Final Results

 28 February 2014

Berendsen plc Full Year Results 

Announcement for the Year Ended 31 December 2013

*Before £25.7 million (£25.1 million) amortisation of customer contracts and exceptional credit of £1.8 million (Nil)

**Underlying growth at constant exchange rates and excluding acquisitions

***Restated for the introduction of IAS19 'Employee Benefits' (Revised)

Full Year Highlights

· Underlying revenue up 3%, with revenue in Core Growth up by 4%

o Facility revenue grew 5% with operating margin at 25.7% (25.4%)

o 210bps operating margin improvement in Workwear to 19.8%

o UK Flat Linen revenue up 4% benefiting from more favourable market conditions

· Turnaround of UK decontamination contract; £1.8 million release of provision as an exceptional item

· 137% of adjusted profit after tax converted to free cash flow, significantly reducing net debt

· Return on invested capital increased by 80bps to 9.3% in line with strategic focus

· 18% growth in adjusted EPS: ahead of strategic objectives

· Dividend up 10% in line with our progressive dividend policy

Iain Ferguson, Chairman of Berendsen, commented

'We are pleased to have delivered a strong set of results, as we make progress towards our strategic objectives. Our focus remains on the many further opportunities to improve our business. The board expects to achieve another year of good progress in 2014.'

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Analyst Meeting

The company will present to analysts at 8.00am today. A live audiocast of the presentation and questions will be available on the company's website on www.berendsen.com. Questions will only be taken at the meeting.

Results for the year ended 31 December 2013

We are pleased to report a strong set of results for the year, which reflected continued momentum consistent with our strategic objectives. Reported revenue for the group increased 7% compared to the same period last year with the underlying level (excluding acquisitions and currency impacts) up 3%. Reported revenue for our Core Growth businesses increased 8% with underlying growth of 4%. Adjusted operating profit was up 12% and, excluding acquisitions and the impact of currency, increased by 7%. The adjusted operating margin for the group increased 60 bps to 15.1%. Adjusted earnings per share for the group were up 18% to 59.8 pence from 50.7 pence last year. The Board is recommending a final dividend of 19.2 pence (2012: 17.5 pence), bringing the total dividend to 28.0 pence (25.5 pence), an increase of 10%.

We continued to deliver strong free cash flow in line with our strategic objectives. Free cash flow increased 11% to £139.4 million (£125.1 million), a conversion of 137% of our adjusted profit after tax as a result of our continued focus on capital allocation and drive for capital efficiency.

We also improved our return on invested capital by 80bps from 8.5% in 2012 to 9.3% in 2013. Moving towards double digit returns remains a key strategic objective and we have added 190bps since 2010.

We made further progress against our strategic objectives, building on the initiatives we have put in place. In April, a new Director of Group Procurement and Supply Chain joined us and has already made a number of key appointments to provide new breadth of experience to the Group. The team has identified opportunities to further leverage our scale in procuring textiles, pool our buying of indirect products and services and streamline our supply chain to improve the management of supplier performance. We expect to see benefits from these initiatives in 2014, which will contribute to the further progress in achieving our strategic goals.

We are also pleased to announce today that Maarit Aarni-Sirviö has been appointed as a Non-Executive Director of the Company with effect from 1 March 2014. Maarit held a number of senior executive positions within Borealis AG one of Europe's largest producers of plastics and was President and CEO of The Mint of Finland. She currently holds a number of Non-Executive Director roles, including Wärtsilä, a Finnish company manufacturing and servicing power sources.

Group Overview

Revenue at £1,054.2 million in the period was up 7% compared to last year (£985.1 million). Adjusted operating profit (before amortisation of customer contracts) was £158.9 million, up 12% from £142.4 million last year. The positive impact of currency translation increased revenue and adjusted operating profit by £27.9 million and £5.1 million respectively compared to last year. Excluding currency translation and the contribution from acquisitions, underlying revenue grew 3% and adjusted operating profit grew 7%. Whilst we benefited from currency translation in 2013, since year end we have seen a weakening of our operating currencies against Sterling.

