Securitas AB

STO:SECU B

Earnings Call Transcript 2024-Q1

[Magnus Ahlqvist, executive]

Good morning, everyone, and welcome to our Q1 update. It is a decent quarter overall with continued operating margin improvement versus the same period last year. The organic sales growth was healthy with 7% in the quarter, and the real sales growth for Technology & Solutions was also 7%. And here the divestment of Argentina last year had a negative impact on the real sales growth in Technology & Solutions. The operating margin improved to 6% and North America with strong improvement in technology and also Ibero-America were the main contributors. The airport security business was weak in Q1, and this had a negative impact primarily then on the results in Europe.Price and wage increases were balanced in the first quarter. And looking at the operating cash flow, it was negative 15% negative, and this was in line with expectations after a very strong Q4. And the net debt-to-EBITDA ratio was 2.9x at the end of the quarter. The integration of STANLEY Security is progressing well, but we're also working through, as previously announced, some operational impacts related to system and support transitions in Europe and expecting to improve that situation in the second quarter. But let's then go to the view on the different business lines in our business. And starting then with Security Services, where the growth was 4%.And the EBITA margin of 4.4% represented slight improvement versus Q1 last year, but this is below our expectations, and I come into some of the reasons behind that in a minute. The European Guarding margin improved in the first quarter as a result of the actions that we have initiated in 2023 and continued into Q1, and this is a positive development on the Guarding margin in Europe. But when looking at the global picture for services, price wage balance and active portfolio management have helped the margin, but the airport security business and also Securitas Critical Infrastructure Services business both had a negative impact on the margin in the quarter.And the performance of a low-performing contract in SCIS improved in Q1, but further actions have been initiated to drive improvement in Q2. Looking then at Technology & Solutions, where the real sales growth was 7% in the quarter, and the operating margin improved to 10.2%. And we are progressing really well with the STANLEY integration and also their cost synergies that have a positive impact. And the performance improvement is really most visible in North America, where we're seeing clear benefits from cost synergies but also operating at a larger scale in the business. And I will share some more comments on that after Andreas finance section.But if we shift them to the performance in the business segments and we start with North America, as usual; and here, we had 4% organic sales growth, thanks to good sales momentum and price increases. And the Technology business recorded good sales, growth, thanks then to healthy installations and RMR growth and also with a solid order backlog. And as previously announced an airport security contract with annual sales value of SEK 1.3 billion was terminated on March 31. And the pricing there, just to remind you of that contract did not meet our margin requirements.If you're looking at Technology & Solutions as a percentage of the overall business in North America, it was 37% in the quarter and the client retention at 90%. If we move then to the profitability in North America, we recorded an 8.6% operating margin in Q1, so a 30 basis point improvement versus the same quarter last year, and this is something we consider continued very strong development. The technology business was the main driver of the improvement with positive impact from cost synergies. But also, as I mentioned earlier, with a lot of the integration effort now behind us in North America, we are seeing significant efficiency gains, thanks to operating at a larger scale.In an area such as monitoring, our installations and service and maintenance operations this brings tangible benefit in terms of the service level that we provide to our clients, but also benefits the profitability in a meaningful way. And looking at the Guarding business, where we initiated actions during the second half of last year related to medical expenses and a few other areas. These have also delivered positive impact and the profitability in the Guarding business contributed to the strong overall performance in North America in the quarter.And moving then to Europe, where we recorded 10% organic sales growth. We had strong price increases in Europe, but the hyperinflationary impact from Turkey accounted for more than half of the 10% in the growth. Technology & Solutions also contributed to a good growth in the Technology business. Technology & Solutions represented 33% of sales and client retention rate was stable at 91% in the quarter. By shifting then to the profitability, where we recorded a 5% operating margin in Europe in the quarter. And the decline was driven by a weaker quarter within the airport security business.And the poor performance in Aviation is related to efficiency and productivity challenges after ramping up a few larger contracts. And we are taking actions to improve the performance, and we're driving good progress in terms of recruiting and also training. And this will have a positive impact on the performance in Q2 and in Q3. But I should also mention that the Aviation business also has to support our operating margin target by the end of 2025 of 8%. So a lot of attention in terms of the actions that we are taking, but also confident in terms of driving improvement in the coming quarters.The operating model in Technology was hampered due to ongoing system and support transitions that we are doing with the integration effort of standard security in a number of markets, but we are expecting performance to improve during Q2 as we work through those transitions. And if you look at Europe on the Guarding side, we have put a lot of emphasis on improving the quality of the contract portfolio in the Guarding business. And here, the operating margin improved, as I mentioned earlier, in the quarter.But having said that, we continue to drive higher margin requirements for new contracts, active portfolio management and also a lot of emphasis on cost actions in the Guarding part of the European business to ensure that we deliver a significant improvement in the margin in the coming quarters and also in 2025. And moving then to Ibero-America, where we had continued good development. The organic sales growth was 6% and the decline versus last year is due to the divestment of our business in Argentina. And the organic sales growth in Spain increased to 7%, thanks to price increases and also strong technology and solution sales development.And the growth in Latin America was primarily driven by price increases. And Technology & Solutions represented 34% of sales in the quarter and the client retention was solid at 93%. And shifting then to profitability in Ibero-America, and our team delivered a great margin development with 6.7% in Q1 and improving margins in security services, including the airport security business in Ibero-America, both supported the operating margin as did the divestment of Argentina, where we had below-average margins. And the divestment of Argentina has also enabled us to now sharpen the business and our team are delivering solid performance in Q1.And with that, conclude the segment overviews, handing over to you, Andreas.

