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Compass Group PLC (CPG)

  Print      Mail a friend       Annual reports

Wednesday 24 November, 2010

Compass Group PLC

Final Results

RNS Number : 7016W
Compass Group PLC
23 November 2010
 



 

Compass Group PLC

Annual Results Announcement

For The Year Ended 30 September 2010

                                                                                   

 

Rewarding shareholders and investing in growth

 



·    Revenue £14.5 billion

é 7.6% (constant currency +4.7%, organic +3.2%)

    

·    Underlying operating profit £1,003 million

é 13% (constant currency +11%)



·    Total reported operating profit £989 million

é 13%



·    Underlying operating margin 6.9%

é 40 basis points



·    Underlying earnings per share 35.7 pence

é 19% (constant currency +15%)



·    Total dividend rebased up to 17.5 pence

é 33%



·    Free cash flow £744 million

é 25%



 

 

 

Richard Cousins, Chief Executive, said:

 

"Compass has delivered another year of strong performance, despite the challenging economic conditions. Encouragingly, we have seen a return to organic revenue growth this year of 3.2%. Our ongoing focus on operational efficiency has enabled us to both invest in future growth and deliver another increase in the margin of 40 basis points. We are using our cash flow to make important infill acquisitions and to reward our shareholders and we are today announcing a rebasing of the total dividend up to 17.5 pence. We have considerable flexibility in our balance sheet and we will continue to keep its structure under review. Looking forward, whilst economic conditions remain challenging, we are excited by the growth opportunities we have around the world and the new business pipeline is strong. We continue to be relentless in our pursuit of operating efficiency and in an environment where cost remains high on the agenda, we are well placed to deliver quality food and support services solutions to our clients."

 

 

 

Sir Roy Gardner, Chairman, said:

 

"I am delighted by the progress the Group has made, delivering another excellent performance with record profits of over £1 billion. We have significant opportunities to continue to grow the business and Compass is well placed to exploit the structural growth opportunity in both food and support services around the world. We are particularly excited by the potential of the fast growing and emerging economies in which we operate. Furthermore, support services is becoming a new engine of growth. Our relentless focus on operating efficiency should enable us to continue to reinvest in the business, whilst delivering steady margin expansion. In addition, the strength of our cash flow is enabling us to both reward shareholders and to accelerate growth through value creating infill acquisitions."

 



Chief Executive's Statement

 

Delivering our strategy

 

Organic revenue growth returning together with further efficiencies and strong margin growth

 

Group overview

 

Reported revenue has grown by 7.6% in the year, 4.7% on a constant currency basis. Adjusting for the impact of acquisitions and disposals, organic revenue growth was 3.2% for the year. Very encouragingly, in 2010, we have seen a gradual improvement in the rate of new business wins to 9.5%. 

 

The Group operating margin has increased by 40 basis points in 2010, taking the total improvement over the last four years to 250 basis points. In the earlier years this was achieved by turning around or exiting loss making contracts and countries, and removing divisions and layers of unnecessary cost. We are now embedding the MAP framework deeper in the business resulting in more efficient processes throughout our operations. This, together with the ability to leverage our overheads with a growing revenue base, underpins our expectation of further steady progress in the margin. We have delivered £92 million of constant currency operating profit growth as follows:

 

£38 million of net new business growth

 

In the last four quarters we have seen an increase in new business wins throughout the Group, reaching 10% for the second half of the year. We have re-focused the business on growth, invested in sales resource where needed and reflected the change in focus in our employee incentive plans.

 

Over the year retention has improved slightly to 93.2%. This reflects fewer bankruptcies and corporate failures as well as the increased investment in retention. The Strategic Alliance Group, our best practice model for retention created in the USA, is continuing to gain real traction across the Group.

 

£24 million of base estate profit growth

 

Like for like growth

 

Like for like revenues are now showing clear signs of stabilisation as headcounts at our client sites level off and the sharp reduction in event catering and corporate hospitality begins to abate. However, we continue to see little evidence of real employment growth in our major markets and we are therefore expecting little immediate improvement in like for like revenues.

 

Cost efficiencies

 

We have continued to deliver productivity and efficiency savings from both food and other unit costs. Our focus on MAP 3 has delivered further gross margin improvement through ongoing initiatives including the rationalisation of our product and supplier base, supply chain optimisation and TrimTrax, our waste reduction programme. Menu planning remains a real opportunity going forward, developing a more consistent high quality offer, delivered in a more efficient way. In MAP 4, we have made some modest improvements in labour productivity and continue to reduce unnecessary unit overhead spend. Whilst we have made further progress, we believe there is still much more to do.

 

£20 million of above unit cost savings

 

We have made further solid progress in the area of above unit costs which, excluding the impact of acquisitions, have been reduced by a further £20 million in the year. In addition to taking cost out, we continue to redeploy resources from back of house to sales and operations, supporting our top line growth. Between 2005 and 2010 we have reduced our above unit costs by over £100m (around 10%), whilst at the same time growing revenue by over 20%. We continue to strive to remove inefficient processes and to operate with flatter organisational structures.

 

 

£11 million from acquisitions net of disposals

 

This relates mainly to the incremental operating profit (after integration costs) from the acquisitions of Kimco and Southeast Service Corporation in the USA, Hurley Corporation in Canada, Plural in Germany, Caterine Restauration in France and a number of McColls retail outlets in the UK.

 

Strategy

 

Our strategy remains unchanged - to continue to focus on foodservice whilst building on the fast growth in our support services business. Our scale within countries enables us to drive efficiencies; our global reach and capability allow us to successfully bid for significant outsourcing opportunities around the world and to serve multinational clients. Sectorisation is a fundamental part of our strategy and we have built big businesses in all of the key market sectors.

