Half Year 2012 G4S plc Earnings Conference Call
Aug 28, 2012 AM BST
GFS.L - G4S PLC
Half Year 2012 G4S plc Earnings Conference Call
Aug 28, 2012 / 07:30AM GMT
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Corporate Participants
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* Nick Buckles
G4S plc - Group Chief Executive
* Trevor Dighton
G4S plc - CFO
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Conference Call Participants
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* Andrew Ripper
BofA Merrill Lynch - Analyst
* Rob Plant
JPMorgan - Analyst
* Jaime Brandwood
UBS - Analyst
* David Brockton
Espirito Santo Research - Analyst
* Steve Woolf
Numis Securities Ltd - Analyst
* Andy Chu
Deutsche Bank - Analyst
* Kean Marden
Jefferies & Co - Analyst
* Paul Checketts
Barclays - Analyst
* Ed Steele
Citigroup - Analyst
* David Hancock
Morgan Stanley - Analyst
* Laurent Brunelle
Exane BNP Paribas - Analyst
* Daniel Patterson
SEB Enskilda - Analyst
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Presentation
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Nick Buckles, G4S plc - Group Chief Executive [1]
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Well, good morning, everybody, and welcome to the G4S half year results announcement. If I quickly take you through the agenda, pretty much the same as usual, I will kick off with the results highlights, Trevor will come on and talk about the financials, and I will come back and talk about the business review and clearly for this half year, an Olympic update as well. And then we will take Q&A firstly from the room here, and then from the wires.
So if we move on to the results highlights, if you strip out the Olympics contract revenue, we had good organic turnover growth of around 5%, 6% underlying group turnover growth, strong performance in developing markets, double-digit growth, and we maintained our overall profits before exceptionals at around GBP236 million.
The margin was lower at 6.2%, down from 6.5% if we exclude the revenue from the Olympics Games, and our cash flow generation was very strong for the first half at 83% of PBITA. We have made a GBP50 million provision for the Olympics Games contract loss, which I will come back to, and also, a GBP24 million restructuring charge which we talked about our restructuring exercise at the Capital Markets Day, we have taken a GBP24 million restructure charges. Trevor will go through that and that could be GBP30 million plus for the full year.
Adjusted EPS is maintained at 9.8p and the interim dividend we have recommended in line with prior year at 3.42p per share.
I'd now like to hand you over to Trevor who is going to talk about the financials.
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Trevor Dighton, G4S plc - CFO [2]
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Thanks, Nick, and good morning, everybody. As usual, the presentation shows this half year compared to the 2011 half year at current exchange rates. We will also be referring both to the published statutory numbers including the Olympics contract revenue and to the underlying business numbers excluding the Olympics.
The statutory revenue line includes GBP78 million of Olympics revenue at a zero PBITA. The loss provision has been booked as an exceptional item. Our total turnover for this half was up 7.5% to GBP3.9 billion. Nearly all of this was organic growth and, excluding the Olympics, the growth was 5.8%. Growth in the Secure Solutions part of the business was 8.5% or 6.4% on an underlying basis. Growth in Cash Solutions has improved to 2.7% driven by the performance in developing markets although the economic environment continues to be challenging in the developed markets.
Looking at total turnover geographically, strong growth in developing markets continues and was 12.7% for the half year, including the benefit of the FM business that we bought in Brazil at the end of last year. Of the growth in Europe of 5.8%, 3.7% is from the Olympics. Growth in North America has picked up to 4.5% on the back of a very strong performance in the US commercial business, partially offset by a further decline in the US government business.
We are showing two organic growth slides. This one gives the figures including the Olympics with total organic growth of 7% including 8% in European Secure Solutions. And this slide shows the underlying organic growth for the half year at 5%. Developing markets has moved back into double-digit growth across both product areas.
Secure Solutions grew by 6% overall with 3% growth in Europe and 4% in North America. In this region, there was a big contrast between 13% growth in the commercial business and a 14% decline in the level of government business particularly impacted by the reduced volumes of demining activity.
Cash Solutions organic growth was negative in developed markets but 3% in total, with developing markets growing by 11%.
PBITA for the half was unchanged from 2011 at GBP236 million in total, and as you can see, it's pretty similar across both product areas. The Group margin was down by 0.5% compared to the same period last year, but if the calculation is adjusted to exclude the Olympics, the decline is 0.3% to 6.2%.
Cash Solutions is only down 0.1%. The fall in underlying Secure Solutions margins is 0.4%, principally due to the poor performance of the US government business. And this shows in the analysis of PBITA by geography. North America is down by GBP7 million with Europe down GBP3 million and developing markets up GBP10 million which includes GBP3 million from the Brazilian FM acquisition. Developing markets contributed 40% of PBITA for the half year.
And finally, margins by geography, North America down a whole 1%, and small decreases elsewhere on the underlying business -- on the underlying basis, I mean.
As we previously indicated, that we will be undertaking a realignment of our organization design in order to minimize costs while still delivering our business objectives and standards. This process is largely complete in the first half. We have incurred restructuring costs of GBP24 million in reducing overhead costs, mainly in the exit costs of approximately 1,100 staff.
We expect the cost for the full year to be a little over GBP30 million with annualized savings of a broadly similar amount after the reinvestment of approximately GBP5 million of the savings in new service excellence centers for the product areas of cash, security and justice. These were focused on improvements in operational efficiency, and sharing best practice.
The P&L to June in total looks like this. In this slide, the prior year is showing the actual 2011 exchange rates. PBITA was GBP236 million as we have already seen, an interest of GBP50 million, slightly above last year, giving profit after tax, amortization and exceptionals of GBP186 million, down GBP8 million on the prior year at actual FX rates.
Next, we have the exceptional loss of GBP50 million for the Olympics contract, Nick will be covering this subject in detail later on. I can confirm that in accordance with accounting standards, we are required to book the loss as an onerous contract obligation at June this year. We also had the exceptional restructuring costs of GBP24 million that I have just mentioned.
Pensions interest is a bookkeeping entry rather than a real cash payment and was a GBP4 million charge. The IASB is changing the way this number is calculated next year, but we have always excluded it from any of our key performance measures and will continue to do so.
Tax was GBP14 million, and discontinued operations in this half included a loss on disposing of our electronic monitoring business in the US and the trading of the cash solutions business in Sweden up to its disposal.
Profit after tax was GBP38 million. The tax charge analysis shows that the effective tax rate on the underlying numbers remains at 22%. This is, in accordance with accounting standards, based upon the anticipated rate for the full year, and as I said at the year end, we do not expect any further sustainable reductions in this effective rate.
Earnings per share, this slide shows the impact from currency exchange movements in the half year. They represent a GBP4 million reduction in PBITA or 0.2p of the adjusted EPS. At constant FX rates, the adjusted EPS is unchanged for this half year at 9.8p.
