29th Feb 2008 07:01
Davis Service Group PLC29 February 2008 FOR IMMEDIATE RELEASE 29th February 2008 THE DAVIS SERVICE GROUP PLC Preliminary results announcement for the year ended 31st December 2007 Well positioned for future growth Financial Highlights Revenue Up 17% to £822.1 million (2006: £704.6 million) Adjusted operating profit* Up 12% to £106.6 million (£94.9 million) Adjusted profit before tax* Up 6% to £90.3 (£85.3 million) Adjusted earnings per share* Up 8% to 38.4p (35.7p) Total dividends per share Up 7% to 19.4p (18.2p) Profit before taxation Down 4% to £78.7 million (£82.0 million) Basic earnings per share Up 15% to 37.1p (32.4p) * before exceptional items and amortisation of customer contracts and intellectual property rights Operational Highlights • Strong performances from all three of the Group's geographic regions o Nordic region: • Revenues up 10% to £263.8m (£238.8m) of which organic revenue growth was 7% • Adjusted operating profit up 7% to £43.8m (£41.0m) • Entry into 3 Baltic States (by acquisition) in 2008 o Continent region: • Revenues up 17% to £191.8m (£164.2m) primarily from acquisitions • Adjusted operating profit up 19% to £29.2m (£24.5m) • Excellent first year contribution from Permaclean, the German workwear acquisition o UK and Ireland: • Revenues up 22% to £366.5m (£301.6m) of which organic revenue growth was 8% • Adjusted operating profit up 13% to £38.2m (£33.9m) • Positive progress on pricing, relief from cost pressures and launch of integrated Clinical Solutions business in October 2007 • Acquisitions totalling £116.7 million, investing for the future Christopher Kemball, Chairman of Davis Service Group, commented: "This has been a good year for Davis. We have delivered significantly higherrevenue and adjusted profit growth while also making key investments for thefuture. "We remain well placed and enjoy a strong and diverse customer contract base.We are seeing the benefit of the investments we have made over recent years, wehave experienced management teams throughout Europe and we have seen the exit ofsome competition from the UK market. Our Continental European businessescontinue to deliver good organic and acquisition-led growth and now account forover 55% of Group revenues and 65% of Group operating profit, while our UKbusiness has stronger prospects than for some time. Our free cash flow is good.We have a strong balance sheet and our debt, much of which is at fixed rates,is committed for periods of up to ten years. "We expect to grow our business in all three regions in 2008 and to maketargeted investments and acquisitions. Each region's growth will stem fromdifferent factors but we continue to believe we can still deliver on theconfidence we have previously expressed in the opportunities for the Group." For further information contact: The Davis Service Group Plc Financial DynamicsRoger Dye, Chief Executive Richard Mountain/Harriet KeenKevin Quinn, Finance Director Telephone 020 7269 7121Telephone 020 7269 7121 (today until 12 noon) Telephone 020 7259 6663 (thereafter) The Davis Service Group PlcResults for the year ended, 31st December 2007 We are pleased to report that this has been a good year for The Davis ServiceGroup, delivering significantly higher revenue and adjusted profit growth thanin 2006 while also making key investments for the future. At the half year, we reported that the year had started strongly and this hasproved particularly so in the second half of the year where earnings grew 10%compared with the same period of 2006. This has been achieved through thecombination of stronger organic growth and the benefits coming through from thetargeted acquisitions we made both in Continental Europe and in the UK. In 2007, we invested in two strategic platforms for growth. In January, weacquired Permaclean to give us national coverage for our workwear business inGermany and, in June, we acquired clinical solutions and instrumentdecontamination businesses in the UK. We have made good progress with both ofthese acquisitions. Since the end of 2007 we have made investments in threeBaltic States and have commenced preparation for a greenfield operation in theCzech Republic. The Executive Board for the Group, which was announced in May 2007, has beenworking well. It comprises Christian Ellegaard and Peter Haveus as ManagingDirectors of the Nordic and Continent regions respectively, Steve Finch,Managing Director of our UK and Ireland business, Roger Dye, Group ChiefExecutive, Kevin Quinn, Group Finance Director and David Lawler, CompanySecretary. We have now appointed a new Managing Director for Denmark who joinsus with good service industry experience. Results Revenue increased to £822.1 million in the year, up 17% (2006: £704.6 million).Adjusted operating profit (before exceptional items and amortisation of customercontracts and intellectual property rights) was £106.6 million compared with£94.9 million last year, an increase of 12%. Our net finance expense was £16.3million compared with £9.6 million last year, reflecting the funding ofadditional investments and interest rate rises. Adjusted profit before tax was£90.3 million (£85.3 million) and adjusted earnings per share rose 8% from 35.7pence to 38.4 pence. Our second half 2007 adjusted earnings per share were 21.5p(19.5p) an increase of 10% over the same period in 2006. We expect a similarpattern of stronger second half growth in 2008 supporting the increasinginvestment in sales and marketing we are making in the first half of the yearand in the new territories we have entered in 2008. Our tax rate on adjusted profit before tax was 27.1%, down from 28.3% last yearbecause of the reduction in rates in Denmark and Holland as well as a number ofone-off tax related items. We expect to benefit in 2008 from the reduction inrates in Germany and the UK and our group rate is therefore expected to remainat around 27%. In 2007 we realised net exceptional income totalling £0.8 million. This arosefrom the sale of property and a further receipt of cash from the HSS businesswhich was sold in 2003, offset by the cost of integrating Permaclean (£2.1million). Amortisation of acquired customer contracts and intellectual propertyrights increased to £12.4 million (£6.1 million) resulting from the acquisitionswe have made. Operating profit after these items was £95.0 million (£91.6million) and profit before taxation was £78.7 million (£82.0 million). We havealso recognised a one-off taxation credit on revaluing the closing deferred taxbalances in Germany and the UK for the reduction in tax rates discussed above.As a result of these items basic earnings per share were 37.1 pence comparedwith 32.4 pence in 2006. We are pleased at the number of attractive investment opportunities we have inthe higher growth areas of our business and in 2007 we increased our net capitalexpenditure to £169.3 million (£133.6 million), in particular investing in newplants for workwear and facilities in the growing markets of Norway and Poland.These plants, built to a standard design, each require an initial investment ofup to £5 million and will generate annual revenues of up to £7 million whenfully operational. With the Norwegian and Polish businesses growing at doubledigit rates we expect to generate good returns from these investments in themedium term. We have also made plant upgrades in the UK to accommodate theadditional volumes we have gained this year. Our textiles spend also increased,primarily to support the new contracts we have won in all our regions and theimpact of acquisitions. Overall, textile spend increased by £20.5 million to£121.2 million reflecting the momentum of our business. We continued to makeimprovements in the terms for sourcing of our textiles, more than doubling thevalue of textiles directly sourced from the Far East. However, there areopportunities for further savings and we have set ambitious targets for 2008. We are currently seeing growth opportunities despite the general economicoutlook and net capital expenditure is expected to be at similar levels in 2008,with proportionately more in the first half of the year than in 2007 due toplant investments, which are discussed in the regional reviews below. This isbefore taking into account the investment required in decontamination centres inthe UK, should we be successful in National Decontamination Programme tenders. Free cash flow remains good at £47.8 million (£59.9 million). Net borrowings at31 December 2007 were £367.1 million (£237.2 million) reflecting acquisitionswith a total consideration of £116.7 million and the impact of exchange, whichincreased net borrowings by £21.2 million. This compares with a total of £550million of facilities, which are committed to 2012 - 2018 under our RevolvingCredit Facility and the 2006 Private Placement notes. In January 2008 weincreased by £40 million the proportion of borrowings at fixed rates and as aresult have approximately £310 million of borrowings with an average fixed rateof 4.2%. We ended the year with net retirement benefit obligation liabilities for thegroup of £5.7 million (£42.1 million) following a payment into the group's mainUK Pension Plan of £12.5 million in January 2007 to fund the past servicedeficit and incorporating the results of its triennial valuation in February2007. Overall the group retains a strong balance sheet and net interest cover of 6.5times adjusted operating profit for 2007. The Board is recommending a final dividend of 13.3 pence, which, together withthe interim dividend of 6.1 pence paid in October 2007, gives a total of 19.4pence an increase of 7% on last year. The dividend will be paid on 6th May 2008to shareholders on the register at the close of business on 18th April 2008. In this report, we present our business operations for the first time under thenew divisional management structure: our Nordic and Continent regions, whichtogether were previously reported as Continental Europe, and the UK and Irelandregion. Results of our Continental European businesses as a whole showedrevenue up 13% to £455.6 million (£403.0 million) and adjusted operating profitup 11% to £73.0 million (£65.5 million). These results reflected the positiveimpact of exchange rates of £3.0 million on revenue and £0.5 million on adjustedoperating profit. Nordic Region Our Nordic region covers the country operations in Denmark, Sweden (includingour direct sales business Bjornklader), Norway and Finland. In January 2008we agreed to acquire textile maintenance businesses in the Baltic countries ofEstonia, Latvia and Lithuania. We are market leader across the region as awhole, with 46 plants and 2,900 staff. Revenue in our Nordic region increased 10% to £263.8 million (£238.8 million)with adjusted operating profit up 7% to £43.8 million (£41.0 million). Organicrevenue growth was 7%. The region benefited from strong economic growth in the year. In our largestmarkets in the region, Denmark and Sweden, real GDP growth was 2% and 3%respectively with low levels of unemployment. Although the Danish and Swedishmarkets have higher overall levels of penetration for our textile service, theystill offer good opportunities for growth. Our management teams are targetingour services to new market areas, such as local communities, which requireservice providers of scale who can manage the additional logistics of aworkforce 'on the move'. Our approach, throughout all our businesses, is to bea total solutions provider, managing the needs of the customer, rather than aprovider of commodity products. We are also growing new concepts, such asprovision of washable shoes. The opportunity for our facilities business,washroom and mat services is strong in these markets with relatively low levelsof rental penetration particularly in washroom, where we estimate roller towelsto account for less than a 10% market share. There is a growing awareness ofthe benefits of our hygiene solution with recognition of our brand. Despite therelative immaturity of the facilities business, we have approximately 55,000customers across Denmark and Sweden and this already provides density for ouroperations to deliver good margins. This has given us the confidence to investfurther in our salesforce with the rate of net new sales growth becomingstronger as 2007 progressed. Our Bjornklader business is a direct workwear and protection equipmentsupplier with a strong brand, which has a network of retail outlets in Sweden.We have expanded the