ISS A/S (QJQ.F) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Martin Hansen. I'm Head of Investor Relations at ISS, and I'd like to welcome you to our results teleconference call. Please be aware that the announcement, the report as well as the slides used for this call can be found on our website. Later today, a replay will also be available, and we'll post the transcript [ here ] from the call as soon as we can. I'd like to draw your attention to Slide #2 regarding forward statements. Presenting today will be group CEO, Jeff Gravenhorst; and Group CFO, Pierre-Francois Riolacci. We'll open for the Q&A at the end of the presentation. And with that, I'd like to hand over to Jeff.

Thank you, Martin, and good morning, everyone. Before we go into the full year results, let me first touch upon last week's announcement on the IT security incident. On the morning of the 17th of February, our hosting provider was alerted to malware spreading across our IT landscape. Within an hour, the ISS IT team, took the decision to shut down our network for precautionary measures, consistent with our standard operating procedures. At that point, we have been impacted by -- in a number of countries. 9 days post this attack, there is still no indication that any customer data or systems have been breached. Our IT partners are providing strong support, especially in relation to the ongoing investigations and forensics to minimize while our network and applications are securely brought back into service. A detailed recovery plan is in place and being implemented. Some applications are already operational. However, this is not a quick fix. We have a dual-track approach, which will combine restorations and rebuild over the coming days or weeks, depending on how much our platform we choose to rebuild. Our most important applications will come back into service, albeit with some limitations to functionalities. At this stage, the complete timeline remains uncertain. Continuing to deliver services to our clients and paying our people accurately and on-time is something we take incredibly seriously. We are deploying local solutions and workarounds to fulfill these commitments. In the meantime, colleagues and customers are proving both understanding and supportive. We are able to fulfill most of our obligations, but absent of operational IT backbone, the need for manual workarounds increases and there are -- inevitably will be some disruption to our operations. The nature of our business is to deliver services on customer sites, mainly through our people. And as such, we will continue our service delivery to customers while implementing our business continuity plans. We are in the process of assessing the potential business and financial impact. Today, we cannot quantify this, but there are clear risks. These risks will include that we are incurring some remediation cost, IT cost and people cost, of course, as we work 24/7 to restore full functionality and incremental cost linked to workarounds. Our ability to capture and deliver non portfolio revenue could be hampered. And there could be some impact related to a contract underperformance. The incident has sucked up resources from across the organization, which leads to the postponement of other important business initiatives. We will, of course, provide further updates as soon as we are in a position to do so. I would like to take this opportunity to express my enormous gratitude to all colleagues across the business, who worked tirelessly over the recent days to contain and address this attack. The level of commitment, engagement and collaboration have been truly outstanding. We are -- we have continued to serve and protect our customers' premises, demonstrating the utmost professionalism and pride in the process. With that, please turn to Slide 4. Turning to our full year results. Let me start by saying that 2019 was a challenging year for us. We continued our strong commercial momentum demonstrated by our industry-leading organic growth. However, we also faced a few but significant operational challenges, as mentioned in November. Organic growth was historically strong at -- in 2019 at 7.1% and 7.9% in the fourth quarter. This was above our original expectation for the year, but in line with our upgraded outlook in -- from November. We will come back to that in a moment. Our operating margin ended at 4.2% in 2019, significantly impacted by selective operational challenges, including 2 loss making contracts provisions and the restructuring of the cleaning business in France. These were the key drivers behind the disappointing downgrade of margins and free cash flow that we mentioned in November. Free cash flow, excluding the reduction in factoring ended at DKK 1.6 billion, an DKK 800 million improvement compared to 2018, despite still being impacted by net negative one offs. Our normalized cash flows is closer to DKK 2 billion. Please turn to Slide 5. Turning to some of the commercial highlights. Key Accounts grew 11% in 2019 and 14% in Q4. Even excluding the major contract development, growth was 10%. 2019 was also a busy year in terms of revenue coming up for renewal. Other than the loss of -- a big part of Novartis, we successfully extended all other large Key Accounts and expanded with many of them. Looking ahead, 2020 is a much lighter year in terms of renewals. Growth in the Key Accounts was also supported by a number of wins, including the launch of Deutsche Telekom. The launch was on time across all sites, and the operating margin was in line with our expectations. The post-launch stabilization plan, including the IT migration is progressing. Although Novartis was not extended, we continue to serve the -- we continue to service delivery for around DKK 0.5 billion annually under a 5-year contract. As such, the net revenue loss into 2020 is around DKK 1.5 billion, with a group margin impact of around 0.1% to 0.2% as we've previously communicated. Turning to operations. We saw a strong and stable performance across our Global Key Account portfolio, with improvements in all of our major KPIs, including top line, bottom line and collections. Together with the overall Key Account growth, this underlines how the Key Account market has a strong market potential from a growth and earnings perspective. However, we also faced selective operational challenges in France, Denmark and Hong Kong. On the loss-making contracts in Denmark, we have seen further recent progress since our update in November. As a result of our continued effort to resolve the challenges, together with a few significant developments on the customer side, the future unavoidable losses have been reduced. We'll come back to that in a moment. In terms of loss-making contract in Hong Kong, the future expected losses have been provided for, for the duration of the contract. And in France, we faced an underperformance linked to the ongoing reorganization of our operation. As disappointing as this is, this underperformance was down to ourselves, but it also means it is in our control to do something about it. As in any other global business, we always have countries that performed better or worse. And in 2019, we benefited from the successful ongoing turnaround in both North America and Sweden. But also face selective underperformance amongst others in the U.K., partly as a result of a high level of contract wins and extensions as well as our ongoing transformational investments. 