Half Year 2018 G4S PLC Earnings Call

GFS.L - G4S PLC
Half Year 2018 G4S PLC Earnings Call
Aug 09, 2018 / 08:00AM GMT 

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Corporate Participants
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   *  Ashley Almanza
      G4S plc - CEO & Executive Director
   *  Helen Parris
      G4S plc - Director of IR
   *  Tim P. Weller
      G4S plc - Group CFO & Executive Director

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Conference Call Participants
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   *  Andrew Charles Grobler
      Crédit Suisse AG, Research Division - Analyst
   *  Bilal Aziz
      UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst
   *  Kean Marden
      Jefferies LLC, Research Division - Equity Analyst
   *  Paul Daniel Alasdair Checketts
      Barclays Bank PLC, Research Division - Director

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Presentation
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 Ashley Almanza,  G4S plc - CEO & Executive Director   [1]
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 Welcome to G4S' half-year results presentation. If we've not met, I'm Ashley Almanza, I'm the Chief Executive; and I'm joined by Tim Weller, our CFO; and we also have Helen Parris, our Director, Investor Relations with us today. We have as usual a presentation I think that will last about 40 minutes, and then we have plenty of time for Q&A afterwards.

 We begin as usual with the customary legal disclaimer. Please read it carefully in your own time. Our agenda this morning starts with the highlights from our results which we released at 7:00 o'clock this morning. Tim will then take us through the financials in a bit more detail. I'll come back and present a business review, and then we'll go to Q&A.

 So with that I'm going to go directly to the highlights. I'm sure you've all seen our results statement this morning and you would have seen that following a first quarter decline in revenues, we had a marked improvement in our revenue generation in the second quarter with 2.8% organic growth meaning that for the first half as a whole, revenues were broadly flat year-on-year.

 By business segment, we saw our Secure Solutions business grow by 3.2% and we saw growth in all of our 4 regions, geographic regions in Secure Solutions.

 Cash as expected was down, was down 13% in revenues, and that as you know was driven by very large retail Cash Solutions contract which we began to mobilize in the fourth quarter of 2016, and we had 5 months of those comps in 2018 numbers, so that mobilization continued through to May of 2017. The effect of that year-on-year comparison is now fully annualized and so we shouldn't see the effect -- we won't see the effect going forward.

 At a profit level, PBITA came in at GBP 212 million versus GBP 219 million in the prior year. Again, by segment we maintained our net operating margins in Secure Solutions. I think that was a pretty satisfactory performance given what we've seen across the industry which is wage inflation, particularly in developed markets, North America, U.K., Europe. We managed to offset that wage inflation with a positive revenue mix and through some modest productivity gains in the first half going through to the bottom line.

 In Cash Solutions, our margin was 10.7%, down from 11% the same period last year. This was a function of course the revenue decline we saw, but also increased business and product development costs in our cash technology business and some quite exceptional attack related costs that came on the back of a really unprecedented surge in violent attacks on the CIT industry, not just G4S, but is 40%-45% of the market share. We obviously bore a big part of that attack assault on the industry in South Africa.

 I'm pleased to say that as a result of management action and government action working together, we're starting to see those attacks beginning to abate. But they had a significant effect on our business in South Africa in the first half. Those effects, revenue, increased business development and product development spend and the attack related costs in South Africa were partially, not wholly offset by a GBP 6 million profit on the early completion of a bullion contract in our U.K. business.

 Operating cash flow, we saw OCF conversion of 84% versus 80% last year and the half 1-half 2 split is following the seasonal pattern that we've seen in the business for many years now. Earnings per share was back in line with last year, GBP 0.074 per share, and the board has declared an interim dividend, GBP 0.0359 per share.

 So that's the highlights from the first half. I'd like to now turn to the outlook for the full year. When looking at the outlook, there are 3 important building blocks very obviously; revenue, margins and productivity. We know from our sales wins, new contract wins in the first half, GBP 700 million, that that will give us some momentum into the second half, and that combined with very good contract retention, I would say exceptional contract retention in the first half, those 2 factors working together give us very obviously positive revenue momentum into the second half.

 Alongside that, we expect also to see margin improvements, firstly from those new contracts and looking at the sales mix in the new contract wins including technology-enabled security solutions where we're selling our people and technology together and sales in our cash technology service line. They give us a positive sales mix in the second half with an associated margin benefit.

 And then of course price increases, we've seen across the industry higher wage levels and through the first half of the year, we've had to increase wages, enter into new wage settlements and alongside that we started a program of engaging where our -- with our customers where we don't have automatic indexation which is more common in our U.K. contract-base, but less common in North America and Europe and indeed the rest of the world. It tends to be done on a negotiated basis, so we started our price increase program with customer communications in the second quarter, and we expect to see the benefit in our margin of price increases in the second half.

 And then of course productivity, we announced last year a new 3-year productivity program designed to deliver between GBP 90 million and GBP 100 million of productivity gains over that 3-year period. More than half of those we expect to drop to the bottom line, but as we pointed out in the early stage of the program, we intended to and did reinvest a lot of the gains in building our capability, particularly in our technology businesses and in sales and business development resource.

 As we move into the second half of the year, we see the balance between reinvestment and capturing those benefits at the bottom line starting to shift, so we expect an incremental net benefit to the bottom line in the second half. So those 3 building blocks; revenue momentum, margin improvement and productivity gains underpin the positive outlook that we have for the full year.

 And on that note, I'm going to hand you over to Tim, who's going to take us through the numbers in a bit more detail.

