Securitas AB

STO:SECU B

Earnings Call Transcript 2022-Q1

[Magnus Ahlqvist, executive]

Good afternoon, everyone, and welcome to our Q1 2022 Conference Call. We delivered a robust performance in Q1, top line growth and continued margin improvement versus last year.

The organic sales growth in the quarter was 4%, and this was driven by strong growth in Europe and Ibero-America. Momentum in solutions, electronic security is improving with 9% sales growth, and the quality and profitability of the portfolio is our highest priority, and we continue to win more business at improved margins versus the same period last year.

We are now starting to see some normalization of the business. COVID-related government grants and support are now at low levels, and event to date at extra sales are starting to pick up again.

The labor market is challenging, and we have seen rising inflation, but we have been successful in working with our clients to manage this situation and have increased prices at significantly higher levels versus in the last 10 years.

The operating margin improved to 5.1%, with 8% real change in the operating results. And we had record level Q1 operating margins in North America and Ibero-America. We had good underlying performance in Europe, but the margin was significantly impacted by high sickness costs and costs related to labor shortage.

But before we review the performance in the divisions, I would like to share just a few comments related to the situation in Ukraine. We do not have any business in Ukraine nor in Russia. But from a securities perspective, we have organized company-wide fundraising efforts, and we have also hundreds, if not thousands of employees, especially in neighboring countries that are helping refugees based on their own initiative. And these important initiatives make us all proud. And I would like to express my deepest sympathy with all people affected from this terrible situation.

Let us then go to the performance in the divisions, and we start with North America. As expected, we had negative organic sales growth in North America in the quarter due to the termination of low-margin contracts and a significant reduction in COVID-related extra sales compared with the same period last year. The extra sales are now back down to pre-COVID levels, and this is impacting the growth in the first quarter in Guarding and continue to do so until the middle of this year.

But the overall portfolio development is healthy, thanks to strong new sales and price increases that are supporting the top line. And looking at the other businesses in North America, electronic security installations were negatively impacted by component shortages and the spread of the Omicron variant at the beginning of the quarter, but we have an improving revenue mix with stronger recurring monthly revenues and maintenance revenues. And growth of our Pinkerton business and critical infrastructure services also supported.

So we feel really good about the development in North America despite some of these temporary factors, and especially when looking at the margin development. So we started the year in North America with strong increasing operating margin, which came in at 6.4% and a higher quality portfolio in our guarding business, in combination with dynamic price wage management, together with our clients contribute to the solid development. We are realizing returns from the North America transformation program, and we expect further benefit realization throughout 2022.

So strong contribution also from our Pinkerton team and the improving electronic security business in terms of the revenue mix were also important contributors to the positive margin development in the division. And I should also mention that critical infrastructure services team also performed well and contributed to the margin development. We are continuously sharpening the business and with stronger client offering and executing on the strategy in North America, and this is resulting in higher margins.

So let us then shift to Europe, and the recovery in Europe continues with healthy growth in most countries. 8% is a strong number, but we also faced fairly weak comparatives. But importantly, we recorded 15% to [indiscernible] sales growth in solutions and electronic security. And improving demand in aviation also contributed to the growth, together with strong price increases.

Some normalization, like I mentioned at the beginning of the business conditions is something we're starting to see. So we have more events, for example, that are now starting to contribute to growth. But I should also mention that there is a clear impact from the inflationary environment in Turkey, behind the high organic sales growth and somewhat less than 1/3 of the organic sales growth in the quarter was related to the Turkey business growth and inflation impact.

And looking at the profitability in Europe, the margin was slightly down versus the same quarter last year. We are in a period of adjustment in Europe when most government grant programs have been stopped in relation to the COVID pandemic, but we had high sickness costs in Q1 and also labor shortage that affected the markets in general, but also our margins. And the negative impact from sickness and labor shortage, we estimate to be around 0.4%, but it's important to highlight that this was concentrated to a few markets in Central Europe.

Previously implemented cost reduction programs and contribution from electronic security businesses that we acquired in 2021, supported the margins. And we have strong performance in most other markets. And except for the sickness and labor shortage issues, the underlying performance is well ahead of last year in the European division.

Moving then to Ibero-America, where the strong development continues. We recorded solid growth in Ibero-America with 12%, albeit on fairly weak comparatives also in this case. And the growth was driven by 10% organic sales growth in Spain, where the business is developing positively across all business lines. We also had decent growth across Latin America and also significant contribution from price increases in Argentina.

Security solutions, electronic security grew at 10% in the first quarter and now represents 30% of total sales in Ibero-America, and that is one of the reasons behind the strong margin development.

So comprehensive actions that our team has taken in the last few years to create a sharper, more profitable business in Ibero-America is paying off. The operating margin of 5.8% is the highest Q1 margin that we have achieved. And looking at the development, our Ibero-America team, so that's essentially our team in Spain and our team in Portugal are on a really good path in terms of strong top line and bottom line development, but also then supported by a few other countries such as Colombia.

I think with that, I'll pass over to you, Andreas, for more details regarding the financials and then I'll provide a few strategic updates before we open up for the Q&A.

[Andreas Lindback, executive]

Thank you, Magnus, and hello, everyone. As always, we start by having a look at our income statement. Q1 was as Magnus said, a good quarter with solid growth of 4% and a continued recovery and good momentum in the business after the pandemic. The operating margin of 5.1% is an improvement of 0.2% compared to Q1 last year and the strongest Q1 margin we've had in many years.

We are living in an environment with high inflation and wage pressure, which has spurred price increases during the quarter, and the team has done well keeping the price wage balance on par.

In the quarter, the corona-related government support continued to decline compared to previous quarters. In Q4 2021, it was SEK 50 million. And in the first quarter now, it was SEK 37 million. This was nearly SEK 170 million less than Q1 last year. The remaining support we have is mainly limited to Sweden, and we see no increases in these support measures going forward. The number of people on temporary unemployment remained on a fairly low levels and also stable compared to the last 2 quarters.

