G4S plc Interim Management Statement Conference Call
May 15, 2012 AM BST
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
GFS.L - G4S PLC
G4S plc Interim Management Statement Conference Call
May 15, 2012 / 07:00AM GMT
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Corporate Participants
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* Helen Parris
G4S plc - IR
* Nick Buckles
G4S plc - Group Chief Executive
* Trevor Dighton
G4S plc - CFO
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Conference Call Participants
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* Rob Plant
JPMorgan - Analyst
* Jaime Brandwood
UBS - Analyst
* Andy Grobler
Credit Suisse - Analyst
* Laurent Brunelle
Exane BNP - Analyst
* Paul Checketts
Barclays - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the G4S IMS call. I will now hand you over to your host to begin today's conference. Thank you.
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Helen Parris, G4S plc - IR [2]
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Thank you. Good morning, everyone. And welcome to our interim management statement conference call. In a moment, Nick Buckles, our CEO, will take you through the key points of the statement. And then Trevor Dighton, our CFO, will make some brief comments on our financial position. And then we'll open up the call for some Q&A.
As this is just an update on current trading, we don't intend to get into a great amount of detail on specific countries today. And we will update you in more detail on the great opportunities for the Group at the Capital Markets Day next week on May 22 and at our half-year results, which are published on August 28.
So I'd now like to hand over to Nick, who will give you a brief summary of today's statement. Here you go.
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Nick Buckles, G4S plc - Group Chief Executive [3]
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Good morning, everybody. As you can see from our statement this morning, we've seen revenues grow 7.5% at constant exchange rate and 6.7% at actual exchange rates, with sterling strength expected to have a more significant impact as the year progresses.
We have continued to see a step up in organic growth in our developed markets and continued strong growth in developing markets. Overall organic growth was strong at 7%, which we're very pleased with, with 4% in developed markets and developing markets continuing to grow strongly at around 11%. If you exclude the Olympics Games increase year on year, organic growth was around 6%.
In the Secure Solutions products, some of the strongest performing businesses in developed markets in the first quarter were the UK, where we took on manned security on the MOJ contract; the US, where we took on Chrysler -- sorry, General Motors, and some additional work for Bank of America; and Canada, where we took on the CATSA aviation contract. The UK government business was still slightly negative due to the lost contracts part the way through 2011, will be strongly positive going forward.
In Europe, the best performing countries were Belgium, Norway, and Finland. Eastern Europe continues to be challenging, with further revenue declines in markets such as Romania and Hungary. And of course Greece is still fairly problematic, although we are seeing better growth this year than last.
In terms of growth in developing market Secure Solutions, very good in Latin America, as you'd expect. Some high inflation driving some strong double-digit growth in Argentina, Brazil, and Peru. But also very good in the Middle East and Africa.
In Cash Solutions, we continue to deliver good organic growth of around 10% in developing markets. And we were positive in developed. The businesses in Middle East and Asia have all grown particularly well.
In developed markets, the organic growth was affected in cash services by the loss of the HSBC contract in the UK about three-quarters of the way through last year. But we have started the new contract with RBS a few weeks ago so we do expect to see a strong improvement in growth and margins in the second half.
But overall margins for the three months were down 0.4%, as we expected, due mainly or almost entirely actually to contract startup phasing in the UK cash solution businesses, as I just mentioned. The UK government business, where we're starting outside the Olympics about GBP180m to GBP200m revenue in the first quarter and April. And also the US government, where, as I mentioned at the results announcement, funding for demining and just government funding overall has become quite tough. And actually our US government business was minus 12% organic growth domestically.
I'll now hand you over to Trevor to make some comments on the finances.
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Trevor Dighton, G4S plc - CFO [4]
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Thanks a lot, Nick. As you remember from the full year, our financial position remains strong and we've got significant current headroom from committed funds. A few weeks ago we raised EUR600m for five years in the public bond market, which will be used for general corporate purposes and to pay down short-term bank borrowings.
We haven't made any acquisitions in the year so far, but we're working on a number of opportunities and still expect to spend around the GBP200m for the full year.
With our continued focus on debtor management, cash flow also remains strong. And we're on track to hit our cash conversion target of 85% of PBITA for the full year.
Okay. I'll just hand you back to Nick for some final remarks before opening the call for Q&A.
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Nick Buckles, G4S plc - Group Chief Executive [5]
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Thanks, Trev. So the business has continued to perform well, and we are very encouraged by the pipeline of opportunities we see ahead. And we will go through them in more detail with you at the Capital Markets Day. And we do expect to improve the margin performance in the second half, ahead of the four-tenths decline we've seen so far.