network by seven shops in 2007 through acquisition, in linewith our growth plans, and the business grew 20% in revenues. Although itsmargin is below the average of our textile maintenance businesses it made a goodcontribution to profits. Our Norwegian business is very well placed in a strong economy where textilemaintenance is relatively immature and we are clear market leader in our sector.We invested this year in a new workwear plant in Bergen and we have alreadyreplaced at substantially higher margins the revenues we disposed of with ourlast remaining flat linen plant in 2006. Customers are increasinglyappreciating the benefits of total customer care and we are deliveringinnovative services, such as the Unimat system for 24 hours a day automateddispensing of garments at customer premises. Our underlying organic growth inNorway, excluding the disposed business, was in excess of 10%. We entered the Finnish market in 2005. As expected, we have incurred minorlosses in the start up phase of our operations but we see Finland as a buoyantmarket with profitable growth opportunities in which we intend to invest. In January 2008, we entered the Baltic region with our textile serviceoperations. We acquired a small but leading mat business in Estonia and themarket leader in mat services in Latvia. We agreed to purchase the marketleader in Lithuania. The total consideration for these acquisitions is £12.6million. These economies are developing strongly as a result of their recentmembership of the European Union and our acquisitions give us good entrypositions in a core service area on which we can build our operations and brandawareness while developing a service offering in workwear and washroom services. The investments we have made over the last two years in the Nordic region arenow fully integrated and performing well. There was less opportunity this yearfor bolt-on rental acquisitions but we still invested £8.9 million in 2007primarily in BjornklTM?der. There are a small number of potential bolt-ontargets for our rental businesses but we remain cautious about timing. Continent Region Our Continent region covers the country operations of Germany, Austria, Hollandand Poland. In January 2008, we established a new company in the Czech Republicand expect to commence operations towards the end of this year. We are marketleader across the region as a whole, with 34 plants and 4,400 staff. Revenues in our Continent region grew 17% to £191.8 million (£164.2 million)while adjusted operating profit was up 19% to £29.2 million (£24.5 million).The organic revenue growth delivered by our Dutch and Polish businesses wasoffset by the expected decline in German Healthcare. Germany is our pivotal market on the Continent with revenues now exceeding £120million. We are pleased to report that, following the acquisition of Permacleanin workwear earlier in 2007, we have seen adjusted operating profits and marginsmove ahead strongly despite the fact that our healthcare business in Germanyended the year with lower profits and revenues. Our management team has builton the business base of Permaclean, which was already well invested with a goodmarket position based on quality and service with a strong, diversified customerportfolio. It is also focused entirely on higher margin workwear andfacilities, which is often not the case in German textile maintenance companies.Management has delivered the benefits of the acquisition, which has given us anational footprint, through a combination of a well planned and executedintegration process and the introduction of best management practice to whichthe new business team has responded well. Permaclean contributed approximately£21.0 million to revenue and we have seen margins build through the year,particularly in the second half, towards the levels achieved elsewhere in thegroup. We believe that there are opportunities for further expansionorganically and through acquisition in workwear in what remains a fragmentedmarket. While the hospital market in Germany, which is substantially outsourced,continues to be under pressure as the hospitals themselves contract andconsolidate, there are other care sectors in the market such as elderly care andnursing homes which are growing and where the level of outsourcing is lessadvanced. We see opportunities for growth longer term and are positioningourselves to address these market sectors more aggressively. On the other hand,our healthcare business in Austria, which has higher margins, did not sufferfrom the same market conditions and grew its profits, albeit from a small base. Our business in Holland grew 5% mainly through organic revenue growth which,with a small benefit from acquisitions providing an improvement in margin, was agood result. We have seen continued good momentum in sales despite the factthat this is a very competitive market for us. We believe we have gained marketshare by investing in our salesforce and by improving its efficiency. We arepleased that approximately one third of sales to new customers, who have notpreviously had a rental contract, were made in the new market segments we havebeen targeting. For 2008, we will invest in our clean room plant to ensure wecapture the maximum opportunity in this niche, higher margin part of thebusiness. Our Polish business again grew revenue close to 20%. We opened our new plant inWarsaw in the summer and, with the transfer of work from our existing twoplants, we have been building up our productivity levels. We opened a new plantin Poznan in February 2008 and we are investing in clean room facilities in thissite which will be the first such facility in Poland to capture this growingopportunity. We have identified a further two greenfield sites in Poland forfurther profitable expansion. We have established a company in the Czech Republic and are currentlynegotiating a land purchase for a greenfield site for workwear and facilitiesservices. Our plan is to have this site operational early in 2009 and through2008 we will build our salesforce and target the strong industrial base in thisnew member state within the European Union. We are using experienced managementfrom within the group to develop our operations there. Acquisitions in the