G4S PLC Interim Management Statement for the three months to 31 March 2013 Conference Call
May 07, 2013 AM BST
GFS.L - G4S PLC
G4S PLC Interim Management Statement for the three months to 31 March 2013 Conference Call
May 07, 2013 / 07:30AM GMT
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Corporate Participants
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* Helen Parris
G4S plc - Director, IR
* Nick Buckles
G4S plc - CEO
* Ashley Almanza
G4S Plc - CFO
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Conference Call Participants
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* Robert Plant
JPMorgan - Analyst
* Kean Marden
Jefferies & Co. - Analyst
* Laurent Brunelle
Exane BNP Paribas - Analyst
* Tom Sykes
Deutsche Bank - Analyst
* Stephen Rawlinson
Whitman Howard - Analyst
* Paul Checketts
Barclays - Analyst
* Ed Steele
Citi - Analyst
* Steve Woolf
Numis Securities - Analyst
* George Gregory
UBS - Analyst
* Daniel Patterson
SEB Enskilda - Analyst
* Andrew Ripper
Bank of America Merrill Lynch - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the G4S conference call. My name is Lin, and I will be your coordinator for today's conference. For the duration of this call, you will be on listen-only. However, at the end of the presentation you will have the opportunity to ask questions. (Operator Instructions).
I will now hand over to Helen Parris to begin today's conference. Thank you.
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Helen Parris, G4S plc - Director, IR [2]
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Thank you. Good morning, everyone, and welcome to our interim management statement conference call today. I'm joined by Nick Buckles, our Chief Executive; and Ashley Almanza, our new CFO. Nick will make some very brief comments today, and then we'll open up the call for Q&A.
So now I'll hand over to Nick. Thank you.
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Nick Buckles, G4S plc - CEO [3]
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Good morning, everybody, and thanks for joining the call at, clearly, short notice. In terms of the first quarter, organic growth was pretty good, around 6%.
But, unfortunately, the margins suffered. We were down 0.6% due, principally, to the continued challenging economic environment in Continental Europe, renewed and continuing pricing pressure in the UK and Ireland Cash businesses. And also, in UK Government, with the new contracts coming on volume growth is good, but underlying growth in some of the existing contracts has been weaker, hitting the margin there.
There's also a one-off GBP6 million charge in the Africa region, which is mainly relating to the write-off of receivables in Djibouti. However, that -- so clearly a big chunk of the first quarter margin issue was the one-off. But basically, when we reviewed in detail the forecast going forward for the year, these challenging trading conditions, and some of the trends we've seen in the first quarter, and some new information which has come to light in the last few weeks, has meant that we do expect the margin deterioration to continue for most of the year.
One of the issues which has arisen in the last month, or last few weeks actually, is the loss of our very major contract in Holland in terms of the Ministry of Justice, who are closing around 30 prisons. We've had that contract for a number of years. It's about EUR35 million/EUR40 million revenue, and we were expecting a EUR20 million extension in the second half. Basically, because they're shutting 30 prisons, we've got to reduce that whole contract by the end of the year with the costs of 70 -- 700 staff being removed.
Clearly, we've got improvement plans ongoing. The pricing pressure in the UK and Ireland, as I mentioned, has been an issue. A lot of the new contracts we started to the back end of last year haven't delivered in terms of profitability. But we've got cost reduction plans in place in the overall business, and certainly our plan is to increase prices and margins in the second half on the UK and Ireland Cash businesses.
On the positive side, organic growth has been good, as I mentioned. Developing Markets has performed strongly, organic growth going up to 12%; and margins holding up well, aside from the Africa issue.
Looking forward, our confidence in the growth story absolutely remains. We've got a great geographic footprint. Our pipeline is still strong, with over GBP4 billion of annual revenue, which we expect decisions from in the next 12 months.
And in terms of outsourcing, we're currently bidding on some good opportunities in UK, South Africa, and Australia.
So, a disappointing first quarter, a disappointing outlook. Three main areas of weakness; UK and Ireland Cash; underlying UK Government volumes; and Europe, particularly driven by the poor economy there, but particularly driven by the loss of the Dutch prison contract.
So that concludes my wrap-up, I'm now very happy to take questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Robert Plant, JPMorgan.