If we then have a look below the operating result. Amortization of acquisition-related intangibles was SEK 61 million in the quarter. Nothing really major to report here. In Q4, we had some smaller adjustments to the portfolio, but we are now back to normal levels in Q1 and onwards.

The acquisition-related cost was limited as our acquisition activity is reduced after the announcement of the Stanley transaction. And as you know, we have posed acquisitions to focus on the Stanley integration and deleveraging our balance sheet position after closing. So we expect this cost to be lower than 2021 for the full year. Remembering here that the acquisition costs related to Stanley is reported under items affecting comparability.

I should say there maybe 1 or 2 smaller exceptions to the post-acquisitions, which are late in the process. But generally, you should not expect to see any major activity here in the short-term.

Looking then at items affecting comparability. Here, we had SEK 134 million of costs in the quarter, which is more or less comparable to Q1 last year. SEK 121 million of this is related to the ongoing European and Ibero-America transformation programs and the residual SEK 13 million was paid transaction costs related to the Stanley transaction. More information related to this on the coming page.

Moving to the financial net, which was flat to previous year. The increased net debt we had was here offset by lower average cost of funding in the quarter. And given the high inflation and increased expected interest rates in the market, we are expecting to see an increased financial net for the full year of 2022 compared to 2021.

Looking at the tax. Here, the tax rate forecast for the full year is 27.0%. This is presuming then that there will not be any major changes to the tax rate in our key markets throughout the year, for example, by the Biden administration in the U.S., which is under discussion. This forecast also excludes Stanley, where we will come back with further information of the closing.

On the next slide, we have some further information related to the different programs under items affecting comparability. As you know here, we closed down 3 programs under items affecting comparability at the end of last year. In North America, the team is continuing to execute on realizing the benefits from the program that we implemented last year, and this had a positive impact on the margin during the end of last year, and we continue to see a positive effect in Q1.

The European and Iberia America transformation programs are continuing the execution. The programs are on track, and they are now entering a more intense year of implementation throughout 2022. The IC related to these 2 programs were SEK 121 million in Q1, and our estimate for the full year remains the same as in Q4 between SEK 500 million to SEK 600 million for the full year of 2022. And this includes the impact from the cloud computing accounting regulations implemented and communicated in Q4.

We have, as I mentioned, also incurred some additional costs related to the Stanley acquisition in the quarter. Totally, since the announcement, we have spent SEK 75 million of the approximately SEK 1.3 billion acquisition-related costs we announced. The plan is that the majority of this cost will be expensed over 2022 and 2023.

Moving to the next page where we have an overview of the FX impact on the income statement. In Q1, we saw a positive FX impact on sales of 6% due to the weakening Swedish krona, especially compared to the U.S. dollar. You can see on the right-hand side that the USD strengthened 6% in the quarter and the euro 1% looking at quarter-end rates. But it should be said that the impact throughout the quarter was higher than this, explaining then the 6% positive headwinds from FX on sales in the quarter.

Looking at operating results, the FX impact was a bit higher at 8%, mainly due to the different currency mix in our earnings compared to sales and with a similar effect on EPS. The EPS adjusted for currencies improved 15% in the quarter and when also adjusting for items affecting comparability, the improvement was 13%.

We then move to cash flow. The cash flow from operating activities was minus SEK 129 million or minus 9% of the operating result in the first quarter. Q1 is traditionally a weak cash flow quarter for us as we normally are making major annual prepayments in the beginning of the year. We also pay out incentives and also normally have slightly weaker collections of the year-end.

This quarter was in line with that historical trend, but a bit further negatively impacted by our solid organic growth of 4%, a larger incentive payments after a solid performance in 2021, and an increased DSO. I should say here from low levels at the end of last year. I should also mention that the DSO continued to improve year-over-year when comparing to Q1 last year.

Looking at the comparables in Q1 2021, we should say that this was an exception to our normal Q1 cash flow that we've seen historically. This was driven by very low, in fact, flat organic sales growth, supporting our account receivables development, and we had positive payroll timing impact in both U.S. and the Netherlands of approximately SEK 600 million, supporting positively than last year.

The difference in account receivables between the quarters was also approximately SEK 600 million. So when adding these 2 impacts together, you have the main differences in operating cash flow between the quarters. It should be said that these payroll time and differences were neutral on a full-year basis last year.

Going forward, we should also remember that we still will pay the final SEK 600 million of corona-related timing relief measures that we benefited from in 2020 in North America, and this will be paid in Q4.

Looking then finally at CapEx. Here, we saw an increase from SEK 638 million in Q1 last year to SEK 727 million this year, which mainly is related to our transformation programs. The CapEx to sales remained the same at 2.5% in the quarter, and we expect it to come in below 3% for the full year. The free cash flow ended at minus SEK 0.7 billion for the quarter after the negative operating cash flow and the financial net and taxes paid.

All in all, although Q1 traditionally has lower cash flows, this quarter was a bit on the weaker side. And cash flow here remains a strong priority for us going forward, and we are taking active measures here now together with our teams to improve our position further in the coming quarters.

We then go to the slide on net debt. Our net debt increased with approximately SEK 1.5 billion in Q1 comparing them to the beginning of the year. The main reason for the increase is the negative free cash flow, as I mentioned here just earlier.

Acquisition activity was low throughout the quarter and the cash flow from items affecting comparability, mainly our transformation programs was minus SEK 267 million. Together with an increase in lease liabilities, which mainly is related to new office leases, the net debt increased with SEK 1.2 billion. And then we also had a negative effect from revaluation and translation of more than SEK 300 million ending the net debt at SEK 16.1 million.