[Andreas Lindback, executive]

Thank you, Magnus, and good morning, everyone. Starting with the income statement -- where we had solid 7% organic growth in the quarter, and the operating margin improved to 6.0%, where the main drivers were strong margin development in our North American and Ibero-American business. We further had positive support from continued good Group cost control reported in other. Looking below operating result there are no major news related to the amortization of acquisition-related intangibles or acquisition-related costs.The items affecting comparability was minus SEK 217 million, where SEK 128 million is related to our STANLEY integration and SEK 89 million is related to the European and Ibero-America Transformation Program. And as usual, I will come back with some more details here shortly. The financial net is coming in at NOK 554 million, which is SEK 126 million higher than last year, and this is mainly driven by increased interest rates. The SEK 554 million was also impacted SEK 32 million positively from IAS 29 hyperinflation and last year this number was SEK 51 million.In 2023, the full year financial net landed at SEK 2.4 billion, excluding IAS 29 and FX gains and losses, and we expect the finance net to come in at around the same levels for the full year 2024, also here then, excluding any impact from IAS 29 and FX. So basically, no changes to the full year estimate compared to what we communicated in the Capital Markets Day. Moving to tax; here, the forecasted tax rate for the full year is 26.5%, which is a slight decrease compared to last year, and this is mainly due to lower expected tax in the U.S.Moving on then to have a more detailed look into our IAC programs where the two remaining ongoing programs are the European and Ibero-America Transformation Program and the STANLEY acquisition integration and looking first at the European and Ibero-America Transformation Program. Here, we had SEK 89 million of cost in the quarter and the estimate for the full year 2024 is around SEK 150 million. So in other words, there is no change here to our previous estimate and the same applies for CapEx as well. And this also means that the total program spend over all of the years are within the originally estimated budget as we have also highlighted in the previous quarters.Moving on to the IAC related to the STANLEY integration. Here, we announced total cost of approximately $135 million after the acquisition. The integration and synergy takeout continues to make good progress, and we are now focused on finalizing the integration, especially in Europe and execute on our cost synergy targets. The cost related to the program was SEK 128 million in the first quarter, and we expect the full year cost to be around SEK 400 million. And as we have mentioned earlier, we are continuing to go through a period of heavy lifts in the IT integration and platform implementation work related to the programs, and this work will also continue the coming quarters.Looking at the left-hand side here, we have been going through a period of investments into our transformation programs and the STANLEY integration over the last years. The IAC cost peaked in 2023 with a total cost of SEK 1.35 billion for the year, and we are now driving [ such a ] material reduction throughout 2024 where the IAC is estimated to land around SEK 550 million for both programs, impacting, of course, both our EPS growth and cash generation positively throughout 2024. Moving then to an overview of the FX impact on the income statement; and here, we saw limited impact from currencies in the first quarter compared to last year.On sales, there was a 1% negative impact from FX and a similar impact on the operating result in the first quarter where the minor differences on EPS level mainly is due to different currency mix below operating results. The first quarter EPS real change, excluding items affecting comparability was 4% in Q1. This is derived from the real change in operating income being 9%, positively impacted by our 7% organic growth in combination with the strengthened margins while mainly the increase in the financial net impact negatively leading then to the 4% for the quarter.We then move to cash flow. And here, I first want to highlight that we, in the report, have done some changes related to working capital in line with our Capital Markets Day presentation. The key KPIs related to operating cash flow and free cash flow remain the same, but we have redefined working capital to provide you with further clarity and insight into our working capital development related to our trade receivables and operating payables, as you see on this page. And you find more information also in the report related to this.The first quarter is from a seasonality perspective, our weakest operating cash flow quarter as we are making large prepayments within, for example, IT and insurances in the beginning of the year. We are paying out incentives in Q1 and normally collections are somewhat slower due to beginning of the year price increase work. As expected, the first quarter operating cash flow of minus SEK 362 million came in weaker than last year due to the strong working capital position by the end of 2023 and as the quarter this year ended over the Easter holidays, which impacted collections and the DSO negatively by the end of the quarter.We have since then seen solid collection inflows in April after the public holiday period. In the previous quarters, we have mentioned that we have had some negative impact on our invoicing and collections from ERP integrations under the European Transformation Program and related to the STANLEY integration. We saw positive development now again in the first quarter, but it continues to have a somewhat negative temporary impact on the cash generation as we are going through a period of heavy lifting, as I also mentioned earlier. So this is a focus area for us to continue to resolve the coming quarters.The free cash flow was negative SEK 1.4 billion in the first quarter, where we had increased interest payments related to the finance net. The main reason here is that we now have a larger bond portfolio with annual maturity in the first quarter, which is then when the annual coupon payments are being paid. The coming quarters will have lower payments, and we remain with the estimate that the full year cash flow from the finance net will be around minus SEK 2.2 billion. So to summarize here, Q1 cash flow is in line with expectations, and we continue to be focused on generating and operating cash flow to meet our financial target of 70% to 80% for the full year and to continue to deleverage our balance sheet.We then have a look at our net debt, which landed at SEK 41.1 billion by the end of the quarter. And this is up SEK 3.6 billion from the start of the year, impacted mainly by the SEK 1.4 billion negative free cash flow in Q1, but also materially impacted by the weakened Swedish krona compared to year-end, which increased our net debt with SEK 2 billion. The net-debt-to-EBITDA, excluding items affecting comparability, is down from 3.3x in Q1 last year to 2.9x by the end of this quarter and continues to remain below our financial target of a net-debt-to-EBITDA of less than 3x despite the seasonally weaker free cash flow generation and the negative FX impact.Moving on to have a look at our financing and financial position; we continue to have a solid financial position. None of our facilities have any financial covenants and the liquidity position was strong in the quarter at SEK 6.2 billion. We also have our RCF of more than EUR 1 billion in place until 2027, and it remains fully undrawn as per quarter end. In the first quarter, we issued a 6-year EUR 500 million Eurobond to refinance existing maturities of approximately SEK 5.5 billion. We raised the bond at 115 basis points margin with negative new issue premium, really confirming the strong interest we see in Securitas in the credit markets.We are now through the major refinancing work after the STANLEY acquisition and have replaced more than SEK 30 billion of shorter term debt with long-term funding over the last 15 months. And as you can see on the maturity chart, we have substantially less refinancing activities in front of us the remaining part of 2024 and 2025. As a consequence of our strengthened financial position after the STANLEY acquisition, S&P also upgraded us during the quarter, and we are now having the same rating as we had pre-STANLEY acquisition. And we continue in an unchanged way to continue our focus on cash flow and balance sheet and remain committed to our investment-grade rating.So with that, I'm handing back over to you, Magnus.