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 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [2]
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 Thanks Ashley. Good morning everyone. As Ashley has outlined, we've reported a solid set of first half results with the improved momentum since the second quarter underpinning the positive outlook for the second half and for the full year. Let me continue with the underlying results of the business.

 Overall group revenues grew by 0.2% reflecting very strong comparatives in the U.S. Cash Solutions business and slower growth in the Europe and Middle East region. PBITA was GBP 212 million, down 3.2% with modest growth in Secure Solutions and an GBP 11 million reduction in profits in our Cash Solutions business reflecting the demand in comparatives in the North American retail Cash Solutions business.

 Investment in business development and increased operating cost, which are mainly attack related as Ashley mentioned, partially offset by the benefit from the order completion of a bullion center contract in the U.K. The interest charge was GBP 54 million, GBP 2 million lower than the first half of 2017. This improvement reflected a GBP 1 million reduction in other finance costs and GBP 1 million decrease in the pension interest charge.

 We continue to expect a full year interest charge of around GBP 105 million. The effective tax rate for the half year was 24% and earnings were unchanged compared with the same period in 2017 at a GBP 115 million with earnings per share of GBP 0.074. Non-controlling interest reached GBP 5 million, mainly driven by trading conditions in some of our entities in the Middle East where we have minority shareholdings.

 Operating cash flow, after pension deficit repayments of GBP 21 million was GBP 179 million, down around 2%, with a conversion rate of 84% of PBITA, slightly better than the same period last year.

 Turning now to the bridge from underlying results to our statutory results set out on Page 4 of today's release, as explained in the RNS which we issued on the 11th of July, this half-year we simplified our reporting by eliminating the separate presentation of portfolio businesses. Now the portfolio program is substantially complete. Therefore the results of the businesses, which were previously being categorized as portfolio, that have not been sold or closed are now included in our underlying results. These businesses delivered first half revenue and PBITA broadly in line with last year and therefore our reporting simplification had no effect on the group's underlying growth rates.

 We continue to manage effectively the onerous contract portfolio. Related cash outflow was GBP 6 million in the half, unchanged from the same period in 2017 with operational improvements enabling us to keep spend at the lower end of our expected range. No changes in the onerous contract revisions were acquired during the first half of 2018.

 Just to be aware, the onerous contract cost was a material reduction once the current Compass contract comes to an end in August 2019.

 In the first 6 months we sold our businesses in Hungary and the Philippines and secured data storage business in Kenya realizing net cash proceeds of GBP 32 million. In aggregate, these businesses generated revenue of GBP 10 million and PBITA of GBP 1 million up to their dates of disposal in the half.

 Restructuring costs of GBP 11 million after tax relate mainly to strategic efficiency programs in the Europe and Middle East and Americas regions. And underlying PBITA included non-strategic reorganization cost of GBP 4 million mainly in our Secure Solutions businesses, the same level as the first half of 2017.

 And finally, the other reconciling charge of GBP 2 million reflects an GBP 8 million charge in respect to historical employee liabilities in Asia; pretax disposal profits of GBP 4 million; acquisition-related amortization of GBP 2 million; and disposal-related tax credits of GBP 4 million.

 So that was the bridge and now let's turn to the statutory results. Statutory revenues for the half year were GBP 3.7 billion. As we already said, underlying revenues showed a small increase in the first half, and therefore the 7.5% reduction in statutory revenues primarily reflects the impact of foreign exchange movements, coupled with a reduction of GBP 139 million in revenues from businesses disposed of during the current period in the prior year, including the group's businesses in Hungary and Israel and our (inaudible) service business in North America.

 PBITA declined by 10.5%, reflecting the 3.2% decline in our underlying results, coupled with the adverse impact of exchange rate movements and the reduction in disposed businesses PBITA of GBP 8 million.

 Specific and other separately disclosed items, including investment in restructuring, profit on disposal of businesses and amortization in respect to historical acquisitions, resulted in net charge of GBP 20 million after last year's gain of GBP 37 million. The main reason for the year-on-year difference was the GBP 68 million profit on disposal of businesses which were recorded in the first half of last year. As a result, statutory earnings were GBP 48 million lower at GBP 103 million with EPS down to GBP 0.067 per share from GBP 0.098.

 This slide looks in more detail at the cash flow trends we've seen in the first half where we saw a GBP 55 million working capital outflow compared with the outflow of GBP 84 million in 2017.

 Receivables movements resulted in working capital outflow of GBP 20 million, GBP 31 million better than 2017. And the decrease in payables over the first half of 2018 resulted in working capital outflow of GBP 30 million compared with an outflow of GBP 40 million last year.

 Overall operating cash conversion of 84%, that reflected the typical seasonal pattern with lower conversion in the first half of the year than that which we normally see at the full year. We continue to expect operating cash conversion of over 100% for 2018 as a whole.

 Now let's look at cash flow and net debt across the half. This slide shows the full movement in net debt, starting with the year-end 2017 net debt of GBP 1.5 billion. As I said before, underlying operating cash flow was GBP 179 million.

 In terms of investing activities, we invested GBP 50 million in CapEx and finance leases and we continue to expect this to be in the range of GBP 100 million and GBP 120 million for the full year.

 The GBP 10 million restructuring outflow is mainly in respect to strategic restructuring investment in our Europe, Middle East and Americas regions. And we received net cash consideration of GBP 32 million from dispose and made no significant acquisitions.

