Full Year 2015 G4S PLC Earnings Call
Mar 09, 2016 AM GMT
GFS.L - G4S PLC
Full Year 2015 G4S PLC Earnings Call
Mar 09, 2016 / 09:00AM GMT
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Corporate Participants
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* Ashley Almanza
G4S plc - Group CEO
* Himanshu Raja
G4S plc - CFO
* Helen Parris
G4S plc - Director, IR
* Soren Lundsberg
G4S plc - Group General Counsel
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Conference Call Participants
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* Sylvia Foteva
Deutsche Bank - Analyst
* Rob Plant
JPMorgan - Analyst
* Andy Chu
Nomura - Analyst
* Gideon Adler
Redburn - Analyst
* Paul Checketts
Barclays Capital - Analyst
* George Gregory
Exane BNP Paribas - Analyst
* Ed Steele
Citigroup - Analyst
* Kean Marden
Jefferies - Analyst
* Rajesh Kumar
HSBC - Analyst
* Allen Wells
Morgan Stanley - Analyst
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Presentation
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Unidentified Speaker [1]
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(Conference Instructions).
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Ashley Almanza, G4S plc - Group CEO [2]
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Good morning, ladies and gentlemen, and a very warm welcome to G4S's full-year 2015 results presentation.
I'm joined today, as usual, by Himanshu Raja, our Group CFO. Also with us today is Helen Parris, our Director of Investor Relations, who, I think, everyone knows. We also have Soren Lundsberg, our General Counsel; and Debbie Walker, our Group Director of Corporate Affairs.
Before we get started, I'm going to draw your attention to the, by now, I think, very familiar disclaimer on slide 3, and ask you to read that in your own time, please.
We have the following agenda: key messages, results highlights. We'll go through the regional business review, as usual; talk a little bit about our strategy and plan; and then, Himanshu will take us through the financials in more detail. That will take around 45 minutes, and there will be plenty of time for Q&A.
So, we'll get started right away with the key messages. Now I think everyone here, and everyone listening, knows that in November 2013 we laid out some plans to transform G4S. We have made substantial progress over the last two years with that transformation.
And as you think about where we've come from, where we are today, and where we're going I think it's both helpful and important to think about this in three parts.
The first is our portfolio program, where we're going through a very large portfolio of businesses and identifying those businesses that we will sell or discontinue and will not form part of the strategy, going forward. That's improving our strategic, our commercial, and our operational focus; and it's undoubtedly changing the shape of the Group, and improving our operating and financial performance already today.
The second part is the now very well-known legacy contracts. It's very clear that this has been a constant headwind for the last 2.5 years. These remain important in our business, financially significant; important contacts that we must and will deliver.
But they will diminish over time, and they will diminish quite sharply over the next two to four years. We're confident they will diminish not just because of the passage and the effluxion of time, but because the controls that we have in place today around major contract approvals could not be more different.
The one thing we can be utterly confident, that if these contracts were before us today we would not sign those contracts. So the control environment and the governance and the risk assessment around major contract approvals is completely different, and I think that's a really important point.
And the third part of this is the most important part of our transformation program, and that relates to the businesses in which we're investing and that will form part of our long-term future and are core to our strategy. We are creating long-term value in those businesses. And, I'm pleased to say, there is now tangible evidence of that investment showing returns, as is evident in our results. And the results of our continuing businesses, I think, are more than satisfactory.
The performance of those continuing businesses is evident not only in the full-year results, but we saw quite strong momentum in the second half.
We grew much faster in the second half than in the first half. And that gives us confidence that we're going to make further operational and financial progress in 2016. We know already, of course, we're in March, that we've had a good start to the year, and that increases our confidence in the outlook for 2016.
The combination of that improving performance and the cash proceeds from our ongoing portfolio program, those things together also give us confidence that we're going to reduce debt over the next 12 to 24 months towards our 2.5 times EBITDA-to-net debt ratio, all over.
You will have seen that the Board is recommending a dividend of 5.82p per share. That's flat on the previous year's final dividend, and brings the full-year dividend to 9.41p per share; an increase of 1.8%.
Our dividend policy is unchanged. The long-term objective is to grow our dividend in line with the long-term growth in earnings. But for now, we're holding the dividend whilst we drive net debt down.
Let's turn to the results. I hope by now you've had a chance to read the release that we put out earlier this morning.
Overall Group revenues were up 4%; emerging markets, 8.6%. I think that 8.6% demonstrates, once more, the resilience of this business, because this was taking place in a world where growth from China was slowing down, commodity prices were at record lows, and there was general macroeconomic uncertainty. All of those things affected Asia, Middle East, Africa, Latin America, and our business grew at 8.6%.
As expected, our UK and Ireland business we saw revenues decline by 3%, principally as a result of large contracts which we lost in 2014: the Tesco contract, and, of course, infamously, the electronic monitoring contract.
In Europe, we've been investing heavily in sales and business development, and Europe returned to growth, up 2.6%.
And another quite exceptional performance from our North American business, growing at 5.8%.
The investment that we're making in our sales and business development is evident also in our sales performance, sales of GBP1.3 billion ACV, annual contract value; GBP2.4 billion total contract value; and a pipeline of GBP5.7 billion.
The ongoing demand for our services and the resilience of our business gives us confidence that this pipeline and the demand for our services can support growth of 4% to 6%, going forward.
The combination of top-line growth and our productivity programs, operational productivity, procurement, and so on, dropped through to the bottom line, and the profit from our continuing businesses rose 5.7%.
Earnings and EPS were up 14%.
Cash flow was GBP460 million; that's down 12.9%. That's a function of two things, both related to working capital. The strong growth in sales that we saw in the second half of last year absorbed cash in to working capital, so the level of investment in our working capital went up.
And we're also transitioning to a shared service center in the United Kingdom, and that also affected our working capital. We expect that effect to reverse in the first quarter of this year, and we're seeing that coming through already in the first part -- first two months of the year.
Net debt was GBP1.78 billion; up from GBP1.64 billion. That's a function of the heavy investment programs that we've had, both capital investment, but also a lot of our investment goes through the P&L, whether it's sales and business development, or general management; the working capital effect that I have just referred to; and, of course, the utilization of cash to service the onerous contracts, that's OCP. And there was also an FX effect on net debt.
Himanshu will take you through all of these numbers in more detail.
As I mentioned a moment ago, we believe the outlook for the Company is positive, driven by the momentum that we have in the business. And the combination of improving performance, improving operating cash flow, and our portfolio program will help us to drive net debt down over the next 12 to 24 months.
And I have covered the dividend already.
We'll move on to the regions, starting with Africa, as usual. As you know, Africa is dependent on a commodity-based economy in many countries. Against that background of sharply lower commodity prices in general, I think, and macroeconomic headwinds, our business continued to grow in Africa: revenue's up 6.8%, and profit's up 8.1%.
We are continuing to invest in our businesses in Africa. We're continuing to strengthen our sales and business development under the leadership of Eddie Ueckermann down in Johannesburg, he's doing a fantastic job.
Our sales operations in Africa have been transformed. When I look back at my first visit there 2.5 years ago and compare it with my most recent visit, it's very clear we've made huge progress in this area. We have better control; better visibility on our pipeline; much better earlier rigorous qualification of that pipeline; and we're getting better at identifying which opportunities we should go after.
We're also investing in our operational capability, and we've made two senior changes in Africa in the last year.
Mel Brooks, who previously ran our Indian business. It's the largest single country business we have, 130,000 employees. We'll talk later about the operational transformation of that business. That was led by Mel; he's now gone down to Johannesburg, leading our Africa region, and applying the same operational rigor and discipline.
We also moved Tim Kendall, who ran our nuclear security business in the United States, which, as you can imagine, has very exacting operational standards. Tim's now the Chief Operating Officer.
So, we are building that team to drive operational excellence in to our businesses in Africa.
And then last, but by no means least, product and service innovation, I think sometimes we think all of the innovation happens in London, or North America. Actually, our emerging market businesses are quite capable of innovating, and they have done so.
Our team in Africa has come up with some really innovative new services and products, including something we talked about before, which is Deposita, which selling well, and very profitably, across Africa. We're now looking to deploy that cash-recycling technology in Asia and Middle East.
We are building a diversified pipeline in Africa. Historically, I think we've had too much concentration in energy, mining, and construction; we're now broadening that in to retail, financial services, telecommunications, and infrastructure.
Asia Middle East, here, too, I think generally there were macroeconomic headwinds, slowing growth in China, and yet our business continued to move forward. Revenue, up 8.4%, profit's up 12%; that, again, is a combination of top-line growth and improving productivity. Here too, we are continuing to invest in sales and business development across a range of sectors to diversify our pipeline.