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Robert Plant, JPMorgan - Analyst [2]
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In terms of the 60 basis points lower guidance, do you think there's more upside or downside risk on that? In particular, I'm thinking about the fact that the high margin UK tagging contract comes up for re-bid. That could lead, even if you decided to bid for the contract, to GBP15 million less profit; is that baked into this guidance? Thanks.
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Nick Buckles, G4S plc - CEO [3]
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Yes, in terms of -- the tagging contract is a big moving part in both the forecast and next year.
In terms of the forecast, we have actually, although not announced it, won an extension of the contract through to early next year. So that's in the numbers currently.
But the underlying volumes in the existing contract are actually down about 15% in terms of people on tag. And so there's a positive in that the contract's extended, but although we did extend it on lower prices than our current to see it through to February next year. But the underlying volumes on that contract, say, are down 15%, and that does have quite a big operational leverage impact on the bottom line.
So some of the downturn in the tagging contract, if we win it, for next year is already baked into this year's forecast, so we don't expect a downside on that contact this year.
In terms of prison places, on our four prisons we run, the additional prisoner places contract, which is pretty profitable, again because the prison population is falling, we expect the additional prisoner places' profitability, which is pretty significant, to fall during the year, which is down to a reduced prison population, basically. So some of the underlying economics in the Government business have been reduced by falling volumes.
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Robert Plant, JPMorgan - Analyst [4]
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And those two points, Nick, about less volumes in prisons, less volumes in tagging are captured in today's statement.
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Nick Buckles, G4S plc - CEO [5]
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Correct.
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Robert Plant, JPMorgan - Analyst [6]
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Okay. Thanks, Nick.
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Operator [7]
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Kean Marden, Jeffries.
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Kean Marden, Jefferies & Co. - Analyst [8]
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I've got quite a few, so I'll try and rattle through them, if that's okay, Nick? Can I just ascertain, specifically, your comments regarding full-year guidance for margins? Are you guys trying to communicate here a 60 basis point reduction for the full year, or that margins will remain down year on year, for the remainder of the year?
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Nick Buckles, G4S plc - CEO [9]
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It's pretty much the same thing, I think. We're expecting our margins - if we're [0.6%] down in the first quarter, looking at the forecast, and looking at some of the moving parts, and some of the weakening performances of which we didn't expect, that we would expect our year-end margin roughly to be down a similar number.
Clearly, we're very early in the year. And we've had to do a lot of detailed work over the weekend on the forecast, but that's where our current thinking is.
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Kean Marden, Jefferies & Co. - Analyst [10]
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Okay. And then just thinking about gross and net, obviously, you engaged in cost reduction measures last year, which were obviously intended to give you some EBIT margin improvement this year. Should we think about the minus 60 basis points being minus 80 basis points from the 5 points that you outlined in the statement, offset by 20 basis points of cost reduction?
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Nick Buckles, G4S plc - CEO [11]
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Sorry, I don't quite get that, Kean.
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Kean Marden, Jefferies & Co. - Analyst [12]
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You were basically -- if we look at your 60 basis point year-on-year margin reduction, the cost reduction measures that you put in place last autumn should deliver you a 20 basis point margin increase this year. So to get to minus 60 basis points, the gross impact of the 5 points in your statement today, presumably, is minus 80 basis points.
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Nick Buckles, G4S plc - CEO [13]
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I guess so, but they're baked into the forecast. So when we -- we haven't gone through the forecast and said how much would the cost reductions have been. So, basically, Europe is down a level which we would have expected not to have been down so far due to cost reduction, so the [0.6%] is where we believe we are against market expectation in terms of our internal forecast.
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Kean Marden, Jefferies & Co. - Analyst [14]
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Right. And then, are there any working capital implications just in terms of the mix of your business growing, in turnover terms, but seeing lower margins?
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Nick Buckles, G4S plc - CEO [15]
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No. We'd still be heading for at least 85% of profits as cash-generating impact. I'm pretty confident we'll be more than that, but that's something that we expect to continue to achieve.
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Kean Marden, Jefferies & Co. - Analyst [16]
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Okay. And Ashley's obviously been there all of, what, five days, six days, maybe?
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Nick Buckles, G4S plc - CEO [17]
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He's been CFO for six days, but he's been with us about one month and six days.