 Looking at the use of funds of GBP 223 million, we paid net interest of GBP 66 million, which is higher than the first half of 2017 reflecting the timing of annual interest payments on certain of our recent bond issues.

 Overall, we anticipated cash interest cost for the full year broadly in line with the income statement charge of around GBP 105 million. Cash tax paid was GBP 48 million, in line with previous guidance.

 Dividends paid to equity and minorities were GBP 104 million.

 After a small foreign exchange movement, we finished the half with net debt GBP 79 million higher than December year-end, the amount of just GBP 1.5 billion reflecting the normal seasonality of the business.

 And then on the financing front. We had very strong liquidity with GBP 967 million of cash and cash equivalents and in addition, access to unutilized, but committed funds of GBP 1 billion from our revolving credit facility.

 Our recent 7 year EUR 550 million Eurobond, which we launched in May, was more than 3x oversubscribed with the order book of GBP 1.7 billion. This covered our July maturities in full and a large portion of those in December 2018.

 This means we've now secured interest cost savings which will amount to an annualized level of around GBP 20 million from the end of 2019 onwards following the redemption of our more expensive debt.

 Our net debt to EBITDA finished the half-year at 2.7x, unchanged from the last half-year. And we continue to expect it to be 2.5x or below by the end of the year.

 And with that I'll now hand back to Ashley.

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [3]
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 Thank you. Thanks Tim. Turning now to our business review. I think you all know that 4 years ago we launched a portfolio program and the objective of that was to improve our strategic focus. Along the way we sold more than 50 businesses, raised substantial cash proceeds, improved our net operating margin, but very importantly, we improved the strategic focus of the company.

 At the same time and in parallel we began investing in strengthening our resource and capability across the company and this was in general management, technology, skills and capability, customer-facing technology as well as back office technology, business development, and very importantly product development.

 And bringing these 2 things together, we completed substantially our portfolio program at the end of last year and we've made sufficient progress with strengthening our resource and capability, both customer-facing and support functions to reorganize the group. And from the 1st of January this year we created a global cash division and we consolidated our Secure Solutions business into 4 regions.

 And so today we have a much more focused group. Our global cash business operates in 40 countries, represents 17% of our revenues on our Secure Solutions business, which operates in 90 countries. Obviously represents the balance 83% of our revenues.

 And what we'd like to do now is just touch on the strategic position of those 2 businesses, how they performed in the first year and where we -- first 6 months I should say, and where we see them going in the second half of the year and further beyond.

 So starting with our Secure Solutions business, and the market context. I think this is well understood by everybody, but there's significant change going on in the security market at the moment. Historically there have been 2 major, let's say product and service groups or markets within the overall security market.

 On the one hand, traditional manned security services, everything from static manned guarding through to more sophisticated mobile deployments. And then security technology products and services.

 And increasingly in recent years we've seen these markets starting to converge as players, G4S and typically larger players begin to offer customers integrated solutions. The drivers for that change, well, there are many factors; the 2 most important in our view, firstly on the demand side. Our customers and particularly our larger customers have much more complex security needs today and they're looking for more sophisticated solutions to address those needs. And typically those solutions involve bringing people and technology together to respond to their needs.

 So as a demand-side driver, that continues to evolve in one direction which is greater use of technology. Customers are also looking for lower total cost of ownership and that's supported by supply-side factors because over time the unit cost of labor continues to rise and this, if you like, the normalized unit cost of technology continues to fall, and that presents a very obvious substitution opportunity, economic opportunity. That's most prevalent today in developed markets where the arbitrage between technology and unit labor costs is greater, that is what we have seen and what we continue to see.

 G4S has not only been responding to this trend in the marketplace, but in fact we've been helping to drive this trend and we've been doing that by investing in resource capability and changing the way in which we organize ourselves and the way in which we go to market. So a slide some of you've seen before, 6-7 years ago the company possessed many, but not all of the ingredients that you would need to successfully go to market with an integrated security offering.

 In the last 4-5 years, we've been investing particularly in risk consulting, in security software and secure integration services. We've also brought in new management talent with extensive technology experience and changed the leadership in our technology business, which has given us the ability to offer bundled offerings. So combining security offices with technology, but not all of the technology, and perhaps not in all cases being involved at the front end in the design, build, operate, maintain.

 Today in North America, U.K. and Europe, we are able to offer an integrated service to our customers starting with risk assessment through design, build, operate and maintain. That brings very obvious benefits to our customers, lower total cost of ownership, greater functionality and of course benefits for us. In general, we expect a longer commercial relationships with these customers, so longevity in our contract portfolio and an opportunity to earn a higher margin.

 The capability that we have developed in North America, U.K. and Europe we're now extending across our global market footprint. We now for example have secure integration capability in 43 of the 90 countries in which we operate. Our technology-enabled security revenues represent 42% of our total revenue-base. That 42% we expect not only to grow, but to deepen, that is to say, to upsell to the customers that represent that 42% today.

 We have over 0.5 million monitoring connections globally, and alongside the investment we've made in our own resource and capability, we've built strategic partnerships that give us a qualified supply chain to not only broaden our offering to our customers, but also we think to more efficiently manage your fixed cost-base.

 So that's the strategic context, the strategic position of the business. I'd like to now look at each of our new regions in turn, how they performed in the first half and what the outlook is for the second half, starting with Africa, where we saw organic growth of 4.2%, and a PBITA margin of 7.1%, which was a 20 basis point improvement on the same period last year.