Our net debt to EBITDA came in at 2.0% in the quarter. This is 0.1% higher than Q4 2021, but 0.1% lower than the same quarter last year. And as you know, our financial target is 2.5. So we are materially below this target, preparing the balance sheet ahead of the standard security closing.

Moving on to the next slide and looking at our financial position and debt maturity charge. As you know, we have solid financing in place today. None of our facilities have any financial covenants and the liquidity position was strong in the quarter at SEK 3.7 billion.

In April, we extended our SEK 9 billion RCF for 1 more year. The original facility was for 5 years. We have now extended the facility using our last option year into 2027, and the facility is fully undrawn.

During the quarter, we also successfully refinanced the EUR 350 million bond maturing in March. We refinanced this with Swedish private placements within our EMTM program maturing in 2024. As you are aware, since earlier, we have fully committed bridge facility in place related to the USD 3.2 billion standard transaction, and there are no further news here since Q4.

As we have mentioned earlier, the bridge facility will be refinanced after the acquisition closing with the mix of debt and equity, where the rights issue will be approximately USD 950 million. The plan remains here to execute the rights issue as soon as possible after the closing and thereafter refinance the remaining part of the bridge facility in the debt markets, and we will come back with further details around this after closing.

Looking then at our rating. There is no change since last quarter. As a consequence of the Stanley acquisition, Standard & Poor's put us on credit watch in Q4 with a negative outlook, but where they also indicate that a downgrade likely will be limited to one launch. We reiterate our commitment to remain investment grade, and we will focus on deleveraging our balance sheet after the closing of the acquisition.

With that, Magnus back to you.

[Magnus Ahlqvist, executive]

Good, Andreas. Thank you. So I would like to share just a few updates related to our transformation programs and the Stanley acquisition before we open up the Q&A.

So as Andreas mentioned, we concluded the North American global [indiscernible] transformation programs at the end of 2021. At that time, I also made an update in terms of what this actually means for the business in terms of real benefit realization. And happy to just reconfirm that we are starting to realize benefit from these investments now and expect further improvement as well throughout this year.

And the investments we have made, modernization, digitization of the business, they are starting to generate good returns. It is notable in North America, as I mentioned, we will now operate with more modern platforms that help us drive and optimize the business like never before. And we are executing according to plan with the programs in Europe and Ibero-America and we're leveraging the experience and knowledge from the first programs and driving the transformation work in these 2 divisions.

And all this work is fundamentally important to create a modern, digitally capable, and more efficient securities. And we're on the right track, and this also gives us a stronger foundation as we are preparing to join forces with Stanley Security when the transaction is closed. And we made the announcement to acquire Standard Security at the beginning of December. And by joining forces, we built the foundation to be the leading intelligent security solutions partner.

We've become the most attractive choice for clients worldwide with a clearly differentiated offering and with world-leading technology and expertise. And we continue working expeditiously internally and with the Stanley team on integration planning to prepare for closing.

The customary regulatory processes are progressing and we maintain the ambition to close towards the end of the second quarter. But let me just reiterate some of the reasons that we see such a strong future together with Stanley Security. Technology is becoming increasingly important for our clients. We have built significant leadership competence in terms of how to run the electronic security business in the last 6, 7 years, and we have a strong team in place.

But together with Stanley Security, we are shifting the profile of Securitas in terms of offering and value creation. This will be immediately margin accretive and over 50% of the contribution to our operating result will come from higher value and higher growth solutions and electronic security.

And we have received tremendous response from our clients to this announcement regarding the future opportunities that this combination will create. And I think this is based on the strength that we have built up in the -- very much in the guarding relationship. Many clients are looking at also having an equally strong partner in technology locally as well as globally.

And the Stanley Security team has repositioned their business for growth in the last few years with a more stable and strong management team. And we also benefit from having acquired an integrated Stanley business in 5 countries at the end of 2020 with strong return on investment. And today, like I mentioned before, we have a dedicated and strong electronic security leadership team that is managing the process leading up to the closing of the transaction.

So together with Stanley, we are in a solid position to create an outstanding team, which is perfectly placed to win in the security services industry. And together with the other initiatives and programs that we are driving over the last few years and that we are driving now, this will lead to substantial operating margin improvement in the coming years.

So I think with that, we are ready to wrap up the presentation. So we have a robust start to the year, 8% real change in the operating result, continuing the margin improvement with the highest Q1 margin in more than a decade. And we're building high momentum with solutions and electronic security in a more normalized environment from a COVID perspective. And we continue to execute on the strategy to build the new Securitas modern, digitized, and innovative Securitas Solutions Company.

So with that, Andreas and I are happy now to open up the Q&A.

[Operator]

Our first question comes from the line of Stefan Knutsson from ABG.

[Stefan Knutsson, analyst]

It's regarding margins in Europe and APAC. Firstly, Europe, do you expect full margin recovery from the Q1 issues in Q2? Or do you think it will take longer than that? And then on APAC margin, do you -- would you say that you're ahead of your transformation program, given the strong margins here in Q1? Or are there some temporary drivers to that result now in Q1?

[Magnus Ahlqvist, executive]

Thank you, Stefan. So on the first question, I mean we called out specifically the sickness related costs and also some costs related to labor shortage. In terms of sickness, this has been a significant impact in the first quarter, and that's obviously very much related to not only for Securitas, but in Europe, in general, and especially in key countries in central parts of Europe with very high infection rates, et cetera, and absence related to sickness.

So that has been a significant factor. We're seeing some improvement now in that over the last few weeks, but obviously, difficult to then make a forecast in terms of how will that develop in the next couple of months. Hopefully, the positive trend is continuing.

And then in terms of labor shortage, I mean we are operating in an environment where there is a significant shortage of labor in a number of markets in Europe. And that's why I say, I think it's a little bit of an adaptation period as well after quite volatile situation in 2020 and 2021, years that were affected quite a lot up and down throughout the pandemic. So that's a little bit the situation that we are now working through.

