Preliminary 2013 G4S PLC Earnings Presentation
Mar 12, 2014 AM GMT
GFS.L - G4S PLC
Preliminary 2013 G4S PLC Earnings Presentation
Mar 12, 2014 / 09:00AM GMT
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Corporate Participants
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* Ashley Almanza
G4S Plc - CEO
* Himanshu Raja
G4S Plc - CFO
* Helen Parris
G4S Plc - Director of IR
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Conference Call Participants
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* Andrew Ripper
BofA Merrill Lynch - Analyst
* Rob Plant
JPMorgan - Analyst
* Kean Marden
Jefferies & Co. - Analyst
* Sylvia Foteva
Deutsche Bank Research - Analyst
* George Gregory
UBS - Analyst
* Alex Magni
HSBC Global Research - Analyst
* Charles Wilson
Goldman Sachs & Co. - Analyst
* Ed Steele
Citi - Analyst
* Karl Green
Credit Suisse - Analyst
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Presentation
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Ashley Almanza, G4S Plc - CEO [1]
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Good morning, ladies and gentlemen. A very warm welcome to our full-year results presentation.
We have a full agenda today. I'm going to take you through the financial highlights, then, region by region, a business review, after which, I'll hand over to our Group CFO, if you've not met Himanshu Raja, who will take us through the numbers in a bit more detail. I'll then provide a brief update on some of the strategic priorities which we outlined in November last year. And then, we'll be happy to take any questions you might have. We have plenty of time for questions.
Before we get started, can I draw your attention to something which I'm sure you've seen every presentation, and leave you to read it in your own time.
This is the agenda, which I've just outlined. So without further ado, we'll go straight to the results highlights.
Hopefully, by now, you will have seen the preliminary results announcement, the slightly delayed announcement. And you will have seen that we continued to have a good demand for our services across all of our businesses, with aggregate revenue growth of just under 6%, and a very strong performance in our emerging markets businesses, revenues up 16%.
Profit of GBP442 million, before interest, tax and amortization, was impacted by two risks, which we identified at the half-year last year, namely, trading conditions in Europe, and federal spending in the US. And Himanshu will cover those in a bit more detail.
I'm sure you will have seen also that we had very significant one-off charges in the full-year results. This reflects an enormous amount of work that has been undertaken over the past six to nine months, clearing up, going through the balance sheet, going through our contract portfolio, and also putting in place plans to restructure those of our businesses that need to be put on a more competitive footing, principally in the UK and Europe. And again, Himanshu is going to take us through those one-off charges in more detail.
It's pleasing to see strong cash flow from our continuing operations at GBP460 million, a sharp increase of 36%. Again, here there are some significant items going in both directions which need deeper explanation that Himanshu is going to help us with.
And of course, we ended the year in a much stronger financial position; a function of our operating cash flow, some asset disposals, although most of those closed after yearend and are not reflected in our net debt numbers, and also the successful share placing at the end of August last year.
So in summary, a year of clearing up, consolidating, restructuring and getting the business in a position to move forward with confidence.
I'd like to now turn to the regions, taking Africa first. I should say that the numbers that you see here are all on an underlying basis, so in the announcement you'll have total results and underlying. All of the figures here refer to the underlying results.
I'm pleased to see that, in Africa, the business is moving forward strongly. Profits were up 30%, and this was a broad-based performance improvement. Standouts were our South African cash business, very successful turnaround in the second half of the year. Nigeria, Mozambique and Kenya also stood out.
You'll remember that, last year, we established Africa as a separate organizational region for the first time. Until June of last year, Africa was a sub-region reporting into and managed out of London. We now have a leadership team on the ground in Africa, based in Pretoria, and we've taken steps to further strengthen that leadership team with the appointment, in the last six months, of three new regional managing directors, and a commercial director, who will spearhead our efforts to lift our game in sales and business development right across the continent.
We made a modest acquisition in Africa last year, a business we call Deposita, it's a cash technology business, and we're very pleased to see that business performing and growing strongly.
We're also taking steps to strengthen our sector specialism, and you will know that Africa is blessed with vast natural resources. There's an enormous amount of foreign direct investment coming into Africa, exploiting those natural resources, and that generates natural demand for our business.
We've deployed now, on the ground, experienced sector specialists in natural resources; again, based in South Africa and operating across the continent. That's new; previously, Africa would have to call off that resource from either Dubai or London.
All of these steps, I think, are improving our pipeline. We have a growing pipeline across diverse markets and customer segments. So this is a business, a region, that's delivering profitable growth and one where we're investing, given our view of the long-term prospects for this market.
Asia Middle East, very strong revenue growth, the strongest across the Group, almost 18%, and a 24% improvement in profit. Again, the improvement in financial performance was broad-based across the region, but there were also three standout areas. The Manus Island contract in Papua New Guinea, which is an immigration processing center, grew strongly, performed well. That contract goes back out to tender. It will not be extended beyond March of this year; it will go back out to tender.
The Middle East, Qatar, Kuwait, Saudi Arabia, UAE, all performed very strongly, and we continue to see strong demand for our services in those markets.
And India, a very large business, a large market for us, I should say, we had a structured performance improvement program, which is being led by our country MD, Mel Brooks, and our regional Executive, Dan Ryan, and that is showing early signs of success, some of which came through in the financial performance. And I think this program is going to be a template for other parts of Asia and, hopefully, other parts of the business globally.
Really very, very pleased to see outstanding improvement in safety performance in this region. This region had one of the worst road traffic accident records in the Group two years ago and, through real determination, focus, proper alignment of incentives, we had the best road traffic performance across the Group, so delighted with that. It's an example for the other regions and we're taking the learning from the structured program that was deployed, principally in the Middle East, and using that elsewhere across the Group.
This is another region where, although the business is growing strongly and performing profitably, we don't want to rest on that position. We're investing in sales and systems capability because we think there's more potential beyond that which we're achieving already. I'm going to come on to talk more about that in the second half of the presentation.
We have a strong and diverse portfolio in this region, and a healthy pipeline. Again, delivering profitable growth; we're building capacity because we see more potential in this market.
Latin America, double-digit growth in all of our leading markets, 16.6% overall, of which 11% organic. We had some acquisitions last year in Brazil, so that explains the difference between the organic and the reported revenue growth.
Profits up 23%, and another region where we've put in place new leadership. You'll recall we appointed Martin Alvarez in October last year. This is an experienced executive who's spent his entire career in Latin America. He's lived and worked in eight countries in Latin America. Martin's having an immediate positive impact in terms of focus and energy in that business.
We also took steps to sharpen our strategic focus, selling our Colombian data archiving business on an exit multiple of 13 times, bringing in GBP34 million of proceeds; a very satisfactory transaction. And here too, although the business is growing strongly, is showing progression in profitability, we don't want to rest there, we're investing.
We see longer term potential beyond that which we have in our grasp already, so we're investing in sales, operations and systems capability in this region, all of which, we think, will help to further develop a diversified pipeline and grow our business profitably.
Europe, a different story from the three regions that we've talked about already. Revenues were down 1.6%, and profit was sharply down, almost 15%. We know that a big impact was the closure of Dutch prisons; saw us lose top line and incur, because of the nature of the contract, significant costs in terms of restructuring that business, redundancies and so on.
We've put new leadership into this region. Graham Levinsohn was appointed as regional Chief Executive in November last year. Graham has more than 20 years' experience in the security industry and he is making an enormous difference in a very short space of time, so I'm very encouraged by the start. His team, and the team across Europe, has responded very positively to his arrival, and the energy and the clarity that he's bringing to our mission in Europe.
His arrival has enabled us to accelerate the restructuring program that we outlined in November last year, so we're going further and deeper in the restructuring, particularly in the Netherlands, Belgium and Finland. And we'll come on to talk about the profile of that restructuring program, the sort of returns and paybacks that we expect to secure from that investment.
Here, too, we sharpened our strategic focus, selling our Slovakia cash solutions business and our Norway secure solutions business, both unprofitable businesses, bringing around GBP30 million of net proceeds.
We're taking steps to strengthen management teams across Europe and, in particular, sales capability. You'll remember that, in November, we reported on a resource and capability audit that we conducted across the Group. This was an area, clearly, where we needed to improve our sales teams; our sales capability in Europe was seriously underdeveloped. And Graham's addressing that with a lot of focus and energy.
Establish positive sales momentum, that's the objective is to get positive sales momentum again in 2014. And we're pleased to say that we had a good start winning a major contract from GSN, which is a cash utility business in the Netherlands. And we secured a EUR50 million per annum [euro] contract for five years in the first two months of this year.
The overall story here is one of restructuring, reset, get the capability in place, get the management in place, invest to grow and improve the profitability of this business.