2019 was a challenging year. But it was also a big step forward in aligning and thereby derisking the business in many ways, reflecting -- reflected among others by the significant investments and our DKK 150 million provision for onerous contracts and other identified risks. As a consequence, we launched an efficiency plan, targeting a DKK 400 million cash savings -- annual cash savings. The plan is progressing, and most redundancies were carried out in December. Turning briefly to our transformation. Firstly, our strategic divestment program proceeded as planned with around 40% of assets divested. Total -- the total expected net divestment proceeds remain DKK 2 billion to DKK 2.5 billion. Secondly, in 2019, we launched our transformational investments. Over the course of 2019 to '21, we have earmarked around DKK 700 million to DKK 800 million of our investment proceeds towards investing back into the business. Investments in 2019 amounted to around DKK 300 million. And finally, on our returns to shareholders. We have promised -- we have -- we are proposing to maintain a stable dividend of DKK 7.70 per share to be paid out in April. And we are recommitting to at least keeping the dividend stable also next year. With this, I would like to turn to Slide 6. As a result of our strategic position in the Facility Services market, our organic growth continues to be driven by our Key Accounts. On average, our Key Account grew by 6% to 7% annually -- and grow 6% to 7% annually and even more in the last couple of years. Growth in this part of our business is not only driven by solid new wins, but also strong retention rate at 94%, which is 8 percentage points higher than the non-Key Accounts. In addition, Key Account also drives higher-than-average levels of projects, above base work and expansions. With an increasing share of revenue coming from Key Accounts, we're becoming a structurally higher growth company. And it provides confidence in our midterm organic growth guidance of 4% to 6%. Please turn to Slide 7. It's fair to say that 2019 has been a significant year in terms of renegotiations. A central part of our organic growth strategy is to retain and expand with existing clients. From that perspective, it is pleasing to see that over the last 2 years, we've extended all large Key Accounts coming up for renewal, a part from Novartis. And in many cases, expanded our relationship in the same instance. Turning to the contract maturity chart on the right-hand side. As we enter into 2020, 26% of our revenue is generated by around 50 existing large Key Account, which individually generate more than DKK 200 million in annual revenue. Of this, only 2 percentage points of group revenue is up for renewal in 2020, significantly less than an average year. In fact, we don't have any individual contract worth more than 1% of the group revenue up for renewal until the end of 2021. Please turn to Slide 8. As we continue to shift our business towards larger clients, we also continue to adjust and strengthen relevant processes to fit the changing needs of our business. As we come out of a tough year, we are also taking the consequence of having -- had a couple of loss-making contracts in 2019. We have taken a number of actions to further strengthen our contract bidding and governance process even more. Our substantial contract governance standards already cover multiple commercial measures, tools and processes. However, we've not had consistency in one standard tool or process across all of our countries. Learning from some of our challenges in '19, we've further improved our existing processes with the objective of ensuring that business case and risk assumptions are transparent, better contractually matched and executed. This has been undertaken in 2 main ways. Firstly, we're going through a commercial rebalancing, amongst others in regards to a strict matching of commercial models and resources against operational risk. We have a number of key target segments with a risk profile we're comfortable with, and we will increase our focus on these. Additionally, we are rebalancing bidding for new customers towards retaining and growing existing close customers, where we already have good partnerships and a well-established risk framework. Secondly, we now have a standardized and seamless end-to-end bid process from bid -- no-bid over negotiation to transition and operation. As part of this, we've lowered certain threshold for the escalated contract sign of procedures. And we have also upgraded our contract risk assessment tools to better able -- to be able better to identify, measure, mitigate and properly price the risk. Please turn to Slide 9 for a regional update. Continental Europe delivered a very strong organic growth in 2019 at 12%, the strongest on record. Growth was particularly strong in the second half supported by the launch of Deutsche Telekom on the 1st of July. In addition, performance was driven by strong Key Account growth, especially in Iberia, Netherlands and Turkey, with the latter partly being supported by price increases on the back of high inflation. However, even excluding price increases in Turkey, organic growth in Continental Europe would appear -- be around 10%. The demand for our projects and above-base work also increased in 2019. The Continental Europe operating margin declined to 5% in '19, mainly due to the underperformance in France during our reorganization in the cleaning business. Turnaround plans are currently progressing according to plan. Getting back on track in France will be a key driver of group margins in the medium term. To put it into perspective, the continuing business in France makes up 5% of group revenue at a margin of minus 4% in 2019 compared to the long-term historical average of plus 4%. On a positive note, the operating margin on Deutsche Telekom was in line with the communications -- the communicated expectations. Northern Europe also delivered solid growth, organic growth of 4%, actually the strongest in almost a decade, driven by Key Account, contract launches and expansions in 2018 and '19. In addition, the demand for projects and above-base work also increased in 2019. Operating margin disappointedly declined to 4.5% in 2019. Denmark reported a significant shortfall due to the loss-making contract, following a challenging transition and misalignment of expectations. As mentioned before, we have seen further progress since our update in November. As a result of our continued effort to resolve the challenges, together with a few significant development on the customer side, further -- the future unavoidable losses have been reduced and to an extent where it no longer qualifies as an onerous contract. In short, we now expect to reach a way of working, which was not deemed possible when we announced in November. Unfortunately, while this is clearly a positive development, it means that no provisions have been taken for the contract in '19. And that will have a post -- will post a loss for 2020, albeit smaller than in 2019. As expected, our operations in the U.K. have been impacted by a