Preliminary 2012 G4S plc Earnings Conference Call
Mar 13, 2013 AM GMT
GFS.L - G4S PLC
Preliminary 2012 G4S plc Earnings Conference Call
Mar 13, 2013 / 09:00AM GMT
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Corporate Participants
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* Nick Buckles
G4S plc - CEO
* Trevor Dighton
G4S plc - CFO
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Conference Call Participants
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* Rob Plant
JP Morgan - Analyst
* Kean Marden
Jefferies - Analyst
* Andrew Ripper
Merrill Lynch - Analyst
* Andy Chu
Deutsche Bank - Analyst
* Charles Wilson
Goldman Sachs - Analyst
* Paul Checketts
Barclays Capital - Analyst
* William Vanderpump
UBS - Analyst
* Daniel Patterson
SEB - Analyst
* Laurent Brunelle
Exane BNP Paribas - Analyst
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Presentation
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Nick Buckles, G4S plc - CEO [1]
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Good morning, everybody, and welcome to the presentation of our full-year results for 2012. I'll begin in a few moments with a summary of the key trading highlights and Trevor will then follow with an overview of the financials, and then as usual, I'll return to discuss the performance of the regions and service lines, and a little bit on strategy. And then we'll take questions first of all from here and then from the lines.
Upfront, I think it's important to acknowledge that 2012 was a tough year for us due to the challenges we faced with the Olympic Games security contract. We're very pleased to have included -- concluded the negotiated settlement with LOCOG as we announced last month. This resulted in us recording an overall exceptional loss on the contract of around GBP88m. As Trevor will explain in more detail later, we have excluded the Olympic Games impact from our underlying trading results in order to provide clarity on the underlying trading position and outlook for the Group.
We took the opportunity also during 2012 to conduct a review of the business both from a strategic and operational point of view, which has resulted in two key actions. The first was an overhead reduction exercise, which we talked about at the half-year, and resulted in us identifying annual cost savings of around GBP35m. We incurred GBP45m of costs in order to achieve these savings and actually now have reinvested around GBP10m a year in service excellence centers and upgrading our business development and bidding resources across the Group. So, some momentum going forward in terms of margin improvement. The GBP45m has been taken as an exceptional item in the 2012 results, and Trevor will talk that through.
As we have previously described, as well as investing in acquisitions to support growth in margins, we also have an active divestment policy which focuses on businesses which we believe aren't able to meet the Group's long-term targets, where we are unable to maintain the appropriate scale or market position or where we think an alternative parent would be able to add or extract better value than us. And as you saw from our announcement last week, we have made the decision to divest of our US Government Solutions business as part of this ongoing strategic review.
As we described in the announcement last week, there are numerous challenges in turning around this business as we're a non-US parent. We really don't get access to operational information. And so clearly a divestment to a US parent will make sense. We expect the business to be sold within the next six months and to use the proceeds to further invest in higher growth markets. It's classified as held for sale and therefore financial impact excluded from the results.
So, just turning to the underlying trading performance, despite the challenges and distractions of last year, the overall business has performed very well, with acceleration in underlying organic turnover growth to around 7%. This was largely due to a number of North American commercial contracts, UK government contracts, and of course developing markets, and also against the backdrop of very challenging economics in Europe.
Developing markets, as I mentioned, strong growth, 15% overall, 10% organic, and still targeting 50% of our business to be in developing markets by 2019. Underlying profit is up 6% and maintained margins over 7% despite the tough economic environment. Great news on the cash flow, 95%, one of our best ever against our target of 85%, and adjusted EPS up 3%.
So, despite the challenges, underlying trading remained strong, our market-leading business, broad customer base, strong contract pipeline give us good confidence in the outlook, and that confidence is reflected in our second half dividend going up, recommended, go up 8%, 5% for the year.
I'd just like to make one further comment before I hand over to Trevor. As you will have seen, we've announced this morning that Trevor will be stepping down from the Board and as CFO later this year and will be succeeded by our new CFO, Ashley Almanza. Trevor has informed the Board that he would like to retire in the near future, so we began a search for his successor. Trevor has been with the Group for 18 years, and over that time he's had a number of senior line management and finance positions across the Group. He's staying with the Group for a while yet in order to make the handover as smooth as possible and also to work on some strategic projects.
Ashley, who was the former CFO of BG Group, the FTSE 15 gas company, will succeed Trevor on May 1, 2013. I'm delighted that Ashley will be joining us. His experience of working across a complex group of companies in a large number of countries with many cultural difference will certainly hold him in good stead for working with us.
So without further ado, I'd now like to hand you over to Trevor to go through the financials.
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Trevor Dighton, G4S plc - CFO [2]
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Thanks, Nick, and morning, everybody. There's a lot of complexity in the numbers this year, and we want to give you both full information on the reported numbers but also visibility of the underlying numbers which form the base of the businesses going forward. So I'll try to explain what's in and what's out in each of these slides.
The turnover slides show a five-year history of the Group excluding the Olympic Games contract for both 2011 and 2012, with 2011 restated for all 2012 discontinued businesses and at current exchange rates. 2008 to 2010 are as reported at historic exchange rates, but as Nick has already discussed, the US government business is in the process of disposal and, owing to its materiality to the Group, its results have been excluded from the historical numbers as well.
As you saw on the highlights slide, our total turnover in 2012 went up by over 8% to GBP7.3b with almost all of this being organic growth. Turnover growth in the Secure Solutions part of the business was 9.3%. Growth in Cash Solutions was 3%, a significant improvement on the 1% in 2011 driven by the performance of developing markets. The economic environment in cash solutions continues to be challenging in developed markets.
Over the past five years, turnover growth was 32% in total, with 39% in Secure Solutions and only 8% in Cash Solutions. All of our acquisitions in this time period have been in the secure solutions side of the business.
Looking at total turnover geographically, developing markets continue to show strong top line growth at 14%, including the impact from our acquisitions in Brazil in both facilities management at the end of 2011 and security in 2012. Growth in Europe is 3.5% and growth in North America is very good at nearly 11%, primarily driven by the US commercial security business. Over five years, developing markets has grown 64% and now comprises 33% of Group turnover. Growth in North America was 58% including the impact of the acquisition of technology businesses, and growth in Europe has been low at 10% -- lower at 10%.
We're showing two organic growth slides, both exclude acquisitions, are adjusted for current year disposals and discontinued businesses and are calculated at constant exchange rates. But the first includes the Olympic Games contract and shows growth of 9% including 11% in European Secure Solutions. And the second, excluding the Olympics, shows Group organic growth of 7%.
Developing markets growth is in double digits across both product areas. Secure solutions growth is 8% in total, with 11% in North America due to the performance of the US commercial security business, and a respectable 5% in Europe, helped by UK government contract startups. Cash solutions organic growth was flat in developed markets but 3% in total.