We also took the decision, last year, to strengthen our organizational leadership and focus. This was our largest region in the Company, it stretched from the Suez Canal to the other side of the Tasman Strait, vast region.
We have created two regions from Asia Middle East. Asia Pacific, which will be headquartered, is headquartered, in Hong Kong, and led by Jon Corner, who was previously our Regional Commercial Director. Jon's been with the Company for coming up for five years, has lived and worked in Asia for almost two decades.
And then, the Middle East India region, which is headquartered in Dubai, and is led by Claude Allain, who we hired from Johnson Controls. Claude has a long and proven track record in both services and technology industries; he's lived and worked in the Middle East for many years, he's now in the saddle.
This change reflects the importance and the potential of these growing markets to our Company.
Latin America, we talked about this last time we met. We've been pleasantly surprised at the rate of continued growth in this market. There's obviously huge macroeconomic headwinds in Latin America, and yet demand for our services continues to be strong.
I think we also flagged last year, or at the half year, that we were starting to see a lag between cost inflation in wages and price pass through. It's a tough environment in which we're operating there. And the growth and productivity initiatives were offset by those delays, which meant that the top-line growth did not translate through to improvement in the bottom line. Profits were flat year on year at GBP29 million.
Here too, we are continuing to invest in our sales and business development. Historically, this has been the most under-invested area in our Company. And we're strengthening our pipeline in both secured solutions and FM across Latin America.
Europe, this was probably the region that had the least investment historically in sales, sales leadership, sales operations. There was no sales leadership in Europe two years ago.
We've invested heavily; that is starting to pay off. We're seeing revenue growth return for the first time to our businesses in Europe, driven by our cash business in Netherlands, cash business in Greece, and our secure solutions in Belgium. We had positive growth in other parts of the businesses, but those were the stand-out businesses.
Going against that, in the other direction, is the cost of the ongoing investment in sales and business development, but also an adverse revenue mix effect; and that was contract portfolio changes in the Netherlands and in Hungary, where we lost some contracts. We also had a systems project in Hungary, which came to a natural end.
Under Graham Levinsohn's leadership, our headquarters in Holland, we've got a clear plan to improve sales and productivity, and to restore our margins in this business.
North America, as I mentioned, I think this is quite an exceptional performance. Our team down there has delivered a fantastic result. We've got a very strong franchise in the world's biggest security market, and that's evident in these numbers.
We're growing faster than the market; we're taking market share, therefore. I think that's a function of the quality of our team, but also the fact that we've invested in product and service innovation, and so we're constantly refreshing the service offering that we're putting in to the marketplace.
We saw growth across all of our services and our customer segments.
We implemented the Affordable Care Act, and, as we signaled this had virtually no impact on our business, because our existing care healthcare plans were broadly consistent with ACA already.
Top-line growth, combined with operational gearing, dropped through to 17.5% increase in profits.
We'll talk later about service innovation.
One of our standout, I think, successes here has been taking CASH360 from the UK, developed many years ago, and, to some degree, left on the, shelf gathering dust, took that over to North America. In the last 18 months, 24 months the team there, under the leadership of Brian McCabe, our Chief Innovation Officer, has done a phenomenal job in creating a service offering and a product that is now getting real traction in the marketplace. And we can talk more about that, later.
The UK and Ireland, as I mentioned, revenue's down 3%. We lost electronic monitoring contract, this was a big and highly profitable contract, and I think the reasons for that are well understood. And we also lost the Tesco cash-handling contract in -- both of these were in 2014. That, obviously, affected our revenues.
They were both also above-average margin contracts, and that fell through to the bottom line. Profits were down 9.4%; a combination of that revenue mix, and our ongoing investment in sales and business development.
Our UK living wage, we talked about at the half year. We've completed our analysis, Himanshu can talk about this in more detail; we estimate a 1% to 2% impact in 2016.
We're obviously focused on operational efficiency in the UK, along with the rest of our business. And we will be taking some of the lessons that we've learnt from our operational transformation in India, together with -- we've had a [lean] process design project running across the Company in 2015.
We're bringing those things together, and we're going to run a pilot to put new core operating systems in to our UK secure solutions business. This will be run as a pilot, so as not to threaten the operational integrity of our business. And we hope, in a year's time, to be talking about taking that in to full operation and then rolling it around -- out around the rest of the Group.
And then, clearly, a key priority for 2016 and 2017 is managing our legacy contracts efficiently.
I'm going to move on from the results to just touch on a few areas of our strategy, give you an update.
These, I think, are increasingly familiar strategic priorities to everybody, certainly, inside the Company: investing our people, investing in our customers. What that means is simply getting closer to our customers, understanding their business well, understanding their strategic objectives, their priorities, and designing services that help them meet those objectives; investing in growth, sales and business development investment every year; investing in products and service innovation.
Service excellence: one of our core values has been, for many years, customer focus and service and yet 2.5 years ago we didn't have a way of systematically measuring customer satisfaction. We started that process 18 months ago and have made a good deal of progress. We are now able, still not where we wanted to be, to more consistently measure customer satisfaction across our businesses, and respond to that. Knowing is one thing, responding is also very important.
Operational excellence: I think in many of these meetings we've talked at length about our operational excellence program, and we'll return to that.
And then, financial discipline, and I'm going to say a few words about financial discipline, and then Himanshu is going to cover that in more detail.
When we talk about financial discipline, these are the core elements of what we mean at G4S by financial discipline. Himanshu is going to cover risk management, capital allocation, working capital; these are all fairly new approaches to a common issue in many businesses. By new, I mean the way we approach this today in G4S is very, very different to how we approached this three years ago. And Himanshu will talk about that.
And then, obviously, gearing is very important. I've touched on that already.
I'm going to talk about portfolio management. I think all of you will remember this picture from November 2013, so about two years ago. What we noticed was something that was I think well understood already, which is that we're geographically a dispersed business, a large global business, operating in 126 countries with, Himanshu, I want to say, over 800 subsidiaries around the world.
And they were not all making an equal contribution to the business then, and when we looked forward we noticed or recognized that not all would play a long-term roll in the Company strategy. So we set out some criteria, and then we went about systemically working through that portfolio and identifying businesses that would remain in the Company, form a core part of our strategy, and those that would leave.
And there were some in the middle, where we said we're going to give them one year or two years to see whether or not they can be combined as another business, turned around, or sold.
Progress to date, I think, we've made more than satisfactory progress. We've identified 61 businesses; completed the disposal or closure of 23 businesses. They have combined revenues of GBP1.2 billion, and losses of GBP30 million. It's been a phenomenal team effort from across the Group.
We identified a further four businesses, bringing 61 to the total of 65; those are children's services, which we announced a few weeks ago in the UK, our UK utility services in the UK, G4S Israel, and youth services in the US. Together, those businesses have combined revenues of around GBP400 million.
We expect our ongoing portfolio program to not only sharpen -- continue to sharpen our strategic, commercial, and operational focus, it's very, very important in terms of management focus versus management dilution; but also, to release capital. And we expect another GBP250 million to GBP350 million of proceeds over the next 12 months to 24 months, which will go towards reducing our debt.
Now, I want to move on to people. When we meet in these forums we spend a lot of time talking about numbers, revenue, profit, cash flow; that's very important, we're always happy to talk about this. But it's very important, every so often, to return to this subject, because all of those measures are a function of this input. And we have spent a huge amount of time, effort, and substantial money reorganizing our business and bringing talent in and promoting talent from within.
If you look at our Group Executive Committee and our global leadership team, we define that Group of around 220 individuals, senior leaders across the Group. 130 of those are new in post in the last two years, plus.
Now, of course, when you make that scale of change one of the risks is that you lose some momentum. And that's true; in some parts of the business we get a completely new leader in from the outside, they have to understand the context in which they're operating, get to know people, get to know customers, and we do lose momentum. That is a cost well worth paying, and this is an investment well worth making. It will be the deciding factor in the success of our business.
Around 60% of our 130 have come from outside the Group, so there's been a big infusion of new blood, new talent in to the Company.
And I'm delighted to say that 40% have been internal promotions. So it's important: it's good and well to look outside and bring talent in, but increasingly important to us is to have structured ways of identifying talent in our Company and developing their talent and giving them an opportunity to move on, so really thrilled to see that about 40% of our changes have come from within the Company.
The other very important change is the way we've organized ourselves. Again, 2.5 years we had literally 3.5 regions. 3.5 is an odd number, but that's what we had, and we now have seven regions; and all seven are under new leadership. Most of that new leadership has either been hired externally or have been in the Company for not very long; though we have -- of course, we recognize the huge value that comes from those employees and leaders who have been in our Company for a long time. And we're seeking to get the best of both of those.