North America; this was the second area that we identified as a risk at the half-year last year. Lower federal spending impacting our revenue and our profitability in two ways; infrastructure projects, not generating as much demand for our technology, and systems and border protection being cut back, both of which affected us.
We also had, in 2012, some one-off benefits from the occupy Wall Street protests which gave us security work, and additional security work in airports which was not repeated in 2013.
We're taking steps, in North America, to extend our technology business. That has been quite heavily focused on federal and state demand with this shift in federal spending. We've been out reconfiguring our sales teams and our market offering to target the commercial market as well as the federal and state market. We need to rebalance and we're getting after that.
We're also continuing to invest in CASH360. Our target is the major retail market, and we have a pilot going on in North America at the moment which is progressing to plan; we're very happy with it. It's very early days, but we see quite considerable potential in this part of the market.
More portfolio action here as well. The sale of our US Government solutions business continues. It's quite well advanced, but we will only conclude if we achieve satisfactory terms. If we don't get satisfactory terms, this business will remain in the portfolio and we'll manage it for value. And if the asset market returns, then we'll look at it again. But at the moment, it looks as though that process is progressing quite well.
We sold our Canadian cash solutions business, as you know. That was inked in 2013 and closed in 2014. So again, the proceeds we're not in our net debt and cash figures at the end of the year.
Our business in North America have comprehensive plans in place for the implementation of the affordable care; it's also known as ObamaCare. And that will now be implemented across the industry in 2015. This will not have a significant impact on our operating costs, and the reason for that is simple. The vast majority of our healthcare plans in North America are already complaint with ACA.
So what we have in North America is a strong franchise in the world's largest security market. We need to invest through the cycle, keep this business moving forward and that's what doing.
UK and Ireland, modest growth, barely any growth, up 2.2%, and profits down 5%. I think the reasons for this are well known already. The profitability and the revenue growth were impacted by our cash solutions businesses in the UK and Ireland. And as you know, we announced last year restructuring plans for both of those businesses, cash solutions in UK and Ireland. We're getting on with that.
We're also taking the opportunity to rationalize and restructure our regional head office with a clear focus on efficient organizational design and minimizing overhead.
Here's another region where we have new executive leadership. We appointed Eddie Aston who's here today as regional Chief Executive in the fourth quarter of last year. And we have been getting on building the team around Eddie. We have a new regional general council.
We have also reorganized the business units in that region, along customer and market lines, to strengthen our customer focus, including a new and dedicated business unit focusing solely on UK Government solutions.
That business is going to be led by a gentlemen who goes by the name of Jean Taillon, who led our Canadian business and was very successful in implementing a turnaround which put that business on a good footing and, indeed, was instrumental in the value creation that we saw in the transaction that we completed. Jean comes with very strong management credentials, and he arrives in two weeks to lead that business.
There are other changes being made to the functional leadership of the team. We have a new regional general council; we'll be appointing a new CFO, and so on. So lots of effort going into putting in place a very strong executive leadership team around Eddie Aston.
We're also, as part of our focus on organizational efficiency, not just looking at the head office, but we're looking at back offices around the UK. We have the proliferation of back offices, multi systems, multi back office teams, and we're bringing this together in a single shared service.
This is not a project that will be done next week or next month. This is a project that will be over many months. We are pursuing it in a phased and disciplined way, but this is going to be an essential part of the ongoing story of G4S as bringing disparate systems, duplicative organizations together in a more and modern and efficient way.
I'm pleased to say that our discussions with the UK Government over billing issues in relation to electronic monitoring have been very constructive. And I think we're on track for a satisfactory resolution of those discussions very shortly.
So here again, the story is to reset, restructure and get this business moving forward again.
That concludes the first part of the presentation. I'm going to hand over to Himanshu, who will take us through the financials in a bit more detail. Then I'll return for a brief update our strategic priorities, and we'll go to Q&A. Himanshu.
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Himanshu Raja, G4S Plc - CFO [2]
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Thanks, Ashley. Good morning and welcome. As you can imagine, it's been a very busy six months in my first six months as the CFO for G4S. And whilst there remains much to do, I think we've made genuine and sincere, solid progress on many, many fronts. And, as Ashley said, we have put firm foundations in place as we look forward to 2014.
As Ashley said, I'm going to take you through the results, and then also talk about both the reported and the underlying results. You will have seen, from the announcement this morning, we've broken out Latin America and, therefore, given you some enhanced disclosure, really to tease out the different dynamics between what is happening in North America and Latin America.
Let me just turn to the results. We've set out underlying results in order to give you an understanding of the trajectory of the business on a like-for-like basis. So the prior year has been adjusted for two or three things.
One, the businesses that we've discontinued, and Ashley has referred to those, such as Norway, Slovakia, the Canadian business that was sold. It's adjusted for the impact of the pension interest charges that now go through the P&L; what you will know as the IAS 19 adjustment.
But we've also adjusted 2012 by GBP40 million for the very comprehensive review we did during the year of the balance sheet, reviewing the carrying value of assets and liabilities, and I'm going to cover that in detail.
Looking at the results, underlying revenues are up 5.8% to GBP7.4 billion, and profit before interest tax and amortization was GBP442 million, up from GBP430 million underlying, being that GBP40 million adjustment for the balance sheet review.
The overall operating margin was 6%, and operating cash flow from continuing operations was GBP460 million, a sharp increase of 36% year on year. And earnings per share was 14.7p.
The mix of revenues and PBITA is clearly changing. Revenues from the emerging markets now represent around 37% of the Group, and it was 34% this time last year. And at the PBITA level, 44% of the Group's PBITA comes from emerging markets. That was around 36% last year.
And it's worth just calling that out here because, when you look at the foreign exchange effects of these things, at a transactional level, our revenues and costs are typically in local currencies. So there isn't typically a transactional foreign exchange exposure but, clearly, there is a translation one.
And you can see at the bottom of the slide, with the relative sharpening and strengthening of sterling, our PBITA would have been GBP20 million lower if you mark-to-market at December 31 spot rates, rather than using the average for the year.
So if I go then to the reported results; revenue growth of GBP7.4 billion, a 2.7% increase. PBITA before specific items was GBP442 million, a 6% overall operating margin. And during the year, we took GBP386 million of specific charges, which I'm going to cover in detail in the next few slides.
The reported PBITA, after the effect of these specific charges, was GBP56 million, an 84% decline year on year, and an operating margin of 0.8%. The operating cash flow, again, GBP460 million, and reported earnings per share a negative 24.9p.
So let me now just take you through the details of the specific items. You can see the GBP442 million PBITA there. And then we had three elements of specific items; GBP136 million with respect to a global review of contracts; the review of the balance sheet assets and liabilities, GBP182 million and combined GBP318 million; restructuring that Ashley's already referenced of GBP68 million.
Ashley's going to talk more about the detail of that and the payback and the returns and the profile of the previously announced restructuring that we talked about on November 5, and the acceleration that took place during the fourth quarter.
Let me now just turn to the contract review. You will recall that, during 2013, we had both the Cabinet Office and the MoJ review all our UK Government contracts.
The outcome of these reviews was that there were no material issues, except in relation to three contracts; electronic monitoring; the total facilities management contracts around the Courts of Justice; and the Manchester Magistrates' contract.
Now electronic monitoring, this is a complex contract. It was subject to multiple CCNs, or contract change notices, as the contract evolved. It's been 9 years and 35 million records that we've been working through with the MoJ, and our contract was roughly 60% of the UK electronic market. And Ashley just said, we continue to make satisfactory progress in our discussions with the MoJ.
Overall, we took a charge of GBP136 million, principally relating to UK Government contracts but really, on the back of the issues in the UK, I initiated a global review of contracts. And that we looked at the size, the profitability, the risk profile of those contracts. It covered 163 contracts in total with an annualized revenue of around GBP2 billion.
I have to say, the overall financial disciplines and management disciplines around the contracts, on a global basis, were very robust indeed. On a handful of contracts within the GBP136 million, we took a small charge for future losses on those contract but, principally, the GBP136 million relates to UK Government contracts.
Let me just turn to the review of assets and liabilities. At the half-year, we did an initial review of the carrying value of assets and liabilities. And it was done in a compressed timeframe, really focused on the largest business units and the largest countries. I've had the opportunity to complete that exercise more comprehensively, covering all business units and all countries around the world.
Within the Group, we have around 900 legal entities, so the completion of the review was done at that level of detail. And the total charge of GBP182 million really arises from taking a much more balanced judgment on the treatment of these items.
The charges for the full year are really three or four things. One, for the impairment of fixed assets; within the current asset writedowns, inventory obsolescence; the writedown of receivables and capitalized costs; and the recognition of employee-related liabilities. So let me give you some examples in plain English.