PBITA history, shown in the same way as turnover, in the year, PBITA has increased by 6% to GBP516m, on a margin that's 0.1% lower than last year. This reflects the 0.2 reduction in Secure Solutions margins mainly as a result of the phasing of the new UK government work. Margins in cash solutions have been maintained at 10.5%, with declines in Europe offset by improvements in both North America and developing markets.
The impending disposal of our US Government Solutions business increases our average margin for the Group above the 7% level, and the margin has been over 7% throughout the last five years and PBITA has grown by 32% over this period.
By geography, PBITA in 2012 increased by 14% in developing markets and 8% in North America but declined by 2.5% in Europe due to the margin pressures in cash solutions business in Europe, particularly in the UK and Ireland. Again, what's very noticeable on the longer-term view is that developing markets has increased by 52% since 2008 and now contributes 37% of Group profits.
Our only significant acquisition in 2012, as you can see from this slide, was the security business of Vanguarda in Brazil, which added to the facilities management business of Interativa that we acquired at the end of 2011, giving us a full range of capabilities in that exciting developing market.
As we announced at the half-year, we're undertaking a major program to improve the efficiency of the way we do things in order to maintain margins. We've invested GBP45m this year in organizational redesign to achieve ongoing overhead savings of around GBP35m. But efficiency is not only about overhead costs, and we're reinvesting GBP10m of those annualized savings into business development and into service excellence centers. These will identify best operational practice on a product-specific basis and ensure that it's applied across the Group. During the next three years we'll also be running a Group-wide procurement initiative and developing and implementing best practice models for back-office operations.
I'll come back to the detailed analysis of cash flow in 2012 a bit later, but here we summarize the five-year history of operational cash generation. If you recall, our target cash generation is 85% of PBITA. We've consistently exceeded this target from 2008 onwards, and this is through differing global economic circumstances, from growth to recession. In 2012 we achieved 95%, which is a very strong result.
To return to the financial detail, the P&L in total looks like this. In this slide, the prior year is at 2011 exchange rates and includes last year's Olympics-related PBITA, so it agrees to what is published in our announcement. PBITA in 2012 is GBP516m, as we've already seen, and interest of GBP104m is slightly higher than last year. We're expecting a similar level of interest costs in 2013. Amortization of acquisition-related intangibles and acquisition expenses totaled GBP93m.
Next, we see the losses on the Olympic Games contract. These comprise the losses on the settlement of our negotiations with LOCOG of GBP70m, together with associated legal costs, sponsorship costs and the additional costs incurred in ensuring that we delivered as much of the contract as we could. There was also a GBP3m interest cost arising from delayed payment by LOCOG.
I discussed the restructuring program a little bit earlier and we're showing the GBP45m costs here as an exceptional item.
Finally, there's a net pension interest of GBP8m, which is a bookkeeping entry rather than a real cash cost. The IASB is changing the way this number is calculated from 2013. Under new calculations, it would have meant a GBP6m higher charge in 2012. But we've always excluded pension interest from any of our performance measures and it's never been included in PBITA, and we'll continue to treat it in this way. Discontinued operations I'll cover in a minute.
The tax charge is analyzed at the bottom, and you can see the effective tax rate on the real numbers has stayed at 22%. The total tax charge is GBP42m and profit after tax is GBP70m.
As I said, I would return to discontinued businesses. As we said last year, we're continuously reviewing our portfolio quite aggressively and businesses that are non-core, that we can't get minimum performance standards, or that present permanent serious operational difficulties, or have greater potential to more relevant owners, will be exited, part of our continuing initiatives to improve the quality of the underlying business.
We've taken a major decision to dispose of our Government Solutions business in the US. As you know, this has been impacted over the last two or three years by reduced government spending in many areas, but perhaps particularly in the de-mining area, and by contract losses and reductions. As a non-US parent, we've got limited access to classified operational data and we found that we have limited ability to manage the business through a period of change. There remains very good opportunities in the medium term in the US government sector, but we believe that a US parent will be much better able to take advantage of these, and have therefore commenced a disposal process and we hope to complete this within the next six months.
During 2012 we completed the disposal of businesses in Sweden and Poland that started last year. We sold our electronic monitoring business in the US and completed a number of smaller disposals.
The profit and loss impact of discontinued operations is presented here. The net cash impact of the discontinued line was actually a net outflow of only GBP1m, and I'll cover this with the cash flow slides. The EPS calculation shows the impact of currency exchange rate movements from 2011 to 2012. At actual foreign exchange rates, we're very slightly behind the prior year, but at constant FX rates, the EPS of 21.2p per share represents a 3.4% increase on the prior year.
On the balance sheet, net assets have decreased by a little over GBP300m, including a GBP95m FX impact and GBP175m from the actuarial pension calculation, which they're both booked through reserves. Goodwill still dominates the balance sheet at GBP2.4b.
One of our key financial ratios is the net debt to EBITDA. I said before that we are comfortable with up to about 2.4 -- 2.5 times. It's increased in 2012 to 2.6 times, but we anticipate that it will return to our target range within 2013.
Here's the operating cash flow detail. It shows CapEx in continuing operations of GBP137m. This is only 98% of depreciation for 2012 as tight control on spend continues. The working capital outflow was only GBP27m, GBP46m better than last year. This is a very small outflow when the top line is growing by GBP0.5b and it reflects very strong debtor control, and debtor days have decreased slightly in a very difficult cash collecting environment. Overall, operating cash generation was 95% of PBITA, significantly above our target level of 85%.
We then show the reconciliation of operating cash back to the IFRS statutory presentation. The main adjustments relate to exceptionals and discontinued which we excluded from both PBITA and operating cash flow. The other items in discontinued operations, outflow of GBP220m, that includes the Olympics outflow of GBP174m, this is the total loss of GBP88m plus GBP86m of cash collected since the yearend, the final LOCOG -- that's the final LOCOG payment plus the VAT recoverable that we've got back now.
There's GBP45m of reorganization cash costs. And the impact of the discontinued line in cash flow terms is only GBP1m outflow. This is because the US Government Solutions business generated cash at around the same level as the outflow of the other discontinued businesses trading. The large items in the GBP63m P&L discontinued figure are the non-cash write-down of goodwill of GBP35m and the non-cash loss on disposal at Poland and Pakistan, etc. of GBP20m. The tax paid was slightly above 2011, and the additional pension payment of GBP37m was in respect of the UK schemes.
This is the rest of the reconciliation back to the statutory with all the normal items. Net interest cost was higher than last year, in line with the increased costs. Net acquisition cash spend includes the GBP101m detailed in the acquisition slide earlier, less GBP19m received from disposals and GBP15m cash acquired. The other line, showing GBP22m, is dividends to minorities and a small amount of purchase of our own shares.
All pension valuations have been negatively impacted by the extraordinary financial conditions currently applicable in most developed economies. Quantitative easing has driven down bond yields which are used to discount pension liabilities under IAS 19 and the rates applicable to our UK schemes at December 2012 was 4.5% as compared to an already low 5% from last year. The deficit calculation at December 31, 2012 was therefore increased by GBP140m to GBP436m before tax or approximately GBP335m after tax.