We have a policy of increasing dividends broadly in line with earnings and we are maintaining the interim dividend at the 2011 level of 3.42p per share.
The balance sheet remains quite similar in most respects to both June and December last year. Goodwill and intangibles totaled GBP2.5 billion and dominate the balance sheet. Net debt has increased by GBP67 million since December and overall net assets have reduced by GBP132 million, due primarily to payment of the final dividend and to exchange differences on overseas assets.
Operating cash flow has been very good in the half year. If you recall, our target for full year is in operating cash to PBITA ratio of 85% with a June target being 75%. We have achieved 83% in the first half this year, mainly due to tight working capital control. Capital expenditure has also been tightly controlled and is below depreciation.
We then show the reconciliation of the statutory presentation of cash from operating activities which excludes capital expenditure and includes tax paid. We also include here the additional pension deficit repair payment of GBP19 million. The other item of GBP26 million primarily comprises the expenditure on restructuring.
Here's the rest of the cash flow. We take off interest of GBP65 million which is higher than the P&L charge at the half year because of the timing of interest payments on the public bonds. CapEx spend as we saw before was GBP60 million, and dividend is GBP72 million. Net cash flow from acquisitions and disposals in the half year was a GBP2 million inflow.
Pensions, as I've said on several occasions before, there has been volatility along the way but the net pension position at June has hardly changed since December with a pre-tax deficit on the IAS 19 calculation of GBP298 million, which equates to approximately GBP226 million after tax. We made deficit repair payments of GBP19 million in the first half which is consistent with 2011, and we will soon be commencing discussions with the trustees in respect to the triennial evaluation due in the UK which may impact payments from 2013 or 2014 but it's too early to give you an indication of the outcome of this process.
There has been no significant change to the financing slides since the Capital Markets Day which shows the maturity of our financing arrangements with no major repayments until 2016. Net debt to EBITDA was 2.5 times. Our headroom at the half year was GBP713m.
Nick will now take you through the business review.
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Nick Buckles, G4S plc - Group Chief Executive [3]
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Thanks very much, Trevor. Let me catch up with my notes. So first of all, into trading, you can see here that overall, we had a very good organic growth on our Secure Solutions business of 8%. Even stripping out the Olympics, it's around 6%. And really the margin ex-Olympics is down by about 0.4% which is primarily down to the US government downturn predominantly and we will come back to that.
First of all, moving on to Secure Solutions Europe and the UK and Ireland, we had good underlying organic growth of around 4% slightly higher on the government side than the commercial side but not significantly different from the 4%. And then in terms of the government, clearly from last year, we had the negative organic growth effect of detention and escorting contracts and court services to large contracts that went away sort of halfway through last year.
But then in terms of positives, two new prisons including the new prison we started in April, Oakwood, the Scottish Court we started in January, Lincolnshire Police started in April, that has gone extremely well so far, so much so that we are still talking to Bedfordshire, Cambridgeshire and Hertfordshire consortia, about taking that contract into their forces, which is good news. We started the Compass contracts. We also started the MOJ contracts for 340 sites around the UK, and actually, our Integrated Services business which won that contract has also shown very good underlying growth in the government sector.
On the commercial side, good growth as well, some of the highlights have been Utility Services that has grown over 20% off the back of some new smart metering wins, and our Compliance and Investigations business which grew about 50% to 60% off the back of the Aviva win. So there is some good underlying performances in the UK and actually the margin ex-Olympics is very similar to last year, which is better than we expected at the year end.
Moving on to Continental Europe, clearly very tough market, we have seen a lot of challenges with our competitors in Continental Europe in terms of their performance and clearly ours cannot be completely unaffected by their economic situation, but we still showed reasonable organic growth, slowed down slightly because we had some good start-ups in Belgium in the second -- sorry, in the back end of the first half last year. There is still good underlying.
In terms of the highlights, we lost a contract in Belgium but gained one in Luxembourg for the European Parliament, we won some contracts in Sweden but really the tough market has been the Netherlands for us. We have lost about 1.5% margin points there in the first half, and that is really down to general pricing pressure on rebidding for existing business and winning new business and actually, it is in this case, recovering the wage awards which came through in January.
European -- Eastern Europe is stabilizing, we had a slight organic growth but the margins are still challenged there. But as Trevor mentioned, we have taken action there in Continental Europe to actually take cost out and we expect to see the margin gradually improve from the current position.
Moving on to North America, as Trevor mentioned, good overall organic growth of 4% but actually quite a mixed performance underlying that organic growth. Commercial sector, very strong growth, probably the best first-half performance we have seen in a while, actually, where we had organic growth of 13% and margins improving. And a really good pipeline, probably the best pipeline we've seen and we do expect to have good organic growth and some good wins in the second half too.
On the other hand, government has been very tough, the government market is very difficult, we've had 14% negative growth and actually the margin has come down from 5% to around 2% in the first half and we did flag that -- flag up that at the year end as an underlying trading issue.
That profit shortfall of around GBP10m on prior year is split 50/50 roughly between the mine clearing business, which has gone into a loss situation, and the other half is just general margin pressures and volume reductions in the US domestic government business.
In terms of initiatives, we are undertaking to sort that out, on the US government piece, we are into cost reduction plans in the business to reduce the SG&A costs and we are also looking at merging the US and UK mine clearing businesses. We had two businesses operating independently and we are looking to bring those together in the second half. Both businesses have suffered due to a lack of NGO funding for mine clearing projects throughout the world, but that will come back in time and bringing them together will certainly bring the cost base down.
The good news is there is still a pipeline out there for US government business. We've won Diego Garcia which is GBP55 million a year. That is a Navy base in the Indian Ocean. Unfortunately, it's now under protest and so we have won it but it is now under protest so we don't know when the start date will be but it's good to see that we still have a pipeline in federal government and particularly on overseas business, we think there is some healthy opportunity.
And in Canada, the CATSA contract drove us overall to 30% organic growth so good performance there.
Moving on to developing markets, organic growth strong, 10% plus on secured solutions, and margin down slightly mainly due to Africa and I'll come back to that, but if we pick up the individual regions, Asia, 8% growth. Hong Kong was picked up quite nicely in the last six months and some double-digit organic growth coming through from the countries you can see there, Thailand, China, South Korea, Japan, Indonesia. Kazakhstan, which we run in Europe, is a business but actually geographically reports into Asia and India, still double-digit growth in India although that has slowed somewhat as we have really focused on improving margins there.
Recent wins within PNG got on United Nations and then in Australia, where there was negative organic growth overall due to the loss of the Western Australia prisoner transport contract in the second half of last year with government, we really have refocused the business well into the commercial sector as well with some good wins with DP World and Bechtel.