We've historically capitalized internal transformation programs. So on November 5, we talked about, for example, some of the initiatives around the G4S way in documenting best practice and making that available to the rest of the world. Well, those items are really, on a balanced accounting judgment, proper revenue costs and should not have been capitalized.
Equally, we sometimes carried obsolescent stock, even though when you look at the product catalog and the current product offerings, they're no longer featured as current portfolio and yet we're carrying those in stock.
And on receivables, we didn't always take a robust view, and certainly didn't account for them in line with the rigorous accounting policies we have within the Group finance manual around aged debt or disputed debt. So the more balanced judgment really explains that charge.
And on the right-hand side is the analysis of the GBP40 million relating to 2012 and gives you an understanding of the effect of that on the prior year. So you get that like-for-like understanding of the underlying trajectory; net-net, a really comprehensive review of the carrying value of the assets and liabilities across around 900 legal entities across the Group.
Let me now just turn to the bottom half of the P&L. Our interest charge was GBP128 million for the year. This is a result of the higher net debt in the first eight months of the year. We, of course, got four months' cash benefit from the share placing in August, and this was offset against our GBP1.1 billion revolving credit facility.
The revolver is our cheapest debt, it's at around 1.3% above LIBOR, so the benefit of the share proceeds in August really had a limited impact on our net interest charge.
And just to remind you also, the interest charge includes the IAS 19 adjustment. It was GBP20 million for 2013, and the comparator for 2012 was GBP15 million.
The pension interest charge for 2014 will be GBP21 million and, overall, I expect a similar net interest cost of around GBP130 million for 2014.
Let's look at amortization of acquisition expenses. The GBP76 million is the normal amortization of acquisition-related intangibles, but also includes around GBP4 million of acquisition-related expenses, principally for the acquisition of Deposita in Africa and small cash solutions acquisitions in Asia.
The goodwill writedown we took at the half-year of GBP46 million, relating mainly to our Brazilian technology business and to our cash business in Ireland and some smaller businesses in Africa. We also made a profit on disposal of GBP24 million for the sale of the Colombian data solutions business.
Let me just cover tax. The tax charge on underlying profits was GBP75 million, an effective tax rate of 24%. The GBP19 million in specific items is the tax effect of the specific charges. For 2014, I expect an effective tax rate, again, of around 24%.
Discontinued operations related to the cash solutions business in Canada, our business in Norway, both of which -- the sale of which completed in January, as well as the US Government solutions business, which is included in here. And as Ashley explained, is at an advanced stage in the sale process, but completion of which is dependent on reaching satisfactory terms.
Let me now just turn to the cash flow statement. The full movement of net debt is shown in this slide, starting on your left-hand side, at GBP1.8 billion being the opening debt last year.
The net cash generated from continuing operations was GBP460 million, and this GBP460 million really comprises the PBITA, after specific items of GBP56 million, adjusted for non-cash movements, depreciation and amortization, asset impairments, movements in provisions.
In the middle of the chart, we paid out GBP38 million of normal deficit repair contributions on the UK defined benefits scheme. And then, right in the middle, I just want to dwell on, and talk a little bit about, working capital.
We have a strong focus on cash, and all business units today are measured on operating cash flow within their performance contracts. And our greater focus on cash generation has started to show some early benefit, but also a small number of large swing items in that number, which is in the detail of the announcement today.
We did get the benefit of the Olympic receivable. We had GBP76 million outstanding in 2013 -- in 2012, receipt of which was in 2013. But also recognized that around GBP60 million of supply payments were withheld in December 2012 that had a cash outflow in January 2013. And, on electronic monitoring during 2013, we had outstanding payments from the UK Government of around GBP27 million.
So net/net, the effect of all of those meant that the underlying working capital improvement really had to drive that overall improvement of GBP87 million. And, whilst there's more to do, it was pleasing to see some of that early traction come through on working capital.
Looking at the investment side; the cash generation allowed the Group to invest around GBP211 million in the business, and that largely comprises vehicles, plant and equipment, mobilization of new contracts. We also have had the acquisition in South Africa and Asia that Ashley referred to. And that acquisition cost of around GBP35 million was offset by the proceeds from the Colombia and Slovakia businesses.
So within that GBP211 million capital expenditure, you'll see in your detail, was around GBP199 million. That GBP199 million includes around GBP30 million with respect to investments in public/private joint ventures in some of our emerging markets. So the underlying CapEx for property, plant, equipment, vehicles, was around GBP169 million.
For 2014, we expect CapEx to be around GBP200 million, really reflecting the underinvestment we've seen in many parts of the business, historically.
In terms of use of funds, the GBP352 million comprised interest, tax and dividends. Interest paid was around GBP110 million; tax GBP88 million. And the effective cash tax rate in the year was around 28%, which largely reflects differences in the timing of payments based on assessments of 2013 profitability.
We also paid dividends of GBP154 million and, as you know, we raised GBP343 million from the share placing in August.
Finally, we had net cash from discontinued operations of GBP29 million, meaning that we finished the year with net debt of GBP1.5 billion from the GBP1.8 billion at the beginning of the year.
Net debt to EBITDA finished at 2.6 times, an improvement from 3 times this time last year.
Let me just turn to financing. Our funding profile remains robust. We have GBP965 million of unutilized and committed facilities. We have no material maturities until March 2016. And, since December 31, we've also had the benefit of the net proceeds of GBP89 million from the sale of our businesses in Canada and Norway.
Together with our continued focus on driving sustainable profitability and cash flow, we expect our net debt to EBITDA to continue to come down in the medium term.
So let me summarize. The business had good growth momentum, especially in emerging markets. 2013 PBITA was impacted by US and Europe, which we talked about at the half-year and in Q3. And we've had a significant set of one-offs, clearing up longstanding issues as well as the acceleration of restructuring. It was pleasing to see the cash flow coming through at GBP460 million. And we finished the year in a stronger financial position, but also having laid strong foundations in place for 2014.
With that, let me hand back to Ashley.
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Ashley Almanza, G4S Plc - CEO [3]
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Thanks very much, Himanshu. In November, we laid out a number of strategic priorities, and I just want to take a few minutes to cover some of those. These are the priorities I think you will recognize, and we'll address each of them in turn, starting with strategic focus.
A slide, I think, that will be familiar to you. On the vertical scale, we have cumulative profit; on the horizontal scale we have number of countries. And what it says, quite simply, is that 62 countries contribute 95% of our profit by 2016. That's not to say that everything to the right of the curve -- of the vertical line, I should say, doesn't belong in our portfolio. From acorns grow large oak trees, and we know we've got some very promising small businesses to the right of the curve that we're going to invest in, nourish and grow.
But we applied a number of filters, materiality, growth, profitability, risk profile, market value, to our portfolio. And we reached a preliminary conclusion in November last year, identifying 35 businesses that we needed to put through a more detailed examination to determine whether or not we should invest to grow, restructure, turn around or, in some fashion, exit those from the portfolio; either a disposal or, for smaller loss-making businesses, a discontinuance.
I'm pleased to say we've made satisfactory progress with this strategic priority.
What you can see is, the first row is what we set out in November, and the second row of that table you can see the position we're now in. We've dealt with 9 of the 35 businesses. And you can see, for a very modest reduction in overall profit for that group of businesses, we've achieved, I think, some very satisfactory results. We focused on high impact or low materiality business.
By high impact I mean for, really, trading substantial cash flow today for a business that might be in a structurally challenging market, unprofitable for many years. And very difficult to see, even with investment, how you could make that business profitable, given the structural conditions in that market.
We sold our business in Norway and our cash solutions business in Slovakia for GBP30 million, and we've discontinued four smaller, unprofitable businesses. Three other businesses have been rolled in, or folded into other business units with synergies, and we are confident that we can manage those businesses in a profitable way.
If you add to that the successful sales of our Canadian cash business and Colombia, you can see a further GBP94 million. And there are two further sales that are well advanced, one of which is US Government solutions and another which, for commercial reasons, we've not yet disclosed. Both well advanced; both subject to satisfactory terms.
So this program, I think, has a number of benefits it brings. It's one dimension of performance management. It brings real attention on those businesses that are either unprofitable or underperforming, or immaterial, and causes us and our colleagues across the management team to really take a view. Are we going to get this business into a position where it earns its place in the portfolio? And if the answer is no, we have to take action to deal with that.
The benefits are not only financial. It's not only about improving the quality of the portfolio and harvesting value where that can be done, it's also about management dilution. What we found was that many of these smaller, unprofitable businesses were absorbing a disproportionate amount of management time, because one of the characteristics of an unprofitable business is it has problems, and you end up devoting too much management time to problems, and not enough time to the really high quality opportunities in the portfolio. So this will remain an important tool in our management toolkit.
