G4S plc UK DK : Final Results

13 March 2012

G4S plc
Preliminary results for the year ended 31 December 2011

Developing markets and outsourcing trends continuing to drive growth

* at constant exchange rates and adjusted for discontinued businesses

Sales up 4.7% (with 4.5% organic growth) to £7,522 million. Adjusted EPS up 6% to 22.8p

• Developing markets revenue of £2.2bn (30% of group total and targeting 50% by 2019) with organic growth of 9% 

• Achieved cash conversion target of 85%  

Security remains core to our global strategy and continues to provide growth opportunities

• G4S has a proven track record in delivering strong performances in security across a number of customer sectors, particularly where security and safety risks are a strategic threat 

• Increasing trend from government and commercial customers to outsource, reshape and embrace innovative, cost reducing, integrated security solutions 

• Will take advantage of trends for integrated facilities services in suitable markets - for example the UK government sector 

• In large developing markets we will expand beyond security where the market opportunity is large and there is significant growth potential - for example, Brazil, India and China 

Small/medium sized acquisitions a key component to deliver strategic objectives

• Expected acquisition spend of around £200m in 2012 with focus on developing markets  

Continued focus on business improvement

• Establishment of service excellence centres for all core services - manned security, cash solutions and care & justice services 

• Continued investment in sales and business development processes to continue to drive growth  

• Cash solutions division (comprising seven cash solutions businesses) now integrated into the regional structure 

• More active divestment planned of non-core or under-performing businesses 

• Overhead review to ensure organisational design is aligned to strategy and economic environment   

Nick Buckles, Chief Executive Officer, commented:

"Today we have announced our seventh consecutive year of underlying revenue, PBITA and dividend growth since G4S was formed in 2004. The business has performed well despite continued global economic uncertainty and has good trading momentum. We have delivered further strong organic growth of 9% in developing markets (30% of revenue and 34% of PBITA).

Looking forward, we are encouraged by the performance and outlook for our US commercial and the UK government and commercial businesses. However, the outlook for our developed markets cash solutions and Continental European secure solutions businesses remains muted and we continue to focus on cost base control.  More generally, we won and mobilised a number of significant contracts in 2011 and expect outsourcing trends to continue. Overall, we are confident about the outlook for 2012 when we expect to deliver organic revenue growth higher than 2011 together with the additional contribution from the London 2012 Olympic and Paralympic Games contract. This confidence is underlined by the 8% increase in our dividend."

For further enquiries, please contact: +44 (0) 1293 554400
Nick Buckles     Chief Executive Officer
Trevor Dighton                  Chief Financial Officer
Helen Parris     Director of Investor Relations

Adam Mynott                Director of Media Relations          +44 (0) 1293 554400
John Sunnucks                Tulchan Group                        +44 (0) 20 7353 4200
David Allchurch                Tulchan Group                         +44 (0) 20 7353 4200

High resolution images are available for the media to view and download free of charge from www.vismedia.co.uk.

Notes to Editors:

G4S is the world's leading international security solutions group, which specialises in outsourced business processes in sectors where security and safety risks are considered a strategic threat.

G4S is the largest employer quoted on the London Stock Exchange and has a secondary stock exchange listing in Copenhagen.  G4S has operations in more than 125 countries and 657,000 employees.  For more information on G4S, visit www.g4s.com.

Presentation of Results:

A presentation to investors and analysts is taking place today at 0830hrs at the London Stock Exchange.  

Webcast
http://view-w.tv/p/707-803-10460/en

Telephone Dial-in Facility

The details for the telephone dial-in facility are as follows:-

Standard International Access: +44 (0) 20 3003 2666
UK Toll Free: 0808 109 0700
USA Toll Free: 1 866 966 5335
DK Toll Free:  8088 8649
Password: G4S

Replay Details

To listen to a replay of the presentation which will be available for 7 days after the event, here are the details:

Standard International Access:  +44 (0) 20 8196 1998
UK Toll Free: 0800 633 8453
USA Toll Free: 1 866 583 1035
DK Toll Free: 8088 7109

Access PIN: 6212562

Annual Report & Accounts

The company's annual report and accounts is due to be published week commencing 16 April 2012

Capital Markets Day

G4S will hold a Capital Markets Day in London on 22 May 2012

Annual General Meeting

The company's annual general meeting will be held in London on 7 June 2012
FINANCIAL SUMMARY

Results

The results which follow have been prepared under International Financial Reporting Standards, as adopted by the European Union (adopted IFRSs).

