Chief executive's statement
Looking forward with confidence
In 2012, we achieved our eighth consecutive year of underlying revenue, PBITA and dividend growth. This demonstrates that, despite ongoing economic uncertainty in 2012 and the challenges of delivering the London 2012 security contract, the underlying business has performed well and the positive trading momentum is expected to continue.
We are confident in the future and expect to continue our track record of growth whilst maintaining our discipline on margins and cash generation.
How would you sum up the group’s trading for 2012?
Despite continued economic challenges in Europe, the overall business has performed well with an acceleration in organic growth to 6.9% from 5.1% in 2011.
Group revenues were up by 8.1% on the prior year and the key highlights of the year were the strong growth in the UK government and US commercial businesses and the continued strong performance in developing markets. Our developing markets activities achieved organic growth of 10% and they now make up 33% of the group's revenue.
Despite the economic challenges of low GDP growth and the impact of low interest rates in developed markets on our cash solutions business, we managed to maintain margins overall through continuing to focus on keeping costs under control and cash flow generation.
What were the main highlights of the year?
There were a number of significant highlights during 2012, which either contributed to our performance in the year or laid the foundations for future growth and success.
Overall, we have performed strongly with organic growth of nearly 7% against a difficult trading environment and the distractions of the Olympics contract in the summer. We worked hard to implement substantial cost savings during the first half of the year, significantly reducing our overhead costs to help counter the current margin headwinds, particularly in Europe, resulting in us maintaining our margins at 7.1%.
Despite significant economic challenges, our US Commercial business grew particularly strongly in 2012, as a result of a firm focus on customer service and retention, the expansion of a number of existing contracts and a number of new business wins such as Google, Gallagher Bassett and Iberdola. Overall the US commercial business grew by 11% in the year.
One of the key achievements during the year was the mobilisation of a number of major contracts in the UK. We began the facilities management of more than 340 court buildings across the Midlands, Wales and the North of England in February this year on behalf of the UK Ministry of Justice.
We opened Oakwood Prison, one of the largest in the UK, providing places for over 1,600 prisoners in the West Midlands during April, and commenced the provision of transport and accommodation for asylum applicants across four regions of the UK in June.
In April, we also successfully mobilised the first major support services contract with Lincolnshire Police Authority where we provide a wide variety of back office functions to allow the force to concentrate more resources on front line policing services – reducing the Police Authority running costs by around 16% in the first nine months of the contract.
Our developing markets businesses performed well in the year and we continue to focus on developing markets for future growth. We expanded our presence in the high growth Brazilian market in the second half of 2012 through the acquisition of Vanguarda, one of the country’s leading security providers, to complement the acquisition of Interativa which was completed late in 2011.
These acquisitions provide us with an excellent platform for growth in one of the world’s leading economies and help to strengthen our service offering and capabilities across the region to include security, facilities management and technology.
We have made excellent progress during the year in establishing our product-specific service excellence centres which are focused on ensuring long-term operational efficiency, high quality service standards, the development of technology to support service delivery and the sharing of best practice across our main service lines.
These service excellence centres have already had a significant impact on the businesses through reduction in attack losses in the cash solutions business and assisted nine countries in identifying profit improvement opportunities.
It is also important to recognise the efforts of our managers and finance teams in terms of keeping the focus on generating cash throughout the year, particularly against a difficult economic environment where customers have been looking to extend payment terms and hang on to their cash for as long as possible. Delivering 95% of PBITA as cash in 2012 was a significant achievement.
What were the biggest challenges of the year and how did they impact the group’s performance?
The most significant challenge of 2012 was handling the issues associated with our failure to provide the contracted number of security personnel for the Olympic Games. The Games was a huge success for Britain and as a British company which has been an important part of British society for over 75 years, we wanted to play our part in delivering a great Games for Britain.
The realisation as the Games approached, that the workforce numbers we believed to be in place would not materialise, was a big shock for us all and was the start of one of the toughest periods in the group’s history.
On the plus side, I was impressed with the way that colleagues across the group – from both the UK and overseas – stepped in to help resolve the issues as soon as they came to light. This meant that, in the end, we were able to recruit around 16,000 security staff and around 8,000 of them worked at the Games on the peak day.
Overall we delivered around 82% of the contracted requirement and all of the security workforce requirements for the transition period between the Olympics and Paralympics and throughout the Paralympic Games.
Reputationally, the group faced extreme scrutiny, particularly from politicians and the media, which took an enormous amount of effort and resource to manage.
The detailed financial implications are highlighted elsewhere in this report, but the overall impact was that rather than making a modest profit on the contract, we will make a loss on the contract of £70m having agreed to refund a significant proportion of the management fee as a gesture of goodwill to the UK Government – an important customer for the group.
We also incurred additional costs of £11m relating to external fees and a further £7m in sponsorship and marketing costs. This all equates to a total loss of £88m.
Whilst the overall situation was extremely disappointing for us, I am proud of the way our staff worked together with the military and police to ensure that the Games was safe and secure.
Having reached agreement on the settlement, we hope that in 2013 we can put the issue behind us and continue to demonstrate that G4S is a great company which plays an important role in societies all over the world through the efforts of our over 620,000 loyal and dedicated employees.
In November, we were faced with what seemed like a significant change of policy by the UK Government when the Ministry of Justice announced that it would not outsource a number of prisons to the private sector and would be taking an existing outsourced prison back under the control of the Prison Service.
Whilst this was disappointing to us and to the market at the time, there does appear to be some positive news as a result of the developing UK prison policy, which will include a substantial amount of outsourcing of services such as rehabilitation, facilities management and other related services.