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Kean Marden, Jefferies & Co. - Analyst [18]
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Okay. I'm just wondering, in terms of your thoughts, collectively, around shape of balance sheet, because that 2.7 times net debt-to-EBITDA number doesn't look like it's going to decline appreciably this year. Would you think that's a fair comment?
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Nick Buckles, G4S plc - CEO [19]
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I'll pass that over to you, Ashley, yes?
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Ashley Almanza, G4S Plc - CFO [20]
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Yes, thanks, Nick. I think, broadly, I would agree with that. As Nick has alluded to, we're going to put in place, on the back of this forecast process, a number of business improvement plans, focusing on both profit and cash flow.
So, in the near term I would agree with your comment, but we've also got some disposals in the pipeline. And we have to take a hard look at discretionary spend, both operating expense and capital expenditure, to over time, through a combination of improved operating efficiency, therefore, operating cash flow, and portfolio efficiency, strengthen our balance sheet somewhat from where it is today.
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Nick Buckles, G4S plc - CEO [21]
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And we've talked before about disposals, divestments, our criteria for divestment, they haven't changed. There's quite clear criteria around margin targets in terms of a better parent, in terms of reputational damage, reputational risk. We have been going through, as we've talked about for the last few months, a number of businesses which hit that criteria and so there will be some disposals coming up over the next few months.
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Kean Marden, Jefferies & Co. - Analyst [22]
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Would it be fair to characterize that the weaker areas of your business that have capitalized today's announcement are probably the business units that are more likely to not be part of the Group in a year or two's time?
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Nick Buckles, G4S plc - CEO [23]
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No, I think the issues, UK and Ireland Cash; we've talked about that. I can go into that in a bit more detail. They, as I mentioned, took on a lot, in the UK, contracts towards the end of last year in ATMs, and ATM engineering particularly. We are now, clearly, the market leader on ATM engineering, but we're not making money on those contracts so we've got some work to do in terms of operational improvement.
The pricing in the UK has been tough now for two years. The volumes are reducing because of low interest rates in the traditional business. And getting cost out quickly is the key challenge.
Our run rate isn't where we expect it to be on UK and Ireland Cash, at the moment. We've got a lot of work to do in the next couple of months to get the business performing well in the second half, but certainly they are clearly businesses we expect to keep in the future.
UK Government, I mentioned some of the underlying trading issues there. We clearly expect to keep that.
The European businesses, underlying profitability has been a challenge. But the biggest issue, by far, is the loss of this Dutch prisons contract, which has not only got a good profit contribution and a high revenue, but there's also exit costs associated with that contract.
So I wouldn't say that our current issues are around businesses we expect to dispose of, no.
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Kean Marden, Jefferies & Co. - Analyst [24]
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Okay. I'll stop there. Thanks, guys.
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Operator [25]
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Laurent Brunelle, Exane.
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Laurent Brunelle, Exane BNP Paribas - Analyst [26]
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I have two questions, if I may? First, a follow up on margins. Can you maybe break down the 60 bps decline by reason between the different elements, please?
And second, looking at the top line, can you update us on the current pipeline? Do you expect the ramp up of contracts to fuel a top line acceleration by the end of this year? Or do you expect the [organics] is going to remain around [6%]?
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Nick Buckles, G4S plc - CEO [27]
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I think I heard them. In terms of the 60 basis points decline, we're looking at forecast profitability and roughly, very roughly, that's split into four buckets, almost equal, but not quite. One is UK and Ireland Cash; one is UK Government; one is Europe; and the rest really is the Africa Djibouti issue, combined with the sale of RSS. Well, actually, that's not a margin issue, but that's a profit issue.
So I think you could almost say, roughly speaking, there's a couple of tenths around UK and Ireland Cash, UK Government, and Europe basically.
And then in terms of organic growth, a month or two ago I said that I expected our developing markets' organic growth to be strong this year. It is 12%; we certainly expect that to continue for the year.
Developed markets, with the UK Government start-ups last year, we'll expect that to slow down a bit in the second half because we haven't got as -- clearly a number of wins coming through in the second half, so developed markets might be slightly lower in the second half. But overall, organic growth, I think the 5% to 6% mark for the year is absolutely right.
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Laurent Brunelle, Exane BNP Paribas - Analyst [28]
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The 5% to 6% you said, sorry?