2012 results are restated for the introduction of IAS19 'Employee Benefits' (Revised). The increase in reported pension costs for 2012 as a result of the prior year adjustment was £3.2 million.

Our net finance expense was £22.6 million, a decrease from £25.6 million last year. We expect the interest charge to be slightly down again in 2014. Adjusted profit before tax was £136.3 million, 17% above last year (£116.8 million) and adjusted earnings per share were up 18% to 59.8 pence (50.7 pence). Our effective tax rate on adjusted profit before taxation was 25.0% down from 26.1% last year with the expected reduction in country rates in Sweden, Denmark and the UK. We expect the tax rate for 2014 to be maintained at this level.

In 2010 we made a provision of £9.9 million, which we reported as an exceptional item, against the losses we expected to incur over the lifetime of our two decontamination contracts in the UK. This year we have returned one of these contracts to profitability ahead of schedule and have therefore released £1.8 million of the provision. This is disclosed separately as an exceptional item in the Income Statement.

Amortisation of acquired customer contracts was £25.7 million (£25.1 million). Operating profit after exceptional items and amortisation was £135.0 million (£117.3 million) and profit before tax was £112.4 million (£91.7 million). Basic earnings per share were 49.8 pence compared with 41.3 pence in 2012.

Our net capital expenditure was up on last year at £167.0 million (£154.5 million) but below depreciation of £175.2 million (£164.4 million). Plant investments amounted to £27.5 million, similar to the £27.3 million of last year with funding to upgrade our UK Workwear plants as well as maintaining our well-invested operations. We have an excellent footprint across the markets we serve. Investment in textiles was £142.1 million (£127.8 million) reflecting a good level of new contract activity. Overall, we expect net capital expenditure to be similar to depreciation next year.

Free cash flow was again strong at £139.4 million (£125.1 million), a conversion of 137% of the adjusted profit after tax of the Group with a contribution of £9.5 million from reduction in working capital. We have contributed £5.0 million to the UK pension fund in the period and intend to contribute a similar amount over each of the next three years following the triennial valuation of our main UK fund this year. This showed a deficit on a funding basis of approximately £13 million. At 31 December 2013, the pension accounting surplus for the group was £7.1 million (£20.5 million deficit at the end of 2012). Net borrowings at 31 December 2013 were £389.0 million (31 December 2012: £463.7 million), reflecting strong cash flow conversion, with dividends paid of £44.8 million and a favourable currency movement of £2.1 million. Acquisitions amounted to £2.7 million in the year.

Overall the Group retains a strong balance sheet with a ratio of net debt to earnings before exceptional items, interest, tax, depreciation and amortisation (EBITDA) of 1.2 times (2012: 1.5 times), compared with a covenant level of not more than three times. We have total private placement notes of £334 million with a single maturity in 2014, when £31 million equivalent is due to be repaid. In addition the Group's bank facilities extend to July 2016 and amount to £447.0 million, of which £311.0 million was undrawn at the year end.

We seek to create value by increasing our return on invested capital in line with our strategic objectives: we aim to increase our returns by growing revenues and margins and managing our invested capital by converting our growth to cash. This year we increased our return on invested capital by 80bps from 8.5% last year to 9.3%. Further improving these returns remains a key strategic objective, with a target of double digits.

The Board is recommending a final dividend of 19.2 pence, which, together with the interim dividend of 8.8 pence paid in October 2013, gives a total of 28.0 pence, an increase of 10% on last year's level. The final dividend will be paid on 2 May 2014 to shareholders on the register at the close of business on 11 April 2014.

Business Line Performance

Below we report the results for the year ended 31 December 2013 in our Business Line segmentation.

* before amortisation of customer contracts and exceptional credit

**restated for the introduction of IAS19 'Employee Benefits' (Revised)

CORE GROWTH

Workwear

Revenue was up 6% in the period at £305.8 million (£288.0 million), with adjusted operating profit 19% ahead at £60.5 million (£51.0 million). Underlying constant currency growth was 3% for revenue and 15% for adjusted operating profit. The adjusted operating margin increased 210bps to 19.8%.