Management; we've referred, earlier in the presentation, to changes in the executive leadership in a number of our regions. Of course, there's been significant change in the Group executive team. Bringing it all together, across our global leadership team, which is approximately 120 of our most senior executives across the Group, we have made 28 senior appointments in the last nine months.
So a lot of time and effort; my time and colleagues on the Group executive, Himanshu, and the rest of our colleagues, is being spent on identifying where we need to strengthen our management team, and then, going through the process of going into the market, finding the right candidates, shortlisting and appointing. It's a time-consuming process, but it's well worth the investment.
We've also created some new roles and made appointments there. Three that I would highlight, Chief Information Officer, Chief Procurement Officer, Group Head of Risk and Program Assurance, who we mentioned in November.
The CIO has got a very important role to play in this Company. Because of the way we've grown over many years, there's an important job to do to improve IT efficiency and effectiveness. I'll come back to that in a moment. Procurement, we don't have a global procurement function. We have many good procurement colleagues in business units around the Group, but that's not pulled together in a coherent way.
And we've made an appointment, a new Chief Procurement Officer who will be joining us in two or three months. Again, a very important agenda, and I look forward to providing you with an update on progress there, in due course.
We've also set about benchmarking our organizations, starting with the areas where we see the highest potential to make a change that will not only bring efficiency, but improve the effectiveness of that organization. We piloted this in India, very successfully and, although it's early days, we can see the potential to apply this benchmarking in other parts of the organization.
So a number of things happening in terms of appointments and organizational efficiency, which I'm convinced will enhance management capacity and capability, and our organizational effectiveness.
Group values is something we touched on, as well, in November. We've refreshed, updated our Group values to more closely align those with our strategy, our customers, and ultimately our shareholders; shareholder value creation.
And we've added a seventh value, which is very near and dear to me, which is safety first; bringing a sharp focus on our safety performance. It's very, very clear to me, and to my colleagues on the executive team, that investing in this area and making this an important aspect of everything we do, all of the time, will improve the quality and the value of this Company.
And for that reason, it is a core objective of every member of the global leadership team, and it's in performance contracts. So there is an incentive for management, not that you only need a financial incentive. I think this has to come from within, it has to be a belief, and we're promoting that belief. We've got a systematic program, including training, and we're re-launching our values across the Group. A very important area, and you'll hear more about this in due course.
I'd like to spend a moment on performance management. Again, what we've done here is we've revised our performance measures for the global leadership team; again, aligning them more powerfully with good customer outcomes and shareholder value creation, focusing on revenue growth, sustainable profit.
By that, we mean it's a source of profit that we can rely on in future periods, and when we measure it, it conforms to the new standards that Himanshu referred to a moment ago. And the ultimate quality of earnings, cash flow; not a metric or a percentage, but real pounds cash flow.
This revision of performance measures has been translated into performance contracts. Our senior leadership all had their financial performance targets before they went home for Christmas. It's the first time. So they came and they started, first day of school, everyone knew what the financial targets were for 2014. That, then, gets cascaded through the global leadership team and the business units.
Alongside those measures, we've introduced something that we call ABP, accelerated best practice; prioritizing high impact areas where we can transfer best practice in performance management from one area of the business to another, or where we can introduce a new way of managing a particular dimension of our business, whether it's revenue or cost. And I'm going to come on to say more about that, in a minute.
So we've put the framework in place, and the task now is to embed that in our monthly and quarterly routines, so that this way of managing performance just becomes reflex; it becomes a deeply engrained habit.
I mentioned ABP, or accelerated best practice. What we've done is, we've gone through the business, and this was part of what we did last year, the bottom-up business review which has carried through into this year, and we've identified those areas of the business where we think, through accelerating the introduction or transfer of best practice across the Group, we can have the biggest impact on effectiveness, efficiency and profitability.
These are the priorities under accelerated best practice for 2014. And I'll go through them fairly quickly; happy to talk about them during Q&A.
Direct labor efficiency; hardly surprising, we employ over 600,000 people in our Company. If you can make even an incremental improvement in labor efficiency, you can have a big effect on the bottom line, and you can also have a big effect on customer satisfaction. This is about getting the right people to the right place, at the right time, and ensuring that hours contracted, hours paid, hours billed, and bills collected are all the same thing.
And what we have found is that is not the case across the business. There are some good practices being deployed in parts of our business, but I think there are very few, if any, places where we see systems being applied and used to their full potential, to ensure that hours contracted, hours billed, hours collected all look like the same number.
So a big opportunity for us. Very early days, but we're going to set about targeting our highest value opportunities, and going after labor efficiency.
Route planning and telematics addresses really vehicle fleets. We have thousands of vehicles covering many millions of road miles each year. This program is designed to look at how we can employ technology to reduce the size of the vehicle fleet. When you do that, you reduce the number of drivers you require.
And it's also focused on improving customer satisfaction, being at the right place at the time, and lowering fuel cost. Big prize for us; very early days, but we think by deploying technology in a disciplined way, we can improve our performance here.
IT standardization and infrastructure rationalization. I mentioned we've appointed a CIO; he's here today, Martin Taylor. He's an experienced, seasoned CIO.
We conducted a baseline study in the second half of 2013. We went out to the business and we tried to inventorize our IT estate. And what we found, not surprising, was a proliferation of infrastructure, applications, ERP systems, no standard for desktop, no standard for what equipment employees should have according to the role that they're performing.
What we also found is that we're spending 20% of Group operating cash flow on IT. So we think that there's an opportunity here. We appreciate that this is not a big bang; it's not a quick fix. We're going to go about this in a disciplined, systematic, structured way, but this is a large prize for us.
Procurement; I mentioned earlier, we don't have a global approach to procurement. We've hired a CPO; he's going to bring immediate focus to a standardized approach to category management, and integrating our global and local effort to leverage our purchasing power. We're spending, on non-payroll spend, $1.5 billion to $2 billion a year. That feels like purchasing power to us, and we're going to go after it.
And then, shared services, we've touched on this already. In the UK, we're putting in place a shared service center for our back office functions. And in North America, we're combining Canada and the US into a single shared service center, currently, there are two, and that's going to be based in the United States.
We've identified two further areas where we will pilot, probably not this year, Europe and Africa, some smaller shared service centers. So high potential, cost improvement, operational effectiveness opportunities.
Restructuring; Himanshu touched on this. On the left-hand side of this slide, what you have is the plan that we laid out in November. The change of leadership that we had in both the UK, with the appointment of Eddie Aston, and the appointment of Graham Levinsohn, in Europe, gave us the opportunity to take a fresh look.
And what we realized was that we could accelerate this. As you know, with restructuring programs, around three-quarters of the cost are payroll costs, so acceleration can have a dramatic impact on the economic return that you achieve.
We've put in place structured plans. Those plans have been communicated to the unions, to employees, to landlords, to all of those that are affected. And we're now, through 2014, going to be implementing the restructuring plan, which previously would have rolled out over, probably, a further 12 months.
All of these deliver -- each one delivers an internal rate of return, after tax, on more than 10%, and payback of between 12 and 36 months. So these programs will strengthen our competitive position, principally in the UK and in Europe, and we'll keep you updated on progress.
Technology, something we talked about, again, in November. We're looking at the development of our technology in G4S in three distinct ways.
Customer-facing technology, or go-to-market technology; operational technology, technology we deploy every day in the delivery of our services, which affect both the effectiveness of those services, and the efficiency, and in infrastructure and shared services, which I touched on already.
Customer-facing technology; we've identified centers of excellence, areas where we have capability, people, technology, IT, that can be deployed in other parts of the Group in markets where, today, we don't have a presence.
The centers of excellence are the US, UK, Europe and South Africa. And what we're now doing is building regional capacity in other parts of the Group. Because it's no good pushing that technology out from the centers of excellence if there's no-one on the other end to receive and take it to market.
So we're building capacity in our other regions, in order to absorb the push from our centers of excellence and take that to market. And again, we'll come back to that.
And the third category is operations, infrastructure and shared services. We've touched on that already; the appointment of a CIO, who's going after the opportunity to standardize and globalize our IT estate, I want to stress in phased, and disciplined fashion. You will not see a big bang technology project from G4S. But there's a big prize that we can go after in a more structured way.
Customer-facing technology; I said that we're building capability in the regions to pull on the centers of excellence. Over the last 9 months, we've employed 90 new employees, specialists in systems and technology, across the Group as a whole.
We're also reorganizing our resource and capability in the US. I mentioned earlier we've focused quite heavily on federal and state opportunity, and we're repositioning to also address the commercial market. So we've made a number of important hires there to spearhead that effort. And as I said earlier, we're investing in CASH360 in the US, and that, we have a very important pilot project.
We see huge potential; very, very early days, too soon to know for sure how that's going to turn out, but we're going to invest because we have confidence in the scale of the potential opportunity.