Also important is leadership training. And she's not here today, our new Group HR Director, Jenni Myles, has been working with the rest of the leadership team to develop, and now launch, new leadership training programs. These programs address young leaders, and then some of our more senior leaders, who have the potential to go on and lead a large country, and ultimately, in time, lead a region or a big function. And that's an important part of our investment in our people.
Next week, we will be re-launching G4S' core values at our global leadership conference. And last year, under the leadership of Debbie and Soren, we re-launched a program called Speak Out. And this is to encourage employees to speak up anonymously, typically. It is a third-party service provider. Most of you will have this in your organizations. And to speak out when they see conduct, behavior in our organization that's not consistent with the values that we [aspire].
This is a really, really important part of the transformation at G4S. I think it's been completely underscored by the events at the Medway Secure Training Center, at the back end of last year. One of the things that was evident from that was that people did not feel able to speak out. So we've started, we've got a long way to go. And this will be an important part of the corporate transformation.
Health and safety: we talk about this whenever we meet as a management team, and we talk about it whenever we meet.
We have trained over 1,000 of our leaders around the Company in safety leadership, online training programs, classroom training programs. It's in the annual objectives and so-called performance contract of every single one of our 220 global leaders. And we expect everyone, doesn't matter whether you're in a frontline role or in a functional support role, to play their part in improving our health and safety performance.
We've completely refreshed our policies and our practices, but it's very obvious that we are not performing satisfactorily in this part of the business.
We lost 46 colleagues in 2015 in the line of duty, and many of those were attack-related fatalities. We're in the security business. We work in an inherently hazardous business. None of that, though, is acceptable. It's totally appropriate for us to have as a goal, and to mean it, zero harm is our goal in health and safety. So we're a long way from achieving that, and this is going to continue to be an important part of our business.
I think some of you have heard me say before that this is not just -- of course, the most important reason, is self-evident: we've got a responsibility to do this well. But, in my opinion, strong opinion, good health and safety performance is an indicator of a well-run business. These two things go together. And as we get better at this, the rest of our operations will also get better. You can't have one without the other.
I'm going to move on to growth and innovation, and service; key areas of our strategic plan.
We have been, over the last 2.5 years, investing heavily in sales leadership; sales and service training; customer relationship and account management, having an account plan, understanding your customers' business, their objectives. These are disciplines which had fallen by the wayside in our Company. We're bringing them back.
Global accounts: going after global accounts, learning how to identify the best opportunities and going after them. And then, of course, where we win, and we are starting to win, delivering. In fact, it's not been announced, we've just won another global account, which we're starting to mobilize. And we'll tell you more about that at the half year.
Pipeline and sales management: sales operations, again, had fallen by the wayside. salesforce.com is now mandatory across our Company, everyone has to use it. Our sales people are incentivized to use it properly. It's giving us better visibility on our pipeline.
Most importantly, we're now starting to get better at qualifying our pipeline early so that you don't burn a lot of shoe leather on something taken from a suspect to a prospect and just before you go in to bid decide not to bid; try and identify early and get your best people focusing on the most promising opportunities. And that's something where we have a long way to go still.
And then, service and product innovation, which we'll look at a case study in a moment.
So, what is all this investment doing? Well, we have a healthy pipeline. It's diversified by service, geographical segment, customer segment. We had sales, as I mentioned, of GBP1.3 billion in 2015; pipeline stood at GBP5.7 billion.
I think it's great that our sales operation is becoming more effective. We're getting better at deal capture and improving our visibility. I actually would like to see this pipeline managed more rigorously. I want to see better and earlier qualification of this pipeline. If that means that we take things out the pipeline and the pipeline becomes smaller, I think we should be comfortable -- not just comfortable, but happy with that. Because we can dilute our sales force quite quickly by having everybody chasing everything, so we want to get more focused in this area.
Pleasing to see that over the last three years we've been winning more. Our work is not done. And I think this ties back to the point I just made: as we get better at pipeline qualification we should see our win rate improve, because we're going after things that we have a better chance of winning and a better chance of executing well against.
This slide, which is quite busy, and probably quite hard to read, is focused on the schematic representation. This is addressing our strategic priority of innovation. Te point that we're making here is in each of our main service areas, secure solutions, cash solutions, and care and justice, we are building on a very solid platform.
We have a fantastic customer base across, I would say, an unrivalled geographic footprint, and that's a massive intangible asset for this Company.
We have not, historically, focused on or invested much effort in cross-selling and up-selling. And so when you go to our businesses today you see progressively a more joined-up approach.
Again, 2.5 years ago you would meet the leader of manned security, then you meet the leader of systems and technology and the leader of cash. And, frankly, sometimes they competed with each other. The manned security guy would say don't bring that systems guy near my customer because he'll reduce the number of man hours I can bill to that customer. And we've put incentives in place, we've changed people, and we're getting these working together.
The simple principle here is we have to exploit the phenomenal intangible asset we have, which is our customer base; and find ways to be more relevant to those customers and offer them the services that we already have in our Company and are selling well. And so schematically what this represents, of course, is that as we add more value to our customers we improve the margin in our business.
And we describe here the different service lines that already exist in our Company today but which we don't cross-sell or up-sell, and that represents an enormous opportunity for us.
I want to dwell for a moment on one of these case studies which I mentioned earlier, which is CASH360, a cash-recycling service; combination of people, software, and end-user devices.
And this was, as I mentioned earlier, developed in the UK and then stopped developing. Obviously, when you develop these products and services it goes through the P&L and so there's a tension there. This would have been a very easy thing to not do two years ago, but we had the confidence to believe in our people and invest in it. And they've done a phenomenal job.
I think one year, or 18 months ago, when we met we were talking about a pilot with potential. This is now in full commercial operation in North America, in partnership with the Global Bank, and targeting one of the world's biggest retailers, if not biggest. We've installed this system in 350 stores. We have firm orders for another 800, these are megastores, so large format, large recyclers.
Alongside that, our team has developed a small box solution for small- and medium-sized retailers. That's installed in 550 small- and medium-sized retail formats, and we've got confirmed orders for another 560. The pipeline shows there's potential for almost 3,000 more stores.
And I think there's going to be potential beyond that, not just in North America. But if we can make this work with the Global Bank, one of the world's biggest retailers, in a market where service standards are pretty demanding, then I believe we can make it work in many other markets.
Our order book is growing nicely: $42 million of ACV, and $210 million TCV. But this is just the beginning for this product.
This is one example. We've talked about other products, AMAG Symmetry CONNECT, RISK360; all consuming time, effort, and money, but all will pay off, we believe, down the line.
Operational excellence, briefly on this, you will know we've invested substantial shareholder funds in restructuring programs. We've put in place a global procurement team. We have more than 30,000 vehicles on the road every day. We've got Telematics and Route Planning now installed, that program is complete.
We're putting IT systems in to build on our lean process design. I mentioned the UK pilot that will take up all of this year, and we hope that we'll go in to operational phase next year. And this is producing benefits, self-evidently in our UK and Ireland cash business; but also in India, which we've not talked about before. And I'll spend just a few moments on this.
This was a program led by Mel Brooks, and our COO, [Rajeev], down in Delhi. On the left-hand side you have a schematic of what the business looked like before we started this program: four zone heads, 14 regional heads, 132 branches, no P&L accountability in the branch, manual scheduling of a workforce of 130,000 FTEs, numerous processes and governance controls. Didn't look the same in one region compared with another region, each branch had their own system and process.
We simplified the management structure, created seven hubs, 85 branch heads. Every branch manager has a P&L. We've used an in-house developed system to automate scheduling, Saturn system. That -- again, we're learning from developing that system. We're not saying by any means it's cutting edge, but it's a vast improvement from manual scheduling. We're going to take the learning from that and put it in to UK pilot.
Standardized processes. And we've brought in new talent, particularly in our sales team. And we're seeing the benefits of this. The productivity and profitability of our India business over the last 24 months has been transformed.
If we can do this in India, 130,000 FTEs, we can certainly do it in other countries. And we have a program now called Javelin, which is aimed at replicating this success in other parts of the Group. And we sent the leader, Mel Brooks, down to Africa to do the same again.
I'm going to, on that, I think, high note, pause and hand over to Himanshu, who's going to take us through the financials. And I'll return for a minute, then we'll go to Q&A.
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Himanshu Raja, G4S plc - CFO [3]
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Thank you, Ashley. Good morning, everyone, and welcome, again.