We continue to make progress in delivering the benefits of best practice transfer and in implementing the key elements of our standard business model. Our international collection, where we have taken the best design elements from different markets is selling well and has reduced material costs and lead times further compared to locally sourced collections. Salesforce efficiency continued to improve, particularly in National Accounts, through our focus on sales management and better coaching methods delivered by our Sales Academy programme. Our operational excellence programme, supported by focused improvement reviews, has delivered productivity improvements of almost 5% in aggregate across the Business Line. At the same time, we have delivered service and quality improvements with consistently higher customer satisfaction scores. Our focus on textile management, based on best practices and workflow optimisation which we defined last year, delivered significant savings in textile purchases in the first year of the programme.

A key element of our margin increase has been the improvement in Germany and UK where the opportunities for best practice transfer are greatest. We delivered in aggregate a 3% increase in revenue and a 22% increase in operating profit, resulting in a margin improvement of 200bps. We have made good strides towards moving these countries towards the margin potential we see in our best practice reference countries.

In the UK, we have continued to deliver significant benefits at our Rainhill plant since the conversion to the same production model we use in Continental Europe, which is based on the principles of lean production and self-managed teams, branded as CL2000. Productivity at the plant is up and its margin increased by almost 4ppts over the year. We are also taking the opportunity to consolidate production in 2014 and we are consulting on the closure of one of our smaller plants into Rainhill to drive for further productivity improvements. There is a modest cost of exit, which we expect to be reported in the segment result in the first half of 2014. In October 2013, we completed on schedule the conversion of a second plant, at Wakefield, and have already seen productivity improvements in line with our plan. In Germany, our revenue growth was 8% following significant new contract wins and this was a key driver of our excellent profit growth in the business, the highest for the Business Line.

Economic activity in Denmark and Sweden was mixed and while this held back top line growth in Sweden overall, we did see a stronger second half with Denmark ending the year with growth of 5%. Our Dutch business, also a best practice reference operation, made good progress in tough local conditions, growing revenue by 3%. Despite an economic environment which is still challenging, these countries also benefited from operational improvements and in aggregate their margins increased significantly.

As we implement our best practice transfer programme, new opportunities emerge and our management teams are increasingly looking within the Group for proven best practice to increase operating efficiency.

Facility

Revenue was 14% ahead of last year at £243.3 million (£212.8 million) and adjusted operating profit at £62.5 million (£54.1 million) was up 16%. The adjusted operating profit margin was 30bps higher than last year at 25.7%. On an underlying constant currency basis excluding acquisitions, revenue grew 5% and adjusted operating profit was up 9%.

We are encouraged by the increase in the organic growth rate of this segment in the second half, which was 5% for the full year and 3% at the half year. We believe that the opportunities for growth in Facility are strong as a large proportion of our existing customers are not taking a fully outsourced service in Mats and Washroom. The potential to expand or enhance the level of services to existing customers is significant. The separation of each of the three operations of Mats, Washroom and Cleanroom is facilitating the development of our business models. We have been particularly encouraged in the second half by the progress we have made in washroom offerings, adding a number of service ranges and seeing good market acceptance for our fixed billing package concepts which grew 20% in the year. Overall our sales efficiency increased, especially in washroom with momentum picking up throughout the year with sales in the second half of the year well ahead of those in the first half. The number of new larger customers in Cleanroom has also been encouraging with a further increase in the average number of services sold to each customer.

We expanded our contract base in each of our Mats and Washroom businesses, with the volume of mat placements in particular increasing 6% in the period. We delivered a good level of new sales, which were ahead of plan. This has more than offset any reduction in volume per contract and price pressure, although this eased through the second half of the year. Norway in particular delivered good growth in revenue and operating profit.