The Middle East is being a focus area for us. In the second half of last year, we conducted a detailed market assessment. We estimate $2 billion per annum market size for security technology and related technology. We think that's probably a conservative estimate. We're now investing in bid and delivery capability, on the ground, based in the Gulf states, and we've made 52 new hires over the last 9 months.
Deposita is the South African cash technology business, which has performed well in 2013. I think we've got this on a proper footing in its home market, South Africa. And the task now is to start to market that and deploy that capability across Africa, and also Asia and Middle East.
In Europe, we're integrating our systems business and our patrol and response business to be in a position to offer a bundled product. And in the UK, we are strengthening our sales resource team to make better use of our IT and technology knowhow that we have in our technology center in Tewkesbury, which has been, surprisingly, not very focused on the market in the UK.
All of this effort is designed, in part, to strengthen the quality and the scale of our pipeline. We entered 2014 with a pipeline of GBP5 billion, and across the Group as a whole, we've made 136 new sales and business development appointments. There is some overlap; some of those are in the systems and technology teams that we talked about a moment ago.
So a strong, diverse pipeline, with a attractive organic growth opportunity, and we're getting after it.
So in conclusion, I think it will be clear to everyone, 2013 has been an extremely challenging year for G4S. We've taken clear action to address longstanding legacy issues in the business, and we've introduced wide changes to strengthen the Company.
Our study, and our bottom-up business review last year, identified the strength -- confirmed the strength of our global market position and the attractive growth characteristics on many of those market positions. And I think that's shown up in our full-year results; 5.8% top line growth, and 16% in emerging markets.
We have a clear and focused strategy against which we're now executing, and we have an array, a strong array, of performance improvement opportunities. Revenue, cost or operating efficiency, gross margin, and overhead, all of which we're going to go after.
We're investing, through the cycle, in our resource and capability to deliver sustainable, profitable growth. All of these measures, and the actions we've take to deal with longstanding issues and put the Company on a solid footing, give us increasing confidence and enable us now to focus on the growing demand for our services and our customer needs.
That concludes the presentation, ladies and gentlemen. We'll be happy now to take your questions. Could I ask you please, when you ask a question, to state your name and your affiliation?
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Questions and Answers
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Andrew Ripper, BofA Merrill Lynch - Analyst [1]
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Andrew Ripper, Merrill Lynch. I've got a couple, if I may? First of all, just in terms of the receivables, adjustment, Himanshu, looks like it was a UK issue. Can you be a bit more specific about what it related to?
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Himanshu Raja, G4S Plc - CFO [2]
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Clearly, it would be inappropriate to go into individual customers. But you'll see in the segment analysis, I've tried to show both the UK, as well as all the segments, are reported and underlying. It's really across the board, it's not just the UK, where you'll see that we had issues around dispute of an aged debt, really like I said in the presentation.
So there are examples where we had dispute letters from customers, we've been in negotiation for a while, but there really wasn't a clear case where we were going to recover those debts. So I recognize I'm giving you a generic answer, but it would be inappropriate to into specific customer issues.
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Andrew Ripper, BofA Merrill Lynch - Analyst [3]
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And then secondly, on the provisions, obviously with the charges there's been a big increase, about GBP190 million increase in provisions, at the yearend. I guess the biggest component of that relates to the future MoJ settlements. But can you clarify for us, are the provisions now in relation to onerous contracts, which lost money in 2013? And if so, what the ongoing impact would be, as those losses drop out of the P&L?
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Himanshu Raja, G4S Plc - CFO [4]
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Just two things in there, in the provisions. It's the GBP136 million of specific charges for contracts, and there's around GBP50 million with respect to the review of balance sheet assets and liabilities.
Within the GBP136 million it's principally UK Government contracts, although there's a small handful of contracts from around the world from the 163 that we reviewed. And of those small handful, those will unwind over the next three to four years; that's the lifespan.
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Ashley Almanza, G4S Plc - CEO [5]
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I think, to the second part of your question, Andrew, the impact on future profitability, I don't think is going to be material. This is, I think, good housekeeping that's been put in hand.
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Andrew Ripper, BofA Merrill Lynch - Analyst [6]
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Okay. And then just finally, in terms of the restructuring, you talked about a one- to three-year payback. I wonder if you could just be a bit more definitive about the benefit in 2014 and, for example, of the headcount reductions that you flagged of 3,000-odd, how much of that has been done already and where could you get to by middle of this year?
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Himanshu Raja, G4S Plc - CFO [7]
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I'd split that into two. Of the GBP68 million, around GBP35 million was done just after the half-year, around July/August and predominately in the UK, so one- to two-year payback on that.
And then the GBP33 million, which took us to the GBP68 million was really done at the end of the year, so during December. And that has a slightly longer payback of two to three years.
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Ashley Almanza, G4S Plc - CEO [8]
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With the emphasis on Europe.
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Himanshu Raja, G4S Plc - CFO [9]
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Yes, just a longer payback.
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Ashley Almanza, G4S Plc - CEO [10]
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Yes.
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Andrew Ripper, BofA Merrill Lynch - Analyst [11]
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Thanks.
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Rob Plant, JPMorgan - Analyst [12]
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Rob Plant, JPMorgan. It looks to me as though probably Q4 organic growth stepped up to around 4.5%, after Q3 it was about 3.6%. What kind of growth could we expect for 2014? The outlook does point to improving revenue.
And within that, emerging markets did well; the cut-off date was the end of Q4, there's been emerging market turmoil since then. Has the emerging market division suffered in Q1 at all?
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Ashley Almanza, G4S Plc - CEO [13]
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It's quite early in the year, so there's a lot of road still to travel before we know precisely what the organic growth is going to be like.
I'd say a couple of things. We've been investing in building sales and business development capability. That work is not yet complete and it takes time when you put resource on the ground to establish your credentials in the market and to get go-forward momentum. But we would be disappointed if we didn't see any payback on that investment at all towards the end of the year, let's say.
We have not seen, in the demand for our services, a slowdown in emerging markets, but I don't think it would be sensible for me to sit here and say, I expect us to knock out 16% again in emerging markets. I think that would be a quite exceptional outcome and not a proper basis for planning.
But we continue to see good demand for our services across emerging markets. I think the more obvious short-term effect is going to be on our numbers will be exchange rate and Himanshu's, I think, provided some guidance in his presentation, also in the release, as to how you might calibrate that.
We're two completed months into the year and I think we would say satisfactory start to the year, but too early to put an organic growth target out there, Rob. But we know that, for example, Manus Island will come to an end at the end of March, but we're not without cards to play in Asia.
We know that, in some markets, we're struggling to keep up with demand and that, if we can get good resource to the coalface, we can make progress there. So I think, this early in the year, we still see a balanced set of risks and opportunities to drive the business forward, but you won't be surprised, we're not going to give a target on organic growth for this year. But satisfactory start to the year so far. Thanks.
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Kean Marden, Jefferies & Co. - Analyst [14]
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Kean Marden, Jefferies. Can I turn, first of all, just to 2014, because to some extent, 2013 is now a little bit historic? You obviously revised the operational management KPIs; I wonder if you can share some of the proposed revisions to the executive management team, so on the PSP. Something -- my understand is that the proposal is still for quite an EPS growth, heavy set of KPIs, I think, with a growth band of somewhere between 5% and 12%. I just wondered if you can comment on whether that's accurate and what you have proposed.
Secondly, Himanshu, your net interest guidance for fiscal 2014, have you made any particular assumptions regarding disposals or DSO improvement within that that we should reflect?
And thirdly, should we now be including RSS in continuing rather than discontinued?
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Ashley Almanza, G4S Plc - CEO [15]
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Okay. Let me take the incentive question first and Himanshu can take the discontinued and DSO question.
With the incentives, first thing to say is this is obviously going to go a shareholder vote, and we've had pretty extensive shareholder consultation iterative to develop something that we think not only drives the Company forward, but that, straightaway, has the support from shareholders because of the strong alignment with their objectives.
Important thing to say is that it's not only the measure but how you measure it. So a big part of what we were doing in 2013 was, effectively, changing the mindset in the Company about what you measure and how you measure it.
So, for example, when we talk about profit, we are talking about a different profit measure. There are certain things that just don't count towards your bonus if they show up in profit. I think we've got a much clearer and explicit understanding, right across the Company, of what constitutes sustainable profit that goes into the bonus calculation.
The benefit of that is the sort of profit we're interest in is cash-generative profit, and I think that's strongly aligned with shareholder interests.
The other thing about measurement is, I think I've probably shown my hand on OCF. I'm quite cautious about using quotients and metrics that have a lot of management input into them. So we're going to lift numbers off the cash flow statement and we're going to look at cumulative cash flow.