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Nick Buckles, G4S plc - CEO [29]
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Yes, it's 6% at the moment, but it depends. Developing markets continue to be strong, but UK Government at the moment is double-digit; that won't be as high as that in the second half.
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Laurent Brunelle, Exane BNP Paribas - Analyst [30]
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Clear. Thank you.
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Operator [31]
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Tom Sykes, Deutsche Bank.
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Tom Sykes, Deutsche Bank - Analyst [32]
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I just wondered if you could clarify, have there been any changes in accounting policy or revenue recognition on any of the contracts in this statement at all?
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Nick Buckles, G4S plc - CEO [33]
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No.
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Tom Sykes, Deutsche Bank - Analyst [34]
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There aren't? Okay, thank you. And then in terms of your comments on pricing, you obviously mentioned UK, UK contracts, UK Government, as well as the cash services. In terms of the sort of pipeline of UK Government, could you maybe talk about what you thinks happening on prices there, and maybe any changes in contract type, or structure that you think may affect the profitability on the pipeline as you see it coming forward?
And what's the pricing like on more -- the more vanilla [guarding] contracts in the developing and developed world, please?
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Nick Buckles, G4S plc - CEO [35]
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Yes, in terms of the UK Government pipeline, it's ever changing. Just recently, we've learnt there's probably going to be a couple of PFI prisons come out next year, so that's a new [end] change which we didn't expect. And clearly, those type of contracts still will continue to be -- go good margin.
We're bidding a lot more now for BPO type outsourcing contracts, and the margins tend to be better on those, particularly first generation. But typically, as I've said before, when we're rebidding on second and third generation contracts the margins are clearly much lower than you build up over a five to seven-year period.
So we know we've got the UK tagging contract extended to next year, but clearly, if we win that, which we hope to, the margin will be reduced even from the reduced level of this year. So we've got that to build into next year's view.
But we have got a number of bidding opportunities coming up in the second half. So we've talked about [courts' fines], we've talked about probation, and we do expect to bid on those. They are typically first generation and we would expect the margins to be reasonably good on those. But I think the underlying UK Government margin, which has been double-digit in the past, clearly isn't going to be at that level in the future, which is what we've been saying for a couple of years, or so.
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Tom Sykes, Deutsche Bank - Analyst [36]
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Okay.
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Nick Buckles, G4S plc - CEO [37]
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And then in terms of general manned security pricing, it's a tough market when you haven't got a differentiated product. Clearly, our strategy has always been around having a differentiated product and being able to combine with technology, incident management, etc.
Margin pressure is always there on re-bids, on manned security. It's particularly prevalent in Continental Europe, where the market isn't growing and there's a lot more customers coming up to bid in Continental Europe because they know the pricing environment is so tough.
But in UK and US, pretty much the same. It's site by site. We can still win business, we can still retain business. We don't have as many reasons to go out for price increases as we do in Continental Europe and, hence, the performance tends to be a bit more robust.
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Tom Sykes, Deutsche Bank - Analyst [38]
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Okay, thanks very much.
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Operator [39]
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Stephen Rawlinson, Whitman Howard.
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Stephen Rawlinson, Whitman Howard - Analyst [40]
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Just a couple of questions from me. Firstly, with regard to current -- the margin level, does this mean that we should be looking at this sort of level from 2014 onwards? That seems to be the sense of what I'm getting from what you're saying.
Secondly, you referred in the conversation this morning to more cost improvement coming through. But that isn't referred to in the tax, you just refer to ongoing cost improvements. Are we going to see you redouble your efforts in that particular area? If so, what sort of number might we expect?
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Nick Buckles, G4S plc - CEO [41]
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In terms of go forward, our plan will be to get back to 7%. Not saying we're going to do that in 2014, but clearly we will get plans in place to get there as quickly as we can.
Some of the issues that we've got at the moment can be fixed, like UK and Ireland Cash Solutions. I'm pretty confident we can get those margins back up in time. UK Government, probably more difficult. And Europe, clearly, some of that issue is a one-off with the loss of the Netherlands contract. But 6.5 -- sorry, [0.6%] off for this year is about where we expect to be. But going forward, we would expect to build that back up with some business improvement.