If you look at what does that mean for us? Well, the important thing then is that we are continuously successful in terms of price wage balance, and this is an area where we have a strong track record, but also maintain very high focus on managing as well because that is also important to make sure that we can attract and retain good people, which is important for our service delivery.

So I would say that, that is really the situation with regards to Europe. And Stefan, you said Asia Pacific, I think, on the second question, did you refer to because we don't...

[Stefan Knutsson, analyst]

Ibero-America. Sorry.

[Magnus Ahlqvist, executive]

Ibero-America. Yes. So the Ibero-America development, I mean if you follow over the last year as well, we've taken very extensive actions to improve the business. And that has been active portfolio management, continuously pushing successfully with the solutions and electronic security agenda in the markets. And we've also taken more specific actions if you look at some of the Latin American markets like Argentina and Peru over the last 2 to 3 years.

I would say in its entirety, these actions are now starting to come together and also helping us in generating good results. So we are in a pretty good place, I would say, I feel good about the business and especially about the fact then that it's very much driven by very strong performance in Spain, but also to a large extent, Portugal.

So the teams in the Iberian Peninsula are really leading the way. But if you're looking at the margin development on a year-on-year basis, we also had good contribution from Colombia, for example, and a few other markets in Latin America. So yes, generally good assessment and feeling about the business.

[Andreas Lindback, executive]

I can add on there also that, I mean Spain is strong as Magnus is saying as well. And then we also did a Techco acquisition, as you know, a while back as well, and we also see really strong momentum from that acquisition and the integration process there, both on the commercial side and on the profitability side as well as supporting... Yes.

[Stefan Knutsson, analyst]

And just a follow-up on your issues within the installation business in North America and the supply chain-related issues and how that might translate to Stanley Security, which is heavy on installation and product revenues?

[Magnus Ahlqvist, executive]

Yes. So that's an important one. We did have a very significant impact in the beginning of the quarter, and that was very much Omicron related because of the unfortunate spike there in terms of infections. And that then affected us in a few ways. One was obviously sickness of our own people, technicians, et cetera, but also then restricting or limiting access as well to client premises. So that was an important one.

The Omicron related, we have seen normalize in Q1. So we had better momentum towards the end of the quarter than what we had at the beginning. And if you look at component shortages, I would say that it's been more of a kind of a continuous challenge that we are working through. Some suppliers for some specific components, et cetera, are improving a little bit, but it is something that we continuously have to manage very, very closely.

So I think those are the main points, better momentum towards the end of the quarter. And the important thing as well is that if you're looking at the mix, we have very strong contribution from a profitability perspective towards the end of the quarter. And that's also because we have very healthy growth in terms of recurring monthly revenue and maintenance and those are also very important in terms of the value creation. So that's the perspective that I would share in terms of installations and [indiscernible] North America.

On your previous question related to the transformation program and the Ibero-America division, we should just say that, I mean, those positive effects from the transformation program there is still to come. So it's an underlying sort of solid business development that we see.

[Operator]

Our next question comes from the line of Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, analyst]

I've got 2 questions. First, just -- I mean, you said in the statement that -- or in the presentation, there has been a significant price increase and then there is some sort of higher inflation benefit presumably to the organic growth in Argentina and Turkey. So if you could split up the price and volume for the organic growth that would be super useful.

And then just sort of trying to understand the European margins a bit better here. Now, I appreciate there was a sickness-related impact. But then there was SEK 37 million of government grants, which is like 30 basis points to the margin. And then you're saying that the -- you are able to pass on the inflation. So I'm just trying to reconcile why the labor shortages are having a material impact on the margins.

[Magnus Ahlqvist, executive]

Yes. Anvesh, I tried to capture all the questions here. If you're looking at the inflation impact, Turkey, we estimate a little bit less than 1/3 of the growth in Europe is coming from Turkey with clear impact then from -- primarily from inflation driven, but also some volume growth there as well.

If you're looking at the Iberia-America, there, we're assessing a little bit less than half of the growth coming from Argentina. The important thing is -- and we highlight that also in the results for Iberia-America that we had 10% organic sales growth in Spain. And Spain obviously carries a very important weight in the business there.

On the last question, did you capture that, Andreas?

[Andreas Lindback, executive]

Related to the government trends. And please fill in if it was not part of the question.

[Anvesh Agrawal, analyst]

Yes. The question really is like -- I appreciate there was some COVID sickness-related costs, but you equally had the government grants, which were like SEK 37 million. So naturally, there was some offset if there was more sickness. And then your comment of able to pass on the prices, but then you're flagging the impact from the labor shortages on the margin. So I'm just trying to reconcile why the underlying margins have sort of declined in Europe.

[Magnus Ahlqvist, executive]

Yes. So the -- I mean, the dynamic there is that if there is a struggle in terms of finding people, it would typically [indiscernible] one important consequence is that we would have higher need for subcontracting. And if we're subcontracting parts of our business that would then have a negative impact on our own margins. So labor shortage does impact margin primarily in that way.

[Anvesh Agrawal, analyst]

Okay. So when you say you are able to pass on the inflation that is only related to your own employees and not the rates on the subcontracting?

[Magnus Ahlqvist, executive]

Yes. I mean we -- what we focus on is essentially price wage balance, the broader kind of concept that you could apply here, of course, is then price to overall production costs, and we're looking at that in different angles. But there was a significant impact related to sickness in the quarter that then had a, yes, a significant impact on the margin in a negative way because if you're looking -- I mean, adjusted for sickness and labor shortage impact, the underlying trend was positive and well ahead of last year in Europe.

[Anvesh Agrawal, analyst]

Okay. And do you expect to be on that trend from sort of Q2 onwards then?