As Ashley has pointed out, we've continued to make substantial progress in 2015 on our continuing businesses. At the same time, we've continued to actively and effectively manage both legacy contract, as well as legacy accounting, issues.
You will have seen from this morning's release that we took the opportunity with the new auditors, PWC, for FY15 to conduct a very comprehensive review of reporting accounting across the Group, which results in a restatement of our 2014 numbers. The results presented today reflect these restatements with 2014 and 2015 all presented and accounted for on a like-for-like basis in both the statutory and the underlying results. The full details are in the release; I'm happy to give a tutorial for anyone who'd like to go through them.
The disclosures are quite extensive, as is the nature of these things. But the key point is that the restatements do not affect the future cash generation of the Group.
So, with that, let me turn to the full-year results. Revenue for the full year was up 4% to GBP6.4 billion. Our emerging markets grew at 8.6%. As Ashley has explained, and was expected, the UK was down. But this was more than offset by the growth in North America of 5.8%, and Europe, which posted a 2.6% increase on the same period last year.
First-half growth was 2.5%, and the growth in the second half accelerated to 5.4%, with all regions except Latin America growing faster in the second half than in the first. Latin America posted a very respectable 9% growth.
Our PBITA was GBP427 million, up 5% year on year; and an operating margin of 6.6%, up 10 basis points year on year.
There was a modest FX impact of 3.8% in 2015 from the strengthening of sterling against the euro and emerging markets currencies, partly offset by the stronger dollar. If you use the February spot rates, our 2015 PBITA would have been GBP21 million higher.
The underlying interest charge was GBP100 million, GBP19 million lower than 2014, benefiting from lower interest charges on swaps fixed to floating debt. And we also repaid a $150 million bond in July 2015, which bore a 6.43% coupon.
Our pension interest charge was GBP10 million lower, benefiting from a lower IAS 19 pension deficit.
On tax, our effective tax rate was 24%; and I expect the tax rate to stay at around the same level for 2016.
On NCIs, I flagged at the half year that I expected NCIs to be at around GBP27 million; they came in at GBP22 million. Those businesses continue to perform well. The difference is simply attributable to the change in FX.
Our earnings are up 14% to GBP227 million, with underlying earnings per share of 14.7p.
And you will have seen the cash from continuing operations was GBP460 million, and was down 13%, principally a function of growth in Q4; as well as a temporary increase in working capital, which has reversed in the first two months of 2016.
Our results in OCF conversion was 108%.
In summary, against the background of global economic uncertainty, the underlying result show the resilience of the Group in terms of geography, service line, and customer segment that Ashley has taken you through.
Turning now to the total result slide, which shows a reconciliation of our statutory results and the underlying results, as set out on page 3 of today's release, our reported revenue was GBP6.9 billion, and PBITA was GBP390 million.
Net earnings were [GBP8 million], which includes the losses on businesses identified for sale or closure; the investments in restructuring; the impact of legacy onerous contracts; and the goodwill and impairment in respect of historic acquisitions. And I'm going to spend a few minutes just taking you through each of those in turn.
Ashley has already mentioned, we've identified a further 38 businesses earmarked for sale or closure with revenues of GBP430 million, and operating losses of GBP35 million, which flowed through to statutory earnings in 2015. For the avoidance of doubt, those do not include the further businesses identified today with revenues of GBP400 million, which will come out of discontinued at the half year.
The restructuring costs of GBP44 million relate mainly to investment programs in the second half of 2015 to address organizational efficiency in Latin America, in Africa, in Asia, and North America. And we saw some of these benefits coming through in 2015, and expect the full-year effect in 2016. I've got some more detail on those later on in the presentation.
On exceptionals, we've taken a pre-tax charge of GBP65 million on onerous contracts, which I'll also cover in more detail on the next slide; and a net GBP5 million from the re-measurement of provisions from the balance sheet reviews in 2013 and 2014.
This year, we're able to complete that exercise and took a charge of GBP17 million, which was offset by GBP12 million of pension-related gains. And you'll know, both debits and credits of an exceptional nature go below the line.
Again, with the help of the new auditors, PWC, we've now drawn a line in the sand on the review of the assets and liabilities that began in 2013. All future charges will go to underlying earnings, unless they're individually material and warrant calling out.
So, continuing down the results, we made a profit on the sale -- we made a profit on sale of GBP12 million, principally relating to the sale of our IPS business and our secure archiving business in Austria.
And finally, you see non-cash amortization and impairment of goodwill of GBP106 million in respect of legacy acquisitions and businesses that are in the process of being sold, or ceased.
So, let me go to onerous contracts in a little bit more detail. The chart here ties in to the release and the notes in the release. We started the year with opening provisions of GBP47 million.
In the year, the GBP65 million charge relates principally to two previously identified contracts: Compass, that was signed in 2012, and an FM contract signed under a PFI framework that was signed in 2015, and which has 22 more years to run. We also reached settlement on a number of contracts.
Let me cover Compass in a little bit more detail. The Compass provision is calculated through to the end of the current contract, which runs for a term of five years, ending on September 1, 2017. The way we've arrived at those calculations is to use the latest available forecast from the customer, plus our own best estimate of the costs of accommodating service users. The increase in the Compass provision is GBP20 million, bringing the carry-forward provision to GBP31 million.
You'll know in this contract the customer has the option to extend the contract to 2019. And our best estimate of the incremental provision would be GBP57 million, and this has been disclosed in today's release as a contingent liability.
And when you do the math, roughly, GBP1.5 million run rate per month, the increase arises from the compound growth in service users for that additional two years, as well as the growing costs of accommodating those additional service users.
There remains, of course, GBP45 million of additional charges which arise from the re-measurement of eight previously identified contracts, the largest one of which is this PFI contract. It's a small annual loss, but clearly extends over 22 years.
During the year, we utilized GBP28 million of provisions, of which Compass was GBP17 million, bringing the total charges on the Compass contract to date to GBP48 million; a GBP31 million carry forward, plus GBP17 million utilized to date. We also had a modest reversal of GBP1 million, which also went through exceptional.
We, of course, continue to actively and effectively manage these legacy contracts. They are important to the Company, and we are committed to fulfilling our obligations under those contracts. From an accounting perspective, of course, we'll keep the level of provisioning under review as circumstances change.
You'll be aware of the very significant changes we've made in our financial and risk management framework since 2013. We have a more rigorous contract review process in terms of the contract at pre-bid, at bidding, through mobilization, and in-life review.
I personally perform a financial review of our largest 200 contracts on a quarterly basis, and you can see the progression there of the annualized revenue that we cover.
Specially also, you'll know that we significantly strengthened our financial and risk-management capability within the Group. In 2015, we further invested in strengthening the capability in Africa with a new regional finance director; and we brought in new finance directors in many of the countries across that region.
We continue to have a strong focus on working capital management, again, a subject I'll return to. And we operate a single pool of capital where all investment opportunities, including revenue and restructuring, need to deliver a greater than 10% post-tax internal rate of return. For restructuring, we also look for a payback in three years, or less.
We're extremely disciplined about monitoring the payback and returns on our restructuring programs.
This sets out the progress since 2013 of those restructuring programs, where we've made substantial progress in tackling inefficiency and overheads. We started out in the UK, and then Europe, moved to North America, AME, and Latin America. Our 2015 programs are on track, and we expect to see full-year benefits flowing through in 2016.
We've invested GBP110 million over three years, delivering annualized cost savings of around GBP30 million.
Let me now turn to cash flow and net debt. The full movement on net debt is shown in the slide. Starting with the year-end net debt of GBP1.6 billion, which is after the effects of 2014 restatements, the cash generated from our continuing operations was GBP460 million, which was impacted by the higher working capital, which reversed in 2016.
We invested GBP131 million in CapEx and finance leases.
The GBP46 million restructuring outflow was in respect of the previously announced restructuring.
And then, we received gross proceeds of GBP14 million from the disposals, and had an outflow of GBP20 million in acquisitions. That principally is in respect of a legacy earn-out settlement in Latin America. You'll know, our current acquisitions are very modest bolt-ons that drive both contribution, and are accretive to earnings.
Just turning to the right-hand side of the chart, and the use of funds of GBP399 million, we paid interest of GBP91 million.
Our cash tax is at GBP102 million. That included GBP25 million in respect of payments in advance for ongoing discussions with tax authorities, and timing differences. I expect the cash tax for 2016 to be in the region of GBP80 million to GBP90 million.
We've paid GBP44 million in pension payments under our existing pension deficit repair plan, which is line with the payment profile. We're presently in discussion with the trustees with respect to the triennial review, when we expect that to be agreed in the second half of 2016.
Our dividends paid to equity and minority shareholders were GBP174 million. That also included some one-time payments of GBP8 million by way of catch up.