[Magnus Ahlqvist, executive]

Very good. Thanks a lot, Andreas. So just a few comments from my side related to the strategy and how we are shaping the future Securitas before we open up to Q&A. It is an exciting time. And in the investor update at the beginning of March, we shared details regarding the progress we have made since the update in August 2022, but also focus on the journey ahead and also our more near-term target in terms of achieving 8% by the end of 2025. And we have been driving extensive transformation and investment into our business, and we are increasingly well-positioned now to deliver value at a higher level than before.And I've met with a number of clients in North America, Europe and Asia during the last couple of months, and there is a tremendous response to our strategy, where we are building an [ unparallel ] offering focused on presence, connected technology and data. And with our greatly enhanced offering we have a promising pipeline of commercial opportunities with existing and also new clients and are also piloting comprehensive offerings with a few global clients, where we are leveraging our combined people and technology expertise.And all of this is positioning us to deliver long-term value. And we have clear focus here to deliver strong operational value. If you look at the left-hand side on this screen, with an unmatched offering to grow with Technology and Solutions and also with profitability focus in our services portfolio. And as commented earlier, we are building a more scalable business now as well, and cost efficiency and leverage will also help and contribute to the margin journey to 8% by the end of 2025.And our digital capabilities are starting to drive meaningful impact to our client value proposition and also form an important foundation for innovation leadership in our industry. And operational value creation in combination with disciplined capital allocation will lead to increase in cash flow and shareholder returns in the coming years. And we are making good progress and have strong focus areas across the company to achieve 8% target by the end of 2025.So to wrap this up, it is a decent start to 2024, and we are improving the operating margin to 6%, very strong development in North America, driven by technology and also in Ibero-America. Guarding margins improved in Europe in Q1, but the performance in Europe is burdened by weak aviation quarter and also negative more temporary matters in the technology part of the business due to integration efforts. And we continue to drive the strategic transformation, and we are receiving like I said, very positive response from existing and also potential clients regarding our offering and the partnership opportunities and the growth that we see ahead of us.So with that, let us open up the Q&A.

[Operator]

[Operator Instructions] The next question comes from Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

I have two, please. You mentioned that there was weakness in airport security, which affected the margins in Europe in 1Q. Can you maybe share some color on what exactly happened here? And why this should not be a drag over the coming quarters? And then the second question is on the Europe margins again. Obviously, this region needs to see the biggest margin improvement in order to hit your 8% margin target by '25. What should we expect in terms of the progress over the coming quarters? What should we be looking out for?

[Magnus Ahlqvist, executive]

Thank you, Suhasini. So to put this clearly, I mean, the performance issues that we had in aviation are related to a few large contracts. And these are essentially productivity and efficiency related challenges that we've had in these contracts. And if you were to ask the question, well, is this in line with expectations? No, it is below expectation. But here, our teams have also initiated an intensified recruitment efforts with good progress and also training efforts. But some of that work also takes some time.So there is a little bit of a lead time in terms of that to also see -- to see tangible improvement. But when you look at those, those are really the main reasons. We are taking actions in terms of hiring, in terms of training and are expecting as well to see real improvement in Q2 and Q3. So that's really the situation. But it is important just to emphasize, this is not across the board in aviation in Europe. It is a few larger contracts where we have significantly higher challenge. And I think some of that is also related to -- or quite a lot related to the labor market. There is challenges ongoing in terms of finding people.But there, like I said, we have also in the last period also intensified efforts also with good progress in terms of hiring and also training. So that I hope that provides more clarity in terms of the challenge that we are seeing there. If you're looking at the second question, in terms of Europe, yeah, I mean when you just take a little bit of perspective, North America we were at 8.6% in margin in Q1; in Ibero-America at 6.7%. We have many markets now, including the U.S. and North America that are above the 8% margin target.So we are in a good path with many, many tangible or important and relevant examples as well in terms of how do we support the margin journey going forward. I agree with your comment, Europe has the most work remaining to be done. And that one, obviously, the aviation is one factor. But there, like I said, we expect improvement. If you're looking at the guarding part of the business, we have some improvement in Q1 in terms of the guarding part of the business, which is a good thing. But we need to do significantly more as well.So there is material improvement needed in 2024 and also in 2025. And this is a very clear focus and also something that our teams are driving. I think to put some flavor on that, a number of markets that are significant, as we shared in the Capital Markets Day are moving in the right direction. The important thing is that we need to get everyone to drive this once and for all so that we get the guarding portfolio in the services part of the business in really good shape. And then obviously, if you're looking at the technology part of the business, that burdened in Q1. But there, it's also like I commented in the second half of last year.We completed a lot of the integration effort in North America first of the STANLEY acquisition. So that is really good. You can see the impact from cost synergies, but also operating at the larger scale in North America now. This is a critical period that we are driving through in Europe. But we know what we need to do, but we are also driving a deep integration as well in terms of systems to make sure that we're building a really strong business, very much based on the blueprint that we have from the larger markets in North America, where we have completed most of that exercise. So it is an intense period, but we are already expecting improvement in the second quarter when I look at the technology part in Europe as well.

