Our strategy and performance over the last two years have placed us in a sound financial position with headroom of around £900 million. The delivery of strong cash flow provides us with the opportunity to reinvest that cash to grow and reward shareholders.
Overall, organic revenue growth was 5.9%, comprising new business of 8.5%, retention of 94% and like for like growth of 3.5%.
The significant weakening of Sterling, in particular against the Euro, increased reported revenues by 5.1%, resulting in reported revenue growth of 11.4%.
Underlying operating profit from continuing operations, including associates but excluding the amortisation of intangibles arising on acquisition, was £662 million (2007: £529 million), an increase of 25% on a reported basis over the prior year.
Operating profit after the amortisation of intangibles arising on acquisition of £3 million (2007: £nil) was £659 million (2007: £529 million).
The underlying operating profit increased by £104 million, or 19%, on a constant currency basis. This represents a 70 basis points improvement in margin to 5.8% (2007: 5.1%).
Additional information on the performance of each region can be found in the Chief Executive’s statement.
Unallocated overheads for the year were £62 million (2007: £58 million), reflecting tight control over cost while at the same time strengthening certain central functions.
Underlying net finance cost, excluding hedge accounting ineffectiveness and the impact of revaluing minority interest put options, was £73 million (2007: £87 million). We currently expect the underlying net finance cost for 2009 to be around £95 million, reflecting the impact of the weakening of Sterling against each of the US Dollar, Euro and Japanese Yen which comprise the bulk of the Group’s net borrowings.
Other gains and losses include a £4 million (2007: £6 million) cost of hedge accounting ineffectiveness (revaluation gains and losses on swaps and hedging instruments) and a £16 million (2007: £nil) cost of revaluing minority interest put options, reflecting the underlying improvement in performance of the related business.
Profit before tax from continuing operations was £566 million (2007: £436 million).
On an underlying basis, excluding the amortisation of intangibles arising on acquisition, hedge accounting ineffectiveness and the impact of revaluing minority interest put options, profit before tax from continuing operations increased by 33% to £589 million (2007: £442 million).
Income tax expense from continuing operations was £169 million (2007: £124 million).
On an underlying basis, excluding the amortisation of intangibles arising on acquisition, hedge accounting ineffectiveness and the impact of revaluing minority interest put options, the tax charge on continuing operations was £171 million (2007: £126 million), equivalent to an effective tax rate of 29% (2007: 29%). Based on current corporate tax rates applicable to our major countries of operation, we expect a similar rate for 2009.
The profit after tax from discontinued operations was £53 million (2007: £212 million).
Basic earnings per share, including discontinued operations, were 23.7 pence (2007: 25.6 pence).
On an underlying basis, excluding discontinued operations, the amortisation of intangibles arising on acquisition, hedge accounting ineffectiveness, the impact of revaluing minority interest put options and the tax attributable to these amounts, the basic earnings per share from continuing operations were 22.0 pence (2007: 15.2 pence).
| Attributable profit |
Basic earnings per share |
||||
|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 pence |
2007 pence |
Change % |
|
| Reported | 443 | 515 | 23.7 | 25.6 | -7.4% |
| Discontinued operations | (53) | (212) | (2.8) | (10.6) | |
| Other adjustments | 21 | 4 | 1.1 | 0.2 | |
| Underlying | 411 | 307 | 22.0 | 15.2 | +44.7% |
It is proposed that a final dividend of 8.0 pence per share will be paid on 2 March 2009 to shareholders on the register on 30 January 2009. This will result in a total dividend for the year of 12.0 pence per share (2007: 10.8 pence per share), a year on year increase of 11%.
The dividend was covered 1.8 times on an underlying earnings basis and 2.5 times on a free cash basis.
Free cash flow from continuing operations totalled £520 million (2007: £357 million). The major factors contributing to the increase were £133 million increase in underlying operating profit before associates and £46 million lower net interest payments, offset in part by £32 million higher net tax payments.
Gross capital expenditure of £200 million (2007: £195 million), including amounts purchased by finance lease of £8 million (2007: £15 million), is equivalent to 1.7% of revenues (2007: 1.9% of revenues). We currently expect the level of gross capital expenditure for 2009 to be around 2% of revenues. Proceeds from the sale of assets were £26 million and we expect these will be minimal in 2009.