The UK scheme has been closed for future accruals in order to limit the Group's exposure to possible future growth in pension liabilities. The deficit repair payment in 2013 will be broadly similar to 2012. And we are in detailed discussions with the trustees over tri-annual evaluation as at April 5, 2012 and the possible impact on future deficit term repair payments. We should be in a position to report on the results of these discussions with the half-year results. We do anticipate that in the long term, more normal financial conditions will return and the reported position will improve.
The Group's funding profile looks like this, with headroom of GBP856m. We've put in an additional euro bond in place towards the end of last year of GBP500m. And the main revolving credit is in place until 2016 with no significant bond repayments prior to that.
And finally, dividends, as you've heard from Nick, we've got a policy of increasing dividends broadly in line with earnings, which allows some flexibility. We're recommending a final dividend of 5% -- sorry, 5.54p per share, which would take our total dividend to 8.96p per share. This will be an increase of 5% for the year and represents a compound average growth rate of 9% per annum since 2008. Dividend cover will be 2.4 times.
So before I hand back to Nick, as he said before, the announcement this morning, as the oldest CFO in the FTSE 100, I've decided to retire. And we've been lucky enough to find Ashley to take over from me. And he's going to be great for the organization, I'm really pleased that he's coming. And you'll all love him, if you don't already know him.
I've been on the PLC Board for 11 years now, and a few of you have been around for almost all of that time, I can see certainly one in the front row there. I just want to say it's been an absolute pleasure to work with all of you. It's been a fantastic time for me and I'd really love to buy you all a beer before I finally disappear in a few months' time.
Okay, back to Nick for the operational review.
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Nick Buckles, G4S plc - CEO [3]
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Thanks, very much, Trev.
So first of all, Secure Solutions, remember all these numbers are ex Olympics. So, Secure Solutions, excellent organic growth, 8%, industry-leading I would say, and as we've mentioned, driven by UK government, North America manned security, and developing markets. Margins down slightly, and it's mainly due to the GBP200m of startup in the UK of government business where we wouldn't expect significant margins early on, and also some reductions in the US technology business. But great organic growth, really pleased with that.
Moving on to Europe and, first of all, UK and Ireland, really good organic growth, came in around 8%. UK government was actually 13% in the year, so, excellent performance there. And utility services, around 15%. Six major government contracts mobilized during the year, less the GBP200m we talked about, and pretty low margins, so, hence, the hit on the margin in the year.
Commercial was pretty steady, 2% growth, which if you think of the distraction that the business went through in the year, I think that's pretty good, and we've renewed a number of new contracts, all the events business has been renewed for this year as well.
And electronic monitoring, moving really week by week. We now expect that contract to be extended through to February next year, and actually probably hear about the decision, we haven't put in the final bid yet, probably hear about the decision late June, early July. But clearly next year it will have an impact on margin. But good for this year.
Moving through to Continental Europe, still very, very tough economic conditions throughout the region. Organic growth has slowed slightly. Margins underlying have suffered, certainly at gross margin level we're probably about 1% off prior year. But actually with the cost reduction plans we've put in place, we've managed to maintain the margin and expect that to be the case in 2013.
The high-growth spots, Finland, Norway, Turkey. Eastern Europe stabilized, but actually some pretty vicious economies in places like Romania and Hungary where we're seeing double-digit declines, but overall pretty stable, but probably more of the same really next year.
Moving on to North America, stellar performance here, 11% organic growth. Actually manned security across North America up 14% in the year due to the mobilization of some large national contracts in the US and also the CATSA contract where we started up aviation in 21 airports November last year in Canada.
Margins held up very well actually on manned security but have been impacted to the tune of about 3.5% on technology where we declined about 6% as well. So, some of that margin downturn is down to that pure margin hit in technology. Still strong margins but they were double-digit last year. But some of it's down to the mix benefit of manned security growing at 14% at margins around 5%, 5.5%.
We mentioned US Government to be divested and we've got a pretty healthy pipeline of interested parties there. And plans in place for PPACA, that's otherwise known as Obamacare. We don't expect a material a material impact on our business, we've got a lot of good health plans in place anyway, but plans are in place to mitigate the effect of that.
Moving on to Asia, improving organic growth to 9%. India actually with probably its lowest year in terms of organic growth at about 11% to 12%. Inflation there is running at about 9% plus. We spent a lot of time and effort refocusing the business on larger commercial accounts, away from domestic, and we certainly expect that growth to pick up this year, and margin has improved off the back of that refocusing. Great performances in terms of growth in Thailand, China, Indonesia, Kazakhstan, all very good.
And the good news is where we've had a bit of a drain on organic growth in prior years, Australia is improving strongly. We expect 25%-plus growth from Australia this year. We signed a good contract on the Australian immigration on Manus Island. That's about a GBP20m a year contract, we started about November time, and we expect that to give us strong growth, as I said, in '13 across Asia.
Moving on to the Middle East, slightly disappointing growth, really driven by Afghanistan being flat. We really only have the UK government contract now in Afghanistan, that's about GBP30m a year. And also some systems issues across the UAE where we didn't have quite as good a performance. US Embassy finished, but that's now in discontinued. And we had some great growth as usual in places like Qatar, Egypt, Jordan, Lebanon. Margins up predominantly because we had a hit last year in Saudi from the Royal Decree around one-off bonuses. But certainly we've got some really good momentum in the Middle East for this year, expect strong double-digit growth. UAE has bounced back very strongly. So, a good performance expected there.
Moving on to Africa, good growth. Not quite the 10%, but we're getting there. Great performances from Kenya and Morocco. Biggest issue is in Nigeria. You can see quite a big margin decline in Africa. That's down to two major contract losses in Nigeria; had to do some restructuring there to get the cost base right. We expect that will pick up again next year, maybe not to the 9.5%, but certainly pick up. And certainly organic growth is heading strongly into double-digit territory for this year. Strongest pipeline we've had for a long time. We've got a lot of sector focus, a lot of investment going into development, and as I mentioned, it's a very unique platform, Africa. Expect a good performance this year.
Latin America continues to grow strongly, 14%. Good all around really. As you know, we're not overly exposed to one country there, in about 25-plus countries. Brazil now clearly the biggest business, but prior to that [also up] GBP100m. Good wins, good momentum. Very pleased with the way Vanguarda started, our security business in Brazil. And overall positive outlook continuing for LatAm.
Moving on to Cash Solutions, overall organic growth, as Trev mentioned, about 3%. It is a tough economic environment for that business, but the good news is margins are holding up, strong barriers to change, good cost control, margin sticking at 10.5%. But actually the low interest rate environment clearly continues, and actually more and more pressure from retailers. They really are having tough time in developed markets, really is dampening our growth expectation on developed markets.
Specifically into Europe, the UK, as Trevor mentioned, had a tough year. First half we lost business, second half we won business, both of which had a negative margin impact as we started up the three major contracts on FIs. But certainly the organic growth is improving, but there is underlying service reductions from retailers, undoubtedly, and banks in the very tough outlook in the UK business.