[Andreas Lindback, executive]

To add on there on the technology side of things, it's underlying sound development in that business. It's more related to these internal integration matters that we are working through right now. I think that is important to highlight where we expect to see improvements as Magnus was saying in the coming quarters. Then what is also worthwhile highlighting in Europe in the first quarter is the development in the -- on the security services side, outside of aviation, where we see a positive margin development.We see results related to active portfolio management. We are continuing to work that through to see an even increased impact the coming quarters and are also focused on driving out good cost efficiencies as well going forward. So a lot of good activities that is already giving results in the first quarter where we expect that development to continue in the coming quarters.

[Suhasini Varanasi, analyst]

Just a quick final one, if I may. What's the benefit from hyperinflation on organic growth in Europe and at the Group level, please, from Turkey?

[Andreas Lindback, executive]

In Europe today, it's a bit more than half of the organic growth is related to Turkey. On the Group level, it was 3% out of the 7%.

[Operator]

The next question comes from Remi Grenu from Morgan Stanley.

[Remi Grenu, analyst]

The first one is on organic growth. So you just said about the contribution from Turkey, but interested as well to have the mix between volume and pricing within this 7% [ in 1 ]. The second question is on cash generation. Can you help us quantify a little bit what's been the impact of [indiscernible] working cap from Q4? And what's been due to the timing of the bank holidays at the end of March and also interested in how we should think about cash generation in Q2 and leverage at the end of H1. So that's the second question.And the third one, just to pick on something you just said about the labor market, and that's been a challenge for this aviation contract. Is it something new on the ramp-up of your new contract or have you experienced these kind of challenges before? And because labor markets are tight -- its broad-based tightness of the labor market. Just wanted to understand if you think it's a risk that it could impact the ramp-up of other contracts in other verticals, i.e., could it be relevant for other contract, except for aviation?

[Magnus Ahlqvist, executive]

If you first take the organic sales growth question, like I said, then Turkey, Turkey is 3% out of the 7%. If you then look outside that on the securities on the -- where do we have volume growth in the business is mainly related to the -- in Technology & Solutions, we see positive volume growth. We also have volume growth in our Aviation business. If you then look more at our Guarding business, generally speaking, it's mostly price-driven growth and limited volumes. And that is also as we are driving our active portfolio strategy as well.So I hope that gives you an overview on the organic sales growth side. When it comes to cash flow, as I mentioned, quite a few times, we had a very strong position by the end of last year, where our working capital was around 5% of sales, basically. Now in this quarter, we're landing around 6%, which is actually lower than Q1 last year, which is a good thing, right? What are the main impacts then into the first quarter? It's mainly related to accounts receivable, where we saw really strong collection activities by the end of last year, which then means that if some clients have paid in advance or collected the overdues, you see a bit of overhang coming into the first quarter.Then in the first quarter, you have, as I mentioned, also that seasonality that we do a lot of price increase related work as well, which tends generally speaking, to drag out a bit compared to a normal invoicing process, which means that sometimes we are then invoicing later than normal. So that is also the -- why we have seasonality effect in the first quarter. And then obviously, this year, we did have the Easter at the end of the quarter. We did not have that last year, normal seasonality. We saw -- as I mentioned, we saw good collection activities coming in, in April.So we definitely saw a positive impact after the holidays then confirming the Easter day impact in the first quarter. So I mean that's why we are saying we are coming in as expected here. Then, of course, we have strong cash flow focus, but nothing is really closing the first quarter. We are targeting the 70% to 80%, to be clear, right? We're driving a lot of improvements as I went through in the Capital Markets Day as well. We also have incentives in place now to really make sure that we are driving both full year cash flow and also cash flow throughout the year in a good way.And we're going to take it from here to deliver a strong cash flow. So there's nothing in the first quarter that is preventing us from having a strong full year cash flow. Then a final comment, we saw some impact. It's not major, but we saw some impact from these platform integration activities as well, but that's also something that we're expecting to work through the coming quarters throughout 2024 as well. So I would not say that there should be any full year impact from those activities.

[Andreas Lindback, executive]

And then on the third question in terms of the labor market. To put some perspective on that, we have seen some improvement in the labor market overall. When you're looking at Europe, when you're looking at North America in the last 6, 12 months, but unemployment levels are still at historically low levels, if you're going a little bit further back in time. I think the challenge that we have faced is that some of these larger contracts, they are isolated to a few specific locations.And in those locations, there has been a bigger challenge to find people essentially than what we anticipated. So that is a situation that we've had that in the past. To your question, Remi, in terms of have you been able to handle? Yes, absolutely. Based on that, we've also initiated actions to strengthen hiring, but also the training. But there is also a certain lead time in terms of that work. But I think from my perspective, this just leads me into an important theme as well.We need to make sure that we are costing correctly and that we are also pricing correctly as well. And so that we can also be competitive and able as well to recruit people and also deliver really good quality. And that's also the reason that we keep increasing as well the thresholds in terms of new sales and also thresholds for how we are renewing contracts to make sure that the portfolio is healthy on the totality because the general aviation business in Europe is in good shape. The challenges that we have are really isolated to a few large locations.

