The main drivers of the £104 million of constant currency operating growth this year have been:
£28 million of net new business
£57 million from our base estate
£6 million of above unit overheads
£13 million from acquisition/disposals
This year we delivered a strong set of results, maintaining the momentum in driving improved performance from last year.
We have continued to deliver good quality organic revenue growth, up 5.9%. We have improved margin by 70 basis points and an increase of £163 million in free cash flow delivery demonstrates another year of continued improvement.
A combination of excellent operational management and MAP has this year enabled us to deliver £104 million of constant currency operating profit growth as follows:
We have had another year of strong growth in most countries, delivering 8.5% of new business, with overall retention levels remaining stable at 94%. We have seen good levels of growth in all of our core sectors. We believe there is further scope over time to improve retention across the Group. Where we have focused on retention levels and built dedicated retention teams, we have been able to deliver improved performance.
The majority of our profit growth was delivered through sustainable growth in our base estate, a dramatic shift from historical performance.
We have continued to work hard to increase like for like revenue growth to 3.5% through innovation in our client and consumer offer and greater discipline in our approach to pricing.
We have continued to extend our offer and target growth in participation and spend per head. In particular, our greater understanding of consumer eating trends and habits has enabled us to increasingly move to an all-day offer, including breakfast, coffee shops and in-house convenience outlets. At the same time, we have developed a significantly more retail-focused approach to structured promotions, often linked to menu planning, merchandising and the overall service experience.
We have introduced more structured management of both client and consumer pricing. For client contracts this means having pricing sovereignty and appropriate indexation clauses linked to food and labour costs and local market-basket benchmarking. To drive continuous improvement in this area we have developed an online pricing toolkit, using proven tools from across the Group.
We continue to focus on being the lowest cost, most efficient operator. We have made further progress in menu planning and rationalisation of purchasing and supply chain. These initiatives, along with the roll-out of waste management programmes, should, over time, produce further benefits. Food cost inflation was a significant issue for us throughout the year, but we have been able to contain the impact through the actions we have taken during the year and as a result have delivered an improvement in gross margin.
Labour cost remains a challenging area and we are increasing our focus on driving improved productivity and reducing ancillary costs. The majority of the unit efficiencies have come from savings in unit overheads such as uniforms and cleaning products. Whilst we have made good progress in driving out cost from the business, there are still significant opportunities to further improve efficiencies and, with a predominantly flexible cost base, to adapt to varying levels of demand.
While growing the revenue by 5.9%, we have reduced our overheads by a further £21 million in real terms, more than offsetting the £15 million inflationary impact.
This comprises £7 million of trading profit from the acquisition of Professional Services in the US and the remaining 50% of the shares in GR SA in Brazil, partly offset by the disposal of some Japanese concessions businesses and £6 million of disposal profit arising from country exits.
MAP continues to be embedded deeper in the organisation, not only providing us with the intensity of focus that is driving our performance but a common language and agenda, enabling everyone to think, act and behave as a Group.
Earlier this year we launched ‘Mapping for Value’, a two day intensive programme on MAP for our top 400 managers, and this is now being rolled out to a further 5,000 managers across the Group. We continue to evolve how we use MAP to improve the way we manage the business. Most recently we have launched a specific ‘People MAP’ which, as with our business MAP, provides a simple framework of objectives, measures and actions that focus on the key areas of people management and development.
At the same time, we have made considerable progress in identifying, capturing and sharing best practice and knowledge across the Group in a structured way, helping us to bring innovation to market more quickly to create competitive advantage and turn best practice into more standard practice.
We believe that key to creating shareholder value is the delivery of strong cash flow. Our aim is to deliver this through revenue growth and operating efficiency, supported by disciplined use of capital expenditure and working capital. The delivery of strong cash flow provides us with the opportunity to reinvest that cash to grow the business and to reward shareholders.
We have a clear and well-focused strategy. Our combined food and support services offer positions us to take advantage of the continued growth in outsourcing and further ‘bundling’ of services as clients seek to consolidate service providers.
Our approach has been to build scale within countries to enable us to drive efficiencies, combining local market knowledge with the global reach necessary to meet the needs of multinational clients. Sectorisation has also been key, building strong sector-focused businesses.
There is significant opportunity to grow revenue. We estimate the foodservice market, in which we are the global leader, to be around £150 billion. The market is only 45% outsourced and we only have a 7% share of the total. The support services market is even bigger and less penetrated. We will continue to build our market presence by growing revenues organically, and where it makes sense we will invest intelligently in either organic growth and/or value-creating infill acquisitions.
The Group has a very broad spread of business; geographically, in some 55 countries; across clients, with no one client accounting for more than 1% of revenue; and across the multiple sectors and sub sectors in our portfolio. We have a well-balanced exposure to Healthcare, Education and Business & Industry and the diversity of customers we serve considerably spreads our risk profile.
We will continue to improve efficiency in our main categories of cost: food, labour and overheads. Whilst good progress has been made, there are many significant opportunities. In the context of a more challenging macro economic environment, the ability to flex the cost base is important. We believe our key costs of food, labour and overheads are largely flexible, which gives us the ability to align our cost base to any variation in the level of demand. In the last two years, the strength of our operational management teams and the MAP framework have been integral to driving the turnaround in performance and in successfully managing the effects of input cost inflation. These will remain a focus as we continue to move through the challenging macro economic environment.
We are continuing to deliver good organic revenue growth and operating efficiency. In the context of a more challenging economic environment we are not complacent. We have considerable flexibility in the cost base and further significant scope for cost reduction. Together with the scale of the market opportunity and ongoing demand for outsourced services, this gives us confidence that we can continue to deliver.
Richard Cousins
Group Chief Executive
26 November 2008
MAP is fundamental to driving consistent performance across the Group and the discipline it brings to the way we manage the business puts us in a strong position to meet the challenges in the year ahead.