 

Our business model also remains unchanged - to deliver attractive levels of organic revenue growth whilst driving sustainable profit and margin improvement. In combination with disciplined capital spend and tight control over working capital, this should result in strong cash flows. We will continue to invest in further growth, both organically and in value creating infill acquisitions. We believe this will deliver real value to our shareholders.

 

Our biggest growth engine in absolute terms is the USA where we have an excellent business and the culture is receptive to outsourcing. We have considerable scope to continue to grow in the other developed economies around the globe where we operate and the increasing demand for multi-services in these markets is providing a further engine for growth. Importantly, 17% of our business is now in fast growing and emerging economies. These markets offer the opportunity of double-digit revenue growth.

 

The foodservice opportunity remains significant, with outsource penetration rates of under 50% in the £200bn industry. In soft support services, the market is similar in size and only 38% outsourced. We see scope to increase the level of support services business both through further bundling with foodservice and the increasing trend to outsourcing. We are building our global competence with platforms being established to deliver a multi-service offer to the Healthcare, Business & Industry and Education sectors. Today, multi-services makes up 20% of the Group's revenues, with significant new multi-service business won again this year.

 

With acquisitions, our strong preference is for small to medium sized businesses in our existing geographies. Foodservice acquisitions will be underpinned by our desire to grow the Healthcare and Education sectors and to create scale, particularly in our emerging countries. Our support services strategy is to build capability across our businesses and to facilitate cross selling activity. In 2010, we spent £205 million on acquisitions including the foodservice businesses of Tirumala Hospitality Services in India and Caterine Restauration in France and the support services businesses of IDA Services in Denmark, the VSG Group in the UK,

Clean Mall in Brazil, Southeast Service Corporation in the USA and Hurley Corporation in Canada.

 

We continue to focus on efficiencies but also believe that a more sustainable business model will be based upon reinvestment of some of these efficiencies in revenue growth. Our focus therefore is to strike the right balance between delivering healthy top line growth and steady margin expansion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outlook

 

Compass has delivered another year of strong performance, despite the continuing challenging economic conditions. The return to organic revenue growth is encouraging.

 

Looking forward, Compass is well placed to exploit the significant structural growth opportunity in both food and support services around the world. The pipeline of new business is strong and in an environment where cost efficiency remains high on the agenda, we believe the benefits of outsourcing are clear.

 

Our relentless focus on operating efficiency should enable us to continue to re-invest in growth whilst delivering steady margin expansion. In addition, the strength of our cash flow is enabling us both to reward shareholders and to accelerate growth through value creating infill acquisitions. Our confidence in the future is reflected in the Board's decision to rebase the dividend with an increase of 33% for the full year.

 

 

 

Richard Cousins

Group Chief Executive

24 November 2010



 Business Review

 

Focus on growth starting to deliver

 

Despite challenging economic conditions, we have seen a return to organic revenue growth. The continued delivery of significant efficiency gains is enabling us to drive margin improvement as well as to reinvest in the exciting opportunities around the world.

 

Financial Summary

 



2010


2009


Increase








Continuing operations








Revenue







Constant currency


£14,468m


£13,820m


4.7%

Reported


£14,468m


£13,444m


7.6%

Organic growth


3.2%


0.0% 


-








Total operating profit







Constant currency


£1,003m


£911m


10.1%

Underlying


£1,003m


£884m


13.5%

Reported


£989m


£877m


12.8%








Operating margin







Constant currency


6.9%


6.5%


40bps

Underlying


6.9%


6.5%


40bps

Reported


6.8%


6.5%


30bps








Profit before tax







Underlying


£922m


£784m


17.6%

Reported


£913m


£773m


18.1%








Basic earnings per share







Underlying


35.7p


30.0p


19.0%

Reported


35.3p


29.5p


    19.7%








Free cash flow


£744m


£593m


25.5%








Total Group including discontinued operations








Basic earnings per share


36.0p


31.7p


13.6%








Total dividend per ordinary share


 17.5p


13.2p


32.6%

 

(1)

Constant currency restates the prior year results to 2010's average exchange rates.

(2)

Total operating profit includes share of profit of associates.

(3)

Underlying operating profit excludes the amortisation of intangibles arising on acquisition, acquisition transaction costs and share based payments expense - minority interest call option.

(4)

Operating margin is based on revenue and operating profit excluding share of profit of associates.

(5)

Underlying profit before tax excludes the amortisation of intangibles arising on acquisition, acquisition transaction costs, share based payments expense - minority interest call option, hedge accounting ineffectiveness and the change in fair value of minority interest put options.

(6)

Underlying basic earnings per share excludes the amortisation of intangibles arising on acquisition, acquisition transaction costs, share based payments expense - minority interest call option, hedge accounting ineffectiveness, the change in fair value of minority interest put options and the tax attributable to these amounts.

 

Segmental Performance

 



Revenue


Revenue Growth



2010

2009



Constant




£m

£m


Reported

Currency

Organic









Continuing operations
















North America


6,369

5,806


9.7%

8.6%

5.8%

Continental Europe


3,506 

3,429 


2.2%

1.0%

0.1%

United Kingdom & Ireland


1,782

1,829


(2.6)%

(2.6)%

(3.3)%

Rest of the World


2,811

2,380


18.1%

5.8%

6.1%









Total


14,468

13,444


7.6%

4.7%

3.2%











Operating Profit


Margin

 



2010

2009


2010

2009

 



£m

£m


%

%

 








 

Continuing operations















 

North America


491

438


7.7%

7.5%


Continental Europe


248

232


7.1%

6.8%


United Kingdom & Ireland


114

114


6.4%

6.2%


Rest of the World


204

151


7.3%

6.3%


Unallocated overheads


(60)

(58)


-

-










Excluding associates


997

877


6.9%

6.5%










Associates


6

7


-

-










Underlying


1,003

884


6.9%

6.5%










Amortisation of

fair value intangibles

(7)

(7)





Acquisition transaction costs


(5)

-





Share based payments expense - minority interest call option


(2)

-













Total


989

877





 

(1)

Constant currency restates the prior year results to 2010's average exchange rates.