Benelux, overall very strong, strong double-digit margins, reasonable growth. As Trevor mentioned, we exited Sweden. We exited in February. Mainly due to the structure of the market, we've struggled to make money there for two or three years. Three months later, the number three player went into administration. So, clearly a much better market, so, not great timing for us. But it was the right decision at the time. As you know, we only stay in markets which are duopolies. This one wasn't but it became one after we exited, unfortunately. But growth is definitely limited due to the current economic environment. We still expect it to be positive this year.
In terms of America on Cash Solutions, North America, interesting for the first time I'm going to talk about a strong pipeline for CASH360 in the US. CASH360 is our integrated hardware and software for running retailer back offices. There's a big difference in the US market in that cash can get value, on-balance-sheet value, as long as it's notified to the bank when it's in the machine basically. So, more equipment that can give same-day value is a big difference in the US market. We're also working strongly with Bank of America as our partner to sell this into retailers, and we've got a very strong pipeline. You know we don't operate CIT there, but we've got a very good pipeline for this product.
Canada, starting to improve, organic growth 8%, margins increasing, pretty good outlook for this business in the short term.
Moving to developing markets cash, always a tough performer, organic growth 10%. Hong Kong has improved. The price wars come to an end and prices have started to improve and margins are now back to double-digit. And also Middle East, where we had problems with internal losses and robberies over the past couple of years, we've managed to stem those, hence, a better margin improvement.
And the big opportunities really in the short term are in Africa. There's a number of Pan-African contracts we're bidding on, including a great outsourcing opportunity with Absa Bank, we think that could be around GBP40m a year in South Africa. And with the acquisition of Deposita, which is another CASH360 product, mainly for small retailers, a robust product for the developing markets, a really good opportunity to expand our cash business throughout Africa.
So that's a roundup of the trading. If we move into sort of strategy roundup, I won't spend too long on this, but I thought it'd be good to bring you up to speed to where we are.
In terms of our business objectives, they're really grouped into five key categories. They're around organic growth, improving that continuously, delivering margin improvement, getting the organization right, and building and protecting our reputation, so the four big groups of objectives, and then underlying throughout has always been improving our cash generation.
First of all, organic growth in terms of progress, organic growth now has moved above nominal global GDP. You've seen this chart many times before. On a lagged basis, we crossed the line backend of last year in terms of organic growth against the weighted average, and you can see there running at around 7% now going forward, slightly down in the fourth quarter because of the relativity of CATSA, etc. last year. But you can see a couple of percent -- moving a couple of percent ahead of nominal GDP. So, good news. We've been looking at this chart now for a couple of years and we hoped that was the synopsis, and it's turned out that way, which is good news.
We've been implementing Salesforce.com throughout the organization. That's now fully implemented. It's a global system. We've got much better visibility of our pipeline. And we've also, as Trevor mentioned, invested some of the savings in overhead in stronger sector focus, more business development resource in the key businesses and regions, and also bid teams in a number of areas.
And then in terms of sectors, we've talked about our sectors in the past that delivered very good results. You could see the four sectors, the mining one being the latest, have delivered 19% compound organic growth for the last five years. And actually mining, our newest one, we focused on about two years ago, 51%. All from relatively low basis, but you can see the sector focus is really working.
Moving on to actual wins, contract wins over GBP2m a year. Fantastic performance here. We had GBP450m of wins in the year and only GBP76m of losses. So, pretty good performance. We don't expect quite such a strong performance this year, but certainly very, very good and good visibility going forward.
Pipeline still GBP3.5b, changes around a bit with UK government particularly, but still positive and strong. That's annualized contracts. And another real focus, particularly at the service excellence centers, which Trevor mentioned, is making sure our pricing policies are very firmly embedded. That's the quickest way to improve margins, and making sure we've got detailed and delivered price increase plans throughout the Group.
In terms of margin improvement, we talked about the GBP35m savings, but reinvesting GBP10m in development. Procurement, Trevor mentioned, GBP25m target for this year. We hope to deliver. It usually gets dissipated into the businesses, but certainly we expect to deliver that.
Again, to improve margin, we've had this focus now for a number of years on divesting non-core or non-value-creating businesses. Any business that doesn't look like it's going to meet our minimum margin targets, which broadly is 5% on manned security, 10% on cash, we will look to divest. We've always said that, but we're going to be much more active in making sure that happens.
And won't spend a lot of time on this, but the G4S Way through the service excellence centers were a little bit distracted last year during the Olympics, but came back into the business with a vengeance in October, and certainly we're starting to get some really good traction around improving gross margins in a number of businesses, or at least holding them firm where we haven't been in the past.
In terms of organizational development, the next stage of organizational review is around getting the same sort of structures in place throughout our organization. We don't necessarily expect that to save significant costs, but make sure we got best practice operating. We certainly don't expect any one-offs associated with it.
The collaboration is working very well throughout the -- sorry, I'll just get that up. Collaboration is working very well throughout the Group. The CATSA contract was a prime example of that. In its own strange way, the Olympics was a prime example of that. We [drafted] in a very strong parachute team of about 20 people from around the Group to actually make that work and deliver 80% of the contract.
Interestingly, of our top 120 managers, we haven't had anybody resign over the last six months, so a very strong performance in terms of senior management retention.
And in terms of succession planning, we filled the UK and Ireland role internally and the UK government, they've bedded in extremely well, very pleased with how that's going. We announced the CFO today. And the COO recruitment going well as well. We're shortlisting and then I expect to announce that in the next couple of months. And interestingly, probably the highest-ever level of interest in people joining the Group at the senior level, we really are having great success in that respect.
In terms of reputation, clearly important. We're establishing a Board-level risk committee as we speak, and clearly the COO will be a key player in that; the Chairman will chair that committee. On contract startup particularly, we've got a lot of diligence now on managing the risks with contract startups, and we have started, as I mentioned, GBP200m of business in the UK successfully this year, and a number of major contracts in North America, as I mentioned.
Ethics continues to be incredibly important. Everybody's been trained on anti-corruption and bribery and audited against, and that's gone well.
Clearly we've been testing our crisis management over the last 12 months, and certainly that's well embedded in the organization now. And, actually, importantly for our organization, our human rights guidelines, obviously had them in place previously, but updated and re-launched in April this year. And, of course, continuing engagement with all our key stakeholder groups is becoming increasingly important from an investor perspective to get all this right.
In terms of acquisitions, no big changes here; we expect to spend our GBP200m a year of free cash flow on acquisitions, that continues. And we also expect to raise a good sum from divestments. We've talked about the US; there will be others to follow. And that reinvestment will go particularly into developing markets. We have this goal of getting to 50%. That does imply we're going to put a significant amount of our acquisition firepower into developing markets.
But if you move to developed, we need to build our technology capability. We'd like to get more sector expertise. And actually, particularly in the UK, we need some stronger FM capability, the market is definitely moving that way. We've got some great capability; it's our fastest-growing developed markets business by far. So we need to focus more investment into that.