high level of contract wins and expansions as well as our transformational investments. In connection with the implementation of new systems over the last year, we decided to take on a risk review, which led to the booking of provision -- of a provision and lowering operating profit in some business units at the year-end. Looking to other parts of the region, we experienced good and stable performance in Norway and Finland, and progressed our turnaround in Sweden following a nonperformance -- or underperformance in 2017 and '18. Please turn to Slide 10. Organic growth in Asia Pacific was 5%, supported by most countries in the region and especially driven by strong performance in Australia, Singapore, Indonesia and India. In Hong Kong, turmoil impacted the performance of some operations. Overall, there's a solid demand for projects and above-base work in Asia Pacific. The operating margin in Asia Pacific declined to 5.5% in 2019. The decrease was mainly due to a loss-making contract in Hong Kong, following political turmoil as well as mispricing. In addition, as -- and as expected, we faced normalization of margins in Singapore following exceptionally strong performance over a few years. Before we move on to the Americas, let me briefly touch upon the coronavirus. First and foremost, our #1 priority is the safety of our employees and the employees of our clients. We have the necessary business continuity plans. And through our service delivery, we are working closely with clients to help them to take all necessary precautions. Customer sites in China have been partly or fully closed. Hong Kong, China -- Hong Kong, Taiwan and Singapore are currently affected to a lesser extent. For the moment, we expect the financial impact on group performance to be manageable, but it does create uncertainty, especially for Asia Pacific as a region. But we do also expect to see now some uncertainty coming into Europe as we've seen this spreading out also in Southern Europe. And eventually, probably also North America. So this creates further uncertainties. Turning to Americas. Organic growth was 2% in 2019 and remained positive despite the previously announced exit of long-term -- long tail of small underperforming legacy contracts in the U.S. Excluding these exits, organic growth for the region was solid at 6%. In addition, the Americas operating margin improved to 5.3% in 2019, up 2.4 percentage points year-over-year. As expected, margin improvements continued throughout the year in North America on the back of the successful turnaround initiatives and efficiency plans. Margin also benefit from further synergies and scale advantages materializes within -- materializing within the food service division in North America. For a further understanding of our journey in North America, please turn to Slide 11. As you know, North America has been a drag on group performance for too many years. We entered North America around 10 years ago. And in hindsight, we probably should have entered more broad-based from day 1. We were subscale and didn't have the fully fledged integrated Facility Service offering. Prior to '17, we targeted developing our capabilities and scale organically. In 2017, we completed the DKK 1.5 billion acquisition of Guckenheimer, hereby adding scale and filling an important [ wide ] spot in our delivery. The acquisition has been a tremendous success. And it demonstrates our patience and discipline to ensure that we get capital allocation right. Under our 2.5 years of ownership, Guckenheimer revenue has grown 40% organically, with margins improving from around 4% to above 6%, leading to more than 100% growth in operating profit. With the -- with this, the investment provides a free cash flow yield of 15%, and the post synergies multiple stands at 7x EBITDA compared to the 16x at the time of the acquisition. That is a very pleasing development. Following the acquisition of Guckenheimer, we took the decision to exit all small legacy contract to use our strengthened platform to refocus commercial efforts towards IFS and Key Accounts. While our reported organic growth has been held back by these exits as well as the loss of part of HP a couple of years back, our underlying organic growth has gradually improved in -- and in both 2018 and '19, reaching more than 10%. Our contract exits are starting to annualize, and as such, growth in the North America set to accelerate in 2020. So in summary, we've been through a long transformation in North America, which has fundamentally increased the quality of the business mix. As a result of this, margins reached the best level ever in 2019, and we still see potential for further improvements as we continue to gain scale and work with efficiencies. North America is the world's largest outsourcing FM market. And yet for ISS, it's the market where we have the smallest share. It is simply the single largest geographical growth opportunities for us. And we are ready to build on our platform. Please turn to Slide 12. Turning to divestments. We are now in the final stages of the divestment process that has lasted for almost a decade. With an accumulated DKK 20 billion in revenues divested. These divestments have been based purely on the strategic rationale. And as such, we have included businesses for both strong and poor performance. Overall, the divestment impact on margins since the IPO in March 2014 has been broadly neutral. There has been a few key reasons for our divestments. The simply -- first, the simplification and derisking of a previously fragmented business; second, enabling us to concentrate our efforts and reallocate capital to our core operations; and thirdly, it has increased the quality of our customer base. The final step of this process was announced in December '18, and we are progressing well with around 40% of the remaining divestments now completed, both in terms of revenue and proceeds. The only mentionable divestment running behind plan is Chile as a result of the political turmoil in the country. Chile is among our stronger performing assets in the pipeline. And we remain committed to divest the business. But we will not go through with the transition until the situation allows for an adequate valuation. We remain on track to realize the combined DKK 2 billion to DKK 2.5 billion in net divestment proceeds. So please turn to Slide 13 for an illustration of the progress made over the last 5 years in simplifying and derisking our business. We have become focused on significantly fewer but larger clients and in higher value-add areas as exemplified by the increase in the revenue per employee. In addition, our cost -- our country footprint is being sharpened. And we see an increase in share of revenue coming from core customer segments, including integrated Facility Services and Key Accounts. In summary, we have been narrowing our focus in order to allow us to invest deeper. While we have admittedly faced too much local underperformance over the last couple of years, it has more often than not been linked to the legacy part of our operations. Together with the superior performance of our Key Account business, it simply stands as a reminder and a reconfirmation of our strategic direction. With this, I would like to hand over to Pierre on Slide 15.