(2)

Operating profit includes share of profit of associates.

(3)

Underlying operating profit and margin excludes the amortisation of intangibles arising on acquisition, acquisition transaction costs and share based payments expense - minority interest call option.

(4)

Operating margin is based on revenue and operating profit excluding share of profit of associates.

(5)

Organic growth is calculated by adjusting for acquisitions (excluding current year acquisitions and including a full year in respect of prior year acquisitions), disposals (excluded from both periods) and exchange rate movements (translating the prior year at current year exchange rates) and compares the current year results against the prior year.



Revenue

Overall, organic revenue growth was 3.2%, comprising new business of 9.5%, a retention rate of 93.2% and like for like growth of 0.5%. The revenue performance was a little stronger than expected, benefiting from a number of extra working days in the final quarter compared with the same period last year. Normalising for the extra working days in the final quarter, organic revenue growth was 0.4% in the first half of 2010 and 5.5% in the second half. Acquisitions less disposals increased revenue by 1.5% and the significant weakening of Sterling, in particular against the Australian Dollar and Brazilian Real, increased reported revenues by 2.9%, resulting in reported revenue growth of 7.6%.

 

Operating Profit

 

Underlying operating profit from continuing operations was £1,003 million (2009: £884 million), an increase of 13.5%. On a constant currency basis, underlying operating profit increased by £92 million (10.1%). This represents a 40 basis points improvement in margin to 6.9% (2009: 6.5%).

 

Operating profit after the amortisation of intangibles arising on acquisition of £7 million (2009: £7 million), acquisition transaction costs of £5 million (2009: nil) and a share based payments expense - minority interest call option of £2 million (2009: nil) was £989 million (2009: £877 million).

 

North America

44.0% Group revenue (2009: 43.2%)

 

Our North American business has delivered an excellent performance. Revenues were £6.4 billion (2009: £5.8 billion), with organic growth of 5.8%. Operating profit increased by £49 million, 11% on a constant currency basis, to £491 million (2009: £442 million on a constant currency basis). The efficiency initiatives implemented throughout the previous year have flowed in to the current year, contributing to a full year margin improvement of 20 basis points on a constant currency basis.

 

The Business & Industry sector has delivered solid results despite continuing pressure on like for like volumes and the consumer demand for 'value' with good new business wins and retention. The trading environment remains challenging. Increased focus on marketing and retail analysis to drive participation and spend combined with tight cost management has enabled the sector to deliver another year of increased profit. New contract wins include The Gates Foundation's new campus site and Amazon.com's HQ, both located in Seattle, and Sun Microsystems, part of the larger Oracle contract.

 

In Healthcare, our support services offer, strengthened by recent acquisitions, has contributed to the delivery of good new business wins as well as excellent levels of retention. For example, we have recently been appointed to provide support services to The Northeast Health System, an integrated healthcare system near Boston, and HCA in West Florida which has a comprehensive network of hospitals and medical facilities. 

 

In the Education sector, new business has remained strong and we have delivered double digit organic revenue growth. The recent acquisition of Southeast Service Corporation, a support services provider, has enabled us to extend our range of support services to the Education sector, as well as further enhancing our support services capability in the Business & Industry and Healthcare sectors. We have recently won the foodservice contracts for the Adams Country Schools district in Colorado covering over 10,000 students, the Rochester Community Schools district and Andrews University, one of the oldest educational establishments in Michigan. 

 

In Levy, our Sports & Leisure business, double digit new business and excellent retention, combined with a continued focus on cost efficiencies, has contributed to a solid performance. Exciting wins include a significant contract at the Boston Convention & Exhibition Center and John B. Hynes Veterans Memorial Conference Center, which has the capacity of serving 30,000 meals per day, the Amway Centre (home to the Orlando Magic of the NBA and the Orlando Predators of the AFL) and the Xcel Energy Centre, a multi purpose arena in Minnesota. 

 

In Canada, we have recently commenced operations for Vale Inco, a leading producer of nickel, providing multi-services to a large remote camp in Newfoundland. We have also won the Ontario Power Generation food supply contract. The integration of Hurley Corporation, a soft support services provider acquired earlier in the year, is proceeding well.

 

Continental Europe

24.2% Group revenue (2009: 25.5%)

 

Economic conditions in parts of Continental Europe remained quite challenging during the year. Whilst we have generally seen increasing levels of new business, like for like volumes in the Business & Industry sector have been difficult. Overall, revenue in Continental Europe totalled £3.5 billion (2009: £3.4 billion) and organic growth is broadly flat at 0.1%. Management of the flexible cost base and ongoing efficiency gains resulted in operating profit of £248 million (2009: £235 million on a constant currency basis), an increase of 6%, and a margin improvement of 30 basis points to 7.1%.

 

New contract wins include prominent wins in Education such as the University of Lucerne in Switzerland and, Fontys University of Applied Sciences and the Eindhoven University of Technology, both in theNetherlands. New business has also been particularly encouraging in Russia, where we have now extended our business to St. Petersburg. In Turkey, we have secured some very significant wins including Turk Telekom and nationwide food and support services for Sabanci Group.

 

In France we have won the contract to cater for the public at Roland-Garros, the French Open, and a new contract to serve 2,400 meals daily at Credit Agricole. Integration of Caterine Restauration, acquired earlier in the year, is progressing well and this business has further strengthened our position in the Education and Healthcare foodservice sectors. A focus on driving cost efficiencies, particularly in the supply chain and through waste reduction initiatives, has moved the margin forward.