Continent region totalled £45.6 million, primarily inrespect of Permaclean. UK and Ireland Our revenue grew by 22% to £366.5 million (£301.6 million) including acontribution of £21.0 million from the Clinical Solutions business, which wasacquired in June. Overall, organic revenue growth was 8% including the benefitof the linen contracts which we won following the exit of Brooks' from themarket. Adjusted operating profit was up 13% to £38.2 million (£33.9 million)driven by acquisitions, including a contribution of £0.8 million from ClinicalSolutions. The plants in operation number 58 with 9,800 staff in the region. The textile maintenance businesses in the UK and Ireland have performed well,with revenue and adjusted operating profits moving ahead with double digitgrowth in the year (excluding Clinical Solutions). Margins were stable in thesecond half of the year compared with the second half of 2006 after a number ofperiods of decline; a welcome reversal of trend. Our UK business has strongerprospects than it has had for many years, with each of our divisions seeingopportunities for profitable volume growth as discussed below. A levelling out of costs, which have suffered significant increases in recentyears, has also contributed to a more positive outlook with a minimum wageincrease of 3.2% in October 2007 compared to much higher levels in past years.Energy costs are benefiting from our fixed gas prices to September 2008. Our hotel and restaurant division was able to secure new business with an annualvalue of £8.0 million following the exit of Brooks from the market. Thisresulted in a significant amount of capacity permanently leaving the market 12months after Rentokil withdrew from this market. Thanks to the skill anddedication of our staff at all levels, we were able to transfer those contractsover a matter of days to ensure continuity of service to customers. We havecontinued our focus this year on appropriate pricing but much remains to be doneto ensure that pricing meets the demands of scale and service our customersrequire and to enable us to invest for the future growth predicted for thisindustry. Sunlight is now the only company able on its own to provide anational service, although other providers can do so through regional alliances.Servicing of our additional volume meant two additional plants were requiredfor operation during the summer; we recommissioned our Hayes plant and acquiredthe leased facility in Northfleet from the Brooks' administrator. Our margin inthe hotel and restaurant division increased in 2007 but we believe we can nowtarget further improvement in margins for 2008. Our healthcare division saw revenue and profits move ahead. The business hasbeen successful in retaining and extending existing contracts under the NHS(PASA) framework agreement and we are pleased with the level of new contractwins in tenders for new outsourced services. In the period prior to theframework being agreed, NHS Trusts deferred their outsourcing programme but thisis now back on the agenda of many Trusts with further tenders being proposed.The framework has led to lower pricing for those Trusts whose contract pricingwas above framework, which have now mostly been renewed. We therefore expectthat going forward we will see price stability with the opportunity to increaseprices on renewal of those contracts which are below the framework price. Thiswill take a number of years to develop. In June we made a strategic acquisition of clinical solutions and instrumentdecontamination businesses to provide entry to the attractive UK sterileconsumables and decontamination markets, both of which have strong growthprospects. We aim to build on the strong relationships that Sunlight alreadyhas with many NHS Trusts and other healthcare providers and to develop a broaderrange of services alongside Sunlight's existing operations. In addition, we willdeliver the same focus on operational excellence that exists within Sunlight,thereby improving margins. We have moved quickly to integrate the salesforce ofthe Clinical Solutions business in October 2007 to capture the goodopportunities to cross sell services with our existing reusable textiles intothe operating theatre market. We are currently negotiating a contractualfinancial close on a National Decontamination Programme contract, on which thebusiness was awarded preferred bidder status prior to our acquisition. We aremaking progress with the potential for further contract wins but the processremains slower than we would want. As a consequence, bidding costs forcontracts under the National Decontamination Programme have been higher thananticipated as we await decisions from the Trusts on the tenders. While the workwear market remains competitive we have benefited in the year fromthe contracts we acquired for a relatively modest cost from Brooks with £7million in annual revenue. We have invested in new textiles for the businessand on plant upgrades. In the second half we successfully integrated thisvolume into our plants, with the effect that margins have stabilised and shouldnow start to improve in 2008. We continue to invest in sales and service and weare seeing growth in some key profitable sectors. Our operations in Ireland grew both revenue and operating profit with a good andestablished mix of business. During the year, we spent £62.2 million on acquisitions in this region, of which£43.0 million was paid at completion to acquire the clinical solutions anddecontamination businesses of the InHealth group. Further deferred cashconsideration is payable of up to £22.5 million dependent upon futuredecontamination contract awards. We have also acquired a linen direct supplybusiness which complements our textile maintenance business. Outlook We remain well placed and enjoy a strong and diverse customer contract base. Weare seeing the benefit of the investments we have made over recent years, wehave experienced management teams throughout Europe and we have seen the exit ofsome competition from the UK market. Our Continental European businessescontinue to deliver good organic and acquisition-led growth and now account forover 55% of Group revenues and 65% of Group operating profit, while our UKbusiness has stronger