[Magnus Ahlqvist, executive]

Well, the ambition is obviously always that we get in balance as soon as we possibly can. The challenges that we are facing are not unique, I think, to Securitas or the security services industry. It's more of a broader situation in Europe. What we can do is we can work actively with our clients and also then bringing alternatives as well in terms of looking at the security equation. So I think the price wage balancing work, it's as important as ever, but also then looking at converting to solutions and offering alternatives as well to our customers.

[Operator]

Our next question comes from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

Just a couple for me, please. You mentioned that in 1Q, you saw the impact from lower coronavirus-related extra sales. Is it possible to quantify the extent of the drag, please, on the organic growth and how you expect that to evolve through the rest of the year?

And secondly, I think you mentioned earlier as a follow-up to one of the previous questions, the supply chain shortages that affected the electronic security business, do you see any risks to the synergies that you expect to get from Stanley Black & Decker Security acquisition? And maybe as a relation to that, can you maybe comment on the security business for Stanley Black & Decker 1Q results? Because it looks like that 1Q earnings was down quite a bit over there. I appreciate the deal hasn't closed, but any color that you can provide there.

[Magnus Ahlqvist, executive]

Yes. Thank you for the question. So if you look at the COVID-related extra sales, I mean, we're talking about several percent of impact on a year-on-year basis, and that was very significant in North America, but also significant for the entire group. So it is not one, it's not 2. It's a little bit higher than that even though we typically don't break out exact percentages.

If you're looking at supply chain, like I mentioned before, I mean we are managing through and have been managing now for a while in terms of some of the component shortages to be able to mitigate and to plan and allocate as efficient as we possibly can so that we can continue to carry on with the work. This is an area that in the contact that we're having with different partners and manufacturers of equipment, I'm seeing that there is a number of them that are saying that they have an improving situation. They're getting a bit better grip and control, et cetera. And then obviously, that is the hope and the ambition that, that trend continues because it does have an impact in terms of the overall growth.

Stanley Q1 numbers, they have not broken those out. So nothing that we can comment on at this point in time.

[Operator]

Our next question comes from the line of Sylvia Barker from JPMorgan.

[Sylvia Barker, analyst]

3 questions for me, please. Firstly, on North American organic or the group organic, which is easier to answer. Just again, trying to understand the volume versus price, apologies, but obviously, it's very important in this environment. So clearly, that's where we've seen a bigger delta on the volume.

If I give you my numbers, maybe that's the easiest way to comment. So I had kind of minus 4 for volumes in North America in Q4, probably reducing to about minus 6% in Q1 this year. And then for the group, the equivalent is minus 1% volume in Q4 and minus 2% for Q1. Can you maybe just comment versus these numbers and give us a feel if they're right?

Then the second question I have is around airport security. A lot of the catch-up in Q1 has understandably been from higher airport volumes. And obviously, we're seeing a large recovery in that segment going forward. But could you just comment where your airport security revenue stands today versus 2019? And maybe if you can make a comment across the different regions as well where you have a bigger airport business?

And then finally, my final question was just on the benefits of the European cost savings program and how much that benefited the margin in Q1 '22.

[Magnus Ahlqvist, executive]

Thank you, Sylvia. Well, to give some light here in terms of North America, first of all. If we're going back to mid-2021, I mean, we did announce 2 larger terminations of contracts and one was an aviation contract and the other one was a health care related.

The health care-related portfolio value was around $150 million. The aviation one was around $50 million. The aviation one is affecting us until the middle of this year, then it's going to no longer be in the second half of the year in the comparatives. The health care one that will impact until December essentially until mid-December or something like that.

So when you're looking at that, that is one important impact. There is also then important impact from extra sales reduction because we were -- as we commented also 1 year ago, operating at very high levels in terms of extra sale or temporary sales, as we call those in North America. So that was also several percent impact on a year-on-year basis.

But then we have good growth. We have good sales. We are selling at higher margins compared to last year. So that is offsetting. And we also have been very successful in terms of price increases to be able to offset. So that is how we're kind of climbing back up as well compared to some of these bigger negative impacts that we had on a year-on-year basis.

And that's also the reason that I'm saying that I feel good about the overall development in North America, even though we have some of the top line headwind. But that -- the most important for us is the value and the margin development, and there is a very strong development. And it's just confirming that the strategy is the right one that we're executing on that, but also that we're continuously focusing on refining and working with portfolio management to make sure that we have a high-quality portfolio.

So essentially, what that leads you to. And to one of your questions is that a very significant part of the positive impact that we have in terms of revenue is price driven. So I think that is an important message and more than what you would have seen in a normal year.

If you then go to the Aviation business to give some flavor here, this was, I believe, around 7% or something like that of our sales, so maybe a little bit more even before the pandemic. I think that number is now down to around 5%, and it could vary a little bit up and down, but in that type of range, maybe a little above 5%. We saw double-digit growth there in Europe, for example. So that was as commented as well, one of the drivers as well of top line growth. So -- and that's all driven based on us now going back to the North America business as usual and also more demand for travels and more activity in general.

The last question.

[Andreas Lindback, executive]

The last question was around the effects on the cost saving programs in Europe in the quarter. Maybe I can start here, Magnus, as well. I mean as we said in Q4, here, we closed down that program and had those effects coming in according to plan in Q4. So -- and then what we see here in the first quarter is, of course, we have strong growth in Europe that gives us good leverage of the indirect cost. And the cost savings program that naturally also have an effect into Q1. And then we have also made a few acquisitions here during 2021 that is also supporting the position here as well on the cost side of things. So those are the 3 main impacts on the record.

[Magnus Ahlqvist, executive]

Sylvia, I hope that answers or addresses your questions.

[Sylvia Barker, analyst]

Yes. I mean I guess it would be helpful if you could let us know whether in North America, I guess, the price impact has changed from Q4 into Q1 because that's obviously not hyperinflation driven, that's driven by your pricing actions? And I guess I'm just assuming there's about a 4% price element within North America kind of Q4 '21, maybe 5% in Q1. This year, it would just be interesting if you could clarify that at all, but I don't know if you can give that level of detail.