We finished the year with net debt of GBP1.782 billion.
Really, to distill all of that down, on this slide you can see the principal movements in net debt really arose from the outflow of working capital of GBP69 million, which was attributable to the accelerated growth in Q4, as well as the transition to the shared service center.
The transition to the shared service center, the practicalities of that were that we paid down our suppliers earlier, but we also had a disruption in our collection effort. And I'm pleased to say our teams around the world have followed through on the Q4 growth and brought in the receivables.
I'm pleased also to report that the shared service center in the UK has bedded down, and we've seen the reversal of that working capital outflow occur in 2016.
I mentioned then the GBP33 million of one-off both on tax, and on the dividend payments.
Last, but not least, there's a translation effect of GBP36 million of cash and cash equivalents from the strengthening of sterling, and a net movement of GBP5 million of other.
I should add here, and Ashley talked about this, of course, you'll remember that our operating cash flow also includes the cash outflows from onerous contracts; that was GBP28 million, which flow through our underlying operating cash flow from continuing operations.
Let's turn to financing and liquidity. We have strong liquidity and access to unutilized and committed funds -- uncommitted funds around GBP700 million.
I mentioned, in July 2015, we repaid a $150 million tranche of debt, bearing interest of around 6.43%.
And earlier in the year, as you know, we financed our revolving credit facility, extending maturity to 2021, with improved pricing, terms, and conditions.
Our net debt-to-EBITDA finished the year at 3.3 times.
We do expect to get net debt to EBITDA of 2.5 times or lower over the next 12 months to 24 months (sic - see slide 35, "18 months") from the improvement in working capital, further financial progress, and from the GBP250 million to GBP350 million of proceeds from our continuing portfolio management program.
As you know, our practice is not to guide on forward margin, but to report on the progress on margin at each reporting date. The progress has been steady with margins improving since 2013 from 6.3% to 6.5% in 2014, to 6.6% in 2015. These are all on a like-for-like basis, and exclude all businesses being sold or being discontinued.
Let me hand you back to Ashley.
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Ashley Almanza, G4S plc - Group CEO [4]
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Thank you, Himanshu. So, just to sum up and end where we started, as you look at where G4S is today in its transformation program, I think it's very important to look at the three distinct components, the portfolio that we're restructuring and the businesses that are leaving the Group; the legacy contracts, which we must, and will, manage efficiently, and will, over time, diminish in importance; and, most importantly, the continuing operations in which we're investing and creating long-term value.
And we're pleased to see returns coming from the investment in our continuing business. That performance, I think, is reflected in today's results. And the momentum that we saw in the second half of the year has carried forward in to the first two months of the year, giving us confidence in the outlook for 2016.
The combination of improving performance from our continuing operations, and the cash from our portfolio program, these two things together will help us to drive net debt down to 2.5 times, and below.
And we've set, or recommended, I should say, the final dividend be held flat on the prior year.
And driving debt down will be a priority. No change in our long-term dividend policy, but we're going to hold the dividend while we drive debt down.
Those are the key messages.
Himanshu and I would be happy now to take any questions that you may have.
When asking a question, can I ask you, please, as we have people online joining this by webcast, to give your name and your affiliation? And I think, Helen, we have the ability to take questions online, as well. Could we take the first question?
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Questions and Answers
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Sylvia Foteva, Deutsche Bank - Analyst [1]
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Sylvia Foteva, Deutsche Bank. Three questions, please. First, on the disposal, obviously, the balance sheet reaching 2.5 times is very much dependent on the GBP250 million to GBP350 million. Could you be specific about how you arrived at the estimate of how much you can achieve from selling the businesses, and whether you are in discussions already? Shall I --
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Ashley Almanza, G4S plc - Group CEO [2]
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Yes. No, we'll take that, and we'll take them, in theory, [ask and then fine].
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Sylvia Foteva, Deutsche Bank - Analyst [3]
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Okay, sure. Second question, on organic growth, obviously, you talk about an acceleration in Q4. If I take your 2.9% organic and compare to the 2.2% in the first half, take away some of your big contracts, which were obviously rolling off, or the losses annualizing in Q1, it doesn't look like it's necessarily accelerated very much in the second half. So maybe it would be helpful if you just could provide Q3, Q4 run rate.
And then finally, on working capital, out of the GBP69 million, how much was relating to the shared service center, please? Thank you.
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Ashley Almanza, G4S plc - Group CEO [4]
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Okay, thank you, Sylvia. I'm going to ask Himanshu, in a moment, to answer your questions on organic growth and working capital.
Let me answer your question on disposals and our portfolio program. I think the first thing I'd say is, obviously, we've been working on this portfolio program for two years now, since November 2013. And I think over that time we've become better at understanding what we have to get through to get the business separated up and out of the portfolio.
It's been principally led by our regional heads and Soren Lundsberg, who's in the audience today. And so I think with that track record of having sold 28 businesses, generated GBP281 million of proceeds, we're in a better position to look forward and take a view on that.
I think our estimates are prudent. I think if you do some arithmetic on what we sold so far and what sort of contribution they were making to the Group and then you compare that to the businesses that we're -- and we've not giving you the contribution, obviously, and won't, that I think we try to be prudent in our estimates. And we've put a range on it, but I think those are good estimates.
We've had approaches on a number of these businesses, and we are in discussions on some, but not all, of these businesses. But at least on three of those four additional businesses we've had approaches, and on a number of those we're in discussions. I think that's as much as I'm going to say today. Look forward to giving an update at the half year.
Himanshu, could you please take the question on organic growth, and then working capital shared service center?
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Himanshu Raja, G4S plc - CFO [5]
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Sylvia, I'll deal with the working capital one first. The growth in working capital from Q4 growth was around GBP45 million, and the balance, to the GBP69 million, arose from the change in the shared service center. As I said, both of those have reversed in the first two months of 2016.
On organic growth, we don't disclose, as you know, quarter on quarter. But we did see that acceleration come through in the second half, both in emerging markets, as well as in developed markets.
The one region that did not accelerate H1 to H2, which I've already mentioned, was Latin America; that still grew at 9% in the second half.
And the overall headline growth was 2.5% growth in H1, and 5.4% in H2. And you've got the numbers right; it was roughly 2.2% we reported in the first half, and the 2.9% we're reporting today.
You'll know, and Helen can help you offline, we've got a number of things coming in and out: the anniversarying of the Manus contract, Ashley mentioned, in the UK, the effect of the Tesco contract, as well the effect of EM coming out of our numbers. And Helen can help you offline with those.
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Rob Plant, JPMorgan - Analyst [6]
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Rob Plant, JPMorgan. The businesses that you've disposed of to date have been loss-making. The ones that are scheduled for disposal are probably more profitable. Is there an element of you'd like to get the debt down and, therefore, make the disposals, or all four are non-core?
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Ashley Almanza, G4S plc - Group CEO [7]
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No. I think the -- well, the primary driver of our portfolio program has been, and remains, to improve our strategic, commercial, and operational focus.
It is true that we've tackled, and wanted to tackle, the loss-making businesses earlier, for obvious reasons. I would say, actually, looking back, we didn't do that fast enough. I think some of the loss-making businesses we could have tackled earlier and got them out the portfolio earlier. So, no, it's not -- clearly, it's helpful, very helpful that we're releasing capital as well, and that will go towards reducing our net debt, but the primary driver here is strategic focus.
And I think if you look at these businesses, it shouldn't be, I would hope, a surprise to our shareholders that those are the sorts of businesses that we are selling.
But you're right; they are typically more profitable than the businesses we sold to date. Take, for example, our utilities business, this is a very good business. It will never be a material -- I say that with all respect to the team, who've done a fantastic job. It's never going to be a huge part of the Company. It's reached, in our hands, its natural limit. But it would be, we believe, very valuable in the hands of another owner.
And I think you can make the same comment about all three or four of those businesses. And I think that's why, again, I think our estimates are reasonably prudent around the proceeds to be realized.
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Himanshu Raja, G4S plc - CFO [8]
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I might just add, Ashley, there, if I may, the GBP250 million, GBP350 million, we'll also get a contribution from the 38 businesses, the long tail that we're managing our way through. So it will be contribution to the proceeds from those also.
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Andy Chu, Nomura - Analyst [9]
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Andy Chu, Nomura. Three questions, if I may, please. Firstly, in terms of your opening comments, Ashley, you mentioned, and in the statement actually you mentioned, a pretty good start to the year. I wondered if you could give us a flavor, in any sort of quantitative metric, as to maybe organic growth, as to how the first two months of this year have started.