prospects than for some time. Our free cash flow is good.We have a strong balance sheet and our debt, much of which is at fixed rates,is committed for periods of up to ten years. We expect to grow our business in all three regions in 2008 and to continue tomake targeted investments and acquisitions. Each region's growth will stem fromdifferent factors but we continue to believe we can still deliver on theconfidence we have previously expressed in the opportunities for the Group. CONSOLIDATED INCOME STATEMENTFor the year ended 31st December 2007 Notes Year to Year to 31 December 31 December 2007 2006 £m £m Continuing operations Revenue 1 822.1 704.6Cost of sales (455.4) (395.6) Gross profit 366.7 309.0 Other operating income 3.9 8.8Distribution costs (153.4) (130.7)Administrative expenses (105.5) (87.8)Other operating expenses (16.7) (7.7)Operating profit 1 95.0 91.6 Analysed as:Operating profit before exceptional items and amortisation of customercontracts and intellectual property rights 1 106.6 94.9Exceptional items 2 0.8 2.8Amortisation of customer contracts and intellectual property rights (12.4) (6.1)Operating profit 1 95.0 91.6 Finance expense (21.7) (16.0)Finance income 5.4 6.4 Profit before taxation 78.7 82.0Taxation 3 (15.1) (23.5) Profit for the year from continuing operations 63.6 58.5Discontinued operationsLoss for the year from discontinued operations - (3.0) Profit for the year 63.6 55.5 Analysed as:Profit attributable to minority interest 0.4 0.3Profit attributable to equity shareholders 63.2 55.2 Earnings per share expressed in pence per share- Basic 5 37.1 32.4- Diluted 5 36.9 32.3 Earnings per share from continuing operations- Basic 5 37.1 34.2- Diluted 5 36.9 34.1 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the year ended 31st December 2007 Year to Year to 31st December 31st December 2007 2006 £m £m Profit for the year 63.6 55.5 Exchange adjustments offset in reserves 13.3 (4.0) Actuarial gains/(losses) recognised in the pension scheme 23.1 (2.7) Gain on cash flow hedges 3.3 7.6 Tax on items taken directly to equity (11.3) 3.5 Net gains not recognised in income statement 28.4 4.4 Total recognised income for the year 92.0 59.9 Attributable to: Minority interests 0.4 0.3 Equity shareholders 91.6 59.6 CONSOLIDATED BALANCE SHEETAs at 31st December 2007 Notes 31 December 31 December 2007 2006 £m £m Assets Goodwill 383.7 297.0Intangible assets 40.1 29.5Property, plant and equipment 469.4 392.3Assets classified as held for sale 2.2 3.6Deferred tax assets 9.0 21.1Derivative financial instruments 3.9 4.1Pension scheme surplus 12.9 - Total non-current assets 921.2 747.6 Inventories 30.6 12.9Income tax receivable 10.5 6.9Trade and other receivables 161.7 122.0Cash and cash equivalents 82.2 149.7 Total current assets 285.0 291.5 Liabilities Interest bearing loans and borrowings (3.9) (2.8)Income tax payable (16.2) (8.9)Trade and other payables (188.7) (139.1)Provisions (0.6) (1.3) Total current liabilities (209.4) (152.1) Net current assets 75.6 139.4 Interest bearing loans and borrowings (445.4) (384.1)Derivative financial instruments (16.0) (13.2)Pension scheme deficit (18.6) (42.1)Other payables - (0.1)Deferred tax liabilities (56.7) (49.2)Total non-current liabilities (536.7) (488.7) Net assets 460.1 398.3 Equity Share capital 6 51.4 51.2Share premium 6 95.5 93.6Other reserves 6 8.4 5.8Capital redemption reserve 6 150.9 150.9Retained earnings 6 151.7 95.1 Total shareholders' equity 457.9 396.6Minority interest in equity 6 2.2 1.7Total equity 6 460.1 398.3 Net borrowings (see note 8) (367.1) (237.2) CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31st December 2007 Notes Year to Year to 31 December 31 December 2007 2006 £m £mCash flows from operating activities Cash generated from operations 7 246.4 216.9Interest paid (21.0) (14.7)Interest received 5.4 6.4Income tax paid (13.7) (15.1) Net cash generated from operating activities 217.1 193.5 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired 9 (103.7) (36.0)Purchases of property, plant and equipment (172.1) (140.2)Proceeds from the sale of property, plant and equipment 8.0 11.0Purchases of intangible assets (5.2) (4.4)Proceeds from sale of businesses, net of cash - 0.1Special pension contribution payments (12.5) (17.5)Receipt of loan notes 0.4 2.9 Net cash used in investing activities (285.1) (184.1) Cash flows from financing activities Net proceeds from issue of ordinary share capital 2.1 0.4Purchase of treasury shares (1.1) (3.6)Drawdown of borrowings 34.6 209.8Repayment of borrowings - (142.8)Repayment of finance leases/hire purchase liabilities (3.4) (3.6)Dividends paid to company's shareholders (31.4) (30.2)Dividends paid to minority interests (0.1) (0.1)Redemption of B Shares - (6.5) Net cash generated from financing activities 0.7 23.4 Net (decrease)/increase in cash (67.3) 32.8Cash at beginning of year 149.7 117.1Exchange losses on cash (0.2) (0.2) Cash at end of year 82.2 149.7 Free cash flow 47.8 59.9 Analysis of free cash flowNet cash generated from operating activities 217.1 193.5Purchases of property, plant and equipment (172.1) (140.2)Proceeds from the sale of property, plant and equipment 8.0 11.0Purchases of intangible assets (5.2) (4.4) Free cash flow 47.8 59.9 Free cash flow of continuing operations 47.8 60.0 NOTES TO THE FINANCIAL STATEMENTS 1 SEGMENTAL INFORMATION (a) Primary reporting format - business segments In June 2007, the management and organisation of the Continental Europeansegment was divided into the Nordic and Continent regions. The Nordic regioncomprises Denmark, Sweden, Norway and Finland. The Continent region comprisesGermany, Austria, Holland and Poland. At 31st December 2007, the group has only one primary business segment beingtextile maintenance within Nordic, Continent and UK and Ireland. The UK andIreland results include revenue and operating profit contribution of £21.0million and £0.8 million respectively from the Clinical Solutions anddecontamination business. In October 2006, the group completed the sale ofModeluxe, its operation in France. The segment results relating to thisdisposal are reported as a discontinued operation. Based on the risks and returns the directors consider that the primary reportingformat is