 

In Germany, good progress has been made on margin development despite challenging trading conditions in key sectors. In Business & Industry we have won exciting new contracts with Accenture GmbH to provide food services to both staff and clients and with IBM to provide food services including Shop2go and Dallucci retail outlets.  At Philips Medical Systems in Hamburg, we are now servicing a staff restaurant, providing hospitality services and managing the employee shops.

 

The Nordic region has seen strong new business wins in both food and multi-services, including the Sundsvall campus at Mid Sweden University and Capgemini Norge AS in Norway. In Denmark, the recent acquisition of IDA Service A/S, a multi-service business, is providing both cross-selling opportunities and synergies.

 

Italy has once again delivered an encouraging margin improvement and has gained further significant support service business with Trenitalia and Rete Ferroviaria Italiana (Italian Railways). Also, in addition to extending our important foodservice contract with the major global oil and gas group Eni, we have successfully widened our relationship with them by being awarded our first offshore contract in the Adriatic Sea.

 

The Spanish business has had the backdrop of particularly difficult economic conditions; however, there are signs that volumes are gradually becoming more stable. Simplification of the management structure and further improvements in purchasing and logistics processes are providing a solid base for future growth. Notable wins in the year include ISBAN, part of the Santander Group, and a multi-site contract with Mapfre Quavitae.

 

UK & Ireland

12.3% Group revenue (2009: 13.6%)

 

Encouragingly, we have seen some progressive improvement in organic revenue trends in the UK & Ireland business, from a 5.7% decline in the first half of the year to only a 1% decline in the second half. This is despite challenging economic conditions continuing to impact like for like volumes in the Business & Industry and Sports & Leisure sectors. The improvement is driven by a slight acceleration in new business wins and improvement in the rate of retention. Overall, revenues were £1.8 billion (2009: £1.8 billion). We have continued to work hard across the business, moving resources closer to clients and consumers and streamlining back office activities. This has improved margins by 20 basis points. Operating profit remained flat at £114 million (2009: £114 million).

 

In the Business & Industry sector we have continued to win high quality new business in both catering and support services. For example, we have won the contract to cater for 10,000 Virgin Media employees across 17 locations and renewed our contract with the Bank of England to provide staff catering, executive dining and hospitality. We have continued to focus on driving labour cost efficiencies, reducing the overall cost significantly.

 

We have seen good growth in the Healthcare sector, through increasing levels of new business wins and good like for like volume growth. The extension of our Healthcare retail offer has been a significant driver of this growth. The introduction of Steamplicity, the Spice of Life brand and the Medirest Way at the Homerton Hospital supported our retention of this important contract to provide both food and soft support services.

 

Our work over the last few years in the Education sector is continuing to deliver benefits. We have recently won a prestigious new contract with Rugby School, one of the leading independent schools in the country, and retained our contracts with Sevenoaks School and Bedford School. We have continued to make progress on productivity where a focus on labour hours and unit overheads have driven margin improvements.

 

We have continued our success in winning new business in the Sports & Leisure sector. For example, we have won a new contract with the Barbican in London where we now operate a number of public restaurants and have extended our contract with ExCel London to service the exhibition areas and new retail sites as well as the hospitality services. We have a continued focus on costs, particularly labour and in unit overheads, to mitigate the impact on profit of the decline in hospitality revenues that the sector has seen over the last 18 months.

 

Rest of the World

19.5% Group revenue (2009: 17.7%)

 

Our Rest of the World businesses have delivered strong organic revenue growth of 6.1%. Operating profit increased by £33 million, or 19.3%, on a constant currency basis to £204 million (2009: £171 million on a constant currency basis). The margin has increased by 90 basis points on a constant currency basis to 7.3% and this is now in line with the Group's other geographic regions. Going forward, the Rest of the World margin growth is now expected to progress more inline with the other geographic regions

 

We are continuing to see good levels of new business wins across most countries in the region, including new contracts with Kinross Mining in Chile and Kimberley Clark in Argentina. The drive for overhead efficiencies, coupled with restructuring programs, has contributed to the excellent margin progression.

 

Good organic revenue growth in Australia has been driven by strong levels of new business wins across all sectors. In the remote site sector, which comprises the majority of the business, we have been awarded new contracts to provide a wide range of food and support services by Citic Pacific Mining at the Eramurra village near Fortescue River and by Wesfarmers Curragh at their Central Queensland mine. The Royal Victorian Eye and Ear Hospital awarded us a new multi-service contract in the Healthcare sector, which continues to provide excellent opportunities for future growth. Australia has delivered further margin improvement in the year by focusing on all areas of MAP, for example implementing Trim Trax, the Group's waste reduction programme, reducing labour turnover and increasing focus on reducing discretionary overhead spend.

 

With the large Business & Industry and Sports & Leisure sectors in Japan, revenue growth during the year has been a challenge. However, excellent progress on control of costs, for example labour hours and consolidating suppliers and products, has delivered a further 100 basis points improvement in the margin.

 

In Brazil, strong new business wins and improving like for like revenues have delivered double-digit organic revenue growth. The pipeline continues to look strong and retention remains a key focus. The margin has increased reflecting the continued drive for efficiencies across all cost lines. The acquisition of the support service specialist Clean Mall earlier in the year continues to be integrated in to the business. This acquisition has enhanced our ability to provide a multi-service offer to clients, particularly in the Business & Industry and Healthcare sectors. 

 

In South Africa, encouraging levels of new business have been achieved especially in the Education sector with exciting wins such as The University of Venda and the Central University of Technology. The combined number of students on site in these two institutions is over 24,000.

 

Our UAE based business has delivered improved margins reflecting a focus on efficiency, especially in food and logistics. Growth in support services remains strong with large contract wins contributing to double-digit organic revenue growth.