And thank you, Jeff, and good morning, everyone. As you know, the organic growth for the year was strong at 7.1%, well above our medium-term guidance of 4% to 6%. And of course, even, in particular, our Key Accounts, growing 11%. The major contract developments was a positive contribution of plus 1.8 percentage points to the organic growth. It comes, of course, from Deutsche Telekom, which was launched in July. And that growth for Deutsche Telekom was 4% in H2 2019 as expected, despite not having fully ramped up on projects and above-base work as we hinted earlier. Ramping up further on project for Deutsche Telekom remains conditional upon having completed the final part of our stabilization plan, which is including the IT migration. Other contract development in the rest of the portfolio remains strong with plus 4.7 percentage point contribution to growth, again, driven by Key Account contract wins, expansions and high retention. Momentum is slowing slightly towards the end of the year, as expected, from 4.6% in Q3 to 3.6% in Q4. And this is a result of the annualization of several large contracts launched during 2018. Projects and above-base work contributed with 0.6 percentage points to growth in '19, mainly driven by H1. As mentioned throughout 2019, the demand for projects and above-base work became increasingly volatile. Regardless, the absolute level of demand remained high in H2, but just did not continue to grow on top of a strong comparison base. If we look into Q1 2020. We expect deceleration in organic growth compared to the 7.9% in Q4, essentially driven by the loss of Novartis for around 2 percentage points. We also remain cautious in terms of the contribution from projects and above-base work, especially given the short-term challenges with regards to the IT security incident and the coronavirus. All in all, organic growth in Q1 '20 is likely to be solid mid-single digit, excluding the impact from the IT security incident and the coronavirus. Please turn to Slide 16 for the margin development. Our operating profit for '19 came in at DKK 3.3 billion, i.e., 4.2% of revenues. The margin was down 0.8% compared to '19. Jeff has already covered the regional development. So let me just wrap up the development from a group level. Operating profit was supported by strong revenue growth in '19, of course. As well as the successful ongoing turnaround that we see happening in North America and Sweden. But these positives were more than offset by a few significant negative drivers in '19, many of which were short-term in nature. First, a transformational investment program was launched in early '19 and led to a delivery drag of around 0.2%. Secondly, we ended up facing some headwinds from France and from the 2 loss making contracts, which were, in a sense, the reason for a downgrade in November. In addition, we also saw an impact in the U.K. as mentioned by Jeff. 2019 ended up as a year of derisking the business in a number of aspects and especially in terms of provisions. Also not providing for future losses in the Danish defense contract, we decided to cover identified risk, mainly the U.K. and Hong Kong, which led to a DKK 150 million charge. And for those who are interested in details, you have a note 2.6 to the financial statements mentioning these provisions. While the provision did not end up being relevant, again, in terms with the loss-making contract in Denmark, we believe it was a right decision to cover other risks. All in all, the 3 key items behind our downgrade in November, that is France, the 2 loss-making contract and the provision of DKK 150 million, that was flagged at that time, combined had a negative impact of margins of close to 0.8%. Now if we look at 2020. First, we know that progress is never a straight line and based on our experience in '19, we already acknowledged that we have a lot on our plate. With this outlook, we are taking a more conservative approach to guiding in 2020. And also take account of a higher level of uncertainty, especially surrounding this IT incident and the coronavirus as we see. But also, in general, a bit more macro and political uncertainty. We would guide based on the minimum threshold as a way to get away also from guiding in narrow ranges in what is expected to be another significant year of transformation. So operating margins are expected to improve to above 4.5% in 2020. This is lower than our early preliminary expectation of around 5% as communicated in November '19. The around 5% meant in effect above 4.8%, could be seen as a low end of the around guidance, which is what we now changed to above 4.5%. So we lowered the floor with 0.3%. Part of the change is simply building in more conservatism to take account this higher level of uncertainty that I mentioned and that Jeff alluded to. The rest relates to the loss-making contract in Denmark. As mentioned before, the commercial situation has turned to the better. While this is clearly a positive development, it means that no provision have been taken for the contract in '19. And therefore, it will post a loss for 2020, albeit smaller than in 2019 before benefits from the renegotiation -- the negotiation fully materialized. While some headwinds could have been covered by the buffer in a preliminary expectation, we simply don't want to have eroded it, before the year has properly started. The extent to which we end up close to 5%, which we believe is still possible, or just above 4.5%, will among others depend on the degree to which we improved performance in France at the end of the year. On the loss-making contract in Denmark, to the extent we finalize the IT migration on Deutsche Telekom, together with the stabilization plan, and whether we have some spillover effect in the U.K. In addition, our outlook does not reflect the potential financial impact related to the announced IT security incident nor the coronavirus. It is just simply too early to properly assess this potential impact. Even with this adjusted and more conservative outlook, we do expect a solid improvement in operating profit from '19 to '20, driven both by revenue growth and recurring margins. The main building blocks for the improved margin relates to: one, the operational improvement on the 2 loss-making contracts that we have in Denmark and Hong Kong. We are talking about 10, 20 bps. Additionally, the annualization of the DKK 150 million provision, so not taking the provision, again, in '20 will be a margin tailwind of around 0.2%. We also start to see the benefit from the efficiency plan launched in November '19, where we continue to expect around DKK 200 million in P&L benefit in '20, so a bit more than 0.2% as well. Finally, restructuring will continue to come down following the elevated levels that we still had in '19 of DKK 285 million. These positive drivers will be partly offset by the loss of Novartis, which we still expect to impact group margin by around 0.1, 0.2 percentage point. Of course, we do see potential for further upside with the continued turnaround in the U.S., in Sweden and also improved productivity across the organization, but we also make room for potential new underperformance elsewhere. Finally, in terms of the phasing of margin in '20, they are likely to be down year-on-year of -- on H1 with a mentionable increase in H2, where a number of the '19 headwinds will annualize. For an overview of free cash flow, please turn to Slide 17. First, I need to cover the receivables and the factoring part. And the total amount of receivables sold through factoring programs in '19 was DKK 1.4 billion, which is a decrease of more than DKK 1.2 billion from 2018. We are now [ fully ] compliant in all material respects with our policy as announced in November. Going forward, variation in factoring should be immaterial and driven only by contract growth in Key Accounts. We will keep the full transparency on factoring information. But we will guide only and reported free cash flow as we, again, expect to see factoring variation to be not material, but with full transparency. If we look at the change in free cash flow from '18 to '19. Free cash flow, excluding the variation in factoring, improved by DKK 0.8 billion year-on-year to DKK 1.6 billion in '19, which is a very significant improvement that does reflect also that some of the margin pressure is definitely noncash. The implementation of IFRS 16 impacted both EBITDA, interest payments and investment, and you will find the details in the notes. But let's disregard this for a moment. The overarching positive driver for the improved free cash flow was a reduced working capital outflow. Changes in the working capital, excluding factoring variation improved by DKK 0.6 billion from '18 to '19, partly on the back of the annualization of some of the unusually weak performance in '18 