[Remi Grenu, analyst]

Okay, understood. And just to clarify on your last point, the issue that you had on the specific contract, which impacted Q1. This was only recruitment related or was there any kind of pricing issue on this contract as well?

[Andreas Lindback, executive]

No. So the labor market challenges and the hiring challenges that has also meant that we have not had much of an option as opposed or rather than using quite a lot of subcontractor. And when we're using subcontractors to also then find the qualified people that has a very negative impact on the margin so hence, also the impact in a negative way. But the best thing that we can do is that we then hire and that we train at scale because then we can also reduce the dependence on the subcontractors, and that's what we are driving up.

[Operator]

The next question comes from Andrew Grobler from BNP Paribas.

[Andrew Grobler, analyst]

Just a couple from me. Firstly, a quick one just on the phasing of IAC costs -- cash costs throughout the year. If you could update us there? And then secondly, Magnus, just a couple of times through the call, you've talked about kind of everyone having to drive Guarding margins in Europe and ensuring that pricing and costing is correct. Could you just expand a little bit on that? What does that mean? Because the intent you've talked about it before is clearly there from the team.What isn't happening at the ground level to make all of that come through as quickly maybe as you would like? Because I guess at this point, it's a long way to the 8% margin target and progress has been a bit slower in Q1. And I just wondered whether there was some disconnect between what you want and what you're getting at the ground level.

[Andreas Lindback, executive]

If we take the first question related to IAC, I don't have anything material to say when it comes to the phasing, if you mean sort of quarter-on-quarter Q2, Q3, Q4 this year, then we had a bit higher cost. I mean its external consultancy fee mainly in the European and Iberia transformation program. So we saw a bit of a higher number there in the first quarter, but then no specific trend to be honest here as well. So best assumption fairly flat the coming quarters.

[Magnus Ahlqvist, executive]

And then, Andrew, on the guarding margins, yes, it is correctly understood that we know what we need to do. You've heard me talk about this for quite some time. It is a cultural change to move from volume to quality and profit at the broad base or across the entire base all the way to the front line. But when I look at the actions, there are a few key priorities that we are driving with clarity. We know exactly what we need to do.It's just about making it happen and about the execution. And there, obviously, pressure is high to make sure that we are driving and that we are concluding that work. As I commented earlier, we have a number of markets that are leading the way and making it happen. That is also the reason that we are seeing improvement, but it has to happen across all the markets to drive really meaningful impact, and that is where we have 100% focus at this point in time and expecting that to materialize and to be delivered on, and that will also then have a meaningful impact on the margin as well, which will help us to achieve the 8%.

[Andreas Lindback, executive]

And just to provide clarity, when I refer to flat -- flat is not obviously the same run rate as in Q1, but the remaining budgets compared to the estimate for the full year, Andy, just to be clear.

[Operator]

The next question comes from Neil Tyler from Redburn Atlantic.

[Neil Tyler, analyst]

A couple of questions from me please. Firstly, just back to the topic of airport security. Magnus, can you talk about sort of how strategically important that sort of segment of the business, whether the portfolio of contracts there, you're confident of those contributing to the margin target, particularly in Europe? I mean sort of my observation made perhaps incorrectly, but my observation would be that more often than not where you've pursued active portfolio management, there have been quite frequently, you called out airport security as contracts that you've walked away from?That's the first question. Secondly, linked to that, I suppose, on the tight labor markets, how are you thinking about your sales growth targets in the context of the difficulty in accessing labor. I appreciate the business is becoming less labor-intensive, but is that a limiting factor? And then finally, on the balance sheet, you've successfully refinanced most of the debt, you've brought the leverage target down to below 3x. How do you think about the balance sheet from here in capital allocation? Are you -- in terms of excess free cash flow, is that now more likely to be diverted towards growth or do you -- would you feel more comfortable reducing leverage further?

[Magnus Ahlqvist, executive]

Thank you, Neil. So on the Aviation business that can be a really good business. But I've also been clear that in our shaping the company and the business to become the future Securitas all parts of the business, we are assessing all parts of the business also to make sure that they are supporting the 8% target. And that includes -- I mean that includes all parts of the business just to make sure that we have a sharper and a stronger business. What we are seeing in Q1 is some of these really large contracts. And there, as you can tell, I mean, I'm not happy with the performance.It's not what we expected, but we are taking actions to make sure that we get those in good shape and that we are improving in the next couple of quarters. So that's really where we are in terms of that part of the business. When you're looking longer term, we have a really, really strong offering in terms of people, obviously, technology, but also then how we are leveraging data. And I think that is something that we're also looking when we do strategic assessments it's also at the strategic lens as well. How -- what is the quality and the sustainable quality of how we can also shape all portfolio that we have for the mid and the long-term.So I think that is something that we just also explained or talked more about also in the Capital Markets Day. When you're looking at Europe and also your question about growth, like I said, the labor market is, generally speaking, somewhat better now than it was 6 or 12 months ago. So it's not a major concern. But it is important to highlight that in Europe, our main focus is not to drive growth. It's to make sure that we drive tangible profitability improvements. So that is really the focus when I look at this from a European perspective.When looking at North America, 8.6% starting margin here than in the first quarter in Q1. There, obviously, all growth is accretive, and it's also more dynamic labor market. So I think there, we have the entire business technology but also guarding in services part of the business in really good shape. I mean there, it's more a matter of driving responsible growth going forward. So I would say that to your question, does it impact in a significant way.Most important thing for us is that we prioritize quality over volume in terms of the people-intensive part of the business. And that means that we are continuously increasing the pricing thresholds as well to make sure that we are -- any business that we are bringing in is quality business from the beginning, and that we will continue to do. And then I think -- I feel pretty confident in terms of our ability to then also drive good growth overall in the next couple of years.