Group Turnover

Turnover increased by 3.6% to £7,522 million or by 4.7% at constant exchange rates.  Organic turnover growth was 4.5%.

* Calculated to exclude acquisitions and disposals, and at constant exchange rates

Group Profit

* PBITA is defined as profit before interest, taxation, amortisation and impairment of acquisition-related intangible assets, acquisition-related costs and aborted acquisition and legal settlement costs

PBITA increased by £11million to £531million or by 2.1% at constant exchange rates.  The PBITA margin was 7.1%.

Cash Flow and Financing

Operating cash flow, as analysed on page 25, was £449 million in the period, representing 85% of PBITA.  Net cash invested in current year acquistions was £130 million.  Net debt at the end of the period, as analysed on page 24, was £1,616 million (December 2010: £1,426m).

Adjusted earnings per share

Adjusted earnings per share, reconciled to basic earnings per share on page 23, increased by 4%, or by 6% at constant exchange rates.
BUSINESS ANALYSIS

Secure solutions

The secure solutions business continued its strong performance with good organic growth of 5%. Margins were maintained overall at 7%.

Europe

Organic growth in Europe was 4% and margins at 7.3% were higher than the previous year, due mainly to the turnaround of the business in Ireland.  With a large number of contracts being mobilised in the UK in the first half of 2012 we would expect the margin in the first six months to be lower compared to the same period in 2011 but to recover for the full year 2012.

There was good organic growth of 5% in the UK & Ireland and margins improved as a result of the continued strong performance of the UK commercial and government businesses, and an improved performance in Ireland.

The improvement in the UK business performance was a result of a number of major government contract wins and extensions such as:

• Taking over the national security contract for the Department for Work and Pensions which was mobilised on 1 January 2011 

• Strong growth in the level of services provided for the London 2012 Olympic and Paralympic Games. G4S commenced its security operations for The London Organising Committee of the Olympic and Paralympic Games (LOCOG) in March 2011 and will provide security services at the majority of the Olympic and Paralympic venues across the country, as well as at many non-competition venues and at LOCOG's test events, in the build up to and during the Games over the coming year.  

• Delivery of welfare-to-work services in three UK regions - this contract, which was mobilised on 1 June 2011, has performed in line with our expectations  

• Two public to private prisons - HMP Birmingham (transferred successfully to G4S In October 2011) and the new HMP Oakwood (planning is underway to open in April 2012) 

• Facilities services contracts at City Hospitals Sunderland and Liverpool Women's Hospital 

During 2011, G4S was also successful in winning a number of significant government outsourcing contracts such as:

• Integrated facilities services for the Ministry of Justice for more than 340 court buildings across the Midlands, Wales and the North of England from 1 February for five years 

• The provision of transport and accommodation for asylum applicants for the UK Border Agency for two regions - the Midlands and the East of England and the North East, Yorkshire and Humberside 

• Prisoner escorting services for the Scottish Prison Service which was mobilised on 10 January 2012  

• Outsourcing services for Lincolnshire Police - the first contract of its kind to be awarded by a British Police Authority and includes a framework agreement for ten other police forces - this commences in May 2012. 

The pipeline of UK government outsourcing opportunities remains strong particularly in areas such as prisons, police, health and the Department for Work and Pensions.

The UK commercial business grew strongly and contracts won included a number of significant smart meter installation contracts for the major utility providers and insurance claims investigations for Aviva.  Major contract extensions included manned security for RBS and Virgin Atlantic and G4S became preferred bidder for its first large commercial facilities services contract in the UK, for General Dynamics's UK sites.  