that we flagged at that time. But also supported by good progress on a few key working cap optimization initiative in '19. In particular, we are extremely pleased with the DSO, excluding factoring, which is down year-over-year to 49 days. The positive development is really good, given the fact that the launch of Deutsche Telekom in isolation, led to an expected but significant drag on working cap in '19. Capital expenditures, excluding IFRS 16, increased from '18 to '19, partly as a consequence of our transformational investment. But partly also as a consequence of buying some assets, which were previously leased. In addition, we benefit from a DKK 300 million one-off related to the renegotiation and reassessment during the second half of '19 of extension options of certain properties as a result of major contract developments in the year and productivity plans, which have been triggered. These events include the loss of Novartis as well as the announced efficiency program and the related redundancies, revising the range of buildings required. If we combine capital expenditures and additions to leased assets, the net investments were 2% of revenues in '19 within the ongoing range expected to be 2% to 2.5%, and that was part of our cash flow plan for '19. Tax payments came down as expected. Hereby offsetting the higher interest payments, which in addition to IFRS 16 was largely driven by accelerated interest payments related to the repayment of bonds in both Q3 and Q4. Finally, on changes in provisions, pensions and similar obligations, you see the impact from the noncash provision for identified risks made in 2019. Please turn to Slide 18 to cover this in more detail and as basis for looking into 2020. Turning specifically to free cash flow in '19, the DKK 1.6 billion remains negatively impacted by net negative one offs, which will normalize over 2020 and, of course, into the medium term. As expected, the combined drag related to the Deutsche Telekom transition, mobilization and start-up was significant, amounting to around minus DKK 900 million a year. In other words, it includes the upfront investment as well as the initial working cap build-up in connection with launching 1st of July. Other individually mentionable one-off in '19 include a positive -- the positive one-off of DKK 300 million inflow from a settlement that came in H1. And also, the DKK 300 million IFRS 16 reassessment that I just flagged for H2 a minute ago. While we have a few other smaller, positive and negative, including tax refund but on the other side, the refinancing related interest payment, the net of this are broadly neutral. On a separate note, while large Key Accounts may have longer payment terms, they usually pay on time unlike most smaller clients. As such, the DSO in our Key Account business is not structurally dissimilar from group. As it is written on the slide, our DSO, excluding factoring, has remained broadly stable over the last couple of years despite a significant shift in our revenue base towards Key Accounts. Our DSO actually improved year-over-year to 49%. I mentioned that. That's really a very important piece of information. Putting everything together, the net one-off in '19 were around minus DKK 300 million, plus DKK 900 million, minus DKK 300 million and minus DKK 300 million. So it's minus DKK 900 million, plus DKK 300 million, plus DKK 300 million. That's a minus DKK 300 million total net one-off on '19, which will provide further tailwind for 2020. As such, our normalized free cash flow currently sits conservatively at around DKK 1.9 billion in 2019. From this level, we clearly expect underlying growth in 2020, driven by revenue and improved cash margin. This is obviously based on the assumption of a broadly unchanged situation around us, including, for instance, no change in the supplier payment regulation in the U.K. Please turn to Slide 19 as we look into the medium-term for both margins and cash flows. For 2020, we see a few key drivers propelling us towards a medium-term margin target, around 5.5%. First of all, we do expect France and Sweden to recover. As much as both countries have been material headwinds coming down, there will be material tailwinds helping us to get back to the 5.5%. In this respect, please note that our continued business in France, which makes up around 5% of group revenue is currently sitting on minus 4% operating margin in '19, which compares to a historical average of around plus 4%. So a 8% -- 8 percentage point delta on the 5% -- on 5% of the group revenues. 8% margin and 5% of group revenues, that's a lot of money. Similarly, for Sweden, where we are in the middle of the recovery but not completely done, margins were around 4% in '19 compared to a historical average of around 7%. Again, there is a gap to normal. Secondly, a transformational investment program, covering DKK 700 million, DKK 800 million over '19, '21 will lapse as we go into the medium term. The margin drag will disappear, either because given investment further away or because the direct benefits naturalize the upfront costs. Thirdly, the issues on the large loss-making contract in Denmark will also have been resolved one way or the other. Finally, we clearly expect and target the normalization of current local underperformance in a few other areas. But likewise, we prudently expect some selective underperformance elsewhere. Turning to the medium-term free cash flow, growing from loss DKK 2 billion in [ '20 ] to around DKK 3 billion medium term. It will be underpinned, first and foremost, by a few years of revenue growth combined with normalized margin, just discussed. In a normalized year, we see working cap lien cash conversion being above 90%. Or in other words, an outflow of a few hundred million a year. Interest paid should be broadly unchanged from the current run rate, while taxes paid will be based on a cash tax rate of around 25%. Finally, capital expenditures, including addition to leased assets are expected to remain in line with the historical range of 2%, 2.5%. All in all, this leads us to the target of around DKK 3 billion in free cash flow in the medium term. Please turn to Slide 20. We have already covered revenue and operating profit in detail, so we just add a couple of quick comments for the rest of the P&L. Other income and expenses in both '19 and '18 are entirely driven by costs related to acquisitions and divestments. We will incur further divestment related costs in 2020 on the back of the execution of our disposal program. Financial income and expenses increased DKK 114 million for '19, mainly driven by the implementation of IFRS 16, which account for DKK 80 million of this increase. But also the refinancing done in H2 '19, with a significant cost of around DKK 20 million, not replicable in 2020. All in all, we expect financial income and expenses net to decline slightly in 2020. Our divestment program led to some goodwill impairments in both '18 and '19. Further impairments related to the divestment pipeline, if any, should be limited from here on. Finally, the acquisition-related amortization and impairment of brands and customer contracts was DKK 335 million in '19, a reduction from '18 as expected as we are gradually getting done amortizing locally. On this basis, amortization will continue to step down in 2020. Please turn to Slide 21. And looking at our capital structure, we brought down our gross debt in 2019 with a net repayment of DKK 3 billion of corporate bonds in H2 '19. As a result, our gross debt leverage improved by around 0.2x. Looking at net debt cover ratio and adjusting for IFRS 16 and the reclassification of rostering into EBITDA, restated '18 leverage was 2.6x against a reported 2.1x. This leverage increased to 3x at the end of '19 as a result of our decision to significantly reduce the use of factoring and partly because of a weaker performance. We expect the leverage to gradually come down through both EBITDA growth, improving free cash flow and lower net debt. And expect to be within the leverage target of 2.8x by the end of 2020. On the dividend side. On the back of our performance in '19, we proposed another ordinary dividend of DKK 7.7 per share to be paid out in April. We further recommit to at least keeping the ordinary dividend for 2020 paid out in April 2021, stable at the DKK 7.7 per share. For the share buyback, during 2020, we will launch a -- the program to return at least 25% of the combined expected divestment proceeds, i.e., DKK 2 billion to DKK 2.5 billion. With 40% of the divestment program completed, we are getting close -- getting closer, but given the current situation with regard to the malware attack and also the coronavirus, we will await more clarity before we take a decision on timing. With this, I will hand back over to Jeff on Slide 23.