Middle East, organic growth there hit by lower activity in Iraq but still positive. We will be exiting the US Embassy contract in Afghanistan as we speak. Qatar is going pretty well with wins from Qatar Airways and Qatar National Bank so that's been our star performer for a number of year and is still going well.
Egypt, Jordan, and Lebanon, good. UAE has been relatively flat and in fact, slightly negative in terms of growth. It has gone through quite a tough economic time but again, we've got some good contracts coming on in the UAE in the second half. And the margin helped there because last year, we did have the bonus that was decreed by the King which we pushed through our books and we covered some of it but certainly not all of it.
Moving on to Africa, organic growth is good, back up to 10% and pleased to see that. Unfortunately, the margin is being hit by some large contract losses in Nigeria with oil and gas providers, good profitable contracts which has impacted the margin but we think over time, we will rewin those contracts. Still got a very strong pipeline there, we've had a new management team in Africa now for about nine months and they really are building up a very strong bid pipeline and for the first time, we are seeing a growing trend for Pan Africa type bidding.
Latin America and Caribbean, 17% organic growth, pretty much in line with our peers. It's a very buoyant market, very buoyant numbers of economies down there where Argentina, Brazil, and Peru have particularly done well, hitting good sectors that we are keen on like financial services, government and extractive in line with our group strategy.
And the good news is as well, we have been awaiting our opportunity to acquire a security business in Brazil, the legislation is now in place and been confirmed to allow foreign ownership of pre-1983 registered companies. So hopefully, we will have some announcement to make there fairly soon.
Cash Solutions overall, as Trevor mentioned, margin held up reasonably well overall. We expected it to probably deteriorate slightly more than this in the first half. And you can see there the impact on Europe which is predominantly the UK, but elsewhere, developing market is an excellent performance and kind of -- they are actually picking up quite well as well. And overall, organic growth of 3%, so not bad at all.
Looking at the individual parts of the business, Europe, I mentioned, the margin decline predominantly driven by UK contract phasing. One of the contracts didn't quite start as quickly as we expected but we have got three significant contracts starting in the second half, again as we speak. So negative organic growth actually of around 6% in the UK and Ireland cash in the first half but we certainly expect that to be positive in the second half. And actually, there is a good pipeline about sourcing contracts emerging in the UK particularly around the smaller bank cash center outsourcing.
Moving on to Europe, good performance overall so slightly positive organic growth. Good performances from Belgium and Netherlands and also overall in Europe, G4Si, our international valuables business, showed good organic growth and good margin improvement. So no real issues now with the businesses we have in Cash Services Europe, good underlying performance in Continental Europe.
Moving on to North America, you know, this is our business in Canada, return to good organic growth, margin improvement on prior year. We are still targeting a 5% margin for this year so quite a lot to do in the second half. But actually, bringing the business together in terms of management and back office with the Secure Solutions business has meant a much more cohesive approach to cost management and an improving approach to our customer base as well. So that is why we are hopeful that we will see some further improvements in the Canadian business.
Developing Markets Cash, great performance there, 11% organic growth, slight margin improvement. Hong Kong has returned to profitability, we had a tough couple of years there, and the pricing environment has improved well and we are doing much better and also Saudi Arabia where we had some robbery and internal losses issues last year, that is much better this year.
Which really brings us now to the London 2012 contract. So we have completed trading. I wanted to take a few moments to provide some background to the London 2012 contract and where we are in terms of the current situation. What I can't talk about today is the reasons why we were unable to meet the workforce delivery requirements of the contract. As you know, this is subject to an ongoing review and this will be completed during the second half of September.
But first of all, let's -- what I can do today is give you some facts around the contract just to improve people's understanding. So let me remind you of the timeline of the contract.
As you will be aware, we had secured the Olympics park site since 2008 and we were awarded the original LOCOG contract at the end of 2010. By the end of 2011, the requirement for the security workforce had increased from 2,000 to over 10,000 people to work alongside, amongst others, a planned military deployment of 7,500. In order to deliver this 10,000-plus people on the ground on any one day, we needed to have around 15,000 staff ready to go for the buildup and the peak.
As the substantial security ramp up began at the beginning of July, we realized that there were going to be challenges in deploying the necessary workforce in time for the critical period. We had a large number of people who had passed the majority of the required stages to be able to work but we would not be able to guarantee that the right number of people with the right skills would be able to be deployed to meet the significant increase in the demand during the initial ramp-up period.
Following a discussion with LOCOG and the Home Office an additional -- an initial additional 3,500 military were made available to assist with venue security. Subject to that, Home Office made the decision to add a further 1,200. The plan had always been to deploy 7,500 military personnel for the venue security roles but the deployment of the extra 4,700 was specifically to assist with our shortfall.
We put in place significant additional senior management resource from elsewhere in the Group, around 30 to 40 senior managers including members of the Group exec team and some of our senior managers from elsewhere in the UK and overseas to manage the issues that had developed. That team working with LOCOG, the military, and the police were able to ensure that we delivered a safe and secure Games with G4S deploying around 8,000 staff on the ground on a peak day. And I will talk about this detail in a few moments.
Our plans for the Paralympics are in place and we expect to resource it fully without any additional external intervention.
So, let's look at some of the challenges of the contract. The number of venues that we were going to be -- or are operating from or were operating from is 125 of which 34 are competition venues, and all with different securities requirements and site plans. So, truly national service. We then went through a two-week transition which we are currently in and reduced down to 72 venues for the Paralympics of which nine are competition and then the geography moves mainly into the Southeast and into South and Southeast basically. The Paralympics start with the opening ceremony tomorrow and the events will be taking place, as I said, on nine sites but 72 in total.
The contract also had a number of unusual complexities, one of which was the required skills mix of the security workforce. I don't expect you to read this slide -- clearly, there is a huge amount of detail on here -- but in total, there were 49 different roles to be trained for throughout the roles we needed to do, of which 33 of these roles we would describe as specialist and not normal security and perimeter roles and these represented about 40% of the total workforce.
For each role, the candidates were required to undergo specific training in order to fulfill those various roles and each venue required a different mix, depending on the use of the venue. So, fairly complex in terms of jobs to be trained for.
This chart shows two things, the overall demand in terms of workforce numbers which you can see on the red line, and the proportion of that workforce that were required to have specialists skills which I just talked about shown by the gray line. And remember, that all these staff were recruited just for the Games basically. So, this clearly demonstrates the unusual and temporary nature of the workforce supply contract peaking in early August at around 10,000 personnel on the ground.
The dip in demand, you can see on the chart, is in early August, is the transition I mentioned between the Olympics and Paralympics, and then the demand builds up again to a peak of around 5,000 for the Paras.
As you can see, the deployment requirement was relatively low until April when there was a slight step up in demand with the demand building gradually during May and June. The crucial point was in early July when there was a huge increase in the numbers required on the ground. That was when we first identified that there were going to be significant challenges in getting those required numbers deployed in the right roles essentially over a very short period of time.