G4S recently completed the acquisition of Chubb Emergency Response, one of the UK's leading key holding and response services, covering over 7,000 customers across 22,000 locations via a network of 28 dedicated offices and 247 employees.  The acquisition significantly strengthens the strategic development plans of G4S's existing Monitoring & Response capability.

Trading conditions in Ireland remained challenging in 2011 but underlying trading was helped by a cost reduction plan. G4S Ireland broadened its expertise into areas such as safety, security systems, alarm monitoring and patrol and response through two acquisitions in 2011.

The Continental Europe region performed well against an uncertain economic backdrop and has continued to gain market share with its solutions strategy outperforming single service providers.  Overall organic growth was 3% as a result of price increases in some markets and a revised contract mix which improved margins to 5.5%. Revenues for the security systems business, which accounts for around 25% of Continental European secure solutions revenues, were flat. The group divested its home alarms business in Norway.

There were some notable strong performances in the region - in Belgium we were successful at winning the Brussels airport security contract for up to five years from February 2011 and security for the European Commission building from April 2011. In Sweden, G4S won the contract for the Swedish Parliament Administration from March 2011 and Volvo from April 2012 for three years.

In Greece, G4S was awarded the US Embassy contract in Athens. The secure solutions business was affected by the impact of the economic crisis, which was partly offset by a strong performance in cash solutions (see page 11).

In Israel, G4S is the preferred bidder for a PFI police training academy which has a 25 year contract term and G4S began two immigration accommodation contracts in Cyprus in March and April.  

Following significant revenue reductions in 2010, organic growth in most Eastern European markets is stabilising to a low single-digit level.

North America

Organic growth in North America was good at 3% and margins were slightly lower due to the performance of the US government business where revenues were down 8% and margins were lower compared to the prior year.  The US government business has been impacted by the significant reduction in federal funding levels.

In the United States growth in the commercial sector was strong, particularly in the financial institution, compliance and investigations and petrochemical sectors.  The outlook for new US federal government work in the short term continues to be subdued.  State and local governments are also under financial pressure, but we continue to see some level of outsourcing focused on the more effective delivery of public services.  

Recent contract awards include work in the healthcare, energy, chemical, manufacturing, federal government and retail sectors.  G4S commenced the provision of security solutions for a major automotive company from January 1, 2012 valued at $70m per annum for three years.  The group's largest commercial contract with Bank of America has been extended until 2014 and G4S North America has been awarded a secure solutions contract with Google for its locations in the United States and data centres in Belgium and Finland. The US systems business performed well with a number of systems integration projects for Tampa Airport, Iberdrola, and the Port of Tacoma.

We are confident that organic growth in 2012 will be stronger than in 2011 following the large contract wins and contract expansions during the final quarter of 2011 and the first quarter of 2012.

In Canada, the organic growth rate was 7% assisted by the CATSA aviation security contract which started on 1 November. The contract is for security at 20 airports in the Pacific region of Canada and has projected revenue of more than CAD$ 400million over the initial five-year term.

Developing Markets

In Developing Markets, organic growth was excellent at 9% with strong margins, albeit slightly lower than the prior year.

Organic growth in Asia was 10% and margins were 5.6% due to a number of factors including bidding costs and floods in Thailand.   There was strong organic revenue growth in Hong Kong and Indonesia. India, the largest market in the region, achieved a good performance with double-digit revenue growth. Our risk consulting business delivered a good performance helped by our advisory services to a retailer developing its footprint in China.  

In the Middle East, there was double digit organic growth (excluding Iraq) - an excellent performance across the region. Qatar and Egypt performed particularly strongly, mainly as a result of the new airport contract in Qatar.  In Iraq, as we had expected, the work for the US forces contract has come to an end and commercial work for oil and gas companies has taken longer than expected to be mobilised which had a short term impact on margins.  

The US Embassy contract in Kabul, Afghanistan is now expected to continue until at least the summer of 2012. The decision has been made to exit the UK managed risk assessment business operating in Afghanistan. In UAE, the business is being challenged by a shortage of labour supply and the general business environment in Dubai which has impacted our security systems business, but was successful at winning contracts such as Dubai Airport and in event security.