And continuously, we need to look at security consulting capability across all businesses, but that's not going to be significant, but it's a large number of smaller investments.
In terms of divestment, you've seen this before, it's been on most of our presentations the last three years, obviously anything non-core, there's not really anything in that category, particularly. Minimum margin targets, I've talked about, particularly alongside someone else being willing to pay a premium, because as a parent they can add better value than we can. We'll get out of unconsolidated cash markets and always had this reputational risk issue, as well, which is partially the US business as well -- US Government, some reputational risk could be associated with that. And you can see there the list of divestments we've made, and that list will continue to grow over the next 12, 18 months.
So, in summary we have had exceptional costs this year. Clearly the Olympics was a major blow, but hopefully we've drawn a line in the sand and we can move on. The other exception was really a part of our ongoing strategy to, at least hold margins, if not improve them and get the business fit for the future, and there is a tough environment out there.
The strategy review led us to divest the US Government business. There could be more in the future.
Underlying results were good, I would say. Organic growth of 7% is pretty much best in class in our sector, I would say. And we have maintained margins around the 7%, and that clearly is our goal over the next three years to at least maintain margins at 7%.
In terms of the outlook, Europe is still very challenging, but we're holding our own. We've done our self-help measures around cost. Without sounding negative, we had an exceptionally good year on North America commercial and UK Government this year, a strong double-digit growth. We don't expect that to continue this year, but we expect good nominal -- no, well above nominal GDP growth.
But, on the other hand, I do expect developing markets to pick up more than 10% this year. We've got some really good momentum, as I mentioned earlier, so really organic growth would be disappointing if it was less than 6%, hopefully nearer 7%, that's the sort of level that we're expecting.
Continued focus on costs, always. But we have reinvested in this service line expertise to make sure we can at least hold gross margins, if not improve them. And we do expect this positive momentum, we have ended the year in pretty good underlying shape, continue due to our market leadership, particularly in developing markets, the outsourcing trends, particularly in the UK.
And what we've seen, I think, in the last 12 months, despite some pretty strong headwinds, that we have got a pretty durable base, good geographic breadth, good service line breadth, good contract pipeline. So expect that good solid underlying growth to continue.
And, just before I wrap up, really I've got to say a big thank you to Trevor. He's been a fantastic CFO for us. He's worked with me closely the last ten years. Been a vital part of what's been, I think, a great success story over that period of time. So I'd just like to thank Trevor, personally, and from the Group.
Now, happy to take Q&A, first of all from the floor, I'll sit down if you don't mind. Down in the front here, Rob please.
==============================
Questions and Answers
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Rob Plant, JP Morgan - Analyst [1]
------------------------------
Thanks, it's Rob Plant from JP Morgan. The 6.9% organic growth for the full year is better than the 5.5% for the first nine months. But, presumably the first nine months didn't -- did include the US which has now been stripped out. Could you tell us how organic growth progressed across the year on that 6.9% basis, excluding the US? And, at what rate did you exit? Thanks.
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Nick Buckles, G4S plc - CEO [2]
------------------------------
Yes, you saw from the graph I put up, it's relatively accurate. And so first half would have been roughly 6.5%, second half just over 7% and the fourth quarter slightly down on the third quarter. So -- and unfortunately a lot of the comparables -- big contract start-ups in December and January last year in North America particularly, the UK Government a lot of start-ups between October and April, May time.
But to be fair -- so you would expect quite a big drop off in the first half, but actually we don't expect that. I think developing markets and other contracts we started up, I'd be surprised if we don't start at least 6% plus. But we've still got some understanding to get with some of these big contract changes.
To keep the UK growth up it would have been nice to have had some start-ups in the second half, particularly on UK government. But really there's nothing that's going to start up, as we see now, of any significant size, in the second half. But, good news that the EM contract is going to be extended for the rest of the year at least, so, on the UK government piece.
Kean?
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Kean Marden, Jefferies - Analyst [3]
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Morning, it's Kean Marden from Jefferies. Can I squeeze in three? I appreciate it moves around a lot, but if you can possibly run through some of the main swing factors in the bid pipeline, since you last updated us, that would be quite helpful.
Secondly, obviously the results are quite complex, but if you can, maybe, Trevor, just run through the main elements again of the discontinued line, in terms of cash contribution. So I think it's the GBP220m number on slide 21. Just the main breakdown of that will be really helpful.
And then thirdly, I'm wondering what skill set the Board was looking for particularly from the new Finance Director?
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Nick Buckles, G4S plc - CEO [4]
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Yes, the bid pipeline, it is very biased towards the UK government, and clearly the big change in outlook has been around MOJ, UK prisons, where previously we'd expected, upwards of ten prisons a year to come to market, so that's come out of the pipeline now.
Going into the pipeline to replace it has been elements like the MOJ prison FM outsourcing, and hence my comment about FM in the UK, there is definitely a big growing trend, if you're not going to go full outsourcing on prisons, to put the back offices and the facilities management out. And that will, I think, roll out across a number of government departments, and that's really to come in the future.
The other real sort of -- that really is the fundamental change. But in terms of commercial work not a huge difference. ABSA I mentioned has really come into the frame, that's actually out for bid now. We weren't -- we were expecting that a few months ago, but that's tangibly in the pipeline.
To come in the UK, things like Courts' Fines, probation, but really we haven't got a number -- a tangible number in for those. So -- but outside UK government it's pretty much the same as it's always been, it's not a big change.
I'll come back -- I'll do the CFO and then I'll pass to Trev for the GBP220m. In terms of the CFO, clearly an experienced CFO was important for us. I think if they're available you would certainly hire them. We had an extremely good shortlist, very pleased about that. But what we were looking for was some international capability, multi-country. But really track record was really the big differentiator.
And clearly we mention in the announcement we've got to build succession resource as well within our organization and from externally. CFO and COO are two roles that are clearly roles that you would tend to try and fill with succession potential as well as the four regional CEOs we have in place, so that had to be part of the thinking as well.
Trev, on the GBP220m?
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Trevor Dighton, G4S plc - CFO [5]
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Yes, if I could just add to that as well, because that's somewhere very close to my heart. The cultural fit is -- was extremely important as well, and we think Ashley really fits our culture, which is a great addition.
Yes, on the GBP220m, pretty straightforward actually. The Olympics, GBP174m was all cash. And I told you the two elements of that, that's the loss plus the amount that they were holding onto at the end of the year, and a little bit of that associated with that. So that's GBP174m of the outflow. And then all of the reorganization costs were cash costs, so that's GBP45m.
And on the trading there was a positive contribution on the trading from the US business, and negative from the others. There was -- that netted out to about a GBP10m of trading profit, but of that the cash position was better than that, because the US Government business collected actually more cash than they created profit. They had a good year of cash generation as well, so the net impact was practically zero, it was only a GBP1m impact on the cash line.