[Magnus Ahlqvist, executive]

We have continued to raise prices in North America through the quarter. And I would say that the price increases in this quarter were higher than in Q4 in North America, to help you out a little bit more.

[Operator]

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

[Karl-Johan Bonnevier, analyst]

Just a couple of follow-ups on the announcements you have already given. Looking at labor shortages, I noticed that you are not commenting about it really related to North America or Iberia-America. Is it not an issue for you there?

[Magnus Ahlqvist, executive]

Well, [indiscernible] if you're looking -- I mean, the dynamics in North America and Europe are quite different. North America, it is a more dynamic labor market, and we would have -- I mean, the general situation is significantly less restricted by collective labor agreements, for example. And that allows for more of a dynamic dialogue together with the clients.

So the way that we're managing in North America is very much client by client and in some cases, site by site or we're well-positioned in terms of ensuring quality in terms of ensuring that we attract and retain good people. And this is something that we've been working on very, very actively throughout the pandemic, but it became more of a challenging situation in North America starting in the spring last year.

I would say that availability of people, and I mean this is obviously something that can change a little bit. There were a number of people who left or seemingly left the labor market during the pandemic we -- our perception, I should say, because I don't have complete market data because that would have to include all industries and sectors is that this is improving a little bit, that situation.

So it might be an indication that some more people are coming back. But I mean, our approach as well, we are very, very rarely at lower levels in terms of minimum wage, et cetera. I mean we always try to make sure that we pay people well. And that is essentially to basically that, I mean, people can live off of their salary, but also that we can deliver really good quality to our customers. So we are continuously working this as well to have both better employee value proposition as well as customer value proposition. I think that's very important.

If you're looking at Europe then, I mean, in Europe, it is more slow moving and less dynamic. And from my perspective, I think you can understand what is the preference in terms of how you manage that. It is easier if you are really on the board to manage in North America because it is more dynamic and flexible.

In Europe, it is a little bit more rigid in that sense, and it's more related to indexation and CLA agreements, et cetera, and those types of cycles as well. I would say also after coming out of the pandemic, there has been a number of years with fairly low CLA increases. And now then obviously, we are in an inflationary environment. And this is one area that we have to work with very, very actively.

We have a good track record, and we remain confident in terms of our own ability to manage this. But they're quite an extraordinary situation in Europe as well. And that also means that we need to apply more extraordinary measures. So in historically, perhaps you probably would have heard that we're driving most of the kind of the price increase activities towards the beginning of the year.

My view is that in this type of environment, you have to drive those whenever it's needed, and that's more in the dynamic manner probably several times in a year if that is required. So that's the situation there.

In Ibero-America, it is a challenge there as well, similar to North America and Europe, but we've also been able to manage quite well. And one of the ways that we are aligning the strategy and where this aligns very well with our strategy is that we continue with active portfolio management.

And when we talk about that, it's really to make sure that we have a healthy profitability in the portfolio and with each customer. It makes no sense whatsoever to sit and drive a lot of volume and struggle with quality and attracting and retaining people if there is not a decent return and especially in this type of an environment. So I think we are also more focused in terms of how we work with this and also very firm with our customers as well.

If we're ending up in territory with low margins, I mean, there is essentially only 3 outcomes. One is that we are adapting prices, so we can also then be more on balance in terms of price wage -- so that's essentially then a price increase. The other option is that we convert to a solution. We have great technical capability and opportunity to do that in most markets now. And if the customer is not willing to go down on Route 1 or 2 there, I mean, then we would rather terminate that contract than just running low-margin business because no one is going to win from that. I mean we stand for quality and innovation, and we are on a journey to really enhance that value over time.

So a long answer, but it is -- I hope it gives you a better understanding in terms of how we are looking at this and also what the situation is across these different geographies.

[Karl-Johan Bonnevier, analyst]

Excellent color. And on that portfolio management, I noticed in the report that you stopped giving the retention rates for customer retentions in the different regions. Is there anything specific happening there? And why would you have chosen not to give that data anymore?

[Magnus Ahlqvist, executive]

Well, I was not even aware of that myself. But I think now I can just -- I mean, I can give you the situation. We have, generally speaking, quite healthy retention levels. North America is lower, but that is because of the significant size of those contract terminations that I mentioned earlier. One from July last year and another one from December last year. So it is temporarily a little bit lower in North America. The other divisions, we are in good shape.

And when I say in good shape...

[Karl-Johan Bonnevier, analyst]

At the group level, you will still be around 90%, 91%, then basically?

[Magnus Ahlqvist, executive]

Correct. Yes.

[Karl-Johan Bonnevier, analyst]

And one final for me. Given what's happening in Turkey, are you looking to turn over to hyperinflation accounting in coming quarters?

[Magnus Ahlqvist, executive]

Yes, that is something that's gone out, and we will likely start to apply this year throughout 2022, to give you a direct answer here, yes.

[Operator]

Our next question comes from the line of Allen Wells from Jefferies.

[Allen Wells, analyst]

Just a couple of follow-ups from me. I wanted to go back to Europe, if we obviously strip out Turkey, that 8% kind comes 5%, 5.5%. When we think about price versus volume in Europe, is it kind of correct to be thinking about that kind of 2/3 price, 1/3 volume. Kind of any way you can help us just understand that the volume price mix in Europe be really, really helpful.

Second question, just on the collective bargain agreements. Could you just remind me around -- potential timing around increases? How many times a year you sit down with the agreements when you reset on inflation, et cetera. Just trying to understand how much kind of flex you've got in those discussions?