 

Our businesses serving the energy and extraction sectors, which have a focus on blue chip international clients, have continued to deliver solid double-digit organic revenue growth and maintained excellent retention rates. 

 

Unallocated Overheads

 

Unallocated overheads for the year were £60 million (2009: £58 million), reflecting some reinvestment in the central sales and marketing teams.

 

Finance Costs

 

The underlying net finance cost was £81 million (2009: £100 million). This reflects the lower levels of debt compared to last year. At current exchange rates, we now expect the underlying net finance cost for 2011 to be around £70 million, including a charge of around £17m relating to the defined benefit pension schemes.

 

Other Gains and Losses

 

Other gains and losses include a £4 million credit (2009: £7 million cost) relating to hedge accounting ineffectiveness and £1 million credit (2009: £3 million credit) impact of revaluing investments and minority interest put options.

 

Profit Before Tax

 

Profit before tax from continuing operations was £913 million (2009: £773 million).

 

On an underlying basis, profit before tax from continuing operations increased by 18% to £922 million (2009: £784 million).

 

Income Tax Expense

 

Income tax expense from continuing operations was £246 million (2009: £221 million).

 

On an underlying basis, the tax charge on continuing operations was £248 million (2009: £224 million), equivalent to an effective tax rate of 27% (2009: 29%). This reduction reflects lower effective corporate tax rates in a number of countries and we continue to expect the tax rate to average out around the 27% level in the short- to medium-term.

 

Discontinued Operations

 

The profit after tax from discontinued operations was £13 million (2009: £40 million), principally reflecting the release of surplus provisions on the expiration of various warranty periods.

 

Basic Earnings per Share

 

Basic earnings per share, including discontinued operations, were 36.0 pence (2009: 31.7 pence).

 

On an underlying basis, excluding discontinued operations, the basic earnings per share from continuing operations were 35.7 pence (2009: 30.0 pence).

 



Attributable


Basic Earnings

Profit

Per Share



2010

2009


2010

2009

Change


£m

£m

Pence

pence

%









Reported


675

586


36.0

31.7

14%

Discontinued operations


(13)

(40)


(0.7)

(2.2)


Other adjustments


9

8


0.4

0.5


Underlying


669

554


35.7

30.0

19%

 

Dividends

 

It is proposed that a final dividend of 12.5 pence per share will be paid on 28 February 2011 to shareholders on the register on 28 January 2011. This will result in a total dividend for the year of 17.5 pence per share (2009: 13.2 pence per share), a year on year increase of 32.6%. The dividend is covered just over 2 times on an underlying earnings basis and 2.9 times on a free cash basis.

 

Free Cash Flow

 

Free cash flow from continuing operations totalled £744 million (2009: £593 million). The major factors contributing to the increase were: £120 million increase in underlying operating profit before associates and £76 million higher working capital inflow offset by £51 million higher net capital expenditure.

 

Gross capital expenditure of £334 million (2009: £287 million), including amounts purchased by finance lease of £3 million (2009: £4 million) and capital creditors of £2 million (2009: nil), is equivalent to 2.3% of revenues (2009: 2.1% of revenues). We currently expect the ratio of gross capital expenditure for 2011 to be at a similar level. Proceeds from the sale of assets were £19 million and we expect these will be minimal in 2011.

 

Working capital continues to be well managed, delivering an overall £84 million working capital inflow in the year. We have again made good progress in managing all of the key components of working capital and we have had the benefit of some cut-off timing differences at the year end. We believe that there remains further scope for improvement, averaging out over time at neutral to a small inflow.

The cash tax rate for the year was 22% (2009: 21%), based on underlying profit before tax for the continuing operations, benefiting from one or two large refunds received in the year. We currently expect the cash tax rate to average out around the 27% level for the short- to medium-term. 

The net interest outflow for the year was £72 million (2009: £100 million).

 

Overall, we are very pleased with the free cash flow performance, but given the slightly atypical reasons outlined above, we consider £670 million to be a better estimate of the underlying free cash flow for 2010.

 

Acquisition Payments

 

The spend on acquisitions in the year totalled £205 million. This includes £166 million of infill acquisitions (including £41 million on Caterine Restauration in France, £37 million on Southeast Service Corporation in the USA, £30 million on the VSG Group in the UK and £24 million on Hurley Corporation in North America), £5 million on the buyout of minority interests, £5 million acquisition transaction costs, £12 million adjustments to provisional amounts in respect of prior year acquisitions and £17 million deferred consideration and other payment relating to previous acquisitions.

 

Since the year end there has been a small amount of expenditure on the acquisitions of Reilimpa in Portugal (£4 million) and Sabora in Spain (£3 million).

 

Disposals

 

Payments made in respect of businesses disposed or discontinued in prior years totalled £9 million (2009: £31 million).

 

Proceeds from Issue of Share Capital

 

The Group received cash of £97 million in the year (2009: £28 million) from the issue of shares following the exercise of employee share options.

 

Return on Capital Employed

 

Return on capital employed was 20.3% (2009: 19.1%) based on continuing operations, excluding the Group's minority partners' share of total operating profit, net of tax at 26.9% and using an average capital employed for the year of £3,590 million (2009: £3,350 million) calculated from the IFRS balance sheet.

 

 

Pensions

 

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 fund deficit at 30 September 2010 was £389 million (2009: £335 million). The total pensions charge for defined contribution schemes in the year was £54 million (2009: £44 million) and £37 million (2009: £34 million) for defined benefit schemes. Included in the defined benefit scheme costs was a £15 million charge to net finance cost (2009: £11 million).

 

Risks and Uncertainties

 

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' on page 14.

 

Shareholder Return

 

The market price of the Group's ordinary shares at the close of the financial year was 530.5 pence per share (2009: 382.3 pence per share).