[Andreas Lindback, executive]

The capital allocation, like you said, we are in a good financial position now. We are through the STANLEY refinancing, done more than SEK 30 billion of refinancing over the last 15 months. We have strong cash flows that are more than well also covering, of course, interest costs, although interest costs are at a high level compared to historically as well. We've also received an S&P upgrade. So we are basically back to the same rating as pre-STANLEY acquisition at this point in time.But looking then at the capital allocation priorities, number 1 priority for us is to remain with our net-debt-to-EBITDA less than 3x. So we are focused on our balance sheet. We are focused on cash generation. If you then look at -- on your questions, okay, if we have excess cash going forward. Number one is to invest -- continue to invest organically, especially then into our Solutions business, where we see good growth rates as well. And that is also a double-digit margin business that we want to continue to drive.We want to also to continue to be -- to have a good dividend. Our policy is 50% to 60% of net income to continue to have progressive dividends over time. But we have also in the Capital Markets Day of open up that over the coming 6, 12 months from the Capital Markets Day to also restart our M&A activities in a responsible way, strong focus on good return on capital employed, but we will restart that.And there we will mainly then look into bolt-ons within the Technology & Solutions space to cover for the geographical white spots we still may have, but also really focusing in on growing our RMR portfolio, which is the really high value, high-margin part of the Technology business as well, basically monitoring and maintenance across. So we are starting that one up from a bolt-on perspective, but in the end, it also needs to be the right target here as we are working this through. And we don't mind if we don't find the right targets to continue to deleverage from our position today.

[Operator]

The next question comes from Viktor Lindeberg from Carnegie.

[Viktor Lindeberg, analyst]

Three questions from my side. Starting on your Group-wide costs where you also have the critical infrastructure business now. They were trending a bit lower now in this quarter relative to recent quarters. So is this an underlying improvement or is it maybe a change of allocation of costs within the Group, just to understand if there is a change of direction here.Second, looking at timing effects of Easter, you are clear on the cash flow impact, but many companies have in this report is -- commented that also had a certain impact on earnings? And if anything has it impacted your European margins? Maybe starting on those two.

[Andreas Lindback, executive]

Yeah. If we start with -- on the Group side of things, the key driver to the positive development that you see compared to Q1 last year is that we have good development in our Group costs generally speaking. I mean we are prudent on taking on further investments on the Group level. And then, of course, we have good leverage as our business is growing there as well. Other some temporary things. Yes, there are a few temporary things in the Q1 where we have a bit of seasonality, but that underlying trend is also there when it comes to our Group costs. So -- and by saying that, that's the main development.And then the SCIS business had a bit of negative development but much less than in the fourth quarter, right? So overall, you can say -- if you take the SCIS business this quarter compared to last quarter, it impacted 0.1% on the Group margin. Then when it comes to cash flow, if I understand the question correctly, if that had an impact on the P&L, then you're referring to bad debt provisioning, I would presume or?

[Viktor Lindeberg, analyst]

No, this is more the number of working days and maybe you have a fixed cost base. So more if there is a calendar effect in your P&L, not cash flow.

[Andreas Lindback, executive]

No, but clear. You can say, generally speaking, both the Leap Day and the Easter was immaterial overall in the business. So no material impact there.

[Viktor Lindeberg, analyst]

All right. Good. And then on what you touched upon the Andreas, the bad debt provision that you provide in your annual accounts, I looked into both last year and the past couple of years, and it seems you have increased your closing balance of bad debt positions quite a lot. It stands at an all-time high now in absolute terms but also relative to your overdue receivables. And just to see if that's a reflection of your crystal ball being very negatively tilted or conservatism or if there is any vintage changes that you've made following STANLEY, just to understand this sort of hampering effect on your EBITDA in your P&L?

[Andreas Lindback, executive]

I think two different questions in my mind. The first one when it comes to the opening or the closing balance over our bad debt position. This is mainly related to the STANLEY opening balance sheet. And I commented upon this before as well. There was a lot of old aging in STANLEY that we found during the due diligence process, so not a concern, so to say. And then as we closed the STANLEY acquisition, we had 12 months to then work on the opening balance sheet finalization.Smaller acquisitions, we normally do it directly. Here we wanted to work it through consistently over the first 12 months. We took a bit of more time to make sure we got quality in it, especially as it was also a carve-out situation. So that's why you see a bit of an effect within the first 12 months and not directly from the start. So that's point one. On the second question then more on the increases related to bad debt. You can say like this. I mean, since the pandemic, we have been a little bit more conservative generally speaking, when it comes to bad debt.I wouldn't say it's huge in any way, but we have been a bit more conservative without seeing an increase in the actual losses. But then the -- what has fundamentally changed is that we are a much larger also technology business today. And in the technology business, generally, you have a higher sort of bad debt provision -- general bad debt provision than in the Guarding business as when you're looking at the historical trends, the losses there are a bit higher than in the Guarding business. So I think that -- well, that's what you see basically, yeah.

[Operator]

[Operator Instructions] The next question comes from Raymond Ke from Nordea.