------------------------------
Nick Buckles, G4S plc - CEO [6]
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Andrew in the middle.
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Andrew Ripper, Merrill Lynch - Analyst [7]
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Thanks, it's Andrew Ripper from Merrill Lynch. A couple from me if I may? First of all, on the US, can you just give us the split now between the manned business and the electronic business please, on revenue?
And then, following on from that, what's your current experience on prices and wage growth? In your comments about Obamacare, ypu sounded pretty relaxed about the potential impact on your business. Obviously Securitas have been quite vocal in preparing the market for quite big cost and price increases. I'm just wondering, as far as you're concerned, where the differences lie. And I appreciate you may have a, perhaps a larger number of guards that are billed at higher rates, with the custom protection officer program, but is there more to it than that? Are you in general basically a better employer in terms of benefits for the guards, or what?
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Nick Buckles, G4S plc - CEO [8]
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Yes, first question on North America. We've got about GBP1.2b remaining and I think technology -- there's manned security, there's compliance investigations, care and justice and technology. Technology on its own is about GBP150m, the balance is non-technical, of which manned security is probably about GBP900m, GBP950m, then you've got compliance investigations, care and justice, etc.
And the technology businesses, there's two main businesses. One that does large-scale installations and the other is a sort of distribution and international access control business, basically. But the installations business, volumes move around quite a bit, and margins move around quite a bit, because it's a non-recurring revenue business model, and that's about GBP110m.
Second one was?
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Andrew Ripper, Merrill Lynch - Analyst [9]
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Obamacare.
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Nick Buckles, G4S plc - CEO [10]
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Obamacare, yes, obviously the US Government piece that we're divesting has got extremely strong healthcare plans in place. So there's no impact on that business at all. Within the commercial piece that remains we've got about GBP120m of commercial nuclear business, which has got very strong health plans in place, that's unique to us.
Then within the manned security business, which is about GBP800m, probably about 35% to 40% is CPO program, which you mention, where we've got very strong healthcare benefits again. And the balance -- the scheme we have in place is pretty much up to spec when it comes to the new legislation. Now that's not to say there aren't some tweaks we've got to make to it to actually make sure the cost remains the same. But we don't envisage, currently, at all, going for a major price increase with our customers. You might be talking a couple of percent, but nothing significant.
It's fair to say all our US growth at the moment, and has been for the last three years, is all organic volume growth. If anything, probably the average prices have fallen over that period of time. So we haven't had a formal price increase with any of our accounts really for two or three years. So it is a volume growth that we're getting there, typically.
------------------------------
Andrew Ripper, Merrill Lynch - Analyst [11]
------------------------------
Thank you, and then second question from me. Just regarding the sort of divestment thesis, can you just remind us why you see the cash business overall as being a core part of the Group? What's the logic for retaining that?
And then, in terms of tidying up the portfolio, from here, presumably WSI was the sort of biggest potential offload. Where would you move onto next, is it around the edges of the portfolio?
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Nick Buckles, G4S plc - CEO [12]
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Our cash business is a high performer, despite the current economic environment, 2009 I think our organic growth was 11% to 12% overall. And it's still double-digit in developing markets and that will pick up this year, I'm sure.
Where we've got cash businesses in developed markets, they're in duopolies most of the time, high barriers to change, and we run them pretty well I would say. Our expertise around cash solutions -- we're the number two player globally, and our expertise does give us differentiation when it comes to winning new outsourcing business. So I do think we're a very strong parent for the cash business per se. And the UK market, wherever we look around the world, is at least five years ahead in terms of outsourcing trends, and other markets will follow in time.
Then, when you move into developing markets, which we've got probably 55 to 60 cash solutions businesses, there are huge dis-synergies of it not being part of the Group. If you take Africa, where we probably do cash in 20 countries, you just wouldn't be able to afford an infrastructure to support 10 to 20 vehicles, here, there and everywhere. And the synergies alone could amount to tens of millions of pounds.
And actually whenever you look at acquisitions in developing markets, the way the market develops, they're all multi-service businesses, basically. Because that's the way the markets operate, you do manned security, security systems, cash solutions and some facilities. So they really are not discreet businesses operationally, well, they are operationally, but not in terms of market and management structure.
So, it's an easy thing to look like it's divestible, but in practice it really -- from our perspective, wouldn't make sense. In some ways it's a business we should build more over time through acquisition. But at the moment our funds are going into developing markets and that's how it should be. Sorry?
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Andrew Ripper, Merrill Lynch - Analyst [13]
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I was just going to say, are there any bits of the portfolio (multiple speakers) where you can open today?
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Nick Buckles, G4S plc - CEO [14]
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Yes, if you're looking at developed markets business, as I said it's highly unlikely we'd divest developing markets, a substantial business there. In developed markets, on manned security we've a number of businesses that still aren't getting to 5%. We don't have to stay in manned security in markets. We've got global accounts that we quite happily operate without being in France, Germany, Spain, Portugal, Italy, so that's not an incumbent to growth. Although global accounts are becoming increasingly important, they're only 3% to 5%, depending on how we define it, of revenue.
So we can make those decisions. The issue really is -- comes back to one of value and parenting advantage. It's hard to find somebody that's willing to pay a premium, if we were looking to divest. So, anything really, under 5%, manned security, low growth, I think will be something that we'll look closely at over the next sort of six months or so.
Andy?
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Andy Chu, Deutsche Bank - Analyst [15]
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Morning, it's Andy Chu from Deutsche Bank. A few questions if I may? Would it be possible to update us in terms of attack losses year on year please, how that's developed?
Secondly, on the EM contract, if I'm not wrong that's I think a triple-digit million revenue contract, but obviously at high margins given the technology part which will obviously change. Can you maybe help us in terms of how far those margins might step down?
A small question on pensions, I know it's non-cash, but would we pencil in an incremental GBP6m for '13, due to IRS19? I know you're in the middle of your review.
And then just on divestments again, probably a bit of an unfair question, but is it possible to give us a scale of what's at risk on the divestment front, either by revenues and by profits? Thank you.
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Nick Buckles, G4S plc - CEO [16]
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Blimey, attack losses; we never like talking about them without touching the table. We had a pretty good year in 2012. Year-on-year improvement probably from mid twenties to late teens in terms of that sort of millions, an ongoing challenge, but the disappointment for me is, for example in the UK, it was a huge issue a number -- in the last three or four years. It's getting down to -- it's been a really excellent project to bring down the level of robberies. A lot of that improvement has come in the UK, but a lot of that has been passed on in lower prices to customers, basically. So, we haven't seen the profit improvement we should have expected from that approach. In fact I think the robberies, at their high point in the UK, were probably running at about GBP8m to GBP10m a year, and now they're down to GBP2m, something like that, so a big improvement there.
We don't know whether the big robbery in Brussels recently is going to impact our premium for international valuables. But just for your information that sits in a separate policy. That's a different underwriter to our core Cash Solutions business, and our international valuables business premium is only about GBP3m or GBP4m, so it's not a huge issue in there.