Thank you, Pierre. The outlook has already been covered in detail. I will just wrap up by reiterating a few points. With this outlook, we are taking a more conservatively approach to guiding in 2020. And that, of course, also takes into account a higher level of uncertainties, predominantly right now impacted by our distraction from the malware attack but also corona impact. As well as, of course, added macroeconomic and political uncertainty. So putting those uncertainties into a conservative way of looking. And that means above or a minimum guidance. However, our outlook does not reflect any potential direct financial impact from the IT security impact or from the coronavirus. It's simply too early to probably assess as also mentioned by Pierre. As such, the outlook for the organic growth for 2020 remains above 4%, with medium-term targets of 4% to 6%. Our operating margins are expected to improve to above 4.5% in 2020, and reported free cash flow is expected to improve considerably to be above DKK 2 billion. Both driven partly by underlying growth and partly by the annualization of certain headwinds in 2019 as covered throughout this presentation. To put performance in '19 and '20 into perspective, please turn to Slide 24. ISS do have a long track record of solid and resilient organic growth. In almost 3 decades, we have had just 1 year with a negative organic growth, which was almost 20 years ago now. Moreover, our gradually improving business mix is driving us to become a structurally higher growth company as evidenced by 2019, where we were delivering the strongest organic growth on record. Likewise, we have a long track record of stable margins and usually within a tight 90 basis points range, although 2019 clearly falls outside that. The track record demonstrates the robustness of our operating model through the economic cycle. Please turn to Page 25. So in summary, we do remain a leading and differentiated global Facility Service provider, capable of delivering the growth of 4% to 6% with robust margins at around 5.5% and strong cash flow of around DKK 3 billion in the medium term. With that, we would like to open up for Q&A.