In our emerging Central European markets, where we have revenues of over £30 million, we saw double-digit revenue growth in aggregate, with the newer territories of the Baltics and Czech Republic growing strongly. There was a good level of growth in Poland, our larger and more established business, and with the operating margin above 20% this is converting well to profit. Our Baltic business is delivering improved operating margins, up 7ppt in the period to 12%, with further opportunities for improvement.

 Our Cleanroom business combined excellent organic growth with the contribution of the German business we acquired in April 2012, to produce revenue growth of 16% with improved margins. The level of new business in Germany, in particular, has been very strong with the added focus now to improve operational leverage and move the margin closer to the average for this part of the business. In May we contracted to assist one of our major Danish pharmaceutical customers in establishing a plant in the Moscow area. We will manage its cleanroom textile operations from within the customer's plant once this is completed, which is expected to be later in 2014. While the revenue and scale of operations will initially be small it will further develop our relationship with a key customer and build some experience of operating in the faster growing, emerging economies, in line with our strategy.

UK Flat Linen

Revenue was 4% ahead of last year at £204.6 million (£196.7 million) and adjusted operating profit was 6% higher at £27.3 million (£25.8 million). The adjusted operating margin was up 20bps at 13.3%.

We are pleased with the increase in revenue growth rate to 4% (2% in the year to 31 December 2012), which has been driven by a combination of higher underlying volumes, new contract wins and price increases. The business continues to place innovation at the heart of its customer service proposition.

In Hotels we are seeing clear signs of recovery in the UK economy with a 4% increase in underlying volumes in our group customers compared to the same period last year and a particularly strong end to the year. Our salesforce continues to improve its sales management processes, particularly with the introduction of a new customer relationship management (CRM) system leading to greater efficiency. We have introduced differentiated service and product ranges to address a broader market in addition to our traditional area of focus on the branded groups. These have been well received. The competitive environment remains tough, however, and we did experience a higher level of contract churn in the second half, which management is focused on reversing. Although gas prices remained at a higher level than expected we were able to offset these through productivity gains in the second half.

In Healthcare, we are also investing in innovation in service and product enhancements. These have been well received and focus on our customer needs. We saw little change in underlying volumes but we benefited from new contract wins, add-on sales from our innovations in product and services to the hospitals, and contractual price increases. We remain well placed to capture further outsourcing and we are in dialogue with a number of attractive prospects.

MANAGE FOR VALUE

Flat Linen Outside the UK

Revenue in our Flat Linen businesses outside the UK was up 6% at £231.2 million (£218.0 million) but adjusted operating profit was down 13% to £18.2 million (£21.0 million). On an underlying constant currency basis, revenue grew 2% and adjusted operating profit was down 15%. The adjusted operating margin decreased to 7.9%.

The businesses within this segment have demonstrated that they have opportunities within their markets, notwithstanding the pricing pressure in Swedish and German Healthcare, which impacted margin. Underlying revenues increased with good new contract wins in Healthcare in Germany and Austria and in Scandinavian hotels. These, in addition to a number of significant contracts we won towards the end of the year, will benefit fully in 2014, and we expect to deliver good year on year revenue growth for the current year. The margins on this new business will grow over the next few years but there will be significant start up costs for new business of this scale in the first year of operation. 

Clinical Solutions and Decontamination

Revenue was largely unchanged at £69.3 million (£69.6 million) but adjusted operating profit increased significantly to £4.5 million compared to £2.9 million last year, an increase of 55%.

Weaker sales of single use surgical drapes and gowns followed the loss of a significant customer as a result of changes in its circumstances. Although revenues were held back by this, we significantly increased our profit in the period with the completion of our turnaround plan for our sterile consumables business.

We continue to improve the performance of our decontamination contracts. The key actions of our turnaround plan are largely delivered with new volume from the existing contracts and the start up of a significant new contract contributing to a reduction in the loss for the period to £0.9 million compared to £2.2 million last year. Our service is strong and we made further operational improvements with an increase in underlying volumes in the second half of the year. One of the two core contracts is now operating at a small profit and we are therefore able to release £1.8 million of the provision that we made in 2010 that relates to this contract. We have separately disclosed this release as an exceptional item in the Income Statement. We retain £0.5 million of the provision to absorb future losses on the second contract where work continues to move this to a breakeven position by the end of 2014.