by business segment and that the secondary reporting format is bygeographical analysis by origin and destination. Although the group has onlyone primary business segment, we provide additional disclosure for our secondarysegment below. The segment results for the year ended 31st December 2007 are as follows: Textile Maintenance UK &Continuing operations Nordic Continent Ireland Total Corporate Group £m £m £m £m £m £m Revenue 263.8 191.8 366.5 822.1 - 822.1 Operating profit before exceptionalitems and amortisation of customercontracts and intellectual propertyrights 43.8 29.2 38.2 111.2 (4.6) 106.6 Exceptional items - (2.1) 2.6 0.5 0.3 0.8Amortisation of customer contracts andintellectual property rights (3.6) (5.1) (3.7) (12.4) - (12.4) Segment result 40.2 22.0 37.1 99.3 (4.3) 95.0Net finance expense (16.3) Profit before taxation 78.7Taxation (15.1) Profit for the year 63.6 Analysed as:Profit attributable to minority 0.4interestsProfit attributable to equity 63.2shareholders Capital expenditure 56.2 69.2 102.2 227.6 - 227.6Depreciation 37.3 38.8 67.7 143.8 0.1 143.9Amortisation 4.6 5.7 4.3 14.6 - 14.6 Capital expenditure comprises additions to property, plant and equipment andintangible assets, including additions resulting from acquisitions throughbusiness combinations. 1 SEGMENTAL INFORMATION CONTINUED The segment results for the year ended 31st December 2006 were as follows: Textile MaintenanceContinuing operations UK & Nordic Continent Ireland Total Corporate Group £m £m £m £m £m £m Revenue 238.8 164.2 301.6 704.6 - 704.6 Operating profit before exceptionalitems and amortisation of customercontracts and intellectual propertyrights 41.0 24.5 33.9 99.4 (4.5) 94.9 Exceptional items 0.4 - (0.5) (0.1) 2.9 2.8Amortisation of customer contracts andintellectual property rights (2.8) (0.9) (2.4) (6.1) - (6.1) Segment result 38.6 23.6 31.0 93.2 (1.6) 91.6Net finance expense (9.6) Profit before taxation 82.0Taxation (23.5) Profit from continuing operations 58.5 Loss from discontinued operations1 (0.3)Loss on sale of discontinued operations (2.7) Profit for the year 55.5 Analysed as:Profit attributable to minority 0.3interestsProfit attributable to equity 55.2shareholders Capital expenditure 57.3 39.7 89.0 186.0 - 186.0Depreciation 32.2 31.6 61.4 125.2 0.1 125.3Amortisation 3.7 1.2 2.7 7.6 - 7.6 1 Revenue from the discontinued operation was £4.3 million. The capital expenditure, depreciation and amortisation for the discontinuedoperation for the year was £0.6 million, £0.7 million and £0.1 millionrespectively. The segment assets and liabilities at 31st December 2007 are as follows: Textile Maintenance Nordic Continent UK & Ireland Total Unallocated Group £m £m £m £m £m £m Operating assets 448.0 293.0 391.5 1,132.5 35.2 1,167.7Deferred tax assets 2.9 2.5 3.6 9.0 - 9.0Income tax assets - 0.1 1.4 1.5 9.0 10.5Non current assets held for sale - 1.0 1.2 2.2 - 2.2Derivative financial instruments - - - - 3.9 3.9Pension scheme surplus - - - - 12.9 12.9 Total assets 450.9 296.6 397.7 1,145.2 61.0 1,206.2 Liabilities 57.2 34.3 91.7 183.2 6.1 189.3Bank loans and finance leases 3.3 3.4 7.5 14.2 435.1 449.3Derivative financial instruments - - - - 16.0 16.0Deferred tax liabilities 23.0 12.8 19.2 55.0 1.7 56.7Income tax liabilities 3.9 2.2 0.3 6.4 9.8 16.2Pension scheme deficit 14.2 3.2 1.2 18.6 - 18.6 Total liabilities 101.6 55.9 119.9 277.4 468.7 746.1 1 SEGMENTAL INFORMATION CONTINUED The segment assets and liabilities at 31st December 2006 were as follows: UK & Nordic Continent Ireland Total Unallocated Group £m £m £m £m £m £m Operating assets 386.5 238.6 288.1 913.2 90.2 1,003.4Deferred tax assets 2.0 2.2 8.7 12.9 8.2 21.1Income tax assets 1.2 0.6 - 1.8 5.1 6.9Non current assets held for sale - 0.9 2.7 3.6 - 3.6Derivative financial instruments - - - - 4.1 4.1 Total assets 389.7 242.3 299.5 931.5 107.6 1,039.1 Liabilities 46.2 30.0 56.6 132.8 7.7 140.5Bank loans and finance leases 2.5 0.3 5.6 8.4 378.5 386.9Derivative financial instruments - - - - 13.2 13.2Deferred tax liabilities 19.5 13.9 15.4 48.8 0.4 49.2Income tax liabilities 2.7 1.5 3.6 7.8 1.1 8.9Pension scheme deficit 11.6 2.8 23.2 37.6 4.5 42.1 Total liabilities 82.5 48.5 104.4 235.4 405.4 640.8 Segment assets consist primarily of property, plant and equipment, intangibleassets, goodwill, inventories, receivables and cash. Assets such asinvestments, pension scheme surplus, deferred assets, income tax assets andassets classified as held for sale are separately identified. Segment liabilities comprise operating liabilities and separately identifypension scheme deficits, deferred tax liabilities, income tax liabilities andcorporate borrowings. Unallocated assets include segment assets as above for corporate entities andderivative financial instruments. Unallocated liabilities include segment liabilities as above for corporateentities and derivative financial instruments. (b) Secondary reporting format - geographical segments The group's operations are based in three main geographical areas. The UK isthe home country of the parent. The main operations in the principalterritories are as follows: NordicContinentUK and Ireland The relevant information is given as part of the primary segment disclosure. The group's continuing operations revenue is 93% (2006: 97%) from the provisionof services. 2 Exceptional Items Year to Year to 31 December 31 December 2007 2006 £m £m Income from receipt of loan notes (note i) 0.3 2.9Profit on property sales (note ii) 2.6 (0.1)Restructuring costs (note iii) (2.1) - 0.8 2.8 (i) In 2007, the group sold the outstanding US vendor loan notes for a net profit of £0.3 million. In 2006, the group received a net settlement of notes amounting to £2.9 million which had previously been fully provided. There is no tax charge. (ii) The profit on property sales realised in 2007 arises from the Sunlight Group as did the profit in 2006. The tax charge on this is £0.3 million (2006: £1.1 million). (iii) In January 2007, the group acquired the Permaclean business in Germany. The costs of restructuring and integrating the business are treated as an exceptional cost. The tax credit on this is £0.8 million. In 2008, further restructuring costs of £0.5 million will be incurred and treated as exceptional costs. 