[Raymond Ke, analyst]

A couple of questions from me please. First one; so regarding this aviation contract in Europe with a challenging staffing situation that you have, are you considering maybe other alternatives or options like can you take the subcontractors in-house or maybe even exit these contracts or are you stuck with these contracts sort of for a long time? Like what options do you see? And how are you sort of considering the whole situation?

[Magnus Ahlqvist, executive]

Thank you, Raymond. I mean we have taken initiated actions and based on those are expecting improvements in Q2 and Q3. So that is really the main course of action because it is related to a few large contracts, and we have a clear action plan in place.

[Raymond Ke, analyst]

All right. And secondly then, in European, you wrote that the margin in technology was impacted by system and support transitions as well. So this is, if I understand correctly, not related to IAC, I presume. Could you just clarify a bit more what this is and how persistent do you think this might be looking ahead?

[Magnus Ahlqvist, executive]

Yes. So when you look at this and this is something that we have already flagged as well in the second half of last year is that we have -- it is more of an intense period in terms of driving integration. And when we say integration, I mean, we're not just standing up a separate business. We are integrating existing electronic security business that we have had before STANLEY together with the acquired business. And that work is fairly extensive.And just to give some flavor on that, it means that we are migrating over to one system and application in terms of how we manage installations. We are managing over to one system and application in terms of how we manage the important service and maintenance part of the business. We're also migrating over to one ERP system or more the kind of the common core. So the engine that is supporting the entire business. And a lot of that work that we have done really successfully in North America we are now driving then at scale also across Europe. And -- but that's more of a temporary challenge.We know what we need to do. We know the road map ahead as well, but it's also just to manage that. But when we do that, we are building an engine that is going to make the local business is really, really strong. And then we obviously put a lot of effort into how we are constructing that based on what is required to drive the technology business with efficiency and productivity, which will benefit both the clients but also our profitability. And that's what we have been busy doing. Some of that -- it is -- I mean, it is a transition period. And that's the reason I'm also saying that we are expecting to see improvement in the second quarter as we are working through that transition as we speak.

[Andreas Lindback, executive]

And just to be clear on the IAC side, I mean, it's not that the cost of implementation have gone up. That's not the case. It is, for example, as I mentioned that we see some, although not very material negative impact on the cash flow. So as an example, as we have gone live in a country that the invoices are not going out on time, etcetera. It's more those kind of operational impacts that we are referring to here, not increased cost of implementation.

[Raymond Ke, analyst]

All right. And then a question on net working capital was, of course, due to the hangover effect, as you called it before, I think minus -- do you consider now the net working capital here at the end of Q1 as being normalized?

[Andreas Lindback, executive]

You have the Easter impact, just to be clear, which is impacting the working capital negatively. So from that perspective, the answer is that no, right? That will be the main effect. Then you can say you will -- yeah, that will be my main comment on if it's normalized now.

[Raymond Ke, analyst]

Yeah. Got it. And just one final one. The IAC is expected to continue to decrease beyond 2024. Could you help us understand whether this is related to the transformation program and then which geographies are in scope primarily for this?

[Andreas Lindback, executive]

We will come back to this in more details later throughout the year. But as we mentioned in the Capital Markets Day, they will -- I mean, if we take a step back, we have SEK 1.35 billion of IAC now in 2023. And now a material reduction into SEK 500 million, SEK 550 million, and we also said in the Capital Markets Day, we will see some IAC, but it will be on a lower level into 2025 and 2026. And this will be related then to finalization of the integration because the final rollout related to the transformation program and the efficiencies we want to take out as well. But we will come back with further details here throughout the year.

[Operator]

The next question comes from Allen Wells from Jefferies.

[Allen Wells, analyst]

Just two quick ones for me. And apologies, I missed a little bit of the prepared remarks, so if you answered these. The first one was just on North American airport contract expected to impact 2Q. Can you just maybe just elaborate if there's any margin impact there? Is that margin accretive or margin dilutive as that drops out? How should we think about that for 2Q? And then just secondly, on technology growth. Obviously, 7%, I think, was confirmed as real growth.Maybe if you can just confirm that's all organic. That's obviously slowed versus what we were seeing last year. Can you comment on the price versus volume component of technology growth? And then given your comments on the good pipeline, I'm assuming you've got reasonable visibility to directionally, how should we think about technology growth for the rest of this year and into next year? And obviously, the reason why I ask that is tech is very, very important to the margin expansion story. So just wondering how that plays out in your ability to hit that 8% target.

[Magnus Ahlqvist, executive]

Allen, a number of questions. Do you want to start, Andreas, and I can take the pipeline related?

[Andreas Lindback, executive]

Yeah, I can start on related then to the technology growth, 7%, like you said, real sales growth impacted negatively by Argentina. So organic would be 8% there so very much then within our target of 8% to 10%. And here we see good volume growth in this business. But then in the Solutions part of the business, there you also have price component, although also volume component, but especially there, you have a price component as well.But material volume increases in that part of the business for sure. Then when it comes to the technology outlook, I mean, we have a good -- as we've also mentioned, we have a good backlog in place. We also saw a good growth on the technology side, both in North America and in Europe. So North America also improved compared to the end of last year as well, which is positive to see. So from that perspective, solid for us also going into the coming quarters.