Secondly, you mentioned 4% to 6% demand for your services. Could you actually just clarify what that actually means? Is that an organic growth range medium term?
Lastly, on the contingent liability of GBP57 million on the Compass contract, I'm surprised they haven't taken that as a hard provision, given, I guess, you talk a lot about being conservative around accounting. I think, if I'm right in saying, Serco, for example, have taken that all the way through to the end of the contract in 2019. Thank you.
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Ashley Almanza, G4S plc - Group CEO [10]
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Thanks very much. I'll ask Himanshu, in a moment, to comment on the technical accounting around the onerous contract provision. I think there's another dimension to your question, which goes beyond technical accounting. And it is true I think to say that others have gone long and deep on this one, and probably catered for every eventuality.
As we sit here today, the contract ends in August 2017. That's what the contract says, and that's when it ends. There is an option to extend, but that option has not been exercised.
I'm sure there are accountants in the room that, if you could find five, they'd give you five different answers to what the correct accounting is. We debated this at length, and it's been through, I'm sure you can imagine, auditors and audit committees, and so on, and we think this is the clearest way to explain to our shareholders what the situation is.
We absolutely have a contract that will run to August 2017, and we do not know.
Two weeks ago, I think, a week or two weeks ago, the senior officials from the Home Office were in front of the Home Affairs committee and they said they hadn't decided yet. So, if they haven't decided the thing will be -- and we took the view it will be premature for us to decide. But the number's there, so it's not like we're -- people can make their minds up, I guess. But I'll let Himanshu, in a moment, come back to that.
Start to the year, you wanted some numbers. Cash flow, Himanshu has talked about. We've seen the working capital unwinding, so I think we're pleased about that. We need to keep our foot on that and make sure that we continue to drive better working capital performance. But the outflow that was on Himanshu's chart, I think, is largely reversed.
And organic growth, I will say better than the second half that Sylvia calculated, and mentioned earlier. That's as far as we'll go on that.
We're two months in. Good start, but we've got another 10 to run, so we're not going to get over our [skis] on this one. We're very -- we're pleased with the start that we've had, but we recognize there's a way to go.
4% to 6%, yes, that is exactly a medium-term organic growth rate that we think our pipeline, our business, will support, going forward.
I'll come to you in a moment. Have we done the--
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Himanshu Raja, G4S plc - CFO [11]
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Simply, the accounting follows the contract position, which is that the contract has not been extended. And that's why we've given full disclosure, were it to be extended, of what the financial impact would be.
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Ashley Almanza, G4S plc - Group CEO [12]
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Sorry, the other thing I should have said was we did underestimate the volumes, there's no question. We had a very sharp increase in volumes between November and January.
And you may look at other suppliers and say they were more conservative, they had better judgment, they had a better crystal ball, but there are quite a lot of moving parts in this equation.
Actually, the number of people coming in to the country is not necessarily the number of people that you end up with. It's not actually the most important factor always in the number of people that you had in your contract. The rate at which they are processed through the system is a very important factor.
And the other crucial factor is the rate at which local authorities make new accommodation available. Because if they don't, you have to put them in temporary accommodation, that's more expensive. That's where we stand.
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Gideon Adler, Redburn - Analyst [13]
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Gideon Adler, Redburn. I've got three, please. Firstly, on minimum wage, you've given some guidance around the impact on the UK business in 2016. Have you thought further out what the effect could be on the UK profitability?
Secondly, on the annualized effects of your cost saving program, GBP30 million, how much of that are you reinvesting in 2016? You flagged at the half year last year that roughly that went back in to the business in 2015.
Lastly, just on the PFI contract, could you just explain in a bit more detail what's happened with that and the logic of the number you put out there today?
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Ashley Almanza, G4S plc - Group CEO [14]
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Okay, so I'll ask Himanshu to comment on the minimum wage.
On the recycling of benefits, we said in November 2013 that after two years this program would become progressively self-funding; and that is, indeed, the case. We would expect more of that benefit to flow through. We were, I think, actually reinvesting, until the second half of last year, more than we were taking out, and we would expect more of that to drop to the bottom line.
So our restructuring spend, we wanted to bed in the restructuring that we've already done. Restructuring spend will be lower this year. And we will lose the anniversary effect of the investments that we've made in sales and business development and procurement, so that spend was ramping up and then, obviously, year on year the delta gets a lot smaller.
The area that we want to continue investing are those that I mentioned: sales, business development, and product and service innovation. And we'll strike the right balance, but I think our statement from before stands, which is more and more of this will go to the bottom line.
PFI contract has, I think, another 22 years to run. It's a facilities management contract with Churchill, Churchill Hospital. The annual losses are quite modest, but obviously it runs for 22 years, and under the accounting standards you've got to book all 22 years in the current year.
We're in active dialog with the customer as to how we can make their contract more sustainable, commercially sustainable. And we'll have to see how we get on with those discussions, and give you an update at the half year.
Minimum wage, Himanshu?
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Himanshu Raja, G4S plc - CFO [15]
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Gideon, on the minimum wage, all of our early engagements with customers have been very positive and constructive, which is where the 1% to 2% comes from.
A lot of the contracts -- as you know, we have very high retention rates and close customer relationships, so one dialog the pass through of the living wage, and also the related differentials, because that's really the unknown factor. All our experience says that large- and medium-sized customers alike are very receptive to passing on those costs.
So as you look out to 2016 and 2017, our working assumptions are in line with that experience, which is there'll be a low-single-digit million impact, but not material to the Group as a whole, and not material either to the UK business.
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Ashley Almanza, G4S plc - Group CEO [16]
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I mentioned in the presentation that we're piloting this year the introduction of new core operating systems in to our secure solutions business. And the point really is we, apart from improving operational reliability and customer service, the other objective is to reduce our costs and improve our competitive position in the marketplace.
Because UK living wage obviously affects everybody in the UK, and the UK is, broadly speaking, a compliant market. Not all of the markets we operate in our populated with compliant competitors, but, in general, the UK is a compliant market, meaning that all of our competitors will be exposed to the same thing.
I think the variable that everyone's grappling with is what is the knock-on effect on, let's say, supervisors when the minimum wage -- living wage, I should say, comes in.
And the other effect, which I think is unknown, is the degree to which the market as a whole will change the composition of the workforce because there's obviously, unusually, I think, in UK legislation, an age bright line at, I think, age 25. So that will start to, I think, across the industry, not necessarily G4S, affect the composition of the workforce. But at least a 1% to 2% in 2017, I'd say.
We would hope to more than offset -- in fact aim, not hope, to more than offset that progressively with our Javelin project to put all of our UK secure solutions businesses on a common automated platform.
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Paul Checketts, Barclays Capital - Analyst [17]
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Paul Checketts, Barclays Capital. I've got three as well, please. The first is on cash, again. What is the cash drag in the year coming for the onerous contracts and restructuring, please?
And the second question relates to the cash business. Can you give us a sense of how the organic growth is progressing in emerging markets, and developed?
And then, the last is a more thematic one. If I watch this presentation today it comes across like everything's gone quite well and you're fairly content with progress, and yet the shares have lost more than 30% of their value over the last year. And so, clearly, the market is not quite as relaxed about it.
Could you perhaps with a -- looking back, maybe explain to us what you think has been harder, what hasn't gone as well? Thanks.
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Ashley Almanza, G4S plc - Group CEO [18]
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Paul, I'll ask Himanshu to comment on the organic growth rates of our cash businesses in emerging and developed markets in a moment.
Cash drag, very quickly, onerous contracts, I think Himanshu mentioned, GBP20 million to GBP30 million a year for the next two years; and restructuring, GBP10 million to GBP15 million this year.
The all-is-well impression -- perception, rather, that you picked up, we have noticed that the share price is down. I think, clearly, that's something that does concern us. We care about our shareholders, and it hurts them, and we're very concerned about that, of course, as you would expect.
I think one of the reasons, not the only reason, but one of the important reasons, and you can see this by looking at other companies in our sector who have substantial emerging market exposure, so one-third to 40% of our revenues in any year come from emerging markets.
Three years ago, that was seen, I think, in capital markets as a very desirable and attractive thing in this Company. I think right now that's not seen as a positive. And if you look at other stocks in our sector with similar emerging market exposure, you'll see that they've also come off, order of magnitude, same amount.
Conversely, those with 5% emerging market exposure and heavy exposure in Europe and North America, for example, have done rather well; their share price has gone in the other direction.
It would be, I think, complacent for us to take the convenient view that that's the only reason; it's nothing to do with us.
I think, for sure, the legacy contracts have turned out to be worse than we or anyone anticipated. I don't take the view that that's gone extremely well, I take the view that it's been incredibly tough.