In our annual program, we're going to look at operating cash flow; what is actually delivered by the operations, so sharp -- brings into focus working capital management. And in our longer-term incentives, we're going to look at cumulative cash flow over a three-year period. So again, it's what we're measuring and how we're measuring it.
The breakdown of the scheme, and Helen's going to correct me if I get this wrong, is 40% EPS, 30% cash flow, 30% TSR. And again, we've consulted -- I'm getting a positive nod over there -- we've consulted with shareholders on composition of the TSR [of the Group], composition of the metrics.
So I think what we've got here now is, first of all, consistent with the discussion that we've been having with the organization for the last nine months about what matters when we measure performance, and strongly aligned with shareholder value creation.
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Kean Marden, Jefferies & Co. - Analyst [16]
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And sorry, just to press you on that, Ashley. The EPS bands, I picked up 5% to 12%, with full vesting at 12% and I think lower quartile being 5%. Is that accurate, or have those moved?
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Ashley Almanza, G4S Plc - CEO [17]
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Through the consultation process, that was refined on an iterative basis. I think that is where we ended up, but we'd need to double check.
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Helen Parris, G4S Plc - Director of IR [18]
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[It will be in the Annual Report].
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Ashley Almanza, G4S Plc - CEO [19]
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Thank you, Helen. Helen's just reminded us, it will be in the Annual Report, but we'll tell you before then; we won't keep you on tenterhooks.
DSO and discontinued?
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Himanshu Raja, G4S Plc - CFO [20]
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RSS is back in continued operations. And on your interest question, that's a normalized interest outlook for next year; in other words, it does not take account of disposal proceeds, does assume a level of DSO improvement because that's back to the focus on operating cash flow.
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Kean Marden, Jefferies & Co. - Analyst [21]
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Thanks very much.
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Sylvia Foteva, Deutsche Bank Research - Analyst [22]
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Sylvia Foteva, Deutsche Bank. Firstly, could I ask on the EM, electronic monitoring provision? That's obviously significantly higher than what Serco agreed. So can I just check, is that the fine plus some losses, or can you specify this [amount] and what might the cash impact be, I suppose?
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Ashley Almanza, G4S Plc - CEO [23]
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Thank you. Yes, so we are not privy to the details of Serco's settlement. I think, when you add it all up, from public data it looks like the total cost that they incurred, excluding, I think, they've identified an ongoing cost of around [GBP15 million] this year, [GBP10 million] every year afterwards.
Excluding that ongoing cost, I think we make the number to be about [GBP96 million] total. So there have been various different announcements; you've got to add them all up and get to a total cost.
We were, clearly, the largest supplier in this market; 50% larger than the next-largest supplier. As Himanshu pointed out, we've gone through 35 million records over 9 years, so first thing to say is, we just had a bigger piece of the market, 50% bigger, and that has some impact on the numbers.
I'm not giving you a number, because there isn't a number yet, but the program of change and transformation that was initiated in this Company, frankly before electronic monitoring became an issue, and before corporate renewal became an explicit requirement, and a legitimate requirement, UK corporate renewal, we had started on that journey. And so when we stood up in August and November last year and talked about our plans, in essence the change program was fully costed into our business plan.
We don't anticipate having the ongoing cost. I'm sure there are very good reasons for other companies to have it. We just don't see that as a significant incremental cost to our existing plans. Not because we won't be embarking on UK corporate renewal, quite the opposite.
We have already, I think, if you just consider what we said in the presentation a few minutes ago, extensive management change in the UK business; a dedicated UK Government solutions business, with a new leader and new team around him; the introduction of a Group Head of Risk Insurance, and with, under Himanshu's leadership, putting in place a more structured approach to assessing contract risk, to managing audit risk.
We're not going to become overly bureaucratic. These are what I would call just basic, sensible controls, checks and balances that we're putting in place. All of that is costed in our plan. So I don't think it's right for me to make a direct comparison, but I don't see anything anomalous in where I think we're going to end up, versus what you might call the only other benchmark in the market.
So slightly long answer, but hopefully covered everything.
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Sylvia Foteva, Deutsche Bank Research - Analyst [24]
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Thank you. Then --
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Ashley Almanza, G4S Plc - CEO [25]
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You've got a follow-up.
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Sylvia Foteva, Deutsche Bank Research - Analyst [26]
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Sorry, I have another one, year. [Didn't want to list them all]. And then for Himanshu; how should we think about margins for 2014? It seems like a few things have changed. So do you still have the GBP15 million to GBP20 million investment planned in sales and business area?
And then Manus Island, how shall we think about that, in terms of impact?
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Ashley Almanza, G4S Plc - CEO [27]
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So just before Himanshu answers the margin --
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Himanshu Raja, G4S Plc - CFO [28]
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The margin question.
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Ashley Almanza, G4S Plc - CEO [29]
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-- question, our goal is to grow profit and cash flow. Margin is an important dial on the dashboard, but we need more than one dial on our dashboard. It's a very large Company; many things we need to take care of to make sure that the airplane is ascending, and in good shape.
Manus is one contract in a very large portfolio of contracts. And I think it's quite important for management, and dare I say, a helpful way for investors to think about the business. We're managing a portfolio of contracts. Some will go out but, at the same time as those go out, we, of course, have significant resource deployed against the market, bringing in new contracts. We also mentioned this morning a five-year contract of EUR50 million per annum new in our Dutch business.
Contracts will come and go. There's no doubt, Manus is a good contract, and has made an important contribution to the business overall. But I don't think we can say, because one contract falls out, we're going to update margin guidance by 7.5 bps, or make a change to the outlook of the Company.
One of the benefits of this Company is the diversity of the business. Diversity of market; diversity of customer segment; and the scale of the contract portfolio that gives us resilience.
So we're not complacent about losing business like Manus. We don't like to lose it. We don't know if we have lost it; it's going out to tender. We've yet to decide whether we will bid. That's a balanced assessment of the opportunity, and so on.
But I think what I'm saying really is, we don't have any comment to make on margin as a result of Manus leaving the portfolio.
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Sylvia Foteva, Deutsche Bank Research - Analyst [30]
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Okay, that's clear. Thank you. Sorry, I have a third one; just quickly on cash.
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Ashley Almanza, G4S Plc - CEO [31]
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This is your last one.
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Sylvia Foteva, Deutsche Bank Research - Analyst [32]
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This is the last one; it is. And just on cash; can you just -- on working capital, I guess you are assuming some improvement in the DSOs. But we should be seeing a small outflow, I guess, medium term.
And then the 20% spend on IT out of your cash; can you just elaborate a little bit of that? Is that internal systems and the systems business, or how does that split? It's quite a significant number [also].
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Ashley Almanza, G4S Plc - CEO [33]
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I'm going to ask Himanshu to comment on IT in a bit more detail in a moment, but its predominantly infrastructure and back office systems.
When we did this baseline, and we went out and collected all the data, we think we got a reasonably good response, and a good grip on what everyone in the room would recognize as infrastructure IT, desktop standards, and so on.
So I think we probably didn't capture everything in the other two buckets, and in particular, the cost of operational technology. I think we've got a bit more work to do. But the prize is big enough for us to go after it. We don't -- it's a 80/20 rule; we don't need to polish that any harder to know that it's a diamond in the rough, we'd better grab it with both hands.
But this is an area that Himanshu is leading, with Martin Taylor, our new CIO. I don't know if you want to add anything to that, Himanshu?
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Himanshu Raja, G4S Plc - CFO [34]
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Just give some color on it, really. If you think about how the business has evolved over the last number of years, through acquisition, there's never been a functionalization of IT.
Consequently, we have thousands of servers in hundreds of locations. We have different networks; we have approaching 200 finance and HR systems; we have over 1,000 core applications. We're already, and Ashley mentioned around labor scheduling, telematics, route planning, we've already identified an actually best practice that exists in the Group that we're already starting to roll out.
So we know the portfolio, we know the prize. Now it's just chunking through in a systematic way, and replacing the legacy with the new. And we're more advanced in some areas than others. The UK SAP program we talked about in November, that's well advanced. US and Canada coming together is well advanced. But on the blocks we have shared service initiatives, for example, for Africa and for Asia and, in time, for Latin America.
So just gives you a sense of the scale of opportunity. And I'm delighted that Martin is on board, he's somewhere in the audience, to help me with the heavy lifting.
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Ashley Almanza, G4S Plc - CEO [35]
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Thank you, Himanshu. The thing I want to stress again is we're very conscious of the corporate lessons that are everywhere to be seen on IT and IT transformation.
We know that we have to safeguard operational delivery and, therefore, this change needs to be, first of all, phased, properly planned, properly resourced. We can't just lean on the business to say put a new system in, and expect them to deliver it, because we know customer service will suffer. We can't do that.