[Magnus Ahlqvist, executive]

And just making sure that we cover your questions, Allen, I think on the first one as well, on the aviation contract in North America, it's SEK 1.3 billion. It was terminated at the end of March. If you take the SEK 1.3 billion divided by the entire size of the business in North America, that is around 2% then on an annual basis in terms of impact on the organic sales growth. To your second question there in terms of the margin, the margin in that contract that we had was below average margin that we have in North America.And the new margin would have been significantly below and for that reason as well. That's the reason that is being terminated. I just want to mention the pipeline as well because I'm glad that you picked that up as well. It's -- we're driving quite extensive change and transformation of the entire business. And the reason that I highlighted a lot of the -- or some of the client dialogue and also what we are hearing and feedback we get when we have seeing a number of clients individually or also at some of the trade fares that have taken place in the last couple of months.There is an increasing clarity in terms of Securitas positioning competitively versus our competitors in the Guarding space or the services space traditionally or in the technology space because they also start to see real benefit of us having strong guarding capability and presence but also very strong pillar that we are building in the Technology business. And that is something that we are seeing across the board. Most of my engagement is more related to a number of the global client partners that we have.And there, we have really exciting dialogue as well in terms of how we are also shaping our partnership for the future where they are also looking for Securitas to play a significantly more active role and a larger role also within technology, but also more integrated solutions, where we are leveraging the strength of these combined offerings. And that's obviously very relevant for the global clients, but it's also relevant for larger national clients, for example. And yeah, so that is something that we are really starting to see that coming into place now as well. And obviously, this is going to be an increasing focus as we also get most of the integration work done and then we can really start to focus on driving the business and developing and tapping into those opportunities in the next couple of years.

[Allen Wells, analyst]

And can I just ask a quick follow-up, just on the technology to growth. It sounds like the pipeline is solid, as you say, but just directionally versus that 8% organic, would you expect the outlook to be stronger, to be stable or to slow from here in terms of technology mindful of the price versus volume comments that you made.

[Magnus Ahlqvist, executive]

Yeah. So I mean we have communicated a very clear ambition, and that is to grow technology and integrated solutions with 8% to 10% per year. And that is then obviously way above average market growth, but we feel good and confident in terms of driving a higher growth rate in the next couple of years based on the strength in our offering. And when I look at the feedback and also what we are working on more concretely with a number of clients, we feel good about that 8% to 10% ambition.

[Operator]

The next question comes from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

This is Johan at Kepler Cheuvreux. Sorry, I missed part of your Q&A session here, but I was just coming back to these European aviation contracts. Again, I thought you said in your prepared remarks that the costs were a bit higher as they were coming out of a start-up phase. Was that the reason why these issues occurred now or why did you have issues with the profitability right now?

[Magnus Ahlqvist, executive]

Yes. So Johan, we've spoken quite a lot about the aviation part of the business. So just to clarify that, the challenge that we have been facing has been isolated to a few larger contracts. That impact is related to hiring challenges that we have seen because of scarcity essentially in specific locations, but large-scale contracts that we have been ramping up over the last 12 months. What we have done here is that we have taken actions in terms of improving the hiring activity and the training activity. But some of that, there is also a bit of lead time due to regulatory requirements, but also the quality of conducting the training. So we are expecting to see improvement from these actions in Q2 and in Q3.

[Johan Eliason, analyst]

Okay. So it's ramping of sort of new contracts over the past 12 months. Then on airport still and your technology ambition, is the Airport segment where you say your technology part is a key strength supporting your growth opportunity there or your profitability margin or is it the other way around that airport is maybe not the segment where you can benefit the most from having the bigger technology business going forward?

[Magnus Ahlqvist, executive]

Yeah. So if you look at the aviation related business, the vast majority of the demand is still related to passenger screening. And passenger screening, that is still more kind of a large-scale operation, which is very people-dependent. And that is -- I mean, the good thing is that the growth in the market and the demand we see that being strong in the coming years.I mean, there is good growth opportunity, but the ability for us to introduce technology in the screening-related part of the business, yeah, that's more limited compared to the role of technology with most other clients, to be clear. Where there is opportunity in terms of technology is more in terms of the perimeter and the solutions that you can build around leveraging technology and also what we have done in a number of cases as well in the U.S., that's one recent example at one of the larger airports is where we have also then been doing quite extensive technology work in terms of video and access and intrusion-related systems.But that is still a small part when you look at the overall volume compared to the screening business because that is just such a large operation. So that's really where I would say, yeah, there is some advantage, but it's not as pronounced as it would be in a number of other client segments where there is more kind of a logical fit, but also where technology today and also my expectation going forward is just going to play a much more important role.

[Johan Eliason, analyst]

Excellent. And then just finally, still on the airport here, I mean we are seeing these scanners being replaced by some better scanners, which seems to make people screening much faster, at least that's the experience I have at our airport in Stockholm. Is that in any way impacting your airport business volume-wise going forward or margin-wise going forward if you get more of these faster scanners?

[Magnus Ahlqvist, executive]

Not in a material way. And I think there are different factors here. There's probably efficiency gains from that but also when you're looking at the Aviation segment and the airport operators, I mean, they are also forecasting steady and increasing demand on the totality as well. And I would also say that when you look from a customer experience standpoint, it's also good for everyone involved, where there is also a better and enhanced customer experience. So even if there is efficiency, gain, I would also say that a lot of the focus also from many airport operators is also on translating that into a better experience for us as travelers as well. But overall, demand picture, we're looking very healthy also in the coming years.

[Operator]

There are no more questions at this time. So I hand the conference back to the President and CEO, Magnus Ahlqvist, for any closing comments.

[Magnus Ahlqvist, executive]

Okay. So I just want to say thank you, everyone, for your engagement and interest. I hope the Q&A session has been valuable. Otherwise, you know where to reach us as well. So stay in touch, and thanks a lot, everyone, for your engagement and participation today.