So thanks very much for your attention. Now happy to take any questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). And our first question comes from the line of Rob Plant from JPMorgan. Please go ahead.
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Rob Plant, JPMorgan - Analyst [2]
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Morning, Nick, Trevor and Helen. On the margin, as you said, people expected the worst performance in Q1. But when you look across the rest of this year, do you think the full-year margin will be flat? Will it be down a bit, up a bit? And how does it pan out quarter by quarter, please?
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Nick Buckles, G4S plc - Group Chief Executive [3]
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We expect that variance to reduce as we go through the year, down for the reasons I mentioned. We've got UK cash business, which we expect to significantly improve second half v first. There won't be a big issue in the second -- big change in the second quarter v first but certainly second half onwards.
UK government, all those startup issues we're working our way through by about August time, I would say. So we'd see a much stronger second half.
The US government piece, there's a bit more work to do there. As I mentioned, demining business has actually halved its revenue year on year. So that's a significant downturn in revenue and a big profit impact from that. But we are working through a big restructuring program in both UK and US demining in the next couple of months so we'll start to see an improvement there. But the underlying US government margin won't improve back to prior-year levels, we don't believe, during this year. So there's been quite a big decline there.
But elsewhere, the underlying business is still performing well. Developing markets are growing strongly at higher margins. And so the prognosis really, and as we've said before, is a 7% margin for the next couple of years is our expectation, give or take a little bit basically. But with organic growth picking up significantly during the second half of this year, we can't -- looking at the different regions, the UK is definitely going to be significantly stronger because the lost contracts fall away at the half year. US government will get better from the minus 12%. UK -- US commercial has been very strongly double-digit. That'll probably come off a little bit because it's been incredibly strong. Canada will remain high for the year. Developing markets will still be double-digit and stronger.
And so all we can see is stronger organic growth going forward. So I hope that answers the question overall.
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Rob Plant, JPMorgan - Analyst [4]
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Yes. Thanks, Nick.
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Operator [5]
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Thank you. And our next question comes from the line of Jaime Brandwood from UBS. Please go ahead.
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Jaime Brandwood, UBS - Analyst [6]
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Morning. Nick, I just wanted to just check something that you said. Did you say that UK government was still slightly negative year on year in Q1?
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Nick Buckles, G4S plc - Group Chief Executive [7]
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Yes, that's true.
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Jaime Brandwood, UBS - Analyst [8]
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And are you expecting, given the phase-in of the MOJ and other contracts, for the UK government growth ex-Olympics to move into positive territory in Q2?
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Nick Buckles, G4S plc - Group Chief Executive [9]
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Yes, because we've got Lincolnshire Police starting on April 1. And we've got Compass starting as well.
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Jaime Brandwood, UBS - Analyst [10]
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Okay. And in terms of the startup contracts that you mentioned in the UK, do you have a sense? You said these startup costs will start to drop out as of August. Do you have a sense for the first half as a whole in terms of some rough quantification of these UK government startup costs, what that might be?
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Nick Buckles, G4S plc - Group Chief Executive [11]
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It's not so much startup costs. It's contract phasing. So basically, if you imagine our first half of last year, we had a court services contract annualizing at GBP80m plus with double-digit margins. And we had a D&E contract which went through to about April, GBP50m annualized at decent margins, but not double digit. And on both those contracts there were some exit benefits as well. Second half more than the first half. So that's what we're really talking about.
And the contracts we're starting up were all pretty much breakeven for the first three months, purely from the fact -- you price these contracts on long-term margins. They're seven-year contracts. And you don't expect to hit the ground running with big margins basically.
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Jaime Brandwood, UBS - Analyst [12]
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No, absolutely. And what's the latest that you're hearing on the electronic tagging renewal in terms of when we might hear more on that?
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Nick Buckles, G4S plc - Group Chief Executive [13]
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Well, the contract, as we've mentioned before, is broken down in a different way. There's a [rep] supply, etc., etc. We're just working through the process. I don't think they'll -- the start date for the contract won't be until midpoint of next year or Easter, between Easter and summer next year. So there's a long way to go still through that.
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Jaime Brandwood, UBS - Analyst [14]
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And the acceleration that you're talking about for the Group as a whole in terms of this 7% organic growth building through the year, are you also expecting acceleration, excluding the Olympics in terms of that underlying fix?