3 TAXATION Analysis of tax charge for the year Year to Year to 31 December 31 December 2007 2006 £m £mCurrent tax:Tax on profits for the current year 17.7 14.1Adjustments in respect of previous years (0.3) (0.5) 17.4 13.6Deferred tax:Origination and reversal of temporary differences 2.9 9.7Changes in statutory tax rates (4.9) 0.2Credit due to previously unrecognised temporary differences (0.3) - (2.3) 9.9 Total tax charge on continuing operations 15.1 23.5 The amount of overseas tax included in the total tax charge is £12.1 million (2006: £18.2 million) 4 DIVIDENDS Year to Year to 31 December 31 December 2007 2006 £m £mEquity dividends paid during the yearFinal dividend for the year ended 31 December 2006 of 12.4 pence per share(2005: 11.8 pence) 21.1 20.3 Interim dividend for the year end 31 December 2007 of 6.1 pence per share(2006: 5.8 pence) 10.3 9.9 31.4 30.2Proposed final equity dividend for approval at the AGMProposed final dividend for the year ended 31 December 2007 of 13.3 pence per share(2006: 12.4 pence) 22.7 21.1 The directors recommend a final dividend in respect of the financial year ending31st December 2007 of 13.3 pence per ordinary share to be paid on 6th May 2008to shareholders who are on the register at 18th April 2008. The dividend is notreflected in these financial statements as it does not represent a liability at31st December 2007. 5 EARNINGS PER SHARE Basic earnings per ordinary share are based on the group profit for the periodand a weighted average of 170,101,043 (2006: 170,164,428) ordinary shares inissue during the year. Diluted earnings per share are based on the group profitfor the year and a weighted average of ordinary shares in issue during the yearcalculated as follows: 31 December 31 December 2007 2006 No. of shares No. of shares In issue 170,101,043 170,164,428Dilutive potential ordinary shares arising from unexercised 1,129,887 674,449share options 1,129,887 674,449 171,230,930 170,838,877 An adjusted earnings per ordinary share figure has been presented to eliminatethe effects of exceptional items and amortisation of customer contracts andintellectual property rights. This presentation shows the trend in earnings perordinary share that is attributable to the underlying trading activities of boththe total group and continuing group. The reconciliation between the basic and adjusted figures for continuingoperations is as follows: Year to 31 December 2007 Year to 31 December 2006 Earnings per share Earnings per share £m pence £m pence Profit attributable to equity shareholders of the company forbasic earnings per share calculation 63.2 37.1 58.2 34.2(Profit)/loss on sale of properties (after taxation) (2.3) (1.3) 1.2 0.7Exceptional income (after taxation) (0.3) (0.2) (2.9) (1.7)Restructuring items (after taxation) 1.3 0.8 - -Amortisation of customer contracts and intellectual propertyrights (after taxation) 8.4 4.9 4.3 2.5Tax credits due to changes in statutory tax rates (4.9) (2.9) - - Adjusted earning - continuing group 65.4 38.4 60.8 35.7 Diluted basic earnings - continuing group 36.9 34.1 The reconciliation between the basic and adjusted figures for the total is asfollows: Year to 31 December 2007 Year to 31 December 2006 Earnings per share Earnings per share £m pence £m pence Profit attributable to equity shareholders of the company forbasic earnings per share calculation 63.2 37.1 55.2 32.4Loss on sale of business (after taxation) - - 2.7 1.6(Profit)/loss on disposal of properties (after taxation) (2.3) (1.3) 1.2 0.7Exceptional income (after taxation) (0.3) (0.2) (2.9) (1.7)Restructuring items (after taxation) 1.3 0.8 - -Amortisation of customer contracts and intellectual propertyrights (after taxation) 8.4 4.9 4.3 2.5Tax credits due to changes in statutory tax rates (4.9) (2.9) - -Adjusted earnings- total group 65.4 38.4 60.5 35.5Diluted basic earnings- total group 36.9 32.3 Basic earnings per share - discontinued operations - (1.8)Diluted basic earnings per share - discontinued operations - (1.8) 6 SHAREHOLDERS' FUNDS AND STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Attributable to shareholders of the company Share Share Other Capital Retained Total Minority Total capital premium reserves redemption earnings interest equity reserve £m £m £m £m £m £m £m £m At 1 January 2007 51.2 93.6 5.8 150.9 95.1 396.6 1.7 398.3Issue of share capital inrespect of share optionschemes 0.2 1.9 - - - 2.1 - 2.1Purchase of treasury shares - - - - (1.1) (1.1) - (1.1)Dividends - - - - (31.4) (31.4) (0.1) (31.5)Actuarial gains - - - - 23.1 23.1 - 23.1Value of employee service inrespect of share options - - - - 0.6 0.6 - 0.6Cash flow hedges - - 3.3 - - 3.3 - 3.3Tax on items taken directlyto equity - - (0.7) - (10.9) (11.6) - (11.6)Profit for the year - - - - 63.2 63.2 0.4 63.6Currency translation - - - - 13.1 13.1 0.2 13.3 At 31 December 2007 51.4 95.5 8.4 150.9 151.7 457.9 2.2 460.1 At 1 January 2006 57.7 93.2 0.5 144.4 80.5 376.3 1.5 377.8Issue of share capital inrespect of share optionschemes - 0.4 - - - 0.4 - 0.4Purchase of treasury shares - - - - (3.6) (3.6) - (3.6)Redemption of B shares (6.5) - - - - (6.5) - (6.5)Transfer to capitalredemption reserve arisingfrom redemption of B shares - - - 6.5 (6.5) - - -Dividends - - - - (30.2) (30.2) (0.1) (30.3)Actuarial losses - - - - (2.7) (2.7) - (2.7)Value of employee service inrespect of share options - - - - 0.6 0.6 - 0.6Cash flow hedges - - 7.6 - - 7.6 - 7.6Tax on items taken directlyto equity - - (2.3) - 5.8 3.5 - 3.5Profit for the year - - - - 55.2 55.2 0.3 55.5Currency translation - - - - (4.0) (4.0) - (4.0) At 31 December 2006 51.2 93.6 5.8 150.9 95.1 396.6 1.7 398.3 The number of treasury shares held by the company as at 31st December 2007 was1,025,000 (2006: 825,000). 