 

Related Party Transactions

 

Details of transactions with related parties are set out in Note 32. These transactions have not, and are not expected to have, a material effect on the financial performance or position of the Group.

 

Financial Position

 

The ratio of net debt to market capitalisation of £10,007 million as at 30 September 2010 was 6% (2009: 13%).

 

During the year net debt reduced to £621 million (2009: £943 million) including an increase in net debt from foreign exchange translation movements of £11 million and cash received of £97 million from the issue of share capital in the period in connection with the exercise of employee share options.

 

At 30 September 2010, the Group had cash reserves of £643 million. In addition, the Group had an undrawn bank facility of approximately £700 million, of which approximately £650 million is committed through to 2012. Taking account of cash required for day to day operations, the Group estimates it currently has headroom of around £1 billion.

 

Looking forward, £84 million of bank and Private Placements debt is due to be repaid during the 2011 financial year and it is currently envisaged that these will be repaid from surplus cash. With strong ongoing free cash flow generation, the Group believes that it is in a solid financial position.

 

The EBIT to net interest ratio has increased from 5.6 times in 2006 to 12.3 times in 2010 and the EBITDA to net interest has increased from 8.2 times to 15.2 times in the same period. This is adjusted where necessary for covenant definitions and includes share of profits of associates and discontinued operations, but excludes  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.

 

 

 

 

 

 

 

 

Going Concern

 

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Review, as is the financial position of the Group, its cash flows, liquidity position, and borrowing facilities. In addition, Note 19 includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

 

The Group has considerable financial resources together with longer term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

 

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.

 

 

 

 

Andrew D Martin 

Group Finance Director

 



Managing Risk

 

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 Group has policies and procedures in place to ensure that risks are properly evaluated and managed at the appropriate level within the business.

 

The identification of risks and opportunities; the development of action plans to manage the risks and exploit the opportunities; and the continual monitoring of progress against agreed KPIs is an integral part of the business process, and a core activity throughout the Group.

 

Control is exercised at Group and business level through the Group's Management and Performance framework, monthly monitoring of performance by comparison with budgets and forecasts and through regular Business Reviews with the Group Chief Executive and the Group Finance Director. 

 

This is underpinned by a formal major risk assessment process which is an integral part of the annual business cycle.  As part of the process, each of the Group's businesses is required to identify and document major risks and appropriate mitigating activities and controls; and monitor and report to management on the effectiveness of these controls on a biannual basis.  Senior managers are also required to sign biannual confirmations of compliance with key procedures and to report any breakdowns in, or exceptions to, these procedures.  The results are reviewed by the Executive Committee and the Board.

 

The Group also has formal procedures in place, with clearly designated levels of authority, for approving acquisitions and other capital investments.  This is supported by a post investment review process for selected acquisitions and major items of capital expenditure.

 

The table below sets out the principal risks and uncertainties facing the business at the date of this Report and the systems and processes the Group has in place to manage and mitigate these risks.

 

Risk



Mitigation





Health, safety and environment

Food safety


Compass feeds millions of consumers around the world every day, therefore setting the highest standards for food hygiene and safety is paramount. The Group has appropriate policies, processes and training procedures to ensure full compliance with legal obligations.


Health and safety


Health and safety remains our number one operational priority. All management meetings throughout the Group feature a Health and Safety update as one of their first agenda items.


Environment


Everyday, everywhere, we look to make a positive contribution to the health and wellbeing of our customers, the communities we work in and the world we live in. Our Corporate Responsibility statement in the Annual Report describes our approach in more detail.

Clients and

consumers

Client retention


We aim to build long-term relationships with our clients based on quality and value. Our business model is structured so that we are not reliant on one particular sector, geography or group of clients.


Consolidation of food and support services


We have developed a range of support services to complement our existing foodservice offer. These services are underpinned by the Compass Service Framework, our standard operating platform for support services, which gives us the capability to deliver to the same consistent world-class standard globally.


Bidding risk


The Group's operating companies bid selectively for large numbers of contracts each year and a more limited number of concession opportunities. Tenders are developed in accordance with a thorough process which identifies both the potential risks (including social and ethical risks) and rewards, and are subject to approval at an appropriate level of the organisation.


Credit risk


There is limited concentration of credit risk with regard to trade receivables given the diverse and unrelated nature of the Group's client base.


Service delivery and compliance with contract terms and conditions


The Group's operating companies contract with a large number of clients. Processes are in place to ensure that the services delivered to clients are of an appropriate standard and comply with the appropriate contract terms and conditions.                     

 

 

Risk



Mitigation






Changes in consumer

preferences


We strive to meet consumer demand for quality, choice and value by developing innovative and nutritious food offers which suit the lifestyle and tastes of our consumers.

People

People retention

and motivation


The recruitment and retention of skilled employees is a challenge faced by the industry at large. The Group has established training and development programmes, succession planning and performance management programmes which are designed to align rewards with our corporate objectives and to retain and motivate our best people.

Supply Chain

Suppliers


The Group constantly strives to find the right balance between building long-term supply relationships based on the compatibility of values and behaviour with the requirements of the Group as well as quality and price. The Group seeks to avoid over-reliance on any one supplier.


Traceability


To reduce risk we are focusing on traceability, clear specification of our requirements to nominated suppliers and the improvement of purchasing compliance by unit managers.

Economic risk

Economy


Around 50% of our business, the Healthcare, Education and Defence, Offshore and Remote Site sectors, are less susceptible to economic downturns. Revenues in the remaining 50%, the Business & Industry and Sports & Leisure sectors, are more susceptible to the economy and employment levels. However, with the variable and flexible nature of our cost base, it is generally possible to contain the impact of like for like volume declines.


Food cost inflation


As part of our MAP programme we seek to manage food price inflation through: cost indexation in our contracts, giving us the contractual right to review pricing with our clients; menu management to substitute ingredients in response to any forecast shortages and cost increases; and continuing to drive greater purchasing efficiencies through supplier rationalisation and compliance.