In terms of ongoing cost reductions, we will be working, over the next six weeks, or so, we've got our Capital Markets coming up in mid June, to flesh out some of those plans and start to build them into our go-forward estimates, basically.
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Stephen Rawlinson, Whitman Howard - Analyst [42]
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Thanks.
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Operator [43]
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Paul Checketts, Barclays.
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Paul Checketts, Barclays - Analyst [44]
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Cash Solutions, Nick, can you go into a bit more detail in what has changed there since the full-year results, when it felt like you were more confident that margins had troughed?
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Nick Buckles, G4S plc - CEO [45]
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Yes, at the full-year results we'd only had January's trading, and basically revenues held -- overall holding up reasonably well. We're only minus 2% growth in the first quarter in the UK.
But the issue is disguising a number of moving parts. So there's been quite a bit of reduction to service in the network-type of business, i.e., the cash in transit, particularly with bank branch reductions and just fewer, fewer services being requested by banks and retailers, and they have a particularly short term impact on underlying run rates. So, basically, about 80% of that revenue comes off the bottom line until you reduce network costs.
At the same time, we took on quite a bit of business for ATM engineering, particularly for RBS and Lloyds, which has involved us recruiting a large number of staff and all the associated costs with taking on that revenue and getting the service right.
As I mentioned earlier, we're by far the largest engineering provider now in the UK. But we're not making money on that service, and that used to be a strong double-digit margin business. So although the revenue overall isn't down that much, there's quite a bit of mix change within that.
There's also other issues, like a lot of the ATMs that were traditionally run by the banks are moving to the IAD market, the independent market. So we've lost a lot of volume on bank ATMs which have gone to the independents, who either use a different supplier or self replenish, so there's quite a bit of volume reduction on the ATM side as well.
And finally, in terms of cash processing volumes, one of our large processing banks has lost a major retailer, which has gone to a competitor and that's caused a bit of an impact in the underlying cash processing business, again because it's quite a fixed cost.
So lots of different moving parts in there. The real underlying issue, though, is that pricing is at lower levels than it's been for five years. And we've taken a lot of cost out over those five years in terms of two men to one man crew, but we've got to start pricing accordingly to make double-digit plus margins, and that's something we're going to start doing in the second half.
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Paul Checketts, Barclays - Analyst [46]
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Great. And why are you selling RSS? Can you just go through that, please?
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Nick Buckles, G4S plc - CEO [47]
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Yes, RSS, we've had outside of the proxy structure basically because -- but it's a very similar level of service. RSS is the regulated security solutions for the nuclear industry, so this is the commercial nuclear security; similar type of staff, quality of staff, ex-military, highly trained.
And we headed outside of the proxy structure, because clearly it wasn't classified. And then when we stood back and looked at its core operations, it fits much more closely with the work that the WSI, the former WSI, business does in terms of they do nuclear weapons security. This does nuclear power security, but it's regulated in a similar way.
It is a standalone business; it doesn't fit really with a commercial strategy. And it is very much a ring-fenced unit, so it made a lot more sense to combine it with the former WSI/Government Solutions business than leave it as a standalone regulated business within our commercial portfolio.
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Paul Checketts, Barclays - Analyst [48]
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Thanks.
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Operator [49]
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Ed Steele, Citi.
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Ed Steele, Citi - Analyst [50]
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Three questions, please. The first is about the pricing dynamic in Cash Services in the UK. As I understand it, it's pretty much a duopoly with you and Loomis. Is it Loomis that are price discounting aggressively, please? Is that what's going on? That's the first question.
Second question is on the disposal candidates. Is the Dutch business in that now? And was it in the GBP500 million, or so, revenue that might be disposed that you mentioned at the prelim results? And associated with that question, is the Dutch business now making profits, even with this change in the prison supply business, please?
My third question is one really for Ashley on the balance sheet. 2.7 times was where you were last year, and it sounds like you'll be somewhere similar this year. Are we now not able to do that GBP200 million, or so, of acquisitions this year? Or are we able to do that and still not do any sort of equity adjustment, please?
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Nick Buckles, G4S plc - CEO [51]
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Do you want to do that one first, Ashley, and I'll come back to the other two?
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Ashley Almanza, G4S Plc - CFO [52]
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Okay, so our balance sheet, a couple of points. Although we've got GBP200 million out there as an indicative acquisition spend, what we actually spend is going to be a function of the quality of the opportunities, and when they come along.