There has been a continued focus on all areas of working capital management, delivering an overall £46 million working capital inflow in the year. We believe that there remains further scope for improvement.
The cash tax rate for the year was 25% (2007: 26%), based on underlying profit before tax for the continuing operations, and we continue to expect the cash tax rate to be in the mid to high 20s range for 2009.
The net interest outflow of £81 million (2007: £127 million) continues to reflect the impact of the 2004 swap monetisation. The cash interest will be around £10 million more than in the income statement in 2009, and then the numbers should converge for 2010 onwards.
The acquisition spend in the year totalled £181 million, comprising £74 million of infill acquisitions (including £36 million on Professional Services and £23 million on Medi-Dyn in the USA), £102 million on the buyout of minority interests (including £87 million on the remaining 50% of our Brazilian business and £14 million to take our shareholding in Seiyo Food – Compass Group, our Japanese business, from 86% to 95%) and £5 million of deferred consideration relating to previous acquisitions.
Proceeds received in the year, mainly relating to the prior year disposal of businesses, totalled £41 million (2007: £767 million).
The Group spent cash of £352 million (2007: £575 million) on buying back shares in the year, of which £65 million relates to the current phase of the buy-back, which is ongoing. In addition the Group spent £3 million (2007: £1 million) to satisfy employee share-based payments in the year.
Return on capital employed (ROCE) was 14.9% (2007: 12.5%) based on the continuing business before exceptional items, excluding the Group’s minority partner’s share of total operating profit, net of tax at 30% and using an average capital employed for the year of £3,073 million (2007: £2,914 million) calculated from the IFRS balance sheet.
Under UK GAAP, goodwill previously written off to reserves, now extinguished under IFRS, and goodwill amortised prior to 30 September 2004, the date at which the net book value of goodwill was frozen under IFRS, was included within average capital employed. Including these adjustments, average capital employed for the year (for the continuing business) would have been £6,058 million (2007: £5,899 million) and ROCE for the continuing business would have been 7.9% (2007: 6.5%).
The Group’s three year targets for the continuing business for 2006 to 2008 have been achieved:
calculated on a UK GAAP basis
from continuing operations including £53 million from Selecta in 2006
The Group has continued to review and monitor its pension obligations throughout the year working closely with the Trustees and members of schemes around the Group to ensure proper and prudent assumptions are used and adequate provision and contributions are made.
The Group’s total pension deficit at 30 September 2008 was £131 million (2007: £162 million), a significant improvement from the £555 million deficit in 2005. The total pensions charge for defined contribution schemes in the year was £28 million (2007: £36 million) and £19 million (2007: £22 million) for defined benefit schemes. Included in the defined benefit scheme costs was a £2 million credit to net finance cost (2007: £2 million charge).
The ratio of net debt to market capitalisation of £6,336 million as at 30 September 2008 was 16% (2007: 13%).
Net debt increased to £1,005 million (2007: £764 million) including a negative impact from foreign exchange translation of £121 million and cash spent on share buy-backs totalling £352 million.
At 30 September 2008, the Group had cash reserves of £579 million and in October 2008 raised a further £185 million in the private placement market. In addition, the Group has an undrawn bank facility of £689 million committed through to 2012. Taking account of cash required for day-to-day operations and the repayment of around £325 million of debt maturing in 2009, the Group estimates it currently has headroom of around £900 million.
Looking ahead over the next three years, £225 million of debt is due for repayment in 2010 and £75 million in 2011. With three years of free cash flow and the proceeds of any further refinancing during this period, the Group believes that it is in a very strong financial position.
The EBIT to net interest ratio has increased from 3.2 times in 2006 to 9.1 times in 2008, excluding the amortisation of intangibles arising on acquisition, hedge accounting ineffectiveness, the change in fair value of minority interest put options and discontinued operations. EBITDA to net interest has increased from 5.6 times to 11.9 times in the same period, including discontinued operations but excluding the amortisation of intangibles arising on acquisition, hedge accounting ineffectiveness and the change in fair value of minority interest put options. The Group remains committed to maintaining strong investment grade credit ratings.
The Group finances its borrowings from a number of sources including banks, the public markets and the private placement markets.
Maturity profile of principal borrowings
as at 30 September 2008
Borrowings are stated at their nominal value except for the bond redeemable in December 2014 which is recorded at its fair value to the Group on acquisition.