Labour cost inflation


Our objective is always to deliver the right level of service in the most efficient way. As part of our MAP programme we have been deploying tools and processes to optimise labour productivity and exercise better control over other labour costs such as absenteeism, overtime and third party agency spend; and to improve our management of salary and benefit costs and control labour cost inflation.

Regulatory,

political and

competitive

environment

Political stability

                 


Compass is a global company operating in countries and regions with diverse economic and political conditions. Our operations and earnings may be adversely affected by political or economic instability. However, we remain aware of these risks and look to mitigate them wherever possible. We have also taken the strategic decision to withdraw from a number of countries (and had completed most of these withdrawals by the date of this report) where we consider the risks outweigh the rewards.


Regulation


Changes to laws or regulations could adversely affect our performance.  We engage with governmental and non-governmental organisations directly or through trade associations to ensure that our views are represented.


Competition


Compass operates in a competitive market place. The level of concentration and outsource penetration varies by country. Some markets are relatively concentrated with two or three key players, others are highly fragmented and offer significant opportunities for consolidation and penetration into the self-operated market. Aggressive pricing from our competitors could cause a reduction in our revenues and margins. We aim to minimise this by building long term relationships with our clients based on quality and value.

Acquisitions

and

investments

Acquisition risk


Potential acquisitions are identified by the operating companies and subject to appropriate levels of due diligence and approval by Group management. Post acquisition integration and performance is closely managed and subject to regular review.


Investment risk


Capital investments are subject to appropriate levels of scrutiny and

approval by Group management.


Joint ventures


In some countries we operate through joint ventures. Procedures are in place to ensure that joint venture partners bring skills, experience and resources that complement and add to those provided from within the Group.



 

Risk



Mitigation





Information

technology and

infrastructure



The Group relies on a variety of IT systems in order to manage and deliver services and communicate with its customers, suppliers and employees. There is minimal inter-country dependence on IT systems, and all of the Group's major operating companies have appropriate disaster recovery plans in place.

Fraud and

compliance



The Group's zero tolerance based Code of Ethics governs all aspects of our relationship with our stakeholders. All alleged breaches of the Code are investigated. The Group's procedures include regular operating reviews, underpinned by a continual focus on ensuring the effectiveness of internal controls.

Litigation



Though we do not operate in a litigious industry, we have in place policies and processes in all of our main operating companies to report, manage and mitigate against third-party litigation.

Reputation risk



Our brands are amongst the most successful and best established in our industry. They represent a key element of the Group's overall marketing and positioning. In the event that our brand or reputation is damaged this could adversely impact the Group's performance.  The Group's zero tolerance based Code of Ethics is designed to safeguard the Company's assets, brands and reputation.

Financial risk

Overview


Compass Group's financial risk management strategy is based upon sound economic objectives and good corporate practice. The main financial risks concern the availability of funds to meet our obligations (liquidity risk), movements in exchange rates (foreign currency risk), movements in interest rates (interest rate risk), and counterparty credit risk. Derivative and other financial instruments are used to manage interest rate and foreign currency risks. Further details of our financial risks and the ways in which we mitigate them are set out below.


Liquidity Risk

 


The Group finances its borrowings from a number of sources including banks, the public markets and the private placement markets.  The maturity profile of the Group's principal borrowings at 30 September 2010 shows the average period to maturity is 2.7 years. The Group's undrawn committed bank facilities at 30 September 2010 were £696 million (2009: £756 million).


Financial Instruments

 


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.


Foreign Currency Risk


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 2010 actual currency liabilities to the effective currency borrowed is set out in note 18 of 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 34 of 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.


Interest Rate Risk

 


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.



 

Risk



Mitigation





Pensions risk



The Group's defined benefit pension schemes are closed to new entrants other than for transfers under public sector contracts in the UK where the Company is obliged to provide final salary benefits to transferring employees. Steps have been taken to reduce the investment risk in these schemes. Further information is set out in note 22 of the consolidated financial statements.

Tax risk



As a Group, we seek to plan and manage our tax affairs efficiently in the jurisdictions in which we operate. In doing so, we aim to act in compliance with the relevant laws and disclosure requirements. In an increasingly complex international tax environment, a degree of uncertainty is inevitable in estimating our tax liabilities. We exercise our judgement, and seek appropriate professional advice, in assessing the amounts of tax to be paid and the level of provision required. The effective rate of tax may be influenced by a number of factors, including changes in laws and accounting standards, which could increase the rate.

 

 

 



Consolidated Financial Statements

 

Directors' responsibilities

 

The financial information set out below does not constitute the company's statutory accounts for the years ended 30 September 2010 or 2009, but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered following the company's annual general meeting. The Auditors have reported on those accounts; their Reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their Report and did not contain statements under s498(2) or (3) Companies Act 2006.

 

 

The Annual Report and Accounts complies with the Disclosure and Transparency Rules ('DTR') of the United Kingdom's Financial Services Authority in respect of the requirement to produce an annual financial report. The Annual Report and Accounts is the responsibility of, and has been approved by, the Directors. We confirm that to the best of our knowledge:

 

·  the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards('IFRS');

·  the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·  the Annual Report and Accounts includes a review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

On behalf of the Board

 

 

 

 

 

 

Mark J White

General Counsel and Company Secretary

24 November 2010

 

 


 

The directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards ('IFRS'). Company law requires the directors to prepare such financial statements in accordance with IFRS, the Companies Act 2006 and Article 4 of the IAS Regulation.

 

International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expense set out in the International Accounting Standards Board's 'Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards.

 

Directors are also required to:

 

·      properly select and apply accounting policies;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.