 That was principally driven by change in revenue mix with a good increase in our systems and technology business, particularly in Southern Africa and East Africa. As we look ahead to the second half, we can see that the new contract wins that we've had in the first half of the year in mining, transportation, telecommunications, manufacturing and distribution will give us a positive revenue mix in the second half of the year.

 Our business in Americas which combines Canada, U.S., Latin America, saw organic growth of 4.1%. The strongest drivers of that were the 2 areas where we have been investing for the last few years, which is corporate risk services and secure integration, and that of course not only contributes to the top line, but gives us an opportunity to earn a higher margin. We saw margin go up in the U.S. against a background of tight labor markets, probably tighter than in any other market in which we're operating today in the U.S. and we managed to offset wage inflation with positive revenue mix and some modest productivity gains.

 We expect those productivity gains to increase in the second half. We continue to describe our growth in the U.S. as self-constrained, that is to say, we continue to see some contracts coming to market on terms and conditions which we do not feel able to take on or willing to take on, I should say.

 In the last 12 months easily over $100 million of revenue that we've looked at and said that's for somebody else, time will tell whether or not that commercial discipline is being the right decision, the right path to take. As we look ahead, we continue to see a good growth in a number of sectors, particularly energy, IT, and healthcare, where we've got a very strong proposition in those verticals, and we continue to see positive revenue mix effects particularly in the second half of this year on the back of our wins in the first half. We expect greater contribution from our productivity program to drop through to the bottom line in the second half of the year.

 In Asia, organic growth of 7.7%, and a margin also of 7.7%. Good contract wins in IT, transportation. We saw our business in India stabilize and begin to grow again. And we maintained our net margins again, with our revenue growth and revenue mix offsetting wage inflation which we started to see in Asia as well, I would say above trend wage inflation.

 The outlook for the second half is driven firstly by first half contract wins as with our other regions. Again, positive revenue mix and a price increase program which is more customary in Asia, our customers are more used to an annual-semiannual price increase program and we're getting on with that now and expect to see the benefits of that in the second half.

 And finally, our Europe, Middle East region in Secure Solutions, we saw revenues basically flat year-on-year. You will know that in the Middle East we had significant headwinds last year. That business is beginning to stabilize on the top line. And we saw quite strong growth in our risk management business which principally delivers services into the Middle East.

 Europe, again we're seeing constrained growth driven by a tight labor market that has 2 effects, obviously vacancies, direct staff vacancies, which affects your margin as well. And also commercial terms where let's say prices don't keep up with wage inflation. And we've had to make some judgment calls on that just as we did in North America.

 A margin of 6.7% reflects both the revenue trends and the labor costs. As we look ahead again on the back of a strong first half in terms of new contract wins, contract retentions, we have revenue momentum and some productivity benefits dropping through to the bottom line, and alongside that, in Europe we've got a Pan-European recruitment drive going to reduce over time and reduce staff turnover. So it's a recruitment and retention program which we believe will deliver benefits in the form of lower overtime and lower staff turnover.

 So I want to turn now to our new cash division, which as I mentioned earlier represents 17% of our revenues. You will know that we have a global cash business operating in 40 countries around the world. That cash business offers a full spectrum of products and services. Most obviously conventional cash services, CIT, cash processing, ATM replenishment, ATM engineering, and international secure logistics. Those service lines form the bulk of our conventional cash business and we offer those in all of the markets in which we operate today.

 We also have a new set of products and services which have emerged in the last few years and that's our cash technology services, both in terms of recycling the hardware, and the software and service platform that we sell alongside the hardware which we describe as cash technology services. That business is not present in all of our markets or rather those service lines are not available in all of our markets. They're principally operating in North America, Southern Africa and we're starting to get going in Europe and in Asia.

 Now we think that G4S is uniquely positioned to take advantage of changes that are occurring in the payment industry generally. And in particular we see customers, be they bank customers, retail, leisure customers looking for ease of use and of course lower cost of cash handling. When we look at the industry as a whole, obviously at a basic entry level, the whole industry is able to offer standard CIT services to customers.

 Many -- most competitors are able to offer some form of cash processing via ATM services, although the level of sophistication varies greatly. Once you get to mid, large players, more or less everyone can offer those services and a few can offer smart safes and some form of bank cash processing, maybe bank automation.

 When you get to the Big 4, which we claim to be a part of, G4S, Prosegur, Loomis, and Brink's, they can offer alongside us a much broader product offering to customers and service offering, including utilities bank branch outsourcing and recyclers.

 We believe that we continue to be the only one of the major players or any player in the industry that can offer end-to-end cash management, including cash recycling and a software and service that goes with that hardware. And more recently we launched G4S Pay which gives some of our customers the ability to process both cash and electronic payments in a single solution.

 We intend to use that advantage to grow our business. And as we look ahead, you can think of our cash business I think as having a very clear set of priorities. On the left-hand side, this is the position as we see it today. We have a well-established conventional cash business, offering the services that we all know. And we do have a bank outsourcing business most obviously in the U.K. and probably our best example in The Netherlands where G4S processes most of the cash handled in The Netherlands is a cash utility owned by the major banks called GSN and we provide most of the services that that utility delivers in The Netherlands.

 So we have a model which we know works. It delivers lower unit cost to the banks and the retailers in The Netherlands and higher quality service. So we know it works and our goal of course is to take that model and apply it in all of the markets in which we operate. We do some bank outsourcing today in the U.K., but the big prize as we look ahead in conventional cash services is to get more banks to outsource their cash processing, cash handling to G4S.