And then finally, and obviously, you made the point about kind of the options you have going back to customers, price increases, switching to technology, et cetera. Maybe anecdotally, if you could maybe just comment on how some of those discussions are going? How many people in this kind of -- maybe slightly more early stage, I'm happy just to take price increases, how much pushback you're getting? How many more are really going for Tech Solutions? And how you expect that to change through the year? I just be quite interested in your thoughts there, please.

[Magnus Ahlqvist, executive]

Thank you. So Allen, on the first question and looking at Europe, it is very much price-driven increase here as well when you're looking at the growth. And so when you exclude the impact from Turkey, it is very much price-driven. And when I say that, that's significantly more than 50% of the remaining parts, so to speak, having excluded then the Turkey impact.

[Andreas Lindback, executive]

Can I just -- I fully agree on that as well. And then, of course, we have the recovery than in the aviation business as well together with the good momentum on the electronic security and solutions side. So that would be sort of the volume part of that...

[Magnus Ahlqvist, executive]

Yes, explained in the full picture. If you look then at the CLAs, well, some of the more significant ones to call out specific markets. And some of this, there could also be moving targets, but at least indications looking at Germany, for example, significant planned increase, which is being discussed by, I think, October time frame this year. There is also in the Netherlands, a significant increase being lined up for, I believe, beginning of 2023.

And so those are probably the 2 that come to mind that are the most significant. But this is important because that is also then a moment where there is a significant increase on minimum wage. We typically don't operate and don't prefer to be at minimum wage levels because we want to have a better value proposition for our people, but they would definitely drive an impact and also a need and an opportunity for us as well to go out and really engage with the customers on that.

In terms of the general response, I mean, we are -- in terms of price increases, we are typically successful with our price wage work in terms of balancing this over time. We have a very strong track record. If you're looking at the situation here, I think one is it's also quite important to emphasize that I think everyone is aware of the current situation. So general awareness is also high if you look at the kind of the macro factors. But then also, we generally have high client satisfaction, customers that they choose us because they want Securitas. I think that is another important factor in that work because that's always the foundation for also continuing the relationship and also making necessary adjustments over time.

But then also that we have the opportunity to provide an alternative. And technology does become more or better in terms of value for money equation all the time. So better technology at same or in many cases, even lower cost if you take a longer-term time perspective. So I think that is also a very important one.

But then, obviously, if you look at that, so I think that's really the general view that I would share. It is difficult to provide anecdotal comments because it will always be specific examples. But the general approach that we have, I mean, the track record, we feel good about that. And that's why we also say that we are well positioned to also manage going forward.

[Operator]

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

[Neil Tyler, analyst]

I've got a couple actually around the sort of follow-ups really around the subject of the contract terminations. I suppose -- so now that the travel work is normalizing, the question is, has this exposed any further contracts in that industry where you think margins are unsatisfactory or perhaps even the opposite in a tight labor market, it might be easier for you to make contracts that might not have been economic onto better terms. And related to that, can you please update us on the amount of sales that you feel warrant far more negotiation or perhaps exit if that's not successful?

The next part of the question is, the contracts that were terminated, the health care and aviation contract in North America. Was there a discernible margin impact year-on-year, Q1 versus Q1 from those exits?

And then more broadly, around the sort of topic of how you think about this process. These 2 terminations -- large terminations came at the end of your North America transformation program. Is that just coincidence? Or is it the case that as we think about the programs in your other regions that you will try to make your own operational efficiencies first? And if these are unable to improve contract economics, then after that, that you sit down and try to renegotiate?

Sorry, it's very long-winded, but hopefully, you understand the point I'm trying to get to.

[Magnus Ahlqvist, executive]

Thank you. We will do our best here to provide answers. So please come back if you don't see that you're getting a satisfactory answer to the questions. If you look at the aviation sector, first of all, this is the first area where we start to take really strong actions already in the first half of 2020 as the impact of COVID hit and we actually had some of that work already lined up and planned before impact of COVID.

We are through the vast majority of those contracts. So with resuming business, we should see improvement in terms of overall profitability in aviation, but subject and obviously to activity also normalizing now over the next couple of quarters and the next few years. There are still a few, and that's something that I've also highlighted earlier, contracts that are a longer type of duration. And those, we also need to manage, and we are on to that as well because that I think is fundamentally important. But I think there, we've also flagged that there are a few of those that are going a little bit further out. That are still not at satisfactory levels.

And if you then look at the health care and aviation contracts, I mean, these are 2 low margin. Yes, very significant size and volume, but low-margin businesses. So when you're looking at the overall margin that we -- I mean, we were able to also then ensure that we were taking out the related indirect costs so that we were not suffering from negative leverage in the income statement because that could obviously be the first thought that one would have is that, okay, what happens then to the bottom line if we lose a lot on the top line.

We did that very quickly. And so that's also one of the reasons that you're seeing a healthier development overall in the margin in North America because we have on the totality healthier portfolio.

And then the last question was, is there a reason that this came towards the end of the transformation program? No, not really. I mean the transformation program in North America has been a very significant modernization, digitization, and automation of all the core processes that we are driving. But what that has given us is significantly better visibility and transparency in terms of what is true profitability for a customer or for one specific customer site even.

And when you have very good transparency and more than up-to-date systems with good data management, that also enables you to take faster and better decisions. So I think in that sense, you can say that, yes, even more convinced then about the validity in terms of also them pruning lower margin contracts so that we can dedicate our resources and attention on business that really makes sense. But there was no specific connection to the transformation programs in those 2 cases.

[Andreas Lindback, executive]

I can just add on that, on the transformation program side in North America, I mean, as we say, we have managed price wage in a good way here. And the transformation programs and the systems that we are having is really supporting this as well with the transparency on the P&L per contract that Magnus is saying, we can see basically where the recently -- where we're having shortages or wages are going up, and then we can act much quicker than before, also going out to the client to have that kind of conversation as well. So without that transparency it takes longer time. So that's one important impact from these transformation programs and the sort of benefits from the same.