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Nick Buckles, G4S plc - Group Chief Executive [15]
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Yes, that's really what I was trying to allude to in the first answer that the only business we can see going backwards against where it is at the moment is probably Europe, because we had a lot of contracts start -- good contracts start in the first -- towards the first -- end of the first quarter last year in places like Belgium. And I think the organic growth in Europe was about 4% or 5% in the first quarter. That will fall away a little bit during the year. But it's not significant. We've also got the European Parliament contract coming off. So yes, that's the only area. Apart from that, we just see the others improving basically.
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Jaime Brandwood, UBS - Analyst [16]
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And very lastly, in terms of the acceleration in emerging markets, is there anything else that you'd pick out there other than the inflation in places like Argentina and Latin America more generally? Is there anything else that's giving you confidence about that acceleration in emerging markets?
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Nick Buckles, G4S plc - Group Chief Executive [17]
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You know we've been working on the sectors now for a little while. We've just been [moving] our business plan process around the regions. And the opportunities for mining and oil and gas are large contracts. And as opposed to the past, where we're putting on lots of small business in new markets, there's a big opportunity to put on large contracts now. So I think that will start to make a big difference in the second half.
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Jaime Brandwood, UBS - Analyst [18]
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So that pipeline is something that we might hear about a week from now?
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Nick Buckles, G4S plc - Group Chief Executive [19]
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Yes.
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Jaime Brandwood, UBS - Analyst [20]
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Perfect. Thank you.
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Operator [21]
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Thank you. And our next question comes from the line of Andy from Credit Suisse. Please go ahead.
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Andy Grobler, Credit Suisse - Analyst [22]
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Hi. Good morning. Just one question remaining. Just on the US government business, you mentioned the demining contract which you'd lost at the end of -- or got a lot smaller at the end of last year. What's the situation with the rest of that business in terms of scope and pricing? What are you seeing as of now?
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Nick Buckles, G4S plc - Group Chief Executive [23]
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Yes. I'll probably give a bit more detail on Capital Markets possibly. We're still thinking it through at the moment. But you know this business runs behind a proxy structure?
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Andy Grobler, Credit Suisse - Analyst [24]
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Yes.
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Nick Buckles, G4S plc - Group Chief Executive [25]
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And basically there's three elements of the business. There's US domestic high-end security, which is the traditional business which we've been doing for 30, 40 years, so Savannah River, Oak Ridge, etc. And that part of the business, there's been quite a lot of rebids in the last 12 months. Pricing is very, very tight. And price with the US government has become the predominant measure of contract award once you hit a fairly low technical barrier.
So undoubtedly some of the underlying domestic business is lower margin than it has been, not significantly, but definitely lower. And the budgets are being squeezed and so there's reductions to service. And there's a very slow process of getting new contracts awarded basically for new business. But in this area of the business, it's fairly mature. We've got about 70% market share. And the margins are a little bit tighter than they have been.
Then if you go into the facility services part, which is classified facility services with security at the core, the domestic part of that has -- we've been bidding on a very large number of contracts. We're still waiting a number of decisions. We expect to land some of those in the second half or before the second half, which will see the growth improving in the domestic side.
And then overseas in terms of base operations, we've won a big contract in Diego Garcia, Bahrain. And that's a big area of growth that we see, which is integrated facilities on overseas US bases, which will really be the growth driver we think in the future.
But then if you add on the demining and dogs business, canine, that came with the acquisition of RONCO a few years ago, that's had a fantastic run for a couple of years, strong double-digit margins, about $100m revenue annualized. And it's not a case of a contract coming off; it's a case of funding for humanitarian demining drying up completely. So whereas we're working for the United Nations, etc., on large demining humanitarian projects in Iraq, Afghanistan, Sudan, basically the funding just stopped. And so we were left with large tranches of employed workforce and assets which basically we couldn't deploy.
And it's the same with our UK demining business, which reports into the UK risk management business. And the funding has just completely dried up. So we've had to take a lot of cost out to get the business back into shape. And that will definitely show some improvements in the second half.
But that underlying inability of the US government to award contracts, particularly in the integrated facilities area and the fact that the underlying margin in the domestic businesses has come under some pressure has meant that that's probably our poorest performing business relatively year on year. And there's a lot of work to do on it.
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Andy Grobler, Credit Suisse - Analyst [26]
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Okay. Thank you very much.
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Operator [27]
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Thank you. And our next question comes from the line of Laurent from Exane BNP. Please go ahead.