 And then we have our new products and services, retail cash solutions and bank automation. Bank automation we actually launched in Southern Africa. We now have over 200 bank branches using our bulk teller automated services which means you can move those tellers from branches and customers can interact directly with our devices and our software platform. We intend to roll it out in other markets.

 And then retail cash solutions which encompasses CASH360 as it's known in Europe, depositor in Africa and Asia and of course Retail Cash Solutions as it's known in North America, a very exciting business. And when we put those 2 together, bank automation and Retail Cash Solutions, we believe that over the next 3 years to 5 years we'll grow that business by 2x to 3x. That business has the clear potential to deliver more profits than our global cash business today, our conventional cash business. And we're obviously -- we've been investing very heavily in product development, general management and sales and business development resources in that business.

 Today in this business we have coming up for 2,000 employees now globally. Some of those -- most of those are in what we call the service part of that business, that is back office services that support the overall end-to-end cash management for our clients. But a good number of those are technologists, including software engineers and specialist sales people who are taking this product to market. So they have a different profile from the employer that we've typically employed in that business.

 If you look at our sales product development and support costs in this business, the new products bank automation and Retail Cash Solutions, they're running now at about GBP 20 million per annum. All of that is expensed.

 So turning to the first-half performance which both Tim and I have touched on, so I will move through quickly. We've already discussed the year-on-year effect of the large Retail Cash Solutions contract in North America and the impact that had on revenues that's now annualized. PBITA margin, as already mentioned, the effect of revenue, but also product -- increased product development costs, attack related costs in South Africa partially offset by the bullion contract.

 And then more importantly the outlook, the sales wins that we've had in the first half of the year, together with a very large now pilot program again that's part of the increase in our cost-base in this business. We have a very substantial pilot program principally in North America, but also some in Europe. And as we convert those pilots they'll begin to contribute to not only revenue, but margin.

 And then as part of our overall productivity program, we have a restructuring program which has already started, addressing both direct and indirect costs that will contribute to the bottom line in the second half.

 So in wrapping up, before we go to Q&A, I want to return to the outlook. Three very important building blocks. Revenue driven by our contract wins and contract retention in the first half of the year. Margin driven by an improving sales mix and a price increase program; and productivity driven by the ongoing program that we announced last year. All of those building blocks give us the confidence in the full year outlook for the group.

 And on that note we will turn to Q&A. Could I ask you please because we're on a webcast, so could I ask you please, if you want to ask question, raise your hand, we'll bring a microphone to you and if you could give your name and affiliation then people not in the room can know who is asking the question. Thank you. Who has the microphone? Could you go to the gentleman who's hand raised back please?

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Questions and Answers
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 Bilal Aziz,  UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst   [1]
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 I'm Bilal Aziz from UBS. Just 3 questions from me please. Firstly you flagged GBP 700 million worth of new contract wins. Can you perhaps split that by cash and secured solutions? And tied to that you mentioned some of the progress you're making with CASH360 pilots. Perhaps just a number on store numbers you expect to ramp up on the second half of the year? Second question, you're quite clearly flagging wage inflation. Can you perhaps give us indication of the exact level you're seeing in the U.S. right now and your staff turnover related to that? And lastly just on Middle East, you are flagging some stabilization there as well. You had a significant drop through on the negative side in margins in the second half of last year. So where do your margins stand in the first half and do you expect a similar uplift as you go up in the market or has pricing dynamics changed?

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [2]
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 Tim is taking that. I'm not sure we're going to record all of your one question with -- your multi-headed single question. So we're trying to answer all of those and then we'll come back if we've missed anything. So on wins in the first half, they tend to -- and this half is no different, they tend to follow the revenue-base, so if you think about sort of 80-20 split, that's a good rule of thumb for contract wins. In terms of pilots, number of stores was your question that we expect to ramp up. Actually we've already started to contract to new contracts last month July that will begin to contribute. They're not the same scale as the very large retailer that we mobilized in 2017. But they are let's say the first part of a large program. In other words, we are mobilizing the first part of those contracts before I think it's Black Friday -- is it Friday or Thursday?

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 Helen Parris,  G4S plc - Director of IR   [3]
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 Friday.

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [4]
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 Friday, Black Friday. And then we stop and we'll start again in January on those programs. That's probably over the program those parts this year and early next year 1,000 stores. And then the pilot program is a significant multiple of that number. What we can't say today is the rate at which those pilots will turn into store mobilizations. We'll have to give you that update either at the third quarter trading update or when we present full year results. Wage inflation varies a great deal. I mean we talk about the U.S. as a single market, but of course there are many, many wage markets in the U.S. and it's literally on a location-by-location basis is a broad spectrum. I think we're seeing what pretty much everyone is seeing which is mid-single-digits maybe 4% to 5% in some markets and 0 in other markets. So it's a mix and as I say, we have a structured customer engagement program, ongoing dialogue with customers because the U.S. is much more negotiated price program rather than indexation program to pass those costs through. Turnover right across the industry has picked up. I would say 2 years ago we had run at about 20%-25%. That's closer to 45% now. So very high rates of turnover in tight markets. There's some markets where we have 0 turnover, but in those markets where we're seeing tight labor markets we're seeing that sort of level of turnover.

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 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [5]
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 The final one was Middle East --

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [6]
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 Middle East.

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 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [7]
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 -- the final question and margins in the first half versus the second half last year and the first half of last year. We saw margins in the first half of this year about 200 basis points lower than the first half of last year in the Middle East Secure Solutions, so quite a big margin erosion. That is broadly in line with the second half of last year. So it's continued at about the same level. Looking at the last few months of the half, it's beginning to move up and yes, we do as we move into the second half expect margin accretion in the Middle East as we do in a number of our other regions.