7 CASH FLOW FROM OPERATING ACTIVITIES Reconciliation of operating profit to net cash inflow from operating activities: Total Group Discontinued operations Year to Year to Year to Year to 31 December 31 December 31 December 31 December 2007 2006 2007 2006 £m £m £m £mCash generated from operationsProfit for the year 63.6 55.5 - (3.0)Adjustments for: Taxation 15.1 23.5 - - Amortisation of intangible fixed assets 14.6 7.7 - 0.1 Depreciation of tangible fixed assets 143.9 126.0 - 0.7 (Profit)/loss on sale of property (2.6) 0.1 - - Profit on sale of plant and equipment (0.9) (1.2) - - Loss on sale of business - 2.7 - 2.7 Profit on loan notes (0.3) (2.9) - - Negative goodwill (1.1) (0.5) - - Finance income (5.4) (6.4) - - Finance expense 21.7 16.0 - - Other non cash movements 0.6 - - Changes in working capital (excluding effect of acquisitions, disposals and exchange differences on consolidation): Inventories (4.6) (0.1) - - Trade and other receivables (14.8) 1.3 - (0.1) Trade and other payables 17.4 (2.9) - 0.1 Provisions (0.8) (1.9) - - Cash generated from operations 246.4 216.9 - 0.5 In the cash flow statement, proceeds from sale of property, plant and equipment comprise: Net book amount 2.8 7.1 - -Profit on sale of property, plant and equipment 0.9 1.0 - - Proceeds from sale of property, plant and equipment 3.7 8.1 - - Additionally the group received £4.3 million in respect of assets held fordisposal. 8 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Year to Year to 31 December 31 December 2007 2006 £m £m (Decrease)/increase in cash (67.3) 32.8Cash outflow from movement in debt and lease financing (31.2) (63.4) Changes in net debt resulting from cash flows (98.5) (30.6)New finance leases (5.5) (2.8)Bank loans and lease obligations acquired with subsidiaries (4.7) (4.7)Currency translation (21.2) 15.1 Movement in net debt in year (129.9) (23.0)Net debt at beginning of year (237.2) (214.2) Net debt at end of year (367.1) (237.2) 9 Acquisitions (a) Acquisitions of subsidiary undertakings During the year the group acquired a number of textile maintenance businesseswith the primary acquisition of a textile maintenance company being Permacleanwhich was acquired in January 2007. Permaclean is an established workwearbusiness in Germany. In addition, in June 2007 it acquired the clinical solutions and decontaminationbusinesses of the InHealth group. As we achieve preferred bidder status ondecontamination contracts, we recognise the deferred consideration payable. Atotal deferred contingent consideration of £22.5 million is payable depending onwinning future contracts. Details of the carrying values and provisional fair values of the assets andliabilities acquired are set out below: Carrying values Provisional pre acquisition fair values £m £m Intangible fixed assets 0.4 19.3Property, plant and equipment 20.1 25.5Inventories 14.3 12.6Receivables 15.3 14.5Payables (22.5) (18.3)Taxation- Current (0.5) 0.3- Deferred (0.8) (8.3)Cash and cash equivalents 1.2 1.2Overdrafts (2.4) (2.4)Bank loans (4.6) (4.6)Lease finance obligations (0.1) (0.1) Net assets acquired 20.4 39.7Goodwill 72.2Negative goodwill1 (1.1) Consideration 110.8Consideration satisfied by:Cash 99.4Deferred consideration 8.3Legal and professional fees 3.1 110.8 1 Taken directly to the income statement The goodwill arising on these acquisitions is attributable to the acquired workforce and the expected synergies. The fair value amounts contain provisional amounts which will be finalised inthe 2008 accounts. A net adjustment of £0.3 million primarily to fixed assets(land and buildings) was made to the provisional fair values relating toacquisitions made in 2006. The total goodwill addition in the year is £72.2million. The outflow of cash and cash equivalents on acquisition is calculated asfollows: £m Cash consideration 102.5Cash acquired (1.2)Overdrafts 2.4 103.7 9 Acquisitions CONTINUED The total consideration including net financial liabilities assumed and deferedconsideration payable for the acquisitions is £116.7 million. Intangible assetsacquired relate primarily to values attributed to customer contracts. Shown below are the revenues and profit for the year after tax as if the aboveacquisitions had been made at the beginning of the year. This information isnot indicative of the results of operations that would have occurred had thepurchase been made at the beginning of the period presented or the futureresults of the combined operations. £m Revenue 96.0Profit after tax 5.2 From the dates of acquisition to 31st December 2007, the above acquisitionscontributed £75.3 million to revenue and £4.6 million to the profit after taxfor the year. (b) Post balance sheet events In January 2008, we entered the Baltic region with the acquisition of small butleading mats businesses in Estonia and Latvia as well as a further bolt onacquisition in Norway. The total consideration for these acquisitions is £11.1million. We have agreed to purchase the market leader in mat services inLithuania in March 2008. 10 The information on pages 7 to 19 has been extracted from the auditedfinancial statements for the year ended 31st December 2007 and has been preparedin accordance with International Financial Reporting Standards as adopted by theEU and IFRIC interpretations issued and effective at the time of preparing thesestatements. The figures and financial information for the years ended 31stDecember 2007 and 2006 do not constitute the financial statements for that year.Those financial statements have been delivered to the Registrar and includedthe auditor's report which was unqualified and did not contain a statement undereither Sections 237(2) or 237(3) of the Companies Act 1985. The 2007 Report andAccounts will be posted to shareholders on 17th March 2008. 11 The final dividend is subject to confirmation at the Annual General Meetingwhich will be held on Monday, 28th April 2008 at Royal Aeronautical Club, 4Hamilton Place, London W1J 7BQ at 11.00am. Transfers to be taken into accountfor the proposed final dividend for ordinary shareholders must be lodged at thecompany's transfer office, Equiniti Limited, Aspect House, Spencer Road,Lancing, West Sussex BN99 6DA by mid-day on 18th April 2008, the expected recorddate. The proposed final dividend for ordinary shareholders will be paid on 6thMay 2008. 12 The directors are responsible for the maintenance and integrity of thecompany's website. Information published on the internet is accessible in manycountries with different legal requirements. Legislation in the United Kingdomgoverning the preparation and dissemination of financial statements may differfrom legislation in other jurisdictions. 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