This diagram provides an overview of the complex recruitment and deployment process which each candidate had to complete before they could be deployed on the ground. This is not a normal security recruitment process; it had many more stages with multiple candidates and many interfaces with external bodies. In an ideal world, we would have wanted to take candidates through this process sequentially but with such a large workforce and the time constraints of getting the numbers deployed at the right time, this was not possible.
I won't take you through the whole process but just point out some of the key ones. Once a candidate had been interviewed and then passed the interview stage, they had to be assigned a specific role, one of the 49 roles I mentioned earlier and then be trained for that role.
They had to pass G4S screening and vetting, attend an SIA -- Security Industry Authority -- training course, and incidentally, the licenses for this event and events generally are Door Supervisory SIA licenses. Our typical security officer in the UK have a security officer license and wouldn't have been applicable to work on this contract. We only have about 100 or so -- or hundreds of people deployed on door supervisory duties with SIA licenses in the current workforce. And so a different license which meant there was no interchangeability. Pass the LOCOG and Home Office accreditation process, another level of screening and security clearance, collect their accreditation pass, collect their uniform, accept work roster, etc.
As it stands, we were able to get 14,000 candidates to complete this entire process in order to deploy the 8,000 we did during the peak period. We just didn't get them through the process quickly enough.
If we go back to the earlier chart, which showed the overall security workforce demand, and compare it to what we actually delivered, you can see clearly the gap between the red demand line and the G4S workforce delivery which is demonstrated here by the green bars. This shows where the challenges were early in July and June, the massive uplift period which is when the military and the police stepped in to assist with the security workforce and to fill that gap between the G4S delivery and expected demand.
Overall, to date, we have delivered 83% of the contracted shifts. The lighter green bars show our forecast deployment through the Paras for which we expect to fully meet the required workforce demand profile.
So in summary, it was a unique -- and is a unique and complex contract and operational model. We're extremely disappointed that we were unable to deliver fully the contracted security workforce, there is no doubt about that. It was a huge disappointment to us.
But it has been described by some as a pop-up company for a very short time period and that is clearly what it was. We worked very closely with the military police, government and local to ensure the Games were safe and secure. But of course, we are extremely grateful to the military and the police for helping us through that process.
What did we actually deliver in the end? We did actually and have actually recruited more than 14,000 staff and at the peak, deployed around 7,800. And we have actually covered around 83% of our contracted shifts today and clearly, that number will go up if we deliver as intended during the Paras where we do expect to over-deliver.
So moving on to the contract loss provision, within the GBP50 million, we have included an estimate for the additional costs relating to the increased military and police deployments. Our estimates of potential liabilities and contractual liabilities or potential penalties and contractual liabilities, and additional costs relating to the provision of increased internal resource to deliver the contract.
As Trevor has already outlined, the GBP50 million has been provided for in the first half and will be taken as an exceptional item.
So, the review of the contract is now underway and we expect the conclusions to be available during the second half of September. The review is extensive and covers the key deliverables on the contract, the shortfalls against those deliverables, execution issues and timings, an assessment of what prevented us from identifying the failing sooner and, of course, what lessons we can learn for the future.
Our early performance on the contract has been a significant disappointment to me and the Group. But thankfully, with the help of the military, the police, and the G4S workforce, who've worked incredibly well to help deliver the Games, it was safe and secure. It was also a great showcase for Britain of the sport and we look forward to the Paralympics with that in mind.
So, I would like to finish up the presentation with a quick recap on group strategy and a few summary points. You've seen this slide before. This sums up what our key business objectives are and they remain very much our key business objectives for the Group.
We are focusing on organic growth. We're investing in sectors and international accounts to help generate that growth. We're getting delivery frameworks in place with the service excellence centers to get consistency right. And the pipeline is still rolling out through Salesforce.com.
Margins, we're focusing on procurement. We've done the first two phases of overhead reduction. The third phase is a much longer term, where we're looking at best practice sharing. And the service excellence centers also have begun to focus on how we can improve gross margin.
In terms of organizational design, Cash Solutions has been integrated into the regional structure, and some of that cash reinvested in the service excellence center.
I mentioned that we're going to continue to review organizational design to make sure we're in line with the best overheads possible throughout the Group.
And cash generation is still a key focal area, strong debtor control and narrowing that gap between CapEx and depreciation. You saw, in the first half, that went pretty well.
In terms of the pipeline, there's GBP3.8 million annualized revenue. It's pretty much the same as the figure we showed at our Capital Markets with the slight reduction from PIP coming out of the number, the personal independence payments. That's been placed. And also delays to Surrey and West Midlands. But still includes other areas of government, clearly, the prison bids, monitoring and BCH Police. And it's actually being topped up as well by some really good pipeline improvements in the US and also, as we get more countries on the system, globally.
So, in summary, half-one results, a good underlying performance overall. Still reiterating we're very disappointed not to have been able to deliver fully on the Olympics contract. We've made a provision of GBP50 million at the half year. And the full review is underway. We do expect to fully resource the Paralympics.
And we are halfway through organization and overhead review, which will deliver significant cost savings in 2013. And when I say halfway through, I'm talking more about how we then take that forward into gross margin improvement through the service excellence centers to help maintain margins and drive growth.
A great performance from developing markets, 10% plus organic growth, margins holding up, which means they're now contributing over 40% of Group profits. And we expect outsourcing trends to continue to be our key growth driver alongside developing markets.
So, we expect our positive momentum to continue down to our market leadership position in 120 countries, our very broad customer base and our strong contract pipeline.
I'm now very happy to take questions. First of all, from the floor, please. We'll start with Andrew in the third row, please.
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Questions and Answers
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Andrew Ripper, BofA Merrill Lynch - Analyst [1]
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Hi. It's -- Morning. It's Andrew Ripper from Merrill Lynch. I've got a couple, if I may. First of all, on the restructuring that you talked about, can you give us some idea of what the payback is likely to be on the GBP30 million spend?
And you talked about reinvesting, I think, about GBP5 milling of the payback in the service excellence centers, but the rest in the outlook statement, I think, you talked about helping to maintain margin. So do you see, given pressures on gross margins in terms of wages and pricing, etc., this being a neutral exercise for 2013, or would you expect margins to rise next year on a net basis?
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Nick Buckles, G4S plc - Group Chief Executive [2]
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Our underlying guidance to the market has always been we expect to maintain Group margins around the 7% mark into the future. This is part of that process to make sure we've got underlying cost improvement because, clearly, in this current economic environment, there's going to be some gross margin pressure. So this is us taking early action to get back to the 7% margin in the 2013-plus period.
So really the payback that we're talking about in here is around GBP30 million in a full financial year. And we expect, clearly, to get some of that this year and some of it next year. But it's very much to underpin the overall margin performance.