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [8]
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 Thanks Tim. Could we take our next question? I think that's Paul. It is?

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 Paul Daniel Alasdair Checketts,  Barclays Bank PLC, Research Division - Director   [9]
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 It's Paul Checketts from Barclays Capital. I've got a couple questions on the Cash Solutions side please. Are you able to split out what the cash in transit and cash processing businesses did in the first half in terms of organic and margins? And then with regards to the cash technology side and the prediction that you'll do 2x to 3x growth, what's the base? Is it about GBP 200 million of annual revenues at the minute from what you're saying that could [treble]?

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [10]
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 So the 2x to 3x we're focused on is profit. So we'll -- these businesses are quite different. I know you know this, but I'll say it anyway for completeness, but our conventional cash business is a capital-intensive business with a let's say standard industry OpEx profile that gives margins 10% to 12%. That's the norm. Our new service lines are very different. They are not nearly as capital-intensive. We employ quite different people, so the OpEx on a unit basis is higher, but the margins also significantly higher. And that's the reason for us taking the view that over the medium term this has the potential to contribute at least and probably more than our conventional cash business to the bottom line. So it's not -- and we should be clear -- we will be clear about that, it's not a comment on the revenue because the revenue line will follow really the model that customers embrace and there are 2 models that we are able to offer today. The first is the one that we went to market with originally which is where we sell the software, the hardware and the services and integrated package. Some customers still want to do that, but they want to buy the hardware directly and that has an impact on the revenue growth. And so for us it's much easier to provide -- and I think not just easier, but more sensible to provide guidance on where we see the profit contribution coming from that business because in the end it won't -- the bottom line will be more or less the same whether or not customers buy the hardware or we buy the hardware there might be a handling fee on it, but that's not where we do and where we're going to make the money. We make the money with the software and the service integration that we provide. So that's a comment on where we see the 2x to 3x and you can see the base profit we disclose today from our conventional business. We don't provide on a half-year basis the split in organic growth and margins. But in simple terms, our new service lines actually had negative growth. That's the minus 13% that is driven by the big contract mobilization. If you strip that out.

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 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [11]
------------------------------
 It'll be slightly positive.

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [12]
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 Yes, 1%.

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 Paul Daniel Alasdair Checketts,  Barclays Bank PLC, Research Division - Director   [13]
------------------------------
 And if you look at the second half with the Walmart contract, would that be at margin levels now that are consistent with what you would expect across the contract or is there -- does it continue to ramp up? What would be the shape of profit really once the hardware sales are out of the way?

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [14]
------------------------------
 So I've asked Tim to comment on the year-on-year effect in the second half, but I just wanted to say our comments on margins and revenue are not contract-specific where it's clearly not in our interests and nor our customers -- various customers' desire to comment on individual contracts, so the answer is in relation to the business. We understand your question, but it will be in relation to the business as a whole. Tim, would you...

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 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [15]
------------------------------
 We have now got to the point when the effect of that large contract is "annualized" and so there should be no distortive impact between the second half of '17 and second half of '18 from that contract. So effectively we're now reverting to effectively the organic growth excluding that -- the impact of that big mobilization in the first half -- well, second half of '16 and first half of '17.

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [16]
------------------------------
 That was a [dual]. I think I saw him first. Sorry, Kean. Could we go to Andy?

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 Andrew Charles Grobler,  Crédit Suisse AG, Research Division - Analyst   [17]
------------------------------
 It's Andy Grobler from Crédit Suisse. Just a couple if I may please. At the end of June you had GBP 1.3 billion in cash on the balance sheet and I know part of that is just the bond you issued in May. What is the right level -- once you go through this process, what is the right level of cash as a proportion of sales or in absolute terms? And then secondly, portfolio, I know those businesses are now shifting to the main numbers, but there's still a little bit left which looking at it looks to be pretty heavily loss-making. What are the plans for that business which looks to be in Cash Solutions? Can you close it, sell it, improve it, what do you think?

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [18]
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 So I'll take the second -- I'll take the second part first and Tim, ask you to take the first part please.

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 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [19]
------------------------------
 Yes.

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [20]
------------------------------
 All the options on the table we can restructure that business turnaround which is where the effort is focused right now, or ultimately deal with it in the same way that we've dealt with all the other businesses that we're not able to make -- we were not able to make sufficient progress with. So all options on the table, but the focus of the effort right now is on restructuring and turnaround.

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 Andrew Charles Grobler,  Crédit Suisse AG, Research Division - Analyst   [21]
------------------------------
 And what's the kind of time line for that because looking at it, it looks to be minus 20%-odd margins, it's...

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [22]
------------------------------
 Look, we don't -- I mean our plan is to sort that out certainly in the next 12 months one way or another.

------------------------------
 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [23]
------------------------------
 Yes, and on the -- what is the appropriate level of cash, you're right, the level of cash we have at the moment is rather more than would be appropriate, but if you look on Page 12 in the pack we've handed out, there's a analysis of the upcoming bond maturities and clearly having raised over EUR 1.5 billion between '16 and first half of 2018 in the bond market, we are pre-funding a lot of the forthcoming, what is it, GBP 1 billion of redemptions between 2018 and 2019. So you'd actually expect that level of cash to reduce. As I said in the presentation, we've got a GBP 1 billion worth of revolving credit facility. The idea with revolvers is you don't draw them, but I would expect the bulk of that excess cash we have at the moment to be used up over the remainder of this year and into next year as we redeem what are some pretty expensive tranches of debt. Hence the point I was making about a lot of the interest benefit we talked about last year in terms of the overall performance improvement of the group has now been locked in by virtue of the bond issues we've done in anticipation of redeeming the forthcoming tranches of debt where I think the -- yes, the most expensive was 7.75% rate replaced with debt somewhere between 2% and 3%, hence the bottom line benefit we anticipate.