[Operator Instructions] Our first question is from Bilal Aziz from UBS.

Just 3 questions from my side, please. And firstly, you've talked quite a fair bit about strengthening the contract bidding. And how, if at all, has the incentivization between growth, margin and free cash flow changed for your sales team? And do you think -- do you think that strict focus on commercial discipline will be reflected by slower growth from now on? And secondly, what do you think about above-base business? That was broadly flat in the second half of the year. But presumably, that's the most impacted from the system shutdown you're currently seeing? And lastly, I know you've given a lot of granularity around margins in 2020. And perhaps can you talk through the phasing of that as we move through the year and some of the moving pieces there?

Yes. Thank you very much for that. The contract bidding. I think what we're also trying to show you on this one is that we do have a quite tough covenants on all bidding. So I don't see this to be a major change to what we're doing today. We are -- as -- we're putting the escalation levels a little bit lower. But reminding you that out of the 1,000 Key Accounts, we have 2 that created a problem over the last couple of years from an earnings perspective, albeit a significant level as we can see it on the earnings overall. Now in that, there is -- there has never been an incentive to grow over margin. So if you look into the remuneration report, our bonuses is basically wiped out because of the cash flow and because of the margin. So there's always an absolute level of profit and cash that needs to come in. So we have never incentivized growth over value for that matter. And as -- we will not do that in the future either. Going forward on, will it handle the growth? I don't actually think so. The whole point of going into Key Accounts is also underpinned by the growth you see on all the existing accounts in 2019 as well as the year before. It's just easier to grow within existing clients, but also be more firm on what segments it is. And if you look at the big Danish account, there're a lot of services in there, which is different to what we normally do. And that's what we mean by further strengthening the folks on what do we bid for. So going into that, the key driver is our buildings, what happens in factories and not out and about in rural areas. So that's the key driver for it. So I don't see that as a hampering or at least not hurting the 4% to 6% organic growth in the medium term. Above-base, the second half was broadly flat -- in the second half. That's true. I think -- first of all, you have to remember that it was very high in 2018. So we remain at a very high level. I do believe that we continue to see better opportunities for this going forward as we penetrate Key Accounts even further. There has been some uncertainties, particularly, within the banking sector and within the U.K. of these above-base works over the last few years and also seen in -- at the end of 2019. So I do believe that, that will come back up to good growth areas also at the later stage in 2020. Also with, of course, Deutsche Telekom with the IT solutions coming in and so forth during the year, it's expected to come in during the second half year as well. And on the phasing?

Yes. On the phasing, so we do see improvement ongoing throughout the year. However, in H1, we do expect some negatives. You remember that France has started to really come down around summer. So we still have a basis of comparison, which is a bit more demanding on that part in H1. And then in H2, of course, that's a different story. You may remember also that we have a one-off gain and pension in Europe in the first half of '19, and that would be also a basis of comparison that we need to take in account. On the other side, we see in H2, gaining momentum on some of the plants, especially the efficiency plants, some is coming now. But you also know that some initiatives that take time to ramp up and they won't be there until H2. And then last but not least, the DKK 150 million provision that we book in year-end is, again, H2 related, so that will help us to improve sharply in H2 of 2020.

And our next question is from Magnus Jensen from SEB.

A couple of questions from my side as well. First of all, on the cash flow. You've talked last year about payables being a positive contribution to cash flow. Could you quantify that? And could you say anything about 2020 for -- in relation to payables? Are you able to improve that even more? And the second question is related to the coronavirus. Could you try and put a color, words to how this virus is impacting your industry in China and obviously Hong Kong? Where issue is biggest, and what could potentially threaten the rest of the world? And finally, a question on the IT impact. You'll probably would not answer this, but we're pretty much in the dark in terms of size of this financial impact for 2020. Are we talking DKK 100 million? Are we talking DKK 500 million? Where are we? And it'd really good if you could give us some sort of flavor on this? That's my question.

Yes. On the payables, first, we stand at DKK 7 billion in December '19, where we were at DKK 6.7 billion at the end of '18, which is a slight increase, which is, of course, much more now, the increase that we have in receivables on the back of growth. And we have some different impact on that one. One indeed is that we launched a significant initiative around quarterly payment terms, which has been successful and which bring us an advantage above DKK 300 million, which actually explains most of it, which means that with the growth, we have actually also accelerated payment to suppliers. So we have a positive impact, which is this DKK 300 million of new setup with suppliers, but it means also that we have been more disciplined to pay our suppliers on time. And in '19, if you include the growth, so we believe that we are on the right track. Of course, this is also to comply with regulations, which are being implemented, and we had a significant one in the U.K., and that's only the right thing to do. I think it also shows that improvement in cash flow is based on good measures and the right quality, which for us is absolutely key. Do we have some further upside there? Well, we are not completely done with the optimization. Yes. So we will carry on working on that. And we do believe we have some upside, especially in a year with lower growth. We do have -- we have to work on that one to make sure that we get something out of it. Maybe, Jeff, I will leave you the corona to you. On the IT part, it's definitely too early to comment. But we can give you some qualitative items that can help you to understand where we are. First, as you can imagine, we are incurring some significant IT remediation costs. We have people helping us very efficiently but not for free to fight the malware. So there is a cost. There is also a cost because in this emergency mode that we are in quite a few operations. In line with our business continuity plan, we do have work around. And this work around, that may trigger some extra cost as well. So it depend very much how fast we can be to recover to, let's say, a decent level of operation where productivity is not impaired. So that's the second driver, which is key. And that depends very much on the timeline. On the revenue side, I think that, as it was pointed out, clearly, it is the above-base, which is the most at risk and the base, of course, much less. On the above-base, some contracts, they require a lot of systems to be delivered. It's not the case for all of it. So we need also to be careful. And that's part of the story. But of course, the time is of the essence. As Jeff mentioned, we are very pleased that we have not compromised any data or systems from our customers, which means that we have limited exposure to third-party issues. We are on the other side as you can imagine also reviewing our contracts, reviewing our insurance policy to see what sort of covers we could have. But I want to be clear that we do not have a global cyber attack insurance cover. But we do have in part for some of the consequences. So that's a sort of uncertainty that we have to cope with. The good thing is that we are delivering the bulk of our operation and that's also the strength of being local. And that's quite successful. I'm sure on the call, you had quite a few people who are actually operating -- working in places, which are operated with ISS. And I think that they do not actually see a -- any disruption, so I think that's a real big strength. Now it's about productivity, which is a key point, and it's about the time line and that's where we have uncertainty. Jeff?