Since we raised capital with a placing we've paid over GBP200 million to the UK Government. Now, I'd be kidding you if I said that I knew that at the time. So that has not gone well.
Am I content that the management team has done as good a job as could be done wrestling with those legacy contracts? We could always have done better. For sure, we could have done better. But I don't think GBP230 million of cash paid to the UK Government could have been GBP100 million, not a chance, whoever was running this country.
I think the important thing is that we've changed the way in which we do business and around major contracts. They're just -- that contract was approved by a business unit; that just can't happen today, it's not possible. There was no peer review, there was no Group investment committee, no risk committee.
So every major contract now goes through a peer review, and I'm utterly, utterly confident that none of these legacy contracts, if they appeared today before us, would get to bidding.
I said this before, our two single biggest contract opportunities globally in the last 18 months we declined to bid on. Although the customer's calling executives, including me, in the Company, asking us to come back in, we declined. And I think, by the way, that's also reflected in our organic growth rates. And I think we may see this across the industry as a whole.
I think in some markets the industry, and not only industry, but I won't go beyond that, became obsessed with top-line growth and every new contract was another 5p on the share price, and so on. It's crazy. The risk-reward balance is not right.
So, no, I don't want to give the impression it's all been plain sailing, sunny weather, wind at our backs, not at all; it's been hard work. Not everything has gone as well as we had hoped. And, in particular, the legacy contracts have consumed a vast amount of cash, a huge amount of management time.
But I am positive about the Company's position, and its prospects. I won't shrink from that.
I think these contracts are important today, but they are diminishing importance; and in two years' time, hopefully, possibly four, they will be receding in the rear-view mirror. In the meantime, we're not going to do any more of them.
And we are seeing, from the businesses that we will carry forward, these businesses are performing better than they were performing before. We have better people in place running these businesses. That's the first step you have to take care of: have a clear strategy and good people. And we've got both of those things, and these businesses are doing better.
So if you detect a bit of confidence and optimism when I present, you're right, I am confident about our position and our prospects. But I'm not at all complacent about the share price and the effects on our shareholders. Not for a minute.
We're here to serve our customers, look after our employees, and serve our shareholders, deliver them a return. It's quite simple: those are the three things that we have to take care of, very important.
Good question. Thank you. I've lost track of what your other questions were. Yes, cash businesses.
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Himanshu Raja, G4S plc - CFO [19]
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Organic growth, [Gideon], in the cash businesses, it's a different picture for emerging markets from developed markets.
On developed markets, we saw really strong progress in Europe, and in North America, Europe driven by the GSN contract that we've spoken about previously in the Netherlands; and North America, a real driver on the CASH360 that Ashley talked about. And in the UK, first half to second half, as the loss of Tesco anniversaries out then we saw progression in the second half.
On the emerging markets, we saw a modest slowdown in Asia and the Middle East and in Latin America, really reflecting the tougher climate in those markets.
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Ashley Almanza, G4S plc - Group CEO [20]
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And, in particular, in Asia Middle East, that business includes our global secure logistics business, also known as G4Si, which typically moves bullion and other valuables between international markets; and across the board, that trade has come off in the last 12 months.
I think the other point I would make is if you -- I don't know if this is in the detail, but our UK and Ireland cash business held up well, despite the loss of the Tesco contract. I think those two businesses turned in flat profits. And we think we'll make further progress this year on the bottom line in those businesses.
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George Gregory, Exane BNP Paribas - Analyst [21]
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George Gregory, Exane BNP Paribas. Just one from me, please. Your credit rating, given the plans and initiatives you've laid out, are you confident that you'll be able to maintain your investment-grade credit rating, going forward, please?
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Ashley Almanza, G4S plc - Group CEO [22]
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Thanks, George. I wish I was the arbiter of that question and I'm not. The rating agencies will decide. I think all of you are well aware of the stance of rating agencies in current markets. I used to be in the oil business and the oil service business, so I keep an eye on that, and you can see rating agencies' posture has changed a bit.
I don't think we can really -- it wouldn't be appropriate for me to second-guess what decisions they're going to come to. We have a good dialog with S&P, which we maintain periodically through Himanshu and Nigel, our treasurer. So, we can't really comment on that.
What we can talk about is our plan. It's crystal clear that cash generation and getting our net debt down is a priority, an absolute priority. And I think we've gone through a period of two years plus, where we've invested very heavily in the Company; we've done that deliberately, but we've put a lot of cash in.
As I said a moment ago, we also had to write some rather large checks for our government along the way. That didn't include our annual tax bill, by the way, that was just on the onerous contracts. So we've written a few big checks on onerous contracts, and now we've got to really get focused on cash generation.
And one of the things that we've done at management instance is we've changed the incentive plan to put more weight on operating cash generation in the business units, and all the way through the regions and the Executive. Everyone has got more reason to focus on monthly cash generation.
So I think we can be confident that we're doing the right things, and we've got a good plan to get to where we want to be. The investment-grade credit rating will be a decision someone else takes, I'm afraid.
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George Gregory, Exane BNP Paribas - Analyst [23]
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And perhaps just following up on that, in the eventuality that the rating agency decided to downgrade you, would you seek to further repair your balance sheet at this stage, or would you opt to run with higher interest costs? How do you currently see that roadmap today?
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Ashley Almanza, G4S plc - Group CEO [24]
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I think our plan has been something we've worked on carefully. In our view, it's a good plan, robust plan, and we would not change the plan.
I think the -- Himanshu can comment on what the incremental. I think the incremental interest in 2016 would be less than GBP10 million.
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Himanshu Raja, G4S plc - CFO [25]
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Yes, it would be about GBP5 million or GBP6 million, because the step-up on the coupon only occurs at the anniversary of the next interest payment, which is May and December. So it would just be a part-year effect. And before you got to 2017 then we have clear plans in place, and improving financial strength on the balance sheet.
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George Gregory, Exane BNP Paribas - Analyst [26]
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Thanks.
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Helen Parris, G4S plc - Director, IR [27]
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Thank you. I've got a couple of quick questions that have been emailed in. Himanshu, could you talk about the level of financial costs, I think, interest costs for 2016; and a few words on CapEx, going forward?
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Himanshu Raja, G4S plc - CFO [28]
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Yes, happy to that. I think I said in my presentation, I expect interest costs to be in the region of GBP80 million to GBP90 million. We don't get the opportunity to redeem the higher-bearing debt until late 2017, 2018, and 2019, so we expect interest to be in the GBP80 million to GBP90 million range.
On CapEx, CapEx is a function of continued revenue growth. We did around GBP131 million this year. If you're modeling for the CapEx impact, I'd expect to see between GBP100 million and GBP125 million for 2016.
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Helen Parris, G4S plc - Director, IR [29]
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Thank you. Then, the four new businesses added to the disposal program, could you comment on their profitability?
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Himanshu Raja, G4S plc - CFO [30]
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The businesses have a combined revenue of around GBP400 million; that's in today's release. I'm not going to give a precise number as to the profitability of those businesses, I think that was Sylvia's question at the opening question, but they tend to carry a slightly higher PBITA margin than the overall Group PBITA margin of 6.6%.
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Ashley Almanza, G4S plc - Group CEO [31]
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Sorry, just while we're going to the next person, let me just correct one of my earlier comments. We provided GBP230 million on onerous contracts. We've written checks for about GBP150 million, so that's a cash impact; I think I said GBP200 million.
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Ed Steele, Citigroup - Analyst [32]
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Ed, Citigroup. Two questions. In note seven of the accounts, your gross margin disclosure is down -- shows you're down 130 basis points year on year. Obviously, that's a statutory number rather than your underlying number, so could you give us the underlying number ex-the strip outs, please?
And then secondly, your portfolio businesses that you've stripped out of the underlying numbers seem to have revenue down 24% year on year/ I appreciate there's probably a bit of FX in there, and maybe some of them have been sold during the year that may have affected it. What was the underlying organic picture there, please?
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Ashley Almanza, G4S plc - Group CEO [33]
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The underlying what, sorry?
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Ed Steele, Citigroup - Analyst [34]
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Organic shrinkage for revenue.
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Ashley Almanza, G4S plc - Group CEO [35]
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I think that second question, we'll probably have to get back to you offline and post that on our website. I'll ask Himanshu to address your gross margin question.
But I think in your second question you're identifying something which probably Rob was picking up on earlier, which, I think, again, to Paul's question, not everything has gone brilliantly.
I think we are pleased with progress overall with the transformation, not with the share price. But we could have sold some of those businesses earlier, because if you look at them year on year they got worse not better. On the other hand, some of the businesses that we kept and invested in and turned around got better year on year. So we had a bit of both.