In terms of the EM contract, a complex story. Actually the overall revenue, at the moment, probably is around GBP100m for the market, but we only have half of it. It's a high margin contract, split into four lots, as you know. It's been delayed a couple of times in terms of final bids, we haven't put the final bid in yet. But clearly, next year, we expect the new contract to be in place. It's a completely different contract, but I think the revenues -- it's difficult to gauge the revenues, but I would guess they'll probably be nearer say GBP60m in the market, GBP60m to GBP70m rather than GBP100m, depending on the different elements of contract. But it's a complex area and we're working through it. I think we've worked very hard with the customer to make sure we're in good shape and fully understand the rollout implications of the new contract.
In terms of pension interest, over to you, Trev.
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Trevor Dighton, G4S plc - CFO [17]
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Yes, this is this daft standard IRS 19, where the increase in the liabilities that comes out of that standard goes to the P&L, whereas the increase in the asset, which is a positive, goes straight to reserves. So, it's a pretty daft standard. The impact on this year it would have -- it makes about a GBP5m impact to this year. So the GBP8m would have been GBP13m and next year it'll probably be GBP20m. So if you do want to build those into your calculations, you're quite -- do it by all means, but it means absolutely nothing.
And, in terms of our discussion with the Trustees, this hasn't got anything to do with our discussions with the Trustees. They work on the proper evaluation of the assets and liabilities and this is just a peculiarity that just sits at the bottom of the P&L and we don't take any notice of it.
I know some organizations actually used to take the adjustment into their PBITA, and they're the ones that have a bit of an issue with this. But we've never taken it into the PBITA line, so we haven't got that same issue.
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Nick Buckles, G4S plc - CEO [18]
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And then on the divestments, I think -- we've probably got GBP500m to GBP600m of manned security revenue that falls into the category of being below expectation. Don't really know how much converts in the next 12 to 18 months in terms of divestment, but it's that sort of scale that we'd be talking about.
Down here please.
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Charles Wilson, Goldman Sachs - Analyst [19]
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Charles Wilson from Goldman's. Just on the -- on the US divestment, how much have you spent putting that business together? Just so we get a feel what you might be able to sell it for?
And secondly, with your margin guidance, I think it seems pretty similar to what you said last year, and I guess underlying, if you include the US business it would have been down 30 bps or so. So, is your margin guidance you're giving, does that include the impact of divestments?
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Nick Buckles, G4S plc - CEO [20]
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Actually it would have -- it is improved by 30 basis points through it not being in the results. But actually the business made a lot more money last year as well, the US business. I think within the adjustment it's about GBP20m?
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Trevor Dighton, G4S plc - CFO [21]
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GBP20m.
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Nick Buckles, G4S plc - CEO [22]
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So it's not exactly like for like. That business we sold -- one of the reasons we sold it is because its margins have come down significantly, we don't even see them improving basically.
In terms of the forward guidance, we expect to stay above 7% without portfolio change, and if portfolio change leads to margin improvement that should be incremental.
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Charles Wilson, Goldman Sachs - Analyst [23]
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And in terms of what? It looks like that US Government Solutions business, you acquired various businesses to get to it.
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Nick Buckles, G4S plc - CEO [24]
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It's predominantly the acquisition actually of Wackenhut by Group 4 Falck in 2002. And that was part of a much bigger acquisition at the time. And since then the acquisitions we've made really -- a part of Armour Group went into their portfolio. And All Star, which is an FM business, went into their portfolio. But they're not really a good guidance for what we might achieve on disposal. We also took a GBP35m write-down on one of those businesses.
So I'd -- it's probably running at about GBP350m at the moment, with Diego Garcia coming on in April. It's low margin, as you know. And it really depends on what a new parent thinks it can do in terms of improving its performance, a, and secondly if they want to integrate it with another business, then clearly there'll be even better returns. There's -- it's really you can make your own judgment on a low margin GBP350m business that actually gives a unique platform to do US government business. And we've got 15 companies interested, a lot of private equity, that will clearly come down significantly, but we think it's quite a unique platform that an American owner could do something significantly more with than we can currently.
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Trevor Dighton, G4S plc - CFO [25]
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It obviously wouldn't be a sensible thing for us to commercially put a price out there, environment-wise.
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Paul Checketts, Barclays Capital - Analyst [26]
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Hi, it's Paul Checketts from Barclays Capital. I've got three as well. On the UK first, I think it was the one country, Nick, that you didn't give us a sense of why you'd expect organic growth, and I guess after such a strong 2012 that will come down, but maybe give us a number? And also, after the phasing of contracts in 2012, do you expect the margin to improve here?
And on a -- in a broader sense, perhaps you'd give us your thoughts on the UK governmental space, started 2012 as a very exciting arena for G4S and given that some of the stuff that has fell away, perhaps less so now.
And the other two are quickly on US.
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Nick Buckles, G4S plc - CEO [27]
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Oh, that was one was it?
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Paul Checketts, Barclays Capital - Analyst [28]
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That was one.
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Nick Buckles, G4S plc - CEO [29]
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A, B, C, yes.
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Paul Checketts, Barclays Capital - Analyst [30]
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And the other two, US airports, perhaps you could give us an update on opportunities and how you think the contracts might be structured.
And lastly, on Cash Solutions in the developed world, people have talked about it for a long time, the reduction in cash being a risk in terms of the way people are paying. Is it now actually leading to some of this retailer pressure that you're talking about?
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Nick Buckles, G4S plc - CEO [31]
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Yes, blimey, so first of all, UK. I would guess UK organic growth is difficult to call in terms of phasing etc. First half will be better than second; I'm sure, unless we pick up some commercial security start-ups this year. Having said that, utility services growing extremely quickly around smart metering, it's not a big business, but it's going very well.
So nominal GDP, plus two or three is a reasonable expectation; I'd be disappointed if it wasn't 5%, I'd be pleased if it was 6% or 7% I guess, it's that sort of figure. But we need to win some business in the second half to really deliver on that.
Margin's difficult to call, I would say it would be pretty similar this year to last, although we've got some start-ups -- there's not really start-up costs in that GBP200m start-up, it's just low margin. It will get a little bit better, but there'll be other things that aren't, so I think a reasonable expectation is a margin similar to this year.
The UK government space, I think it's still very exciting, but not very short term now for us. In the next six to nine months it's hard to envisage some big chunks of business coming on that we haven't already got. There'll be some, 10s and 20s of millions, but nothing significant. But then probably 2014 we're much more excited about probation, MOJ, FM, Courts' Fines, so I still think the outlook's very positive, but not in the very short term.
In terms of US airports, one of the challenges is going to be that we're going to have to rebuild another proxy structure, which will be different, clearly, from the proxy structure we have. You've got to have a proxy structure to do US airports, which does bring its challenges. But it will be a different structure, not quite as limiting as the current one, we hope. But I think that's a longer-term game. There's a lot of union opposition to it happening. So again we would -- we've got some in the pipeline, but I don't think they'll be big numbers coming through this year. But once it starts I think it could gain momentum.