So we're going to go about this in a structured way. We won't capture the prize in 12 months; we won't capture it in 24 months. We're going to capture it step by step. But the longest journey begins with the first step, and that's what we're embarking on.
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George Gregory, UBS - Analyst [36]
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George Gregory, UBS. Three questions, if I may? Firstly, in terms of the restatement to the 2012 PBITA, if we recall back to the summer, there was quite a significant restatement then, with some profits on disposal and other adjustments made. Perhaps you could elaborate on what precisely has driven this second restatement?
And then I'll take the second and third after that, please.
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Ashley Almanza, G4S Plc - CEO [37]
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Okay. Well, this is a shared responsibility, so Himanshu will be much better equipped to deal with the complexity here. But one distinction to draw is, there is a formal restatement, in other words, under the accounting rules, a statutory restatement, which will appear in the Annual Report and that was the restatement from GBP516 million to, I think at the exchange rates then, GBP466 million; now adjusted, it's GBP470 million.
That restatement stands; no change. It's a statutory restatement which will appear in the Annual Report as the comparator. There's then, effectively, a pro forma exercise which Himanshu has led to say, yes, fine, that's the statutory number, but what do we, from a management accounting point of view, regard as the true underlying number. And that's where Himanshu took the exercise to the next step.
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Himanshu Raja, G4S Plc - CFO [38]
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So just to help you on that, GBP516 million to GBP466 million, that's now GBP470 million; that's simply RSS coming back in, which we talked about earlier. And the GBP516 million to GBP470 million was just to strip out and separately identify one-off credits.
They were fair value provisions that, as Ashley talked about earlier, historically have been recorded into operating profit. What we did at the half-year was to separate that out to give the true underlying business profit in the statutory. And you'll see the GBP470 million on the income statement on page 14.
The GBP470 million to the GBP430 million, as Ashley said, is about giving you a like-for-like basis and giving us, as management, a like-for-like basis, adjusting for the review of assets and liabilities. So really, with the benefit of new information, and looking back, to say were we to revisit those judgments as at December 2012, what would a more balanced judgment have been to recognize the writedown of obsolescent stock, for example, that I talked about, or items on receivables that were clearly aged, and longstanding dialog, correspondence with customers about the recoverability of those.
So this was not done as a top-down exercise, it was done as a bottom-up exercise, with a very thorough review within Group finance. But naturally, of course, it went through the audit committee and the auditors and so on and, therefore, just gives us a like-for-like comparison year on year [of] GBP442 million to GBP430 million.
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George Gregory, UBS - Analyst [39]
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And presumably, therefore, the GBP442 million, or the GBP420 million adjusted for FX, would be a clean base to use for our projections for 2014?
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Himanshu Raja, G4S Plc - CFO [40]
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Indeed, yes.
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Ashley Almanza, G4S Plc - CEO [41]
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The GBP442 million is also a statutory number, so it's a clean base to go forward.
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George Gregory, UBS - Analyst [42]
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And so following up on that then, just thinking about 2014 profits, appreciate you don't want to give margin guidance, nor do you have to do that, but there are quite a few moving parts. You've got benefits from cost savings; you've got other things. How should we be thinking about that at a high level at this point in the year?
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Ashley Almanza, G4S Plc - CEO [43]
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I think at a high level, the way we're thinking about this is there's a balance to be struck here, which is we see a high-quality organic growth opportunity. We have to invest in that; that's the economically responsible, rational thing to do.
And when we invest in that -- historically, organic investment, I think, has suffered in attracting resource in this Company because it's punished the profit and loss account. We think there's a better way to think about that proposition.
So the balance we're trying to strike is to invest, and we've talked today about over 100 new employees in sales and business development; to invest in restructuring, and there, over 3,000 employees will leave the Company over the payback period that's been identified; and to show progress.
I think showing progress in terms of profit and cash flow is important not only for shareholders; it's very important. It's important for our Company, for our management team, for our employees, to see that the things we're doing have an effect, a positive effect.
So it's a balance, George, we're constantly managing, which is, if we see an opportunity in a market to deploy a resource, to go after an organic opportunity, that may cost a few basis points. It may take some profit out.
Now, we've identified a sum of money and that sum has not changed, but I think that, in high-level terms, we're looking to make progress on profit and cash flow this year. I'm not going to give a target and I'm not going to scale precisely how much progress, but that's, in high-level terms, how we're thinking about certainly.
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George Gregory, UBS - Analyst [44]
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Okay. One final one, if I may? Just on net interest, Himanshu, you said that you'd expect net interest to be broadly flat on the 2013 number. Clearly, the average debt level presumably should be ebbing down and you mentioned that you hadn't seen the full benefit of the placing. Perhaps I missed something, but what is the reason for the implied effective rate going up?
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Himanshu Raja, G4S Plc - CFO [45]
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George, when you look in the release, I lay out the debt profile of all of our borrowings, and the offset opportunity I have as I generate cash is really the revolving credit facility. It's GBP1.1 billion. It's also the facility that carries the lowest interest; I don't get much net benefit on the interest line.
My earliest maturities are in March 2016 and then progressively from 2017 through to the year 2022 at much higher rates, so there's no economic case today because they carry the natural early redemption and other penalties. That's the simple reason.
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George Gregory, UBS - Analyst [46]
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Thanks very much.
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Alex Magni, HSBC Global Research - Analyst [47]
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Alex Magni, HSBC. A couple of -- well, three questions on the electronic monitoring contract and the settlement. When you originally proposed a settlement, it was, I think, of the order of GBP25 million which you'd said had already been provided for in the H1 provisions. I'm trying to understand the gulf between what you thought was a level of overbilling and what the MoJ feels is the appropriate level of penalty to be paid. It feels almost like the entire cumulative profit of the contract over nearly 10 years.
To that extent, or to what extent, has that changed your perception of risk of doing business and risk of failure, or contracts going wrong with the public sector? Have you revised the way you intend to bid and the type of margins you'd like to see achieved on contracts?
And then the final part of the question just comes down to the way this was provided. If I understand correctly, about GBP25 million was set aside in the H1 provisions. Assuming that the numbers we're reading in the press are reflected in the current provisioning, I assume that the increment was taken against the GBP136 million. And would that, therefore, leave me with about GBP60 million of onerous contract provisions for other things that will be amortized? Thank you.
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Ashley Almanza, G4S Plc - CEO [48]
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So take your last question first. There are a series of protocols, what we can't do is, by deduction, provide a piece of algebra that allows everyone to pinpoint the settlement; we've just got to follow protocol, I'm afraid.
The GBP25 million, I don't believe we positioned that as a settlement. We announced it as a credit note. And that just simply reflected the Board and management's view that, if at any point, we became aware of overbilling, we confirmed that the customer had been overbilled, we would take immediate steps to set that right.
So as soon as we became aware that there had been an overbilling for equipment that was not fitted or removed, we issued a credit note, and that was the purpose of the GBP25 million.
We were, I think -- hopefully, we were clear; certainly in our discussions with the customer, we wanted a methodical, thorough process to understand very, very clearly what had gone on, what had gone wrong and what the financial consequences were. And then, as Himanshu has outlined, we went back over 9 years, 35 million records, multiple systems, multiple contract change, enormous amount of effort.
I think it's fair to say that this was a difficult exercise where the information was really emerging even in the last week, some of the information. I'm not saying completely new, but the complexity of getting through 35 million records, and analyzing them and checking and so on.
We were talking to the customer yesterday and last night about what some of this meant, with the help of our team and specialist forensic advisors, to really pin this number down.
I don't think we set it up as the settlement, at the half-year; it was a credit note which was due and we issued immediately. I just don't think it was possible at the half-year, or any time before now, for us to properly quantify the cost.
So what does this do in terms of our assessment of risk of doing business and the margins we would seek and accumulative profit? It doesn't represent, incidentally, the cumulative profit from the contract, and margins were definitely not the problem, in this contract. The margins were quite adequate.
There are lots of lessons for our organization, for me, for Himanshu, the rest of the exec team and everyone in the Company; there are lots of lessons here.
I think there were not appropriate checks and balances in place. Too much reliance, too much weight, was placed on a small number of individuals. I would say nothing more than that was both unfair to them and unwise in the context of the Company managing this contract properly.
So there are lessons for us to learn about how we manage contracts, what appropriate checks and balances. Again, it doesn't have to be overly bureaucratic; some very simple checks and balances you can put in place.
I think we need to be very clear, when we bid for and sign contracts, precisely what is required, and what the customer expectation is. And then through the contract life, communication around how we're meeting that expectation is very, very important. I think one of the lessons is there's a communication about what the customer expected, what the customer thought they were receiving, versus what we expected was required and we believed we were delivering. That's the gulf that existed over a nine-year period that has generated this issue.