 

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report and directors' remuneration report which comply with the requirements of the Companies Act 2006. The directors, having prepared the financial statements, have permitted the auditors to take whatever steps and undertake whatever inspections they consider to be appropriate for the purpose of enabling them to give their audit opinion.

 

The Directors are also responsible for the maintenance and integrity of the Compass Group PLC website.

 

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 



 

Consolidated income statement







for the year ended 30 September 2010


















2010


2009



Notes


 £m


 £m








Continuing operations







Revenue


1


14,468


13,444

Operating costs


2


(13,485)


(12,574)

Operating profit


1


983


870

Share of profit of associates


1, 12


6


7

Total operating profit


1


989


877

Finance income


4


5


14

Finance costs


4


(86)


(114)

Hedge accounting ineffectiveness


4


4


(7)

Change in the fair value of investments and minority interest put options


4


1


3

Profit before tax




913


773

Income tax expense


5


(246)


(221)

Profit for the year from continuing operations


1


667


552








Discontinued operations







Profit for the year from discontinued operations


6


13


40








Continuing and discontinued operations







Profit for the year




680


592








Attributable to







Equity shareholders of the Company




675


586

Minority interests




5


6

Profit for the year




680


592








Basic earnings per share (pence)







From continuing operations


7


35.3p


29.5p

From discontinued operations


7


0.7p


2.2p

From continuing and discontinued operations


7


36.0p


31.7p








Diluted earnings per share (pence)







From continuing operations


7


35.1p


29.4p

From discontinued operations


7


0.7p


2.2p

From continuing and discontinued operations


7


35.8p


31.6p















Analysis of operating profit







for the year ended 30 September 2010


















2010


2009





 £m


 £m








Continuing operations














Underlying operating profit before share of profits of associates




997


877

Share of profit of associates




6


7

Underlying operating profit before costs relating to acquisitions and disposals




1,003


884

Amortisation of intangibles arising on acquisition




(7)


(7)

Acquisition transaction costs




(5)


-

Share based payments expense - minority interest call option




(2)


-

Total operating profit 




989


877

 



 

Consolidated statement of comprehensive income

for the year ended 30 September 2010








































Movements in equity









Retained

Revaluation

Translation

Minority


Total


Total





earnings

reserve

reserve

interest


2010


2009



Notes


£m

£m

£m

£m


£m


£m













Profit for the year




675

-

-

5


680


592

Other comprehensive income












Currency translation differences




-

-

34

-


34


89

Actuarial gains/(losses) on post-retirement employee benefits


22


(57)

-

-

-


(57)


(206)

Tax on items relating to the components of other comprehensive income


5


18

-

(6)

-


12


70

Other




-

-

-

-


-


(1)

Total other comprehensive income/(loss) for the period




(39)

-

28

-


(11)


(48)

Total comprehensive income for the period




636

-

28

5


669


544













Attributable to












Equity shareholders of the Company




636

-

28

-


664


534

Minority interests




-

-

-

5


5


10





636

-

28

5


669


544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of changes in equity

for the year ended 30 September 2010

























 



Attributable to equity shareholders of the Company





 




Share


Capital








 



Share

 premium


redemption

Own

Other

Retained


Minority



 



capital

 account


 reserve

 shares

reserves

earnings


 interests


Total

 

Reconciliation of movements in equity


£m

 £m


£m

£m

£m

£m


£m


£m

 














 

At 1 October 2009


185

215


44

(2)

4,489

(2,395)


9


2,545

 














 

Profit for the period


-

-


-

-

-

675


5


680

 

Other comprehensive income


-

-


-

-

28

(39)


-


(11)

 

Total comprehensive income for the year


-

-


-

-

28

636


5


669

 














 

Issue of shares (for cash)


4

93


-

-

-

-


-


97

 

Fair value of share-based payments


-

-


-

-

9

-


-


9

 

Tax on items taken directly to equity (note 5)


-

-


-

-

-

17


-


17

 

Share based payments expense - minority interest call option


-

-


-

-

-

2


-


2

 

Settled in new shares (issued by the Company)


-

9


-

-

(9)

-


-


-

 

Settled in cash or existing shares (purchased in market)

-

-


-

-

(1)

-


-


(1)

 

Transfer on exercise of put options


-

-


-

-

5

2


-


7

 

Buy-out of minority interests


-

-


-

-

-

(6)


(5)


(11)

 



189

317


44

(2)

4,521

(1,744)


9


3,334

 














 

Dividends paid to Compass shareholders

 (note 8)


-

-


-

-

-

(258)


-


(258)

 

Dividends paid to minority interests


-

-


-

-

-

-


(4)


(4)

 

(Increase)/decrease in own shares held for staff compensation schemes(1)

 

-

-


-

1

-

-


-


1

 

At 30 September 2010


189

317


44

(1)

4,521

(2,002)


5


3,073

 














 

(1) These shares are held in trust and are used to satisfy some of the Group's liabilities to employees for share options, share bonus and long-term incentive plans.

 

 











Equity








Share-based





adjustment








 payment

Merger

Revaluation

Translation


for put


Total other

Other reserves





reserve

reserve

reserve

reserve


options


reserves





£m

 £m

£m

£m


£m


£m














At 1 October 2009





146

4,170

7

172


(6)


4,489














Profit for the period





-

-

-

-


-


-

Other comprehensive income





-

-

-

28


-


28

Total comprehensive income for the year





-

-

-

28


-


28














Fair value of share-based payments





9

-

-

-


-


9

Settled in new shares (issued by the Company)





(9)

-

-

-


-


(9)

Settled in cash or existing shares

(purchased in market)





(1)

-

-

-


-


(1)

Transfer on exercise of put options





-

-

-

-


5


5

Equity adjustment for grant of put option





-

-

-

-


-


-

At 30 September 2010





145

4,170

7

200


(1)


4,521