Cash solutions, developed markets, I don't believe that cash in circulation or cash per se is the issue. We've got some more work to do on that. I think it's much more about retailers just having such a tough time. It's really difficult out there. There's no time value of money whatsoever. And so accounts which five years ago were spending GBP3m to GBP4m a year on services are now spending GBP1m to GBP1.5m, that's the level of reduction in some of the major retail accounts. We had a couple go into receivership, not huge, but we had a couple drop out in the first quarter, this year. So it's much more the economic issue, I think, than the cash in circulation or cash processing. That doesn't concern us too much at the moment.
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Paul Checketts, Barclays Capital - Analyst [32]
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Thanks.
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William Vanderpump, UBS - Analyst [33]
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Morning, it's William Vanderpump from UBS, just a couple left from me. In terms of the US divestments, obviously a troubled business in some way and low margin, but did that have any sort of strategic benefits in terms of feed across to your commercial business? And, is there a potential dis-synergy there from prestige contracts that you can no longer show off?
I suppose secondly on cost savings, GBP35m this year, you've obviously done quite a lot of internal soul searching. It sounds like you're now talking about divestment is the best way to now optimize your portfolio. Are you basically all done with cost savings as a result of what you've been through this year?
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Nick Buckles, G4S plc - CEO [34]
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The UK (sic) government, part of the rationale for divestment was that we couldn't add value to it, and it couldn't add value to us, so basically we couldn't transfer best practice out of that business, because we couldn't know what it was doing. So, basically it was almost like a business we didn't talk about. So in the US space we wouldn't have said we do the security at Kennedy Space Station or the Fire Services, because it's not really relevant, and we can't really show people or tell people what we do anyway. So there's definitely no expertise transfer.
I think it's very important for our US business, and we had to position it very much, that we're not getting out of the US, we're getting out of classified business in the US, we're not even getting out of US government business. So, within our commercial business we've got probably $100m to $200m revenue with government, either local or federal. So it's -- so that's the only risk that we -- people think we're not doing US government, we are, we're just not doing classified US government.
In terms of cost saving, we continually look at efficiency in our organization, we have to, gross margins have been under pressure for ten years and never more so than now. But as I said earlier, we don't expect to do a major restructure program; it will be very much operational improvements around gross margin and productivity. Some getting best practice in place on the overhead structure, but we certainly don't envisage a restructuring charge at all. But it never stops, cost management, in our business. We've got 90% of our costs are people related, so we've got to be on top of it day in and day out.
Any more from the floor? Okay, we've got two from the phone lines, if we could switch to them please.
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Operator [35]
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Thank you. The first question comes from the line of Daniel Patterson from SEB. Please go ahead.
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Daniel Patterson, SEB - Analyst [36]
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Yes, hello gentlemen, Daniel Patterson here. I have two questions, both regarding the Secure Solutions and Europe. Firstly, could you comment a little bit on the market dynamics? You're still sort of seeing the underlying gross margin pressure here in '13 or is there some sort of stabilization at the end of the tunnel?
And then also the 7% margin in the business that you're delivering in '12, are you pretty happy with that in Europe? Or what would make you and need you to do more on the reorganization in Europe on secure? Thanks.
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Nick Buckles, G4S plc - CEO [37]
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Europe to us is two regions. We've got Scandinavia and Benelux which are very much developed markets, and we've got Eastern European and Southern Europe which are, I guess, developing but unfortunately not developing much at the moment. But I think in the medium term we expect those to be -- have the same attributes as developing markets. And some of the margins we're experiencing in those developing markets are still good, particularly on cash solutions, and so they're quite different.
So if we come back to the Northern Europe piece, on manned security the average margin last year was probably around 3% to 3.5% in those Northern European, Scandinavian businesses. That's despite the fact that most of the markets are three player markets with 70% to 80% market share. But the big problem there has been the ability to pass on wage awards, and it's not through want of trying, it's the fact that a lot of contracts, the business signs, the market signs are two- and three-year contracts. Some years there not a pricing clause -- increase clauses, some there are. And the gross margin pressure really -- comes from the fact that the market isn't growing.
So there's not new outsourcing coming onto these Northern Europe markets. The governments aren't looking to outsource and customers are willing to move on relatively small differentials in annual cost. And so hence -- the restructure has meant that we've kept margins at net level going, but gross margins are still under pressure. I don't see that changing in the next 12 months, we need a different economic environment in Northern Europe, particularly, because they have been good markets in the past, they are good markets when the economies are growing, because the whole market grows and people can pass on price increases and everything goes pretty well.
Currently, it's just tough on manned security. But our technology businesses are holding their own, the margins are good. They were flat year on year, but still pretty stable. But it's the pure manned security businesses that are the challenge and I don't think that will change in the next 12 to 18 months.
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Daniel Patterson, SEB - Analyst [38]
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Okay, thank you. My other questions have been answered.
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Nick Buckles, G4S plc - CEO [39]
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Okay, thank you. Another one on the line?
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Operator [40]
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The next question comes from the line of Laurent Brunelle from BNP Paribas. Please go ahead.
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Laurent Brunelle, Exane BNP Paribas - Analyst [41]
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Yes, good morning, Laurent Brunelle, Exane BNP, two questions left for me. First, regarding your sales target of at least 6% in 2013, could you maybe split it between volume and price? And what kind of retention rate assumption do you have for 2013 please?
Second on margins, given the expected savings from restructuring programs and procurement, do you expect margins to improve this year, it was not clear to me? Or, should it be offset by price pressure and start-up costs?
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Nick Buckles, G4S plc - CEO [42]
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Organic growth in developing markets, if it's going to be -- it will be strongly double digit I'm sure. We're probably about half and half between indexation and volume. The developed markets' growth I think is nearly all entirely volume at the moment, if not more than. I think there's both price reduction and price increasing going on, typically.
In terms of the margin going forward, the best guidance we can give is 7% plus, that's what we expect to continue to deliver, and it's our expectation for this year.
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Laurent Brunelle, Exane BNP Paribas - Analyst [43]
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Okay, and regarding retention rates at the Group level, please?
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Nick Buckles, G4S plc - CEO [44]
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We've got varying methods of recording retention at the moment across the 120 businesses, ranging -- and some range at 95%, some as low as 80%, but it really depends on the way that they're measuring. And one of our objectives for this year throughout the Group is putting in a more consistent measure of customer retention. We think it is across the Group around 90%, but we're working hard on making sure, through the financial systems, we can get a true measure that's consistent across the Group. So it is always around that sort of level, but we want to be more scientific about it going forward.
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Laurent Brunelle, Exane BNP Paribas - Analyst [45]
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Okay, thank you very much.
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Nick Buckles, G4S plc - CEO [46]
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Thanks. Just wrap up again by saying, thanks very much to Trev; much indebted to his support over the last ten years or so, and look forward to seeing you all again soon. Thank you.
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