Africa performed well with organic growth of 8% and margins of 9.8%, helped by strong performances in Djibouti, Morocco, Tanzania and Guinea. The business in South Africa continued to be challenged by difficult macro-economic conditions. G4S has a unique network of operations in Africa which provides an excellent platform to support our global clients working in Africa and in key sectors such as oil and gas, ports and mining and there is currently a strong contract pipeline across the region.

The Latin America and Caribbean region has performed well as a result of strong performances across all countries.  We have also had a number of strategic contract wins, for example in the pharmaceutical and mining sectors. Overall for the region, organic growth was 20% and margins improved to 8.0%.

We are in the process of extending our presence in Brazil and recently acquired a facilities services company.  We will continue to build our presence in Brazil so that we are positioned to become a key player in this important strategic market.

Cash Solutions

The cash solutions business continued to face a sustained period of low interest rates which has continued to result in some service reductions. Overall organic growth was 2% but margins have declined due to service reductions and lost contracts in the UK.  

Organic growth in Europe was a decline of 1% with additional work in Belgium being offset by a decline in the UK. In the UK & Ireland, as a result of the loss of two ATM contracts, the cash solutions business saw revenues decline by 7%. This impacted the second half of 2011 and will continue to impact the first half of 2012. Organic growth and margins should improve in the second half with the start-up of new contracts for financial institutions, Northern Rail, Accor and the M6 Toll, together with a good pipeline of other opportunities.  In Ireland, the business benefited from the provision of cash outsourcing for An Post (post office) pension payments in 2011.

CASH360 is now a proven retail cash management solution, with almost 1,000 in-store solutions within retailers in nine countries across Europe, Africa and North America.  Major customers who have implemented CASH360 in the last twelve months include TGI Friday's, Center Parcs, Bofrost and Hema.  

In Sweden, the cash solutions business was put up for sale and classified as a discontinued business and was subsequently sold in February 2012.  In Romania, following the termination of the work for the state post office, the cost base has been actively reduced.

G4Si, the international valuables transportation business, achieved another strong performance, with double digit organic growth supported by higher commodity prices.

Elsewhere in Continental Europe, organic growth was affected by a reduction in cash transportation and ATM services but  strong growth was achieved in Belgium, where a number of bank contracts have been won, and in Greece helped by increased cash in circulation as consumers hold on to their cash due to economic uncertainty.

In North America, the business in Canada was impacted negatively by the partial loss of the Bank of Montreal contract.

Organic growth in Developing Markets was good at 9% but margins were affected by one-off costs relating to the floods in Thailand which reduced our ability to deliver services in the region and a King's decree in Saudi Arabia awarding an extra month's salary to employees. A further negative impact was the increased competition and attack losses in South Africa.  Excellent growth and strong margins were achieved in Kuwait, Indonesia and Malaysia.  

STRATEGIC DEVELOPMENT

Our strategy is to differentiate ourselves in our markets by using our expertise to drive outsourcing and to minimise commoditisation of traditional security services.  We see strong evidence of this strategy delivering enhanced growth opportunities for the group by:

• Capitalising on the structural growth opportunity of increased demand for outsourcing by delivering innovative, cost reducing, tailor-made solutions to customers as they re-shape their businesses in response to economic pressures, regulation and compliance requirements    

• Focusing the group on attractive global markets and sectors where security is a  key consideration 

• Increasing global reach - G4S has a broad international presence and unique developing markets exposure. We can export our government expertise into new countries, drive outsourcing  of cash solutions in developing markets and develop secure solutions for multi-national customers across numerous countries 

• Building on strong organic growth through security-focused acquisitions in developing markets where we can extend our market share or enter new high growth sectors. We expect to spend around £200 million each year on acquisitions out of free cash flow 

At the same time, it is essential that the organisational design is aligned to deliver the strategy and that we keep costs under control.  We are creating a number of service excellence centres to work with G4S country operations globally to focus on operational efficiency, service standards, and development of technology to support service delivery and sharing best practice across our main service lines.