The second thing is, as Nick indicated earlier on the call, we are looking at rationalizing the portfolio and making some additional disposals. We're not through that work, and it will be premature to say precisely where that's going to occur, but I certainly expect that there will be some disposal proceeds beyond what we've already announced.
The perennial question with any portfolio program is timing. And we will make sure that we get -- we set this up in a way that gives the best result, and that's not always necessarily the quickest result. So timing is a variable that we're going to control to maximize the proceeds, rather than just to maximize the timeline.
I suppose to sum up, we are looking to progressively strengthen the balance sheet through a combination of measures; increasing our operating efficiency, increasing operating cash flow. And there will be, hopefully, some strengthening of the balance sheet through the portfolio rationalization over the next one to two years.
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Ed Steele, Citi - Analyst [53]
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Understood. And do you think you can afford to make acquisitions as you do all of that balance sheet strengthening, please?
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Ashley Almanza, G4S Plc - CFO [54]
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I think that we can clearly afford to make bolt-on acquisitions, but I would expect that alongside those bolt-on acquisitions we'll also be crystallizing disposal proceeds.
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Ed Steele, Citi - Analyst [55]
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Understood. And do you rule out any equity issuance to just rebuild the balance sheet a little bit, like you did in 2008, please?
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Ashley Almanza, G4S Plc - CFO [56]
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Nothing planned at the moment.
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Ed Steele, Citi - Analyst [57]
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No, okay. Thank you very much.
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Nick Buckles, G4S plc - CEO [58]
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Just moving backwards through your questions, Ed, the Dutch business, we haven't highlighted any disposal candidates as yet, other than the two US businesses.
We're working through a number of issues and options, as Ashley said. But the Dutch business will still be profitable post the present contract. It was a good margin contract, but the underlying manned security business is pretty good as well. It will probably be a 3% to 4% margin business post the prison contract. But it's not in bad shape, and it is the market leader.
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Ed Steele, Citi - Analyst [59]
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Thank you.
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Nick Buckles, G4S plc - CEO [60]
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And then moving backwards to the pricing dynamics in the UK, it's always difficult to say where a price war starts and finishes. You're right, it is basically a duopoly. There are a couple of other almost national players in the UK that come in and out of the market with low prices occasionally, but it is mainly us and Loomis. We are the market leader. We're two or three times bigger than Loomis.
So, whoever started the war and why it came about, we've got to be in a position to lead the market out of it. I think certainly Loomis have got restructuring costs coming through in the UK. They will be in a difficult position as well after losing a couple of contracts. And, clearly, our expectation is that we will lead the market in terms of getting our margin back up.
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Ed Steele, Citi - Analyst [61]
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Understood. Thank you very much.
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Operator [62]
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Steve Woolf, Numis Securities.
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Steve Woolf, Numis Securities - Analyst [63]
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Just to follow up then on Ed's question, what then gives you the confidence that you'll be able to put up your prices in Cash Solutions in UK and Ireland in the second half given the competition? And if you've not won some of those contracts from Loomis, obviously somebody else is, so it sounds like the others are nipping around the edges.
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Nick Buckles, G4S plc - CEO [64]
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We won the contracts from Loomis.
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Steve Woolf, Numis Securities - Analyst [65]
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But, again, presumably that's on the lower price. What gives you the confidence you can get that back up in the second half?
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Nick Buckles, G4S plc - CEO [66]
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Basically, we are going to have a resolve to do so, basically. We are 50% plus of the market. We offer an excellent service. Our margins fall into single-digits. The investment in this cash business and the risks we take means that we should be making double-digit margins, and that is our intention, to get back to that level. We will go through a process of putting prices up, basically.
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Steve Woolf, Numis Securities - Analyst [67]
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Okay. Just then two follow ups in terms of Africa. The GBP6 million you flag here, are you taking that as a one-off? It sounds like you'll take it above the line. I just wanted to check.
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Nick Buckles, G4S plc - CEO [68]
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Everything's going above the line.
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Steve Woolf, Numis Securities - Analyst [69]
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And then in the Dutch business, is the exit costs already factored into what you're flagging with the margin within the overall 60 bps?