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Andrew Ripper, BofA Merrill Lynch - Analyst [3]
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Okay. And then secondly, just in terms of where you're taking the headcount out, is this middle management?
And also I noticed the -- on the breakdown, the 600 heads, GBP5 million people cost in developing markets where you're, clearly, in a good position there with good growth momentum. So maybe you could just elaborate a little bit on where the cost's coming out?
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Nick Buckles, G4S plc - Group Chief Executive [4]
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Yes. They're nearly all in overhead. There's a little bit of direct cost in Europe around staff that have been unable to be deployed over a longer period of time. The problems we've had in some of the restrictive markets like Belgium and France, historically, is getting people out of the system. So there's some direct costs but not very much at all.
Then there are a range of admin overheads from back-office admin staff through to very senior management. We're talking about the Cash division which was folded into the regions. So a range of people in that number.
Developing markets was really mainly junior to middle management staff, where, I think, over the years, because we've got such a large headcount, we haven't looked very closely at overheads. And it really gave us a chance to go through each and every regional and sub-regional cost and each country to make sure we were operating as efficiently as possible.
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Andrew Ripper, BofA Merrill Lynch - Analyst [5]
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Okay. And then just a second question from me. Is that coming through? Is that still on the air? (multiple speakers)?
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Nick Buckles, G4S plc - Group Chief Executive [6]
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Yes.
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Andrew Ripper, BofA Merrill Lynch - Analyst [7]
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The second question from me, the outlook statement's references, I think, accelerating -- prospects of accelerating organic growth. I think you just were talking about developing markets. Can you just be clear in terms of your guidance on organic in the outlook statement? Are you talking just developing and Group? What's your feeling against --
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Nick Buckles, G4S plc - Group Chief Executive [8]
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No, I think the overall --
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Andrew Ripper, BofA Merrill Lynch - Analyst [9]
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(multiple speakers) top line.
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Nick Buckles, G4S plc - Group Chief Executive [10]
------------------------------
What we expect to see with the pipeline we have and the contract startups, that the organic growth should steadily improve overall for the Group. I'm not saying it's going to be dramatically different, but it will continually improve.
------------------------------
Andrew Ripper, BofA Merrill Lynch - Analyst [11]
------------------------------
And then, finally, can you just give us a sense of what the Olympic sales to be in the second half?
And just remind us how big Afghan Embassy is, which presumably will drop out from here?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [12]
------------------------------
Yes. The Olympics in the second half, we expect to be in the GBP80 million to GBP100 million mark, I guess. It's a number that we're looking at at the moment.
In terms of Afghanistan, it's around GBP35 million in the first half.
------------------------------
Andrew Ripper, BofA Merrill Lynch - Analyst [13]
------------------------------
Thanks very much.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [14]
------------------------------
Down the front here, please.
------------------------------
Rob Plant, JPMorgan - Analyst [15]
------------------------------
It's Rob Plant from JPMorgan. One for Trevor. The cash conversion at 83% is higher than the normal run rate of 75% in the first half. Last year, there were some one-off positives and negatives. Are there any issues that we should think about for this first half?
------------------------------
Trevor Dighton, G4S plc - CFO [16]
------------------------------
No. It's very straightforward, actually, the operating cash in the first half of the year. We haven't got any of the hangovers of US government business. There's a little bit of negative from the US government. They do owe us a little bit at the half year. But it's -- it doesn't really bother the scores.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [17]
------------------------------
Next row back, please.
------------------------------
Jaime Brandwood, UBS - Analyst [18]
------------------------------
Morning. Jaime Brandwood, UBS. Just coming back to the organic growth, just looking at the Q1 and Q2 performance, I think Q1 ex-Olympics, you were at 6%. H1 you were at 5%. So Q2 must have been about 4%, despite the fact that you had some UK government contracts kicking in and giving you a full Q2 benefit.
What's the main reason behind that deceleration? And why is it you're very confident of an acceleration into the second half?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [19]
------------------------------
Some of the contracts -- some of the comparables in prior years start to improve at the half year, lost a couple of major contracts there. But really the fact that some of the contracts starting up again have larger revenues in the second half. And we've still got positive momentum in developing markets. And we don't expect the organic growth to be as negative in places like the US government and UK Cash.
So it's the fact that we've got contracts coming on and the relative comparator year on year. Our year-end forecast has got an increase in organic growth, basically.
------------------------------
Jaime Brandwood, UBS - Analyst [20]
------------------------------
And I think you've previously talked about a number including Olympics of about 8%, which, I guess, ex-Olympics might be about 6% or so for the full year. Is that broadly still consistent?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [21]
------------------------------
That's certainly what we're aiming for.
------------------------------
Jaime Brandwood, UBS - Analyst [22]
------------------------------
All right. And then just on the margins, I think you'd hope that you might be able to make up for the shortfall in H1, I guess, 40 or 50 basis points, depending on how you look at it. Do you still think you can therefore drive year-on-year margin improvement in the second half, in order to get you to a fairly flattish level for the full year?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [23]
------------------------------
I think we'll be slightly down in the full year.
------------------------------
Jaime Brandwood, UBS - Analyst [24]
------------------------------
Slightly down. Okay. And then you mentioned, obviously, the fact that some of the other police forces are still going ahead with, or considering, bolting on to your Lincolnshire platform. You've also got some prison bids coming up. Is your overall sense at the moment that, if you like, the reputational fallout from the Olympics bid has been relatively minimal? I guess the only impact we've seen is the drop out from the DWP PIP bids.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [25]
------------------------------
Yes.
------------------------------
Jaime Brandwood, UBS - Analyst [26]
------------------------------
But has there been anything else?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [27]
------------------------------
I think it's very early to call on that. We expect our track record over 20 years to pervade here -- prevail, sorry. We've got a strong track record. We were the first company to take on a private prison 20 years ago. We took on the first EM monitoring contract, probably, 14 years ago. We did the first public to private prison last year. We took on Compass this year. We've taken on the first police outsourcing contract this year as well.
So we've been pretty much at the forefront of all government outsourcing. And with our track record, we expect to still be involved in the mix with UK government. But, clearly, we don't know the outcome of the Olympics so far. And we'll have to wait and see. We're very pleased to still be working with PCH on the police outsourcing contract. And we're still very hopeful that out long-term track record will stand us in good stead with the UK government. But we can't underestimate the Olympics impact.
------------------------------
Jaime Brandwood, UBS - Analyst [28]
------------------------------
And very lastly, US government, what's your best sense? Could there be a lot of uncertainty around fiscal cliffs and what have you. But what's your best guess at the moment as to how that plays out into the second half, that minus 14%? Whether you can --
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [29]
------------------------------
Yes. Well, that's the US domestic business. Clearly, the US -- our business in Afghanistan is US run, but that's in developing markets. But in terms of the US domestic piece, we certainly don't expect it to get any worse. It depends on how many of the contracts, smaller ones that we've won, come on stream. Diego Garcia won't really, even under protest, it probably wouldn't have come on till November. So I don't think it'll be any worse. But it certainly won't be significantly better. We haven't got a lot of startups coming in the second half.