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 Andrew Charles Grobler,  Crédit Suisse AG, Research Division - Analyst   [24]
------------------------------
 So on a -- kind of a normalized basis that with revenues where they are now about GBP 300-odd million is what you think is necessary to run the business?

------------------------------
 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [25]
------------------------------
 Yes, I mean clearly it's not possible to drip fund and therefore we've gone to the market with benchmark-sized bond issues which is why you can end up with large amounts of cash available in anticipation of the redemptions. So, yes.

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [26]
------------------------------
 Could we go to Kean please in the...

------------------------------
 Kean Marden,  Jefferies LLC, Research Division - Equity Analyst   [27]
------------------------------
 It's Kean Marden from Jefferies. Can I first of all just ask a couple of questions regarding the H1-H2 margin bridge because obviously to get to a full year consensus you need quite a big reversal --

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [28]
------------------------------
 Yes.

------------------------------
 Kean Marden,  Jefferies LLC, Research Division - Equity Analyst   [29]
------------------------------
 -- big swing in the margin. So I suppose the 2 areas that'd be particularly helpful if you can shed some light. First of all, just the reinvestment of gross efficiency savings, which I know we've touched on in the past and you've been resistant to providing specific numbers, but I think more additional information would be helpful. And then secondly, if you have any insight into sort of un-recovered wage rate inflation in the first half, so effectively the gap between price and wage rate inflation and therefore how that would swing into the second half. And then an unrelated question. Just maybe some insight into why your guidance for restructuring costs has moved up for the full year?

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [30]
------------------------------
 So restructuring and productivity realization. We said GBP 90 million to GBP 100 million when we launched the program, GBP 20 million of which is the financing which Tim and [Nigel] have already secured for us, although the benefits don't come -- start to come until next year and we get the full benefit the year after that. So if you take that off, that gives GBP 70 million to GBP 80 million and I suppose crudely that's sort of GBP 20 million to GBP 30 million per year on a straight line basis. But obviously it takes a while for the program to get set up and get going so there's a backend loading, so you make an adjustment for that. And so in the first half of this year I would say the contribution to the bottom line was modest. So significant reinvestment in sales, business development and in particular product development and things and service development in secure integration and on our cash technology business where we're spending proper money now. As we move into the second half I think without putting a specific number on it and being too granular about this you would appreciate some of this is -- affects the shape of our organization and affects people. So we tend to communicate with them first and then reveal the results afterwards. But in broad terms if you were to take that simple annualized run-rate, assume very little in the first half, so divide by 2 and then divide again, we're starting to get into the postal code, so about a quarter of the run-rate would be what we would start to expect to see. We might not get all of that in the fourth quarter, but as I think the other part of your question referred to, we have started to accelerate the program which is why we expect to get more this year than we previously anticipated. That -- you can look at it a number of ways, perhaps too much caution at the start of the program, but now that it's up and running and on track we are finding opportunities to accelerate the program and we're going to take those opportunities, hence the slight bump up in the run-rate. I think the other part of your question was wage price inflation. Varies quite a lot depending on the markets. So in the U.K. we're able to close that gap more quickly partly because of indexation. In the U.S. I would say the gap is being reasonably significant in the first half, so if inflation is running at let's say 2% to 4%, we've recovered less than half of that. In emerging markets, it varies quite a bit and historically at least in Asia customers have been -- and Africa have been accustomed to and willing to accept more than one price increase per year. Everybody is cost-conscious now and we have to make a judgment about whether we go to a customer once or twice a year. And so actually in emerging markets it's been a similar pattern to developed markets this year where I would say the gap has increased on prior years. It's a bit of art to this because it's about account management. Many in this audience will know all about that. It's about account management and I think there is some correlation between our customer satisfaction metrics and our ability to negotiate price increases. So we track those as well, we look at our net promoter score that affects when we go to the market. Long story short, we recovered less than 50% of the wage inflation in the first half. Yes. Well, did I cover all of that? No? What did I miss?

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 Kean Marden,  Jefferies LLC, Research Division - Equity Analyst   [31]
------------------------------
 Presumably the higher restructuring cost guidance because you accelerated the progress?

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [32]
------------------------------
 Yes, I beg your pardon. Yes, yes, sorry. I think we've got an online question apparently. Could you give the microphone to Helen please?

------------------------------
 Helen Parris,  G4S plc - Director of IR   [33]
------------------------------
 So the question comes from Rogers at HSBC and so first question is could you comment on the impact of labor turnover? I think probably in the U.S. but I guess --

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 Ashley Almanza,  G4S plc - CEO & Executive Director   [34]
------------------------------
 Yes.

------------------------------
 Helen Parris,  G4S plc - Director of IR   [35]
------------------------------
 -- as a general point? And then the other question he has is whether we capitalize any mobilization costs for the retail Cash Solutions business?

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [36]
------------------------------
 Second one is quite easy, the answer is no. I think that's right.