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Nick Buckles, G4S plc - CEO [70]
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Our best estimate of exit cost is factored into that, yes.
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Steve Woolf, Numis Securities - Analyst [71]
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Okay, that's great. Thanks very much.
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Operator [72]
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George Gregory, UBS.
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George Gregory, UBS - Analyst [73]
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If I could just clarify a couple of things. Firstly, the 60 basis points of year-on-year margin movement, is that off the ex-Olympics margin of 7.1%? Or is it the reported of 6.9%?
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Nick Buckles, G4S plc - CEO [74]
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The ex-Olympics margin.
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George Gregory, UBS - Analyst [75]
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It's the ex-Olympics, 7.1%. Okay, thank you very much.
Secondly, just in terms of the one-off cost savings you're alluding to, I think you said at the full-year results that there was no more activity to be undertaken. Just wondering what areas you'll be working on, and then perhaps that would be coming from. That would be great, thanks.
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Nick Buckles, G4S plc - CEO [76]
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So, that's an area that we'll be working on in more detail over the next six weeks. We've got our service excellence center set up to deliver margin improvement plans in a number of businesses at any given time. And they are working on a number of businesses currently, and we'll be able to report more on those at the Capital Market.
We'll certainly be looking very hard on discretionary spend over the coming six months, or so. We do that typically anyway. But currently, our current thinking is we're not envisaging another big restructure cost; we are saying it's just managing the businesses better and more effectively.
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George Gregory, UBS - Analyst [77]
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Okay, thank you very much.
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Operator [78]
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Daniel Patterson, SEB.
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Daniel Patterson, SEB Enskilda - Analyst [79]
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A couple of questions. Firstly, on the Continental Europe business, again, looking apart from the Dutch issues, I'm sensing it's not new that the market is challenging, but I'm sensing it's gotten incrementally worse in recent months. Is that true? If yes, any flavor on which segments or which geographies, apart from the Netherlands, that are troubling you?
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Nick Buckles, G4S plc - CEO [80]
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Yes, it's always tough in Europe. I think for the last couple of years we've expected some relief in terms of nominal GDP growth picking up, but even in the last two months estimates are being wound down, as we speak.
So the economic environment is very tough. Actually, the place probably where we're getting the most disappointing results currently is in Eastern Europe, where we've got fantastic market positions. With a good economy out there, we would be delivering high growth and high margins. But in places like Hungary, Romania, Czech, Slovakia, at the moment, we're having a tough time basically, just because of the macroeconomic environment.
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Daniel Patterson, SEB Enskilda - Analyst [81]
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Any particular product segments?
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Nick Buckles, G4S plc - CEO [82]
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It's across all services. Security systems particularly gets hit during a tough economic environment, but it's really across all three service lines.
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Daniel Patterson, SEB Enskilda - Analyst [83]
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Okay. And regarding developing markets, you haven't mentioned much regarding margins there in Q1, so just a question. Any issues at all in the developing markets in Q1?
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Nick Buckles, G4S plc - CEO [84]
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Only the Africa issue. If one pulls out the Africa issue, our developing markets business is doing very well. We're very happy with its performance. It's 12% organic growth, margins are holding up well.
And I guess, just going back to some of our earlier discussions, our 50% developing markets' expectation by 2019, part of our strategic thinking in the last month or two, and going forward, is we expect to accelerate that 50% of our business by developing markets certainly by a factor, which we're still working through, basically.
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Daniel Patterson, SEB Enskilda - Analyst [85]
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Okay. And then a final question regarding the Dutch issues. You mentioned earlier that going forward it could be a 3% to 4% margin business. I'm sensing that it has been higher than that. Is that correct? So, the exit costs, even when they fall away next year it's not going to fully compensate for the loss on the prisons' contract.
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Nick Buckles, G4S plc - CEO [86]
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The prisons' contract was probably about 12% of the revenue and making 8/9% margins, so you've probably got about a 1% to 1.5% across the business margin dilution by the loss of that contract, per se.
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Daniel Patterson, SEB Enskilda - Analyst [87]
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Okay, that's very helpful. Thank you.
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Operator [88]
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Andrew Ripper, Merrill Lynch.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [89]
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I've got a couple for you. Just finishing on that Dutch point, when does the Dutch prisons work drop away?