It's much more a margin improvement we're working on with, as I mentioned, combining the UK and US demining businesses and actually taking costs out of that organization. But that's a business that works behind a proxy structure. It's very difficult for us to get access to the business itself. So it's certainly something. It's that's around self help for the business around cost reduction. Not something that we can drive from the UK perspective.
------------------------------
Jaime Brandwood, UBS - Analyst [30]
------------------------------
Thanks very much.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [31]
------------------------------
Second row, please.
------------------------------
David Brockton, Espirito Santo Research - Analyst [32]
------------------------------
Thanks. Good morning. It's David Brockton from Espirito Santo. I've got a couple on developing markets and then one for the wider Group. First, I wonder if you can just set out what's behind, in your view, the losses in Nigeria, with regards to contracts? Is it greater competition, or pricing? What's behind that?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [33]
------------------------------
There's a degree of local suppliers coming into the frame, undoubtedly, and also some foreign competition as well, in terms of risk-management type businesses. And also we've been through management change as well to make sure we've got the right management team going forward. So there's certainly a changing environment in Nigeria.
But the fact is there's enough business to go round there for a number of different players. And we will either re-win back one of those contracts, I believe, fairly quickly or there'll be other contracts there to replace them. But they were high-margin contracts and, hence, the hit on margin in Africa.
------------------------------
David Brockton, Espirito Santo Research - Analyst [34]
------------------------------
Okay. Thanks. The second part of that was actually on Brazil. I just want to understand that the legislative change there, is that the sole reason for the delay that's occurred, in terms of an expected piece of news regarding M&A there?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [35]
------------------------------
Correct. Yes. So we've been hopeful that the legislation will be reconfirmed. It's not new legislation, it's just reconfirmed. And hopefully that will enable us to go forward with our plans with more comfort.
------------------------------
David Brockton, Espirito Santo Research - Analyst [36]
------------------------------
Okay. Thanks. And then the final one was just with regards to the exceptional costs and the savings that you hope to make, from an operating cost perspective, to mitigate perceived gross margin pressure. I just wonder if you could just elaborate on where that gross margin pressure is manifesting itself across the business by region and by end customer?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [37]
------------------------------
Yes. It's a very broad question, clearly. If you look back at trends on margin in our industry for the last 10 years, they've been on a downward cycle, generally speaking, particularly in the more commoditized end of the market. And you have to focus on niches, sectors and areas of business where the margins can be maintained. And that's been our strategy now for a number of years. And hence we haven't seen quite the same margin pressures that others have. So it's a difficult question to argue across -- answer across the board.
The recession certainly leads to more margin pressure. Probably more than lost business it leads to more margin pressure. And, clearly, in Europe, particularly, that's been now the case for three or four years. So Europe is definitely an area where there's probably more gross margin pressure than elsewhere.
US commercial, you know, has been fine. UK -- US government, we've talked about. So clearly that's a gross margin pressure issue. UK's been pretty good. Overall, the margins have held up well. As I mentioned, ex-Olympics revenue, our margin held up in the first half.
And then developing markets, you get some ups and downs. Sometimes you get a positive outcome in terms of margin development in a country. And other times you get a hit like Nigeria. But, overall, there's not a significant change in margins in developing markets in terms of competitiveness or strategy, or anything like that.
------------------------------
David Brockton, Espirito Santo Research - Analyst [38]
------------------------------
I guess I was just trying to understand to what extent do you think it's cyclical through greater competition due to the downturn and to what extent you think it's structural?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [39]
------------------------------
It's a mixture of both. So there's always some structural pressure, depending on the element of market you're in. If you're in the commoditized end, there's always structural pressure. The cyclicality of the recession definitely brings increased pressure. I couldn't quantify the two different effects. But we definitely see in a downturn margin pressure. And you've seen that with our competitors' results as well.
Into the middle there, please, if you can get there. You might have to throw it.
------------------------------
Steve Woolf, Numis Securities Ltd - Analyst [40]
------------------------------
Morning. Steve Woolf from Numis. Just a quick one on, you mentioned there's more Pan-African bidding taking place at the moment. I just wonder if you could give a bit more color on that and how you're approaching and maybe the opportunities there? Thanks.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [41]
------------------------------
Yes. In the scheme of the Group, it's not a huge number. But what we are set up to doing in Africa is to do Pan-African deals. Clearly, we're in about 30 countries, got 100,000 staff. We're in every country really that you need to be to do a deal of that nature. And if there are deals available, and we're working on some, we might have to open in some countries to fulfill those contracts. A couple of smaller ones where we're not there.
So it's mainly financial institutions. So people like Barclays/Absa are looking at Pan-African deals. Breweries, mines. There's certainly, the areas where we're focusing on, in terms of specialization and specialized security requirements are the areas where the Pan-African deals are coming from, basically. And there's also some quite good opportunities around Cash Center outsourcing developing in Africa as well.
So, as we said in the statement, the outlook there is pretty strong in terms of growth opportunities. And we have put a lot more development resource into Africa to take advantage of these opportunities because, clearly, there's no one else able to offer Pan-African deals, basically.
------------------------------
Andy Chu, Deutsche Bank - Analyst [42]
------------------------------
Morning. It's Andy Chu from Deutsche Bank. Nick, could you just, in fact, clarify, just to make sure I understood you correctly? In terms of the restructuring, in terms of SG&A, is that it for the time being, or should we expect further headcount reduction in the next couple of years?
And then in terms of the US government, what sort of level of cost do you think you can pull out of that business, please?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [43]
------------------------------
Yes. In answer to the first question, we've said there'll be some additional costs in the second half from restructuring. And that's some notice periods, people still under notice, some additional people, particularly in Europe. But that's really the finish of that cost-reduction exercise for this year, basically.
The ongoing cost reduction and margin improvements, as we sit here today, are not going to lead to further restructure costs. They're very much about right-sizing the operation over time and getting better gross margin performance from consistent IT systems, consistent approach to markets around price increasing. So we don't envisage another major structural review in the next 12, 18 months.
The US question is difficult to answer because, as I mentioned, it falls behind a proxy structure. And we have to be careful we don't drive that business to take out cost which they believe is not in the best interest of the business. So they'll come up with a number in time. But we haven't pushed them hard on it yet.