OTHER FINANCIAL ISSUES

Acquisitions and divestments

The group invested a total of £137m on acquisitions in 2011 which have added new capabilities to the group and will support the implementation of the strategy.

Acquisitions included:

• Guidance Limited - offender monitoring technology operations 

• The Cotswold Group Limited - the UK's market leader in surveillance, fraud analytics, intelligence and investigations services 

• Chubb Emergency Response - one of the UK's leading key holding and response services 

• Brazil - a facilities services business  

In addition we purchased the remaining non-controlling interest in our security business in Turkey.

During the year we incurred aborted acquisition and legal settlement costs of £55m. The aborted acquisition costs related to the proposed acquisition of ISS A/S which was terminated on 1 November 2011 and included debt finance underwriting fees, financing and hedging costs.

Our acquisition strategy will continue to focus on niche opportunities which will both help to deliver our strategic objectives and meet our financial performance criteria.  We expect to invest around £200m in acquisitions in 2012 and will be more active in our divestment strategy where businesses are not in line with the group's strategy or where an alternative parent could add or drive more value from a business.

During the year we disposed of our Norwegian consumer alarms business and subsequent to the year end we disposed of our Swedish cash business.

Financing and interest

We have a prudent approach to our balance sheet whilst maintaining the flexibility to pursue acquisitions when appropriate. G4S has a long term stable credit rating of BBB granted by Standard & Poor's in March 2009 and has a diverse range of finance providers. Our aim is to maintain our credit rating of BBB and maintain a net debt to EBITDA ratio of around 2 to 2.5 times. The group is currently well financed and the maturity profile is very healthy. Borrowings are principally in pounds sterling, US dollars and euros reflecting the geographies of significant operational assets and profits.  

Our main sources of finance and their rates are set out below:

(i) A £1.1bn multicurrency revolving credit facility provided by a consortium of lending banks at a margin of 0.80% over Libor and maturing on 10 March 2016.

(ii) A Euro 575m revolving credit facility provided by four banks at a margin of 1.20% over LIBOR and maturing 6 June 2012 with the right to extend for a further six months at the group's option. This facility has not been drawn.

(iii) A $550m private placement of notes on 1 March 2007, which mature at various dates between 2014 and 2022, and bear interest at rates between 5.77% and 6.06%.

(iv) A $514m and £69m private placement of notes on 15 July 2008, which mature at various dates between 2013 and 2020 and bear interest at rates between 6.09% and 7.56%.

(v) A £350m Public Note issued on 13 May 2009 bearing an interest rate of 7.75%, maturing 13 May 2019.

At 31 December 2011 the group had uncommitted facilities of £706m.

As of 31 December 2011, net debt was £1,616m. Our headroom was £767m at the year end. We have sufficient borrowing capacity to finance its current investment plans.

Net interest payable on net debt was £99m. This is a net increase of 5% over the 2010 cost of £94m, due principally to the increase in the group's average cost of debt.

Our average cost of gross borrowings during 2011 was 4.9% compared to 4.8% in 2010. The group expects that the average cost of gross borrowings for 2012 will be slightly higher than for 2011.
Also included within financing is other interest costs of £nil (2010: £3m) and net income of £3m (2010: expense of £6m) in respect of movements in the group's retirement benefit obligations.

Taxation

The effective tax rate for the year on adjusted earnings was 22%, compared to 24% for 2010.  The cash tax rate is 18.5% compared to 20% in 2010. Our target is to maintain the effective tax rate.  This will be supported by the gradual reduction in UK corporation tax rates, the ongoing rationalisation of the group legal structure and the elimination of fiscal inefficiencies.

Retirement benefit obligations

The group's funding shortfall on funded defined retirement benefit schemes, on the valuation basis specified in IAS19 Employee Benefits, was £295m before tax or £212m after tax (31 December 2010: £265m and £191m respectively).  The main scheme is in the UK.  The latest full actuarial valuations were undertaken at 5 April 2009 in respect of all three sections of the UK scheme.  However, all actuarial assumptions were reviewed and updated as at 31 December 2011.