So lots of lessons. I think the risk of doing business applies not only in this segment of the market but everywhere. I think we have to manage that risk, just in a more rigorous way at the inception, when you bid, when you mobilize and when you deliver the contract. At every stage, you've got to be managing that risk in a systematic way, really, and make sure that there's no misunderstanding.
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Alex Magni, HSBC Global Research - Analyst [49]
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That's great. Thank you.
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Charles Wilson, Goldman Sachs & Co. - Analyst [50]
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Charles Wilson, Goldman Sachs. Two questions. One, just on your progress on operating profit this year, would you define that as being growth?
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Ashley Almanza, G4S Plc - CEO [51]
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I'm not sure I understand the question.
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Charles Wilson, Goldman Sachs & Co. - Analyst [52]
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Well, you say at the high level you want to make progress on operating profit; does that include growing operating profit year on year, on the GBP440 million?
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Ashley Almanza, G4S Plc - CEO [53]
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Yes.
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Charles Wilson, Goldman Sachs & Co. - Analyst [54]
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Okay. And secondly, do you see any risk if you don't dispose of RSS, and if you paid the full GBP136 million out, that the credit rating agencies will look at your balance sheet again. Do you see any risk from that?
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Ashley Almanza, G4S Plc - CEO [55]
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We're going to have to have a conversation with the rating agencies; rating agency, I should say. I think they ought to, and will, look at the rounded performance of the business and what we've done to strengthen the balance sheet. They'll look at some of the things that are in train which we're not able, for commercial reasons, to disclose.
There's risk in everything. But we'll have a grown-up conversation and I think, Charles, they'll give proper weight to some of the other things that are going on in the Company. I don't know ...
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Himanshu Raja, G4S Plc - CFO [56]
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I would just add, Charles, you're doing a straight read across on that GBP136 million as cash outflow. There are two or three things in there. There's wherever we finally get to and, for the reasons Ashley explained, can't tease out that number. There's amounts that are receivable not yet collected, with respect to EM. And thirdly, on that handful of contracts, there's a provision for future losses. We still have the obligation to deliver those contracts and, therefore, those future losses will unwind over the next three or four years as we deliver those contracts.
There's three things in there, so it shouldn't be a direct read across as GBP136 million outflow. Further details to follow.
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Ed Steele, Citi - Analyst [57]
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Ed Steele, Citi. Couple of questions, please. First of all, on the 3,300 people that are leaving G4S, are they all G4S employees that are not guards, or cash and service operators? Are they just part of your back office, if you like? And if so, what rough proportion does that represent of those equivalent countries' total? Just to get a feel for the total proportion that you've taken out of your cost base in those countries, please? That's the first question.
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Ashley Almanza, G4S Plc - CEO [58]
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I couldn't give you a precise percentage. It's not a large percentage because this is spread across UK and Europe. You can see, I think if you took last year's Annual Report and the breakdown there, we're 50,000 roughly in the UK and more than that number in Europe, so it's not a huge proportion.
It's spread across all areas of the business. We're trying to --
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Ed Steele, Citi - Analyst [59]
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The question was ex-guards, so if you take out security guards and take out cash services people.
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Ashley Almanza, G4S Plc - CEO [60]
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Most of this -- we're trying not to, as you will have gathered from our presentation, deplete our sales and our operating capability. I don't have the precise percentages, but we've focused our efforts on, first and foremost, overhead. There are some -- so, for example, in the UK we're rationalizing our branch network; that reduces the fleet size and, therefore, does affect some frontline staff. But don't have the precise percentages to hand, Ed. Happily give them to you afterwards.
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Ed Steele, Citi - Analyst [61]
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Okay. Thanks very much. Second question, the new Dutch cash services client, is that 100% new revenue and from when does that contract start, please?
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Ashley Almanza, G4S Plc - CEO [62]
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It is a completely new contract and the contract starts?
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Helen Parris, G4S Plc - Director of IR [63]
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January 1, 2015.
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Ashley Almanza, G4S Plc - CEO [64]
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End of this year, yes.
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Ed Steele, Citi - Analyst [65]
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Okay, thank you. And last question from me. I may be misremembering but, the Djibouti bad debtor write-off, of I think it was GBP6 million or maybe GBP8 million, is that in your adjusted number? And could you just remind me of why you have some above and some below the line, if I'm right on that, because obviously you've stripped out quite a lot of other receivable writedowns, please?
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Ashley Almanza, G4S Plc - CEO [66]
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Do you want to take that? I'll be candid; I didn't follow the question precisely. Do you get the question?
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Himanshu Raja, G4S Plc - CFO [67]
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I think the question is how do you -- if I read through the question, what do you put in underlying and what so you put in the balance sheet review, if I understood your question?
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Ed Steele, Citi - Analyst [68]
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Absolutely. I think, certainly in my bridge from 2013 to 2014 I've got, I think, GBP6 million because you won't have a repeat of the bad debtor in Africa that you talked about in the half-year stage. I think that's in the underlying, whereas you've obviously taken a lot of bad debtor write-offs in the non-underlying, in the [exceptionals].
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Himanshu Raja, G4S Plc - CFO [69]
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What was said I think, Ed, at the half-year was that we'd initiate an exercise to look at the balance sheet. We've now finished that, and that's a one-time exercise that has been very comprehensively done, and that's why we've identified that separately as specific items. Where there's a regular receivable that we can't collect, that's a proper underlying charge.
As to your detailed question on Djibouti, we can trace through where that is and come back to you.
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Ed Steele, Citi - Analyst [70]
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Thanks very much. I'd just be interested if that's still in the numbers in the full year versus the half-year, that's all.
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Ashley Almanza, G4S Plc - CEO [71]
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Djibouti was discontinued. It's in discontinued.
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Ed Steele, Citi - Analyst [72]
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Okay. My mistake.
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Ashley Almanza, G4S Plc - CEO [73]
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So we've exited Djibouti. I think we announced that at the half-year.
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Helen Parris, G4S Plc - Director of IR [74]
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Yes, in the announcement.
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Ed Steele, Citi - Analyst [75]
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Okay. Thank you.
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Karl Green, Credit Suisse - Analyst [76]
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Karl Green, Credit Suisse. A couple of questions, just sticking with Ed's question on receivables. Just quite simply, in terms of the movement in 2013 versus 2012, obviously, you've had that balance sheet review. You've also had a number of businesses either sold or discontinued. Could you just give us a sense of the underlying movement in DSOs in 2013 versus 2012? And given your own internal projections for mix shifts through 2014, what sort of underlying DSOs, all other things being equal, in terms of you're chasing?
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Himanshu Raja, G4S Plc - CFO [77]
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We'll give you full details in the ARA. We've seen a modest improvement in DSO on a like-for-like basis. Like other areas that we've talked about today, there are clear opportunities to improve our working capital management processes, both on the receivables side and on the payables side.
I think I talked at November 5; today, we don't measure the event to billing cycle. So when a billable event takes place, how that is contracted for, how quickly we bill and, therefore, how quickly that collection process starts, is the simple example. The systematic application of that isn't there across all of our businesses; one of the many improvement initiatives we're running. Modest improvement this year, more to do.
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Karl Green, Credit Suisse - Analyst [78]
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Okay, fantastic. Thank you. Following on from that, and very much linked to it, you're clearly signaling that you're not going to do a big SAP big bang ERP implementation. You've got projects going on in certain geographies. But could you just tell us a little bit more about how you're thinking about software as a service, as opposed to big bang CapEx projects? Clearly, there's developments there in the ERP space and CRM which can be very powerful, and could also be less draining on cash in the short term. Is that something you're considering, either globally or on a regional basis?
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Himanshu Raja, G4S Plc - CFO [79]
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We don't have a religious outlook on software as service versus hosted applications. Each we'll look at on a business case by business case basis. So, for example, in the portfolio we have salesforce.com ubiquitously deployed everywhere. It's the one application you can point to that, across all regions it's in place and increasingly being embedded, utilize the pipeline and the quality of the pipeline is cleaner.
The way we're going to go about it is like I explained on the operational technology, if I look at Europe, we've got three different really core environments. We've got Oracle, we've got Microsoft and AMIS, we've got SAP. We'll take the best of what exists today and see if we can leverage it across the rest of the region, and I've already asked Martin to do an early assessment of whether we can leverage the UK SAP implementation. So very pragmatic, business-case driven, that gives best bang for buck, really. So no religious cloud-based versus hosted.
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Karl Green, Credit Suisse - Analyst [80]
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Thank you.
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Ashley Almanza, G4S Plc - CEO [81]
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Thanks, Himanshu. Thanks, everyone, for your interest and for your questions today. We look forward to seeing you again soon and updating you on the progress of our Company. Thank you very much.
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Himanshu Raja, G4S Plc - CFO [82]
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Thank you.
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