------------------------------
Kean Marden, Jefferies & Co - Analyst [44]
------------------------------
Thanks. It's Kean Marden from Jefferies. Can I, first of all, just come back to the organic revenue growth guidance in H2 question, just to check? Your comments about accelerating revenue growth based on growth including or excluding the Olympics, first of all. And are you referencing the H2 -- sorry -- the H1 number or the Q2 number?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [45]
------------------------------
I -- it's a very specific question. We're talking ex-Olympics, but I think the commentary is more around, certainly the short term and the medium term, that with the pipeline we've got and the market position, and the contracts we know we've got coming on that the organic growth will improve. I hadn't really decided whether it was second half or first half comparables. But, overall, we see the trend improving over time.
------------------------------
Kean Marden, Jefferies & Co - Analyst [46]
------------------------------
Okay. And just to elevate the horizon a little bit. So if you look at your thoughts post-Olympics, have you had any change, or has the Board had any change in view regarding mix of business or G4S's growth potential within the medium term or the complexity and scale of the contracts that you're likely to undertake in the future?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [47]
------------------------------
No. We haven't had a discussion on that, as a Board. And I don't believe that, subject to the outcome of the review, that that will change materially.
I think, my view is the Olympics contract was a complex short-term contract, manned security in a UK environment, which we took on in December. Absolutely believed we could achieve the contract, despite the complexity. We believed we could deliver on that. But, clearly, we didn't in the end. But it doesn't -- there's not really other contracts like that, apart from events, as you go out through the world. And, clearly, I've already made a statement that we probably won't be bidding for Brazil World Cup and Olympics because, to be honest, the profit upside, it would seen, is not as great as the reputational downside if it goes wrong.
So I think that is definitely the personal lesson we'll take out of it. But the Board really has to complete its review before it decides whether there's any other lessons to be learned.
------------------------------
Kean Marden, Jefferies & Co - Analyst [48]
------------------------------
What's the thought process regarding PIP, just in terms of short-term timeline?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [49]
------------------------------
Yes. We -- in terms of the PIP contract where we withdrew we just didn't have resource to think about mobilizing. We, as I mentioned earlier, 30 to 40 peopled pulled down into Canary Wharf to help mobilize the Olympics contract. And we thought it would not -- A, we didn't have the resource and B, we felt it wouldn't be appropriate while we're still trying to sort the contract out.
------------------------------
Paul Checketts, Barclays - Analyst [50]
------------------------------
Morning. It's Paul Checketts from Barclays. With the possible US airport work, could that be serviced from the US commercial business, or would it have to go through the government separate structure?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [51]
------------------------------
We've got two options there. So we can definitely go through our proxy structure with our current government business. Or we could create another proxy structure with our commercial business to complete. We haven't decided what to do yet.
------------------------------
Paul Checketts, Barclays - Analyst [52]
------------------------------
Okay. And then maybe some for Trev. On working capital, a much better performance than I expected. And CapEx was lower than I thought. Can you maybe touch on those and full-year expectations, please?
------------------------------
Trevor Dighton, G4S plc - CFO [53]
------------------------------
Yes. Working capital's always been a high priority for us. And we've gradually improved over the years really on the control of working capital. It's an area that we've got specific resource on. We've got specific projects. And it just gets better. So it should be fairly similar for the full year, a slight outflow on working capital, reflecting the growth.
And on CapEx, historically, most of our CapEx spend or a disproportionate amount of our CapEx spend is on the Cash Solutions business. And the Cash Solutions business is one that we're careful about at the moment. And a lot of the major reorganizations and investments anyway in the new large branches like in the UK, are done now. So careful control of CapEx spend falls into the same category as working capital. And we've tried to keep the CapEx at least the same as depreciation, going forward.
------------------------------
Paul Checketts, Barclays - Analyst [54]
------------------------------
And lastly, just to finish off, on the dividend --
------------------------------
Trevor Dighton, G4S plc - CFO [55]
------------------------------
Yes.
------------------------------
Paul Checketts, Barclays - Analyst [56]
------------------------------
You've kept it at -- maintained it at its current level. What are your thoughts on balancing the credit rating, are you comfortable that that will be held if you maintain the full year?
------------------------------
Trevor Dighton, G4S plc - CFO [57]
------------------------------
We've still got to talk to S&P. S&P stepped in a little bit over the Olympic period. The sort of numbers that we need to correct a GBP50 million loss of the Olympic contract shouldn't really bother the evaluations that S&P will do. So I don't want to presume on the discussions with S&P, but our discussions at the moment are fine with S&P. So we'll see how they go.
------------------------------
Paul Checketts, Barclays - Analyst [58]
------------------------------
Thanks.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [59]
------------------------------
Last one from the floor then we've got two from the telephone.
------------------------------
Ed Steele, Citigroup - Analyst [60]
------------------------------
Thanks. Morning. It's Ed Steele from Citi. Two questions on pricing and gross margins by division, please. The first is on UK Cash. You've had good success with three wins. What's the pricing dynamic like in the market now, please?
And related to that, is there any reason why, with operational leverage coming back, the margins can't improve more or less to where they were two or three years ago, please?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [61]
------------------------------
Yes. It's always a tough call on Cash Services markets as to how long pricing pressure lasts and how contracts move around. And the point is that two players have to be seen to be making a decent return. And if that balance gets upset, it gets upset and then it takes a while for the balance to redress itself.
So we've taken on three contracts; two from a competitor, one is a new outsourcing. And as far as we can see at the moment, the market is stable and we don't envisage losing any contracts over the coming months. And, on that basis, if the market stabilizes, there's no reason why, in three years, we can't get the margins back up in the UK to previous levels. But we will need some outsourcing wins on top of that and a relatively stable market, definitely.
------------------------------
Paul Checketts, Barclays - Analyst [62]
------------------------------
Thank you. In the US, I think, to one side, the UK -- the US government problems on the margin. The commercial margin seems to have been pretty good.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [63]
------------------------------
Yes.
------------------------------
Paul Checketts, Barclays - Analyst [64]
------------------------------
Could -- is there anything interesting about the margin profile for these large contracts you've won in the last 12 months, GM, for example, that would be supporting to margins now, but perhaps be a drag later on? Or is the margin structure of those contracts the normal type?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [65]
------------------------------
No. I -- there's no three-year prices with a better price in the first year and the next two or anything like that. A fixed price for three years. So there's no reason why the new business should become any less profitable in the future, in fact, maybe a little bit more so. So where we are in margin in the US is pretty solid, I would say. And, as I say, a very good pipeline as well.
------------------------------
Paul Checketts, Barclays - Analyst [66]
------------------------------
Thank you.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [67]
------------------------------
Can we move to the calls on the wires now, please.
------------------------------
Operator [68]
------------------------------
Our first question will come from the line of David Hancock from Morgan Stanley. Please go ahead.
------------------------------
David Hancock, Morgan Stanley - Analyst [69]
------------------------------
Yes. Morning, everybody. Three from me, please. Firstly on the cash flow, could you just talk about the phasing of cash outflow on restructuring and on the Olympics? How much of that restructuring charge in the first half went out in cash?