The net pension obligation has increased by £30m since 31 December 2010 due mainly to a net actuarial loss as a result of the decrease in the discount rate used from 5.5% to 5.0%, although this was offset partly by an increase in inflation assumptions.  Additional company contributions of £40m were paid into the schemes, including £6m relating to the closure of the Irish pension scheme.

We believe that, over the very long term in which retirement benefits become payable, investment returns should eliminate the deficit reported in the schemes in respect of past service liabilities.  However, in recognition of the regulatory obligations upon pension fund trustees to address reported deficits, the group's deficit recovery plan will see cash contributions made to the scheme of approximately £35m in 2012 with modest annual increments thereafter.

During the year the group has closed the UK scheme to future accrual which will limit the future growth in liabilities.  Existing members retain their benefits accrued to-date and have been offered the opportunity to transfer to a new defined contribution scheme for future pension benefits.

Dividend

The board recommends a final dividend of 5.11p per share (DKK 0.4544). This represents an increase of 8.0% on the final dividend for 2010.  The interim dividend was 3.42p per share (DKK 0.2928) and the total dividend, if approved, will be 8.53p per share (DKK 0.7472), representing an increase of 8.0% on the total dividend for 2010.

The group expects to continue to increase dividends broadly in line with normalised adjusted earnings.

REVIEW AND OUTLOOK

Despite ongoing economic uncertainty in 2011, the business has performed well and has good trading momentum which we expect to continue.  

We have had some significant contract wins in the last year which demonstrate the outsourcing model, particularly in the public sector in the UK, is delivering real benefit to the group.  We expect these outsourcing trends to continue and will focus on bidding and winning an increasing proportion of larger, more complex contracts.

2012 will be a year of mobilisation across a broad range of complex contracts and delivery of the security requirements of the London 2012 Olympic and Paralympic Games - a unique opportunity for us to showcase our large scale security capabilities.

Contract phasing and mobilisation may impact margins in the short term, but we expect margins to recover for the full year. We will continue to build on our successes and we remain confident about the outlook for 2012 when we expect to deliver an improved organic revenue growth performance whilst continuing to maintain our discipline on margins for the full year and on meeting our cash generation targets.

13 March 2012

G4S plc
Preliminary results announcement
For the year ended 31 December 2011

Consolidated income statement
For the year ended 31 December 2011

Consolidated statement of comprehensive income
For the year ended 31 December 2011

Consolidated statement of financial position
At 31 December 2011

Consolidated statement of cash flows
For the year ended 31 December 2011

1)  Basis of preparation and accounting policies

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2011 or 2010.  Statutory accounts for 2010 have been delivered to the registrar of companies, and those for 2011 will be delivered in due course.  The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The comparative income statement for the year ended 31 December 2010 has been re-presented for operations qualifying as discontinued during the current year. Revenue from continuing operations has been reduced by £139m and PBT has been increased by £5m compared to the figures published previously. Further details of discontinued operations are presented within note 4. In addition, the comparative consolidated statement of financial position as at 31 December 2010 has been restated to reflect the completion during 2011 of the initial accounting in respect of acquisitions made during 2010. Adjustments made to the provisional calculation of the fair values of assets and liabilities acquired amount to £12m, with an equivalent increase in the reported value of goodwill. The prior year balance sheet has been restated to reflect the reclassification of the entire retirement benefits obligation within non-current liabilities to bring the disclosure in line with the group's peers and to more appropriately reflect the nature of the obligation.

2)   Operating segments (continued)

6)  Finance income

10)  Earnings/(loss) per share attributable to equity shareholders of the parent

In the opinion of the directors the earnings per share figure of most use to shareholders is that which is adjusted. This figure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future earnings.

12)  Analysis of net debt

A reconciliation of net debt to amounts in the consolidated balance sheet is presented below:

Non GAAP measure - cash flow

The directors consider it is of assistance to shareholders to present an analysis of the group's operating cash flow in accordance with the way in which the group is managed, together with a reconciliation of that cash flow to the net cash flow from operating activities as presented in the consolidated cash flow statement.

Operating cash flow
For the year ended 31 December 2011