------------------------------
 Tim P. Weller,  G4S plc - Group CFO & Executive Director   [37]
------------------------------
 It is in the United...

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [38]
------------------------------
 Just checking, but yes, that is right. No, we don't capitalize mobilization cost of anything. Lay the impact, yes, so let's take North America, U.S. and Canada combined. If you're running at sort of levels of turnover that we normally see, so let's say in the range of 20% to 30% for our business that can cost you $15 million to $20 million a year. Where does the cost come from? Comes in screening, selection, training, deployment, uniforms so on. Obviously as that goes up, you can take steps to mitigate that effect, the cost of that. You can get your training costs a bit sharper and we've seen that across the industries. So for example in North America we know now that our biggest competitors if we look at for new hires, training of what we call a [CPA] which is a high-end security officer, we put twice as many hours into initial training as our major competitors. So the question is are we getting the benefit of that in the marketplace? Can we restructure that training program to make it more efficient? And the answer is we think we can. But today we are spending roughly twice what our competitors are spending on training of their CPO. Anyway, so I think that's the sort of normal run-rate in the course of a year for 20% to 30% turnover in a business like North America would be $15 million to $20 million cost. Paul has another -- oh sorry, did -- go there, we'll come back to you, Paul. Was there another question? No. Could you take the microphone up there behind you please to gentleman with his hand raised?

------------------------------
 Paul Daniel Alasdair Checketts,  Barclays Bank PLC, Research Division - Director   [39]
------------------------------
 Can I just come back to the Cash Solutions retail side please and it's more of a big picture question that --

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [40]
------------------------------
 Yes.

------------------------------
 Paul Daniel Alasdair Checketts,  Barclays Bank PLC, Research Division - Director   [41]
------------------------------
 -- it feels like at the minute you've got a lead on the competition, could you explain to us what some of the constraints are internally in terms of how fast that business can grow? And is there a case that given you've got that advantage currently that you couldn't be investing more and being more aggressive and expanding the growth of that business including in Europe and the U.K. where you have established cash in transit businesses?

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [42]
------------------------------
 A very good and very difficult question. I said we're spending around GBP 20 million a year now on sales, business development, product development and service support in let's call it cash technology service line, also in the P&L, don't capitalize that either and which is right, it's not a complaint, that's how you should do it I believe. But -- so that's a judgment call. We want to be judicious in the use of shareholder funds. We are looking at whether we -- because we have -- when we started this journey we set up effectively 4 centers of excellence and they came -- they had their own funding and their own ideas and we are frankly looking at whether or not we can now rationalize that and get a better bang for buck on development. That's one area to both reduce cost and accelerate -- have a more standardized product offering right across on a global footprint and then a standardized go-to-market proposition that goes with that product and accelerate the sales. We've hired more sales people, more support staff. We think we got the balance right, but it's a constant question for us, should we be more aggressive, should we go harder? We are also spending on new product development, so going back to some of our first customers with the next generation of the product. So we've got a lead that we want to keep. We take the view that we -- somebody will have something to offer in -- doesn't matter whether you're in America, Europe or Asia, the world's too big and too full of smart people for us to be out there on our own forever. So you raise a very good question, our goal is to go as hard as possible. I think we're running 23 pilots at the moment. We're carrying quite a lot of water. We'd like to expand that some more. Not sure I'm really answering your question other than to agree with you it's a very important question for us and we are -- we feel like we are investing a lot of effort. We would like to put more money to work, but we don't want to do that in a reckless way. We don't want -- don't want to just throw money at the opportunity, we want to do it in a measured way. I do think it's possible that we could go faster.

------------------------------
 Paul Daniel Alasdair Checketts,  Barclays Bank PLC, Research Division - Director   [43]
------------------------------
 And that's U.K. and Europe where you have the risk of cannibalization?

------------------------------
 Ashley Almanza,  G4S plc - CEO & Executive Director   [44]
------------------------------
 Yes, I mean the other -- I missed a part of the answer. The other -- I hesitate to say this, but the other constraint is it's always us in the end that's the constraint. But the -- I think I've mentioned before when you look at the sales process for these services, it's not like CIT or even manned security, it's a longer sales cycle with somewhat more complex set of stakeholders. Typically, if you're talking about retail you need to persuade your bank partner. The first customer -- the first internal customer or stakeholder that normally buys into this is the treasury department or the finance department because they can see the substantial benefits it brings. You have to convince store operations and IT as well and there's quite a long qualification process to get your -- our IT systems accepted. They talk directly to the customers, IT systems and the bank's IT systems. Those of you who work in banking will know, many of you, that the compliance process is quite extensive. So that's a -- that is to some degree a rate-limiting factor. It's also a huge advantage for us as we now have 4 partner banks for example in North America. We are pretty sure that no one else has got a fully -- even one fully integrated bank partner. Again that will change, but it takes -- it took us best part of 2 years to get our first fully integrated platform where corporate, treasury and the bank agreed to have our software talking to their systems. But that is a rate-limiting factor, the speed at which you can persuade customers and then of course they have competing priorities. I mentioned earlier that everything stops basically between October -- you might run into the last week of October, but November you stop, you don't start again till maybe second or third week of January. So we -- I mean I could sit here and grumble all day. It's a great opportunity and it's a perennial question for us, should we be putting more money and going harder and we're trying to get it right, Paul, but time will tell whether or not we've under-burned or over-burned on that. Like to go faster for sure. Okay, any other questions?

 Thank you very much for coming along and for engaging and look forward to updating you with our third quarter trading update and full year results. Thank you.




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