a solid way to the business and also to the results.With that, unfortunately, we have to round off. So thanks a lot to all of you for your interest today. And looking forward to seeing you when we have, hopefully, a little bit more normal situation in the coming months and quarters.Thank you.