Second one, divestments, would you expect any more divestments in the second half of the year? And, obviously, you have talked about the Danish Alarms business, could you tell us if there's any progress there?
And finally, on the Utilities business in the UK, clearly, you had quite a strong performance in the first half. Can you talk about the outlook there, please?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [70]
------------------------------
Yes. Do you want to do the first one, Trev?
------------------------------
Trevor Dighton, G4S plc - CFO [71]
------------------------------
Yes.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [72]
------------------------------
I'll do the next two.
------------------------------
Trevor Dighton, G4S plc - CFO [73]
------------------------------
Okay. On cash flow, all of those restructuring costs were paid for in cash in the first half of the year. And you'll see them in a separate line in the cash flow slides, actually. Most of the other on that first cash flow slide is an outflow relating to the restructuring cost.
On the Olympics, we've still got discussions to be had with LOCOG about the actual way that the payments were worked. So -- and we can't really update you on the cash flow impact of the Olympics. Eventually, of course, it will be an outflow of GBP50m. At the moment, the cash flow on the Olympics contract is, basically, neutral. So we've had a similar level of cash in to the cash that we've spent on the costs. But that will change over the next few months.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [74]
------------------------------
And then your question around disposals. Yes, we've looked at a number of businesses for disposal during our annual review process. You know the criteria. They're not core to strategy. They're below margin targets with not much hope of getting to them, in a country where we don't see a lot of growth. And if certainly those two apply, if we think there's a better parent for the organization that will pay us a premium, we'll consider that as well. So they're the criteria. And we run all our businesses through that review fairly frequently.
We had a look at Danish Alarms as one of those disposal candidates, because it is mainly domestic alarms. But, actually, in terms of its profitability, what it delivers for us, it is above the margin targets we set. And we don't think we'd find a parent willing to pay a better price. So that isn't going through as a disposal.
And we'll just continue to review others on that same basis. But it really does come down to value and whether we can drive better value from someone else owning it than from us owning it, basically. If it doesn't -- if it fulfills those other -- or doesn't fulfill the other criteria.
And then the third one was?
------------------------------
David Hancock, Morgan Stanley - Analyst [75]
------------------------------
The third one was the Utility business in the UK.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [76]
------------------------------
The Utility business in the UK. It's around GBP110m revenue now. It grew 20% in the first half. Really moving very nicely from a meter-reading business into a smart metering installation and servicing business. Getting into a good position there. Very strong pipeline. The pipeline there is probably around GBP100m annualized contracts in smart metering. And so, yes, we've still got very good growth prospects for that. And it's a good margin as well. So good business.
------------------------------
David Hancock, Morgan Stanley - Analyst [77]
------------------------------
Thank you.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [78]
------------------------------
Another one from the wires?
------------------------------
Operator [79]
------------------------------
Thank you. The next question comes from the line of Laurent Brunelle from BNP Paribas. Please go ahead.
------------------------------
Laurent Brunelle, Exane BNP Paribas - Analyst [80]
------------------------------
Yes. Good morning. Laurent Brunelle, Exane BNP. Two follow-up questions, if I may. First, post the Olympics, is it fair to factor extra internal costs and also new IT investments and higher CapEx?
And second, can you maybe give us more flavor regarding the UK pipeline and the ongoing bids to expect in the coming months?
And have you been already discussing with some clients on what will be the first impact, post the Olympics, please?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [81]
------------------------------
Yes. The first question was around the Olympics and IT, did you say, sorry?
------------------------------
Laurent Brunelle, Exane BNP Paribas - Analyst [82]
------------------------------
Yes.
------------------------------
Trevor Dighton, G4S plc - CFO [83]
------------------------------
I think the answer to that is no. There's no specific areas where it's brought up additional need for investment in capital or CapEx, or systems.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [84]
------------------------------
No. The second point on the UK pipeline. We -- I've talked about a couple of them, I think, in the call this morning. In terms of government business, we've got the nine or so prisons that are out for bid. We're bidding on seven. The most we can win, I think, is five. And the outcome of that bid process is expected sometime during September. And it does move around a little bit. But that's certainly our latest information.
BCH, I think you saw the announcement last week, we're continuing with that as an opportunity. Electronic monitoring was due October. That might move out a little bit. So they're the primary government UK bids outstanding at the moment.
And then your third one around customers. As I mentioned, we haven't had any customer losses from the Olympics so far. Indeed, the service levels in the UK have been exceptionally good. We had a lot of letters of support during that process in terms of the services we continuef to deliver alongside the Olympics and elsewhere in the world. Obviously, we're still doing our monthly reviews with businesses. No reported customer dissatisfaction around the Olympics contract.
But, as I mentioned earlier, clearly it is a reputational issue. We've got to rebuild that reputation. We've got a long-term track record of delivering excellent service. And we've got to make sure that we get that message across.
------------------------------
Laurent Brunelle, Exane BNP Paribas - Analyst [85]
------------------------------
Okay. Clear. Thank you very much.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [86]
------------------------------
A last call?
------------------------------
Operator [87]
------------------------------
Thank you. The last question is coming from the line of Daniel Patterson, SEB. Please go ahead.
------------------------------
Daniel Patterson, SEB Enskilda - Analyst [88]
------------------------------
Yes. Good morning, gentlemen. I just have one question left and it's on India. I just want to check that I understand correctly that you're being a little bit more selective in your contracts there?
And maybe a little bit of flavor on the Indian market and how you see the outlook there, as it's your biggest developing market?
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [89]
------------------------------
Yes. India in the first half, the organic growth, I think, was 13% to 14%. And that typically has been above 20% in previous years. We actually undertake a lot of domestic security business in India, which we felt was low margin and quite difficult to operate. And so there's been an exercise to move much more towards larger contracts and multinationals.
And the whole process of rethinking the India strategy, we're still doing very well, we're still the market leader, probably five, six times bigger than the next nearest player. We've still got hundreds of thousands of staff on the ground. But we are definitely going through a process of focusing on which market sectors are we going to get the best growth, where we're going to get the best margins. It's typically a 6% to 7% margin business. We think it should be more than that. And the growth, over time, we believe, will return back above 20%.
But we are going through a whole market review there to make sure we're making use of our strength, our brand and the geographic coverage we have. We are the only national player. So no concerns there. But I think there's a bigger opportunity in the future, if we get the strategy right.
------------------------------
Daniel Patterson, SEB Enskilda - Analyst [90]
------------------------------
Okay. Thank you.
------------------------------
Nick Buckles, G4S plc - Group Chief Executive [91]
------------------------------
Okay. Well, thanks, everybody, for coming today. And I look forward to seeing you all again soon. Thank you.
------------------------------
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