[Operator]

Our next question comes from the line of Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, analyst]

Just have a follow-up really. On the free cash flow, I mean, obviously, it was negative in Q1. Can you just comment on how you expect to devolve for the rest of the year? Do we need to be aware of any sort of one-offs you had last year that might reverse?

And then just maybe related to that, if you can comment on the free cash flow profile of Stanley Security or just sort of overall your electronic security business and how it differs from your guarding business.

[Andreas Lindback, executive]

When it comes to the free cash flow we're one-off. So what is important to remember is that we will then repay the SEK 600 million, as I mentioned, in Q4 2022 related to the relief measures that we received in 2020, that we should say that we also paid a similar amount in 2021 as well from that perspective. So that is the one-off.

And then we don't see -- as I said, the payroll timing differences we had sort of last year, they were normalized -- they were normalized throughout the year as well. So those would be the one-offs going forward as well.

And then, of course, free cash flow, generally speaking, we have a high focus here to make sure that we are coming back on track and taking active measures as well, but I'm not giving a forecast on that.

When it comes to Stanley, what we have said before when we announced the transaction as well is that they also have solid operating cash flow profile. And of course, then this is a different type of business in terms of project business, but a high part of that business is also recurring revenue, which is important to remember, which is also stabilizing the cash flows. And normally, that part of the business have a strong cash flow profile as well.

So we should expect Stanley to come in also with strong cash flow generation. That is what we have also said before, and then we can come back with more details after the closing of the transaction.

[Operator]

Our next question comes from the line of Rahul Chopra from HSBC.

[Rahul Chopra, analyst]

I have 3 questions, if I may. One is, could you just give us a comment on where are we in terms of volumes related to 2019 levels on an underlying basis, excluding COVID related contracts. Perhaps any color across regions will be really appreciated.

Secondly, given the labor scarcity, which we are seeing in Europe, is this a risk of further wage inflation into second half of 2022? And do we have enough headroom with the current price increase which we have done?

And my final question, if you could please comment if you can is, could you comment on the threshold for low-margin contract before you terminate? I mean is it something relating to negative EBITDA margins or perhaps a negative price wage balance? Any color on your threshold will be appreciated.

[Magnus Ahlqvist, executive]

On the first question, volumes, then we would need to look also at the currency impact, et cetera. So I think that is a little bit of a challenging one. What I would say, I mean, when you're looking at the general development, we are a stronger company now than we were in 2019. I think that's the important part in terms of -- if you're looking at the gross margins, if you're looking at the margin that we are generating, we are in a better shape.

And we set out also at the beginning of COVID, uncertainty was obviously high at the beginning of 2020, but we also set very clear ambition. Whatever happens, we need to make sure that we were the strongest company in the industry going into the COVID pandemic. We wanted to make sure that we are definitely the strongest company also coming out. And I think that is something that we have achieved.

With a number of the actions that we have taken, the transformation investments that we have done, we have exited a number of markets, 20% of the total number of countries we exited in a few months at the end of '20 and beginning of '21. And we have also sharpened the focus in terms of how we're working with portfolio, how we're driving digitization, et cetera.

So I think those will be the main most important things from my perspective in terms of making a comparison before COVID and after COVID. And then obviously, one other important aspect is that we also did take out quite a lot of cost to be able to also adjust the organization based on the new reality.

To your second question, in terms of Europe. Yes, I mean, I reiterated that before. I think these are extraordinary times that requires extraordinary measures. With the wage inflation, with the labor market, scarcity that we are seeing, but we have a strong track record. We are very, very active across all the key markets in terms of managing this, and we have alternatives as well to the clients. So that's as much as we can see, but generally speaking, we have the tools and we have the track record and the focus also to manage going forward.

And then on the third question related to the low-margin contracts there. Yes, we are looking at all the contracts on sort of from an operating margin perspective, mainly. Of course, there is -- it's also important to complement that with the gross profit perspective as well. When it comes to the thresholds, these are very much individual to the different markets, given that you also have these different margin profiles and the different margins in the guarding industry as well.

So that is something that we are taking decisions on a country-by-country basis, but then also over time, of course, increasing these thresholds as well to make sure that we are driving like we said, a strong profitability development in the guarding business, which is very much in focus.

So there is no golden sort of threshold that we are looking for here. But step one is, of course, that we should be profitable. And I mean that's the minimum threshold, but we also then have higher ambitions than that as well. But it should be said, of course, we have content that are not profitable as well. And those are the ones that are sort of easy to identify and then also to work on in the first phase, although I wouldn't say that that is a sort of a big part of our portfolio in any way.

[Operator]

Our next question comes from the line of [ Vincent Steinman ].

[Unknown Analyst]

I wanted to know if you could give us details in terms of the capital increase being the timing or when we get details for the transaction in terms of the ratio and...

[Andreas Lindback, executive]

You're referring to the rights issue?

[Unknown Analyst]

Yes.

[Andreas Lindback, executive]

We will come back to this after closing here we have said. And of course, then there will be important information, as you say, around the terms and so on. But we have also said that we will await the closing. But after that, we will come out as soon as possible, basically after that with the terms, but then also executing the rights issue. So that is what we can say around the timeline. I hope that gives a little bit of flavor here.

[Unknown Analyst]

So early summer, I guess.

[Andreas Lindback, executive]

Yes. First, I mean, we have said that we will close here towards the end of the quarter. And then thereafter, we will execute as soon as we can also, of course, taking the summer period into consideration, but it's too early to speak around the exact timeline at this point in time. We will need to come back when we have -- when we have more information around the close.

[Operator]

And I now hand back to our speakers for any closing comments.

[Magnus Ahlqvist, executive]

Very good. Thanks a lot, everyone, for a number of good and insightful questions again. Thank you.

[Andreas Lindback, executive]

Thank you, everyone.