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Nick Buckles, G4S plc - CEO [90]
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It started in February, end of February, early March. We had about a week's notice.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [91]
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Okay. So about nine months, in fact, this year, okay. And then on --
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Nick Buckles, G4S plc - CEO [92]
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It's not a -- so they started to go. So it's been -- we've lost about 250 of the 700 staff so far.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [93]
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Yes, okay. On the Cash business in the UK, obviously you disclose numbers for Europe overall. Can you just give us a sense of order of magnitude, please, for UK Cash in 2012, revenue and profits?
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Nick Buckles, G4S plc - CEO [94]
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Probably the easiest way to describe it is UK and Ireland -- we haven't talked about Ireland, but the price war is even more fierce there. Actually, the economy, it's played a bigger role there and we have got a very aggressive competitor. But, again, we've got a market share of about 60%. We expect those two businesses to be about GBP10 million down on prior year.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [95]
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Okay. And just in terms of '12, a sense of revenues, GBP500 million, something like that?
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Nick Buckles, G4S plc - CEO [96]
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No, it's only about GBP380 million.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [97]
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GBP380 million? Okay.
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Nick Buckles, G4S plc - CEO [98]
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It's GBP360 millions, GBP370 million, that sort of level.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [99]
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GBP360 millions, GBP370 million, okay. And how profitable was it last year, please?
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Nick Buckles, G4S plc - CEO [100]
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It was close to double-digits in the UK.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [101]
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Okay, so around 10% margin, yes? Okay. And could you just talk about the strategic rationale for keeping the Cash business in the portfolio?
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Nick Buckles, G4S plc - CEO [102]
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Sure. In terms of -- we're in about 70 countries in Cash Solutions. In the developed markets, we've got Canada, Belgium, Netherlands, UK, and Ireland. Really, they are standalone businesses, but they run within the regional structure.
Basically, they provide good margins typically, good growth in a normal economic environment, and we run them pretty well. But the challenge is -- it's easy to say we've got a Cash division, because that's how we show it in terms of the accounts. But basically, in developing markets, which really includes everything outside of those five key businesses, we run it as a multi-service business.
So our customers expect us to be able to do manned electronic and cash solutions. The service evolution in those developing markets is typically manned security, then cash, and then systems, and so if we didn't have a Cash business we would develop them in developing markets, basically, because that's the way the market goes. You wouldn't refuse to do it; that would be a natural evolution of the security business, and so developed markets business gives us transfer of expertise into developing markets.
You know, our developing markets Cash business grew very well in the first quarter. The margin still held up very well, and we've got a very strong differentiation against all the local players there.
And the other issue you've got to look at is in the development markets management structure. If you were to separate Cash Solutions, which, from a customer perspective, as I said, doesn't work, you've got significant management dis-synergies as well. You would not get the strong enough management team through 80, 70 developing markets to run what are relatively small cash solutions businesses.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [103]
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Yes, I'm with you, I get it. Okay, thank you. And then on tagging, Nick, you mentioned the volumes were down and you got, I think, some change in terms for the short extension you've got. Can you give us a sense of what your expectation is for the profit on the contract this year versus last year, please?
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Nick Buckles, G4S plc - CEO [104]
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Yes, it's probably down about GBP7 million, or GBP8 million.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [105]
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Yes, okay, thank you. And then finally, on the balance sheet, Ashley, can you give us what the debt figure is today? I think you got some money in from LOCOG in the first quarter.
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Ashley Almanza, G4S Plc - CFO [106]
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Yes, end of first quarter we're at about GBP1.9 billion.
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Andrew Ripper, Bank of America Merrill Lynch - Analyst [107]
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GBP1.9 billion. Okay, great. Thanks, guys.
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Operator [108]
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(Operator Instructions). As we have no questions, I will hand you back to your host to conclude today's conference. Thank you.
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Nick Buckles, G4S plc - CEO [109]
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Yes, thanks to everybody for joining the call. Sorry for the short notice. Clearly, disappointing results, but shouldn't overlook the fact we've got a great overall platform. As I say, the margin is down first quarter. We do expect it to be down for the year. But we're going to be working very hard to get that margin back up to 7% over the coming couple of years.
So thanks for your attention, and I look forward to seeing you again soon.
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Operator [110]
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Thank you for joining today's conference. You may now replace your handsets.
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