We are in a good position to bid for these contracts which are estimated to be worth around £1bn per annum.
2012 was a challenging year for our US Government Solutions business as a result of a significant reduction in the US Federal Government spending in both the US domestic government sector and in contracts for overseas landmine clearance.
We introduced a number of cost-saving measures during the year to mitigate the challenges in this market and have recently announced our intention to divest the business to a parent which would be able to add or create more value than we are able to, being a foreign parent with limited control over the business strategy and restricted access to important commercial data and limited ability to manage the business and share best practice.
Elsewhere, trading conditions, particularly in Continental Europe continued to be tough with increasing margin pressure on contract renewals across many developed markets. Early in 2012 we began our programme of overhead cost saving measures which have helped to protect our margins in the latter half of the year and should provide a good basis on which to move forward in 2013.
What lessons have you learned during the year and what will you do differently in the future as a result?
We commissioned a thorough review of our performance on the London 2012 Olympic security contract with the assistance of PwC and the findings were published in September 2012. The review concluded that the failures were specific to the very special nature of the contract, but we decided to take a number of actions to ensure that best practices are applied consistently across the entire group.
With that in mind, we are implementing a more rigorous risk assessment for new contracts and improving contract take-on processes and project management. Board oversight of new contracts is also being enhanced including review and approval of large or complex contracts.
We are also strengthening the Group Executive team with the appointment of a chief operating officer, whose responsibilities will include a specific focus on operational procedures, risk management and quality of customer service and delivery. Recruitment for this role is well underway and we hope to announce an appointment during the first half of this year.
Elsewhere, we have continued to focus on keeping costs down and reviewing our overhead structures and resources to make sure we are in good shape to weather the ongoing economic storm.
What are the key elements of the strategy for 2013 and the future?
There is no change to the group strategy for 2013 – security is at the core of our offer and, although we may move into related services in specific markets should opportunities take us there, we will remain true to our security heritage.
We will continue to focus on developing long-term relationships with businesses and governments in countries and sectors where security and safety risks are considered a strategic threat and where we can help customers achieve their own strategic objectives.
With limited medium-term opportunities for growth in Continental Europe, we will continue to look to developing markets for enhanced growth opportunities and to build on our market-leading positions in many of these markets. We will aim to export the knowledge and expertise which we have in more developed markets to these higher growth regions.
We will drive secure solutions and cash solutions markets through the various phases of development to encourage greater outsourcing and focus our attention on larger, more complex bids for new business. We will also focus on effectively managing any risks associated with these contracts by implementing enhanced contract risk management and assessment processes.
We will maintain our focus on service excellence, on retaining and growing our business with existing customers and winning new business across a wide range of markets and sectors.
Our sector-focused strategy in areas where security and safety are of vital importance is a key differentiator for us and it has proved successful in the last 12 months. We will continue to focus our skills in enhanced risk management and safety and security in key sectors such as ports and maritime, aviation, oil and gas, and mining industries.
We are constantly looking to develop and refresh our talent pipeline and we will continue to do this in the coming year through the development of our people to build their skills, knowledge and behaviours and to ensure that we have robust succession plans in place for the key roles across the group.
How do mergers and acquisitions fit into your future strategy?
Acquisitions continue to be an important part of the strategy, particularly in developing markets where we can either improve our market share or where an acquisition can act as a catalyst to drive outsourcing opportunities. Overall, we expect to spend around £200m on acquisitions each year.
We believe there are substantial growth opportunities in these markets and we are targeting 50% of our revenues to come from developing markets by 2019.
We will also continue to be more active in terms of divestments where a service line is not core to the group, where a business could result in material reputational damage to the group or it is unable to reach the group minimum targets within a set period of time under our ownership or where an alternative parent could add or derive more value from a business.
What targets or goals are you setting for 2013?
Overall, our key business objectives for 2013 are to drive organic growth, deliver margin improvement, optimise our organisational development and to build and protect our reputation.
More specifically, we will focus on continuing to improve our organic growth performance through customer service, contract retention and expansion and through winning new business in key target areas.
We are aiming to increase the proportion of our revenues generated in developing markets with a six-year target of 50% of the group total as key security markets such as Brazil and China open up to foreign investment and where we can import our expertise from more developed markets in order to raise standards, deliver operational best practice and help our customers to achieve their own strategic objectives.
We will maintain our discipline on margins through good cost control and sharing of operational best practice as the service excellence centres continue to gain further traction across the operation and as we keep the cost base under constant review.
We will aim to upgrade our approach to contract risk management through the development of new processes for monitoring major contracts and increasing board and senior management visibility of contract issues. The addition of a new chief operating officer to the Group Executive team will be a key element of this focus.
We are targeting strong EPS growth and believe we can deliver that as a result of structural growth trends in the security industry and outsourcing trends, our strong developing markets presence and continued focus on margins and cash generation and are maintaining our overall target of generating at least 85% of PBITA as cash during the year.
How would you summarise the outlook for the group?
Despite the disappointment of the Olympics contract in 2012, the underlying trading across the majority of the group remains strong. The economic pressure is continuing to be challenging in Continental Europe.
However, I am confident about the prospects for the group in 2013 based on our market leading businesses, broad customer base and contract pipeline.
We continue to see good opportunities from outsourcing in key sectors such as government, financial institutions, aviation, oil and gas, mining and ports.
The breadth of our portfolio in over 125 countries continues to present many new growth opportunities.
Chief executive officer