Summary and Outlook for the Group

We are pleased to have delivered a strong set of results, as we make progress towards our strategic objectives. Our focus remains on the many further opportunities to improve our business. The Board expects to achieve another year of good progress in 2014.

Consolidated income statement

Consolidated statement of comprehensive income

Items in the statement above are disclosed net of tax. The tax relating to each component of other comprehensive income is disclosed in note 5.

Consolidated balance sheet

Consolidated cash flow statement

Consolidated statement of changes in equity

2012 has been restated in line with the requirements of IAS19 Employee Benefits.

Consolidated statement of changes in equity

The group has an Employee Benefit Trust to administer share plans and to acquire company shares, using funds contributed by the group, to meet commitments to group employees. At 31 December 2013, the Trust held 2,798,134 (2012: 2,882,275) shares.

Included within retained earnings is an amount of £18.8 million (2012: £38.6 million) which relates to currency translation.

Notes to the consolidated financial statements

1 Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The Berendsen plc's Report and Accounts 2013 (the "Annual Report") will be posted to shareholders on 13 March 2014. The Annual Report will also be made available on the company's website, www.berendsen.com, from 13 March 2014. The financial information set out herein does not constitute the company's statutory accounts for the year ended 31 December 2013 but is derived from those financial statements and the accompanying directors' report. The statutory accounts for 2013 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 24 April 2014. The auditors have reported on the company's statutory accounts; the report was unqualified and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

The comparative figures for the year ended 31st December 2013 are not the financial statements for the financial year but are derived from those accounts which have been reported on by the group's auditors and delivered to the Registrar of Companies. The report was unqualified and did not contain statements under Section 237 (2) or (3) of the Companies Act 1985.

2 Segmental information

The results for the year ended 31 December 2013 under the business line structure are as follows:

Unallocated costs includes group marketing and communication functions.

Capital expenditure comprises additions to property, plant and equipment and intangible assets, including additions resulting from acquisitions through business combinations.

Sales between operating segments are carried out at arm's length. The company is domiciled in the UK.

The results for the year ended 31 December 2012 under the business line structure are as follows:

The 2012 operating profit before exceptional items and amortisation of customer contacts has been restated for the impact of IAS19 Employee Benefits.

The segment assets and liabilities at 31 December 2013 under the business line structure are as follows:

The business line split of operating assets and liabilities as at 31 December 2012 is as follows:

Business line operating assets consist primarily of property, plant and equipment, intangible assets, inventories and trade and other receivables.

Business line operating liabilities consist primarily of trade and other payables and provisions.

Unallocated assets include operating assets relating to corporate segments.

Unallocated liabilities include operating liabilities for corporate segments.

Analysis of non-current assets other than financial instruments, deferred tax assets and retirement benefit assets by country are:

3 Net finance costs

(i) This relates to loan issue costs arising on the 2011 €535 million Revolving Credit Facility and on the 2006 $250 million, 2009 $259 million and £25 million US Private Placements. The costs have been capitalised and are being amortised over the shortest period of the loans being four years, eight years and seven years respectively.

4 Exceptional items

Included within operating profit is the following item which the group considers to be exceptional:

Exceptional gain in the year, before tax, amounted to £1.8 million (2012: £nil). The gain relates to the release of surplus onerous contract provision which was initially established within our Decontamination business in 2010. Since then substantial progress has been made in the turnaround of these contracts, with one of them returning to profitability in 2013. The release of the provision in 2013 reflects this achievement along with the expectation that the remaining contract will break even, in line with plan, by the end of 2014. The tax charge on this was £0.4 million.

5 Taxation

The 2012 tax charge has been restated for the impact of IAS19 Employee Benefits.

The amount of overseas tax included in the total tax charge is £22.0 million (2012: £18.2 million).