We'll come back to you, I think, and we'll put on the website, the answer to your second question.
On the first question, gross margin, Himanshu?
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Himanshu Raja, G4S plc - CFO [36]
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As you know, we -- it's not our practice to disclose underlying gross profit progression. The statutory disclosures that you see in there are a function of FX, as you identify, of investments that we make, as well as restructuring benefits, which [lie] between the cost-of-sales line, where we do branch rationalization; and, clearly, on G&A.
The productivity programs that we run around DLE and Telematics are all about mitigating the effect on gross margin pressure, together with price increase programs to offset wage inflation; and then, the overhead rationalization programs are about protecting the bottom line.
You'll have seen, overall, we increased the net PBITA margin by 10 basis points from 6.5% to 6.6%. But it's not a split that we give out.
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Ashley Almanza, G4S plc - Group CEO [37]
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I'd just add that, you can tell from, I think, the results, and also from the presentation, there are two areas where gross margin did go backwards, for sure: that was UK and Europe. And if you look at the reasons for that, in UK, I think I mentioned that we had two large contracts which were both big in revenue terms, but also well above our Group average margins: that was electronic monitoring, which came to an abrupt end, for reasons well known, and our Tesco contract.
And then, in Europe, in both the Netherlands and in Hungary we had above-average margin contracts in aviation, cash handling, and systems projects, all of which came to an end during the latter half of 2014, and we, therefore, caught the anniversary effect.
So GM did go backwards in -- and those are two, obviously, big parts of the overall component.
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Ed Steele, Citigroup - Analyst [38]
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So, it would probably be fair to say that you'd expect a lesser movement next year, as it stands today?
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Ashley Almanza, G4S plc - Group CEO [39]
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As it stands today, yes, we are not, again, complacent about this. We don't assume, if we do nothing, gross margins will stand still. We have to invest in productivity, technology in order to maintain gross margins. It's a competitive world out there. But, yes, we would see -- we would hope to see less of a movement next year, Ed.
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Kean Marden, Jefferies - Analyst [40]
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Kean Marden, Jefferies. I've got two, if I may; one just developing on George's point earlier. Himanshu, I'm wondering, are you aware of how S&P would treat the OCP provision? Would they treat that as something they would strip out, or would they look at the number basically after that GBP20 million to GBP30 million reduction; and so, in your previous discussions with them, how they would treat some of the other specific items that you detailed on slide 29?
And secondly, on the bid pipeline, I think I'm correct, at the interims you gave us some additional disclosure, which looked at the development of the pipeline during July and August. I think we moved up from about GBP6 billion in June to a higher number, which I think, from memory, at the time was GBP7 billion plus. The numbers you've disclosed for December add up to about GBP5.7 billion, so maybe if you can give us some insight in to where some of the momentum might have come out of the business, particularly [for] (inaudible) anyone who is looking at emerging markets at the moment?
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Ashley Almanza, G4S plc - Group CEO [41]
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Let me take -- Himanshu will take the question on -- your questions on rating. On pipeline, I'd make two comments. We obviously had GBP1.2 billion of wins, new contracts, so that's [Get & Glow], and that excludes [Keeps], if you add Keeps then you can double the number. But Get & Grow wins of GBP1.2 billion, they come out the pipeline.
And the second thing is, as I mentioned in my presentation, we're getting better at qualifying the pipeline early, so taking opportunities. We're very happy that we've got hunter gatherers, who go out and collect opportunities. But what we want to avoid is investing too much money on pursuing those opportunities for too long and then pulling out just before bid.
So I think those are the factors: our wins, and the fact that we're getting better at qualifying the pipeline. And I would not be uncomfortable to see that pipeline become more focused still as we move forward, as long as we were confident that we could -- that we were pruning opportunities out, rather than there being a lack of opportunity in the marketplace. And it's the latter, at the moment.
Credit rating?
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Himanshu Raja, G4S plc - CFO [42]
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Yes, on the S&P question, essentially, the process S&P go through is seek to normalize the effect of the specific items, I'm sure you know from other conversations. So they'll both be adjusting the net debt for the impact of operating leases, as well as they'd be seeking to normalize, we mentioned today, the Churchill contract. The OCP provision includes the details of the Churchill contract for 22 years and, therefore, they'll seek to normalize the effect of both the net debt liability side, as well as arrive at a normalized adjusted EBITDA [measure].
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Ashley Almanza, G4S plc - Group CEO [43]
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We give them the cash flow on those provisions, that's what they're interested in.
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Kean Marden, Jefferies - Analyst [44]
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Maybe you can give it to us as well.
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Ashley Almanza, G4S plc - Group CEO [45]
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(laughter) They said [GBP20 million to GBP30 million] a year, I think.
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Rajesh Kumar, HSBC - Analyst [46]
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Rajesh Kumar, HSBC. Just following up on the UK living wage point you made earlier, when you said 1% to 2% impact was that on sales, on Margin? If you could clarify that, it would be quite helpful.
And also, clarifying the 4% to 6% organic growth guidance, when you say 4% to 6% organic growth guidance, does it include all the disposals and the new base organic growth on top of that? Or does it include the statutory revenue and organic growth on top?
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Ashley Almanza, G4S plc - Group CEO [47]
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Rajesh, I'll ask Himanshu to comment on the living wage.
We're, obviously, looking at our continuing operations on our guidance, so that we get a like for like comparison, rather than the statutory basis.
On living wage?
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Himanshu Raja, G4S plc - CFO [48]
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1% to 2% of the UK PBITA, so you'll see --
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Ashley Almanza, G4S plc - Group CEO [49]
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Profit?
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Himanshu Raja, G4S plc - CFO [50]
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Yes.
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Allen Wells, Morgan Stanley - Analyst [51]
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Allen Wells, Morgan Stanley. Two very quick ones from me. I notice you put some helpful slides and some case studies in the slide pack. The one I was looking at was the India restructuring. Obviously, it's a big business. There's not a great lot of detail in terms of numbers for us to help, what does it actually mean?
I wonder if you could give us an example, some of these actions that you've taken, how has that helped out in terms of growth in the region? What have margins been doing? Just some flavor on that would be really, really helpful.
Then second quick question, just on, particularly, Europe. Some of your competitors, peers in the main guiding area have talked about some tailwinds from the migration crisis, and some of the terrorist activity in the region. How has that impacted your business? Are you seeing additional work coming in through policing and securing, both on a government side or on a corporate side, where there's an additional demand?
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Ashley Almanza, G4S plc - Group CEO [52]
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India first, over a two-year period operating profit's up by more than one-third; and we know that wouldn't have happened if we'd just left it to continue. And when we look at the bottom line in cash generation, a one-third improvement on the base of more than one-third improvement. So, hopefully, that gives a bit of quantifiable context.
Europe, tailwinds, we have had inbound requests to provide service, immigration services, including border protection and custody of refugees and asylum seekers. In most cases, we've turned those down.
We've had also requests to provide security for, rather than to hold people in, custody to protect them in North West Europe, and we have taken on some of that business. It's quite modest at the moment. There's ongoing demand for it. There probably will be further demand for that given what is happening in North West Europe.
But that's the guiding principle at the moment: that we're happy to provide security for refugees and asylum seekers on mainland Europe, but not run border protection or custodial facilities, particularly in those areas where large numbers of asylum seekers are now gathering, i.e., South Eastern Europe. We've turned those down.
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Allen Wells, Morgan Stanley - Analyst [53]
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And the rationale, was that reputation? Or was that more risk around the contracts and the way that the customer was looking to structure them?
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Ashley Almanza, G4S plc - Group CEO [54]
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It was not the contract structure. It was, first and foremost, operational risk, looking at the operational risk, and where we comfortable that we could look after those people. And reputation risk follows from that, but it's first and foremost operational risk.
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Helen Parris, G4S plc - Director, IR [55]
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I have a couple of the Danish analysts asking if we've got any update on our Copenhagen listing.
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Ashley Almanza, G4S plc - Group CEO [56]
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Soren, are you able to -- the question is update on -- ongoing is the answer. Slightly more technical process than I think was envisaged, so ongoing. Really, it's still something that we think makes sense, but we obviously want to do it in a way which is respectful of all -- to all of the shareholders, particularly the retail shareholders. So we're working our way through that patiently and carefully.
Do you care to add to that, Soren?
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Soren Lundsberg, G4S plc - Group General Counsel [57]
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It's fine, [no].
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Ashley Almanza, G4S plc - Group CEO [58]
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Thank you very much. I think we have come to the end. Can I thank you very much for coming along, and for engaging? We look forward to seeing you at the half year. Thanks very much, indeed.
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