Following the year end the Group raised a total of £185 million in the private placement market through the issue of five, seven and eight year loan notes. This has further strengthened the Group’s balance sheet and extended the average life of the Group’s borrowings to 3.4 years.
The Group’s undrawn committed bank facilities at 30 September 2008 were £689 million (2007: £630 million).
The Group continues to manage its foreign currency and interest rate exposure in accordance with the policies set out below. The Group’s financial instruments comprise cash, borrowings, receivables and payables that are used to finance the Group’s operations. The Group also uses derivatives, principally interest rate, currency swaps and forward currency contracts, to manage interest rate and currency risks arising from the Group’s operations. The Group does not trade in financial instruments. The Group’s treasury policies are designed to mitigate the impact of fluctuations in interest rates and exchange rates and to manage the Group’s financial risks. The Board approves any changes to the policies.
The Group’s policy is to match as far as possible its principal projected cash flows by currency to actual or effective borrowings in the same currency. As currency cash flows are generated, they are used to service and repay debt in the same currency. To implement this policy, forward currency contracts or currency swaps are taken out which, when applied to the actual currency liabilities, convert these to the required currency. A reconciliation of the 30 September 2008 actual currency liabilities to the effective currency borrowed is set out in note 20 to the consolidated financial statements.
The borrowings in each currency give rise to foreign exchange differences on translation into Sterling. Where the borrowings are either less than, or equate to, the net investment in overseas operations, these exchange rate movements are treated as movements on reserves and recorded in the statement of recognised income and expense rather than in the income statement. Non-Sterling earnings streams are translated at the average rate of exchange for the year. This results in differences in the Sterling value of currency earnings from year to year.
The table in note 36 to the consolidated financial statements sets out the exchange rates used to translate the income statements, balance sheets and cash flows of non-Sterling denominated entities.
As detailed above, the Group has effective borrowings in a number of currencies and its policy is to ensure that, in the short-term, it is not materially exposed to fluctuations in interest rates in its principal currencies. The Group implements this policy either by borrowing fixed rate debt or by using interest rate swaps so that at least 80% of its projected net debt is fixed for one year, reducing to 60% fixed for the second year and 40% fixed for the third year.
The Board takes a proactive approach to risk management with the aim of protecting its employees and customers and safeguarding the interests of the Company and its shareholders.
The principal risks and uncertainties facing the business and the activities the Group undertakes to mitigate these are set out in the section headed Managing risk.
The market price of the Group’s ordinary shares at the close of the financial year was 344 pence per share (2007: 302 pence).
After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
We are pleased with the results delivered in the last financial year against a background of weakening economic conditions. We have a clear and focused strategy, an internationally diversified and transparent business model and we are the market leader in an industry that has potential for significant structural growth. We see good opportunities to continue to grow revenue and to further improve operating efficiency. Our cash flow and balance sheet are strong. The strengths of the business that are highlighted in these results support the Board’s view that 2009 will be another year of progress for the Company.
Andrew Martin
Group Finance Director
26 November 2008
North America has had another strong year with organic revenue growth of 7.1%. Operating profit increased by £45 million, or 17%, on a constant currency basis to £311 million (2007: £266 million on a constant currency basis). The margin improvement seen in the first half has continued throughout the second half, with a full year 50 basis points improvement taking the overall margin to 6.8%.
In Continental Europe the organic revenue growth rate has continued to improve to 5.4%, driven by increased levels of new business wins and continued strong like for like revenue growth across the whole geography. Overall, operating profit in Continental Europe was £197 million (2007: £172 million on a constant currency basis), an increase of 15%. We have added a further 60 basis points of margin improvement to the 100 basis points improvement in 2007, delivering an overall margin of 6.5%.
In the UK, operating profit was £108 million (2007: £107 million). As expected, we have achieved a similar level of profitability and margin to last year.
The Rest of the World has delivered very strong organic revenue growth of 10.6% through excellent new business wins and improved like for like revenue growth throughout the geography. Overall, operating profit in the Rest of the World has increased by £36 million, or 53%, on a constant currency basis, to £104 million (2007: £68 million on a constant currency basis), in part through the acquisition of the remaining 50% of the shares of GR SA in Brazil and £6 million of disposal profits arising on country exits. The margin has increased by 150 basis points to 5.4% which is now close to the Group average. Excluding the impact of the £6 million disposal profit, the margin would have been 5.1%, an increase of 120 basis points.