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Laurent Brunelle, Exane BNP - Analyst [28]
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Yes, good morning. Laurent Brunelle, Exane BNP. Just a follow up on the organic sales growth. Can you maybe split the 7% achieved in Q1 between price inflation and volume?
And is it fair to assume, well, for the full year, 10% organic sales growth, including the Olympic Games, as you mentioned that the organic sales growth is accelerating without the help of the Olympic Games contracts? Thank you.
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Nick Buckles, G4S plc - Group Chief Executive [29]
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The price v volume is always very difficult to ascertain, particularly as the only measure we have of inflation is retail price index across countries. And often wage inflation is either lower or significantly higher. In developing markets, it's nearly always 50/50 between price and volume. I think in developed markets I would say that nearly all of it is volume growth; there's not a lot of indexation still coming through in a number of territories.
I don't know where that leaves the overall Group. Probably of the 7%, I would say 5% is volume and 2% is price probably.
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Laurent Brunelle, Exane BNP - Analyst [30]
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Okay.
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Nick Buckles, G4S plc - Group Chief Executive [31]
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And in terms of organic growth, you know we never give predictions. So we can't really answer that 10% plus question. But all I'm saying is it wasn't quite 7% in the first quarter. We rounded it up a little bit. But we do expect that to improve during the year. The Olympics will add 2% to 3%, as I said. We may get to 10%. We'll have to wait and see how it pans out basically.
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Laurent Brunelle, Exane BNP - Analyst [32]
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Okay. Clear. Thank you very much.
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Operator [33]
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Thank you. And our next question comes from the line of Paul Checketts from Barclays. Please go ahead.
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Paul Checketts, Barclays - Analyst [34]
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Morning. I've got three questions, please. Firstly, are you finished with the cost-cutting program in the Cash Solutions business in the developed markets now?
And the second question is on any particular movements or imbalances in price and wages across the business that are going on at the minute?
And lastly, on Denmark, there are some reports that you were going to divest part of the business there. I'm sure you won't want to talk about specifics, but maybe you'd just remind us how the Danish business breaks down between cash and secure and some of the systems operations, please.
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Nick Buckles, G4S plc - Group Chief Executive [35]
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Right. Three questions. First one, cost cutting really has been across the whole Group. It hasn't just been on Cash Solutions developed markets. So basically we announced at the year end that we've undertaken something called [Project Meadow] in the Group. And that's around short-term overhead cost reductions in region and Group and following down into the business unit. Most of that is now complete. Some will still be coming through during -- rest through to the half year. But most of that is complete to underpin our second half of margin performance going forward.
The third area of Project Meadow or Meadow 3 is basically about getting the right shape of overhead for the future businesses. That'll take a little bit longer, but something we're working through.
The other area of cost reduction we're working on, and it's only early days, is the whole procurement issue, where we're trying to address about GBP500m of bought-in cost from outside the Group. So good progress being made. Still a lot of work to do, but definitely a good start.
The second question on prices and wages, we've said before, Europe is often the only place where we get these issues. We're not massive in any particular way in Europe. I'm not aware, as we speak, of any major issues in terms of price v wage around the different continental markets. The only market that we've seen quite a big economic effect quite quickly is the Netherlands, where organic growth has slowed to negative, and quite a lot of short-term reductions as well. So that's the only real big economic impact we've seen that's different from where we expected it to be back in March.
And then the third point around Denmark, Denmark is a mixed Secure Solutions business. Doesn't have any Cash Solutions at all. And it's about GBP120m, GBP130m -- sorry, is that about right? Yes, about GBP160m, sorry, a year revenues. So it's a fairly substantial business.
The Secure Solutions or manned security piece is about GBP30m in that figure. And the remainder is some sort of alarms business ranging from B2C to B2SME through to large systems. And as part of our overall look at divestments, we've said that B2C and maybe small alarms isn't fundamental to our strategy. Our strategy is very much on large contract wins, outsourcing, and driving strong organic growth. So it's part of a number of businesses we're looking at to see if there's some value creation opportunities in line with how we dealt with it in Norway basically.
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Paul Checketts, Barclays - Analyst [36]
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That's great. Thanks very much.
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Nick Buckles, G4S plc - Group Chief Executive [37]
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Okay.
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Operator [38]
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(Operator Instructions). Okay. We have no further questions coming through.
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Nick Buckles, G4S plc - Group Chief Executive [39]
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Well, thanks very much, everybody, for joining the call. Very pleased with the start to our year. And we look forward to seeing you in next week. So thanks very much.
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Operator [40]
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Thank you for joining today's call. You may now replace your handsets.
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