The tax charge for the year is different from the effective UK statutory rate of 23.25% (2012: 24.5%). The difference is explained below:

The main rate of corporation tax as at 31 December 2013 was 23%. Legislation to reduce the main rate of corporation tax to 21% was substantively enacted on 2 July 2013 and will be effective from 1 April 2014. A further rate reduction to 20% from 1 April 2015 was also enacted on 2 July 2013.

The tax credit/(charge) relating to components of other comprehensive income and equity is as follows:

6 Dividends

The directors recommend a final dividend for the financial year ended 31 December 2013 of 19.2 pence per ordinary share to be paid on 2 May 2014 to shareholders who are on the register at 11 April 2014. This dividend is not reflected in these financial statements as it does not represent a liability at 31 December 2013.

7 Earnings per share

Basic earnings per ordinary share are based on the group profit for the year and a weighted average of 170,063,960 (2012: 169,124,166) ordinary shares in issue during the year.

Diluted earnings per share are based on the group profit for the year and a weighted average of ordinary shares in issue during the year calculated as follows:

An adjusted earnings per ordinary share figure has been presented to eliminate the effects of exceptional items, amortisation of customer contracts and non-recurring tax items. This presentation shows the trend in earnings per ordinary share that is attributable to the underlying trading activities of the total group.

The reconciliation between the basic and adjusted figures for the group is as follows:

2012 has been restated for the impact of IAS19 Employee Benefits reducing EPS by 1.5 pence.

8 Goodwill

Composition of CGUs

With effect from 1 January 2012, we reorganised the group's structure into Business Lines, resulting in a change in operating segments and the composition of the cash generating units (CGUs). These Business Lines are managed and controlled at the operating segment level and each of the operating segments has their own dedicated management team. The internal group reporting reflects this Business Line structure. Management monitor goodwill at operating segment level and goodwill has been allocated on this basis. Goodwill that is specific to a particular operating segment has been included in the operating segment directly. All other goodwill has been reallocated to the appropriate operating segments prospectively using the three-year average forecast operating cash flow of the time of the change of composition of CGUs in 2012.

Under the new business line structure, we have 23 CGUs which represents the smallest identifiable group of assets that generates independent cash flow from other groups of assets. For the purpose of a goodwill impairment review, acquired goodwill has been allocated to nine groups of CGUs being the operating segments. The operating segments are Workwear, Facilities, UK Flat Linen, Scandinavian Flat Linen, Germany & Austria Healthcare, Ireland, Direct Sales, Clinical Solutions and Decontamination.

For reporting purposes, the goodwill has been allocated to the operating segments as outlined below.

Impairment testing of goodwill

The group reviews at each reporting date whether there is an indication that any of the CGU that contains the operating assets may be impaired in accordance with IAS 36 'Impairment of assets'. An annual goodwill impairment test is then carried out by comparing the carrying amount of the group of CGUs to which the goodwill relates to its recoverable amount. The recoverable amount of each operating segment is based on value-in-use calculations which management develop from forecast cash flows based on past performance, market data and its expectation of future market development. These calculations require the use of estimates and the pre-tax cash flow projections are based on the group's current three-year strategic plan. Cash flows beyond the three-year period have been extrapolated using an estimated growth rate of 2% (2012: 2%) and are appropriate because these are long-term businesses. The growth rate of 2% (2012: 2%) does not exceed long-term GDP estimates for countries that the group operates within. The main assumptions on which forecast cash flows have been based are revenue, operating margin and cash growth. Projected cash flows have been discounted using pre-tax discount rates of 11% (2012: 11%). The discount rates reflect market assumptions for the Risk Free-rates and Equity Risk Premiums and also take into account the net cost of debt. No reasonably foreseeable change in these assumptions would cause an impairment.

The annual impairment testing carried out in the current year showed that the recoverable amount for all groups of CGUs to which goodwill is allocated exceeded the carrying amount of the groups of CGUs.

9 Other intangible assets