On the corona, obviously, we work with all size of clients across the entire world. And we've seen the most impact right now in Asia region. That's highest impact is in China, where some customers have closed sites. And then, of course, when that happens, then it also reduces the level of services that we need to do. Then it comes down to individual contracts and agreements of how much we get paid in those current circumstances. So where it can impact us is, of course, closure, reduction of sites. But also where it's difficult for people to go to work if the government implement curfews and the like. Now that will, of course, impact the entire world. So we are always second in line. We are more resilient than most businesses in cases like this. As we also are with the IT impact, you can argue, that we can continue to run our business. And we get impacted when our customers get impacted. So right now, it's very hard to see overall what the impact the corona will be. And we -- as we speak, is this a distraction to us, everybody else, that creates more uncertainty. We are helping clients on their continuity plans, on how do they improve hygienic conditions, nutrition conditions. How do we change the way we cook food and so forth to help counter the spreading of the disease. And in hospitals, how do we support deep cleaning. So at the end of the day, unfortunately, it can go both ways. We get more services, more hygienic, their needs, but we also have a risk of some reduced services somewhere else. It's simply too early to say what's the assessment. But remember, this is second in line. First in line is our customers. That's the overall robustness of this business.

And our next question is from James Winckler from Jefferies.

So the first one I had was just on the provision, the DKK 150 million. Obviously, no -- not linked to Danish R&D and anymore. But essentially -- I mean, is the correct way to read this then that is being tied to new risks that have emerged since your last guidance? I guess, assuming you have -- you're still provisioning. But for now, it's being tied to things which are not in the majority of the original reasons that you announced revisions, that we should view these as incremental. And assuming that it needs to be some sort of quantifiable aspect, this shouldn't be related to corona and malware. Just wondering if you could talk about what those are and if it's a correct read, that is something that has gotten worse since your last communication to the market? And then if you could also just remind me when the contract exits in North America gets lapsed? So we should start seeing the underlying growth emerge? And then lastly, just on the other receivables, up sequentially 8% since H1. Just wondering if -- just with the drivers being transition mobilization costs for -- and prepayments and stuff. Would you expect these other receivables to come down next year as you start, for example, collecting on being able to build for some of the mobilization transition cost to Deutsche Telekom, et cetera?

Yes. On the -- maybe to start with the DKK 150 million provisions. It does cover a few risks. Among them, there is Hong Kong. And it clearly, 2019 is also, as I mentioned it, a year of cleanup. We had to revisit a risk. It happened that, indeed, we did not have to provide for Danish Defence. It means that we had to revisit to make sure that we had no other risk. It happened that we have been implementing a big change of systems in the U.K. over the last 12 months. We've been building on this to revisit the transparency and the profitability and each and every BU. And on the back of that, we have decided to make a global provision in the U.K., which is actually included in the DKK 150 million. It's, of course, a pure noncash item. And I think that you should not infer that it means there is another difficulty or anything of that kind. It's just part of our estimate as a management to make sure that we cover and review our risk at year-end. And again, '19 was a year to do that.

Mobilization?

Yes. On the mobilization. I mean clearly, we see, of course, a significant drop coming in '20 in terms of transition and mobilization because now the bulk of the work on DTAG is behind us. You know that we do not have a major contract that would trigger a significant transition going forward. So we see that as coming down, which is, of course, good news. It doesn't mean that we won't win another large contract and we won't have some transition. But clearly, what we have in the pipe is much less demanding that we have seen over the last couple of years. That's good. And another one that I flag is, of course, the prepayment to suppliers. I mean, that's an amount which has been increasing over the last couple of years. And it's clear that as we have been very active on our quarterly payment term, this is something that we have decided to tackle with our procurement teams. So we do see some potential there to get that down in the next 12 months. That's also one of our working path in terms of improving our free cash flow going forward.

And in North America, we expect to see a sort of gradual catch up in the first half year, so it starts coming in the first half year of the lapsing.

Okay. And then just first -- only follow-up on the provision, the U.K. systems changeover. Is this not a cost that you should or could have been aware of at the last time when you were talking about provisioning? Or was there incremental clarity on terms of the expected loss that allows you to attribute -- provision to it now relative to Q3? When you announced the previous provisioning.

No. I think that there is -- when you change these terms, there are a lot of work which is going on to reallocate your cost and look at the transparency that you can have, again, BU -- per BU. And this is very much an estimate about where we are. And based on the new allocation. So I don't think that was something that we would have been in a position to do in any area to be very, very direct. There was no chance that we could have done that any time before actually, really Q4, and I would even say, December.

So basically, the -- just last final question is essentially, if nothing has changed for Danish Ministry of Defence, you still had to provision against that. Would you be reaching it this quarter now? Would you have been increasing the provision to cover this U.K. change of systems? Or is this more -- you had a provision that you're expecting to use or announce? And then you didn't have to apply that to Danish Ministry of Defence. So you looked elsewhere to -- for other cost essentially to potentially that you would be prudent to provision against? If nothing else had changed for Danish Ministry of Defence, would this provision against the U.K. have occurred?

Let me tell you -- I -- let's just be very clear. I mean, there are accounting rules, we comply with accounting rules. Of course, there are management estimates and that's not an exact science. But we do comply with accounting rules. So we are compliant on the Danish part. We are compliant on the U.K. part. I know that.