My intention today is to:
• Provide a brief overview the financial performance of your
company for the year to 30 June 2011
• Update you on the fourth year of Spotless' transformative
strategic plan;
• Outline how our sector knowledge is capturing important new
client orders; and
• Make some observations about the outlook for the company
against the backdrop of the current global and domestic
economic environment.
Turning to a review of the 2011 year, a period in which
Spotless continued to execute its strategy in the face of
continued tough economic conditions. Specifically, adverse
exchange rates, higher input costs and natural disasters. At
the 2010
Annual General Meeting I noted a prolonged dampening of
client demand within Spotless' existing base of contracts and
lower discretionary spending overall. These more subdued
business conditions have persisted to varying degrees across
the company's client sectors, but have also given rise to
outsourcing opportunities, which will be elaborated on later
by Jo.
I am very pleased to report that your company delivered solid
earnings in the 2011 year, including second half growth
in
Net Profit After Tax of 37 per cent.
Australia and New Zealand Facility Services - which comprise
more than 95 per cent of earnings - delivered EBIT growth of
45 per cent in the second half of 2011 to achieve record
earnings for the year.
All Spotless' operating divisions delivered revenue growth in
FY11. In total the company delivered revenue growth of 10.9
per cent to $2,785 million. This growth was fuelled by 13.4
per cent growth in global Facility Services revenue.
Offsetting the Facility Services growth was lower Braiform
revenue. Braiform continued to face difficult market
conditions and lower demand, particularly in North America
and Europe. Therefore, in US dollar terms Braiform revenue
declined 0.8 per on
the prior period. When translated into Australian dollars,
Braiform revenue declined 11 per cent, due to the
stronger
Australian dollar.
Turning to operating earnings. Whilst reported EBIT rose 5.3
per cent to $90.1 million, reported net profit after tax
declined slightly by 0.5 per cent to $42.8 million, driven by
higher interest and tax expense. Earnings per share declined
by 4.1 per cent as a result of higher shares on issue from
the non-underwritten dividend reinvestment plan available to
shareholders.
The company's second half results were very strong across a
range of metrics, including NPAT growth of 37 per cent and
EPS growth of 36 per cent. Further, Australian and New
Zealand Facility Services EBIT margins rose by 51 basis
points when compared with the first half. Some 79 per cent of
operating cash flow was generated in the second half of
2011.
Turning to the company's financial position. Net debt was
$282.7 million at 30 June 2011, up from $201.2 million in the
prior corresponding period.
When compared with the prior year, net debt as at 30 June
2011 increased due to working capital and growth investments,
with part of the movement due to a $10.3 million change in
the fair value adjustment to cross currency swaps that
convert the US Private Placement (USPP) Notes into Australian
Dollars. Gearing levels remain within the Board's stated
target range of 30 per cent to 50 per cent, with emphasis on
targeting the bottom end of the range. Moreover, with EBITDA
interest cover of 6.5 times Spotless continues to maintain
ample capacity to fund transformation and continued growth.
1
ASX / NZX Announcement 18 November 2011
Average net debt levels over the course of FY11 approximated
$300 million. Average net debt levels reflect:
• higher levels of working capital and mobilisation costs
relating to new contracts with less than twelve months of
profit and cash flow generation;
• higher levels of capital expenditure. This reflects organic
growth, the new Brisbane laundry and the new business and IT
platform. Capital expenditure in 2011, including expenditure
on the business and IT platform, was $110.3 million, at the
bottom end of guidance previously provided for total
expenditure of between $110 million to $115 million.
During the first half Spotless successfully issued US$160
million in USPP Notes, substantially lowering refinancing
risk and extending average debt maturities from 3 years to 8
years.
The preparedness of investors to subscribe to long dated
funding is a strong endorsement of the Company's program of
transformation and confidence in future performance. We have
strengthened our financial position by diversifying our
sources of funding and significantly reduced refinancing
risk.
The purpose of the issue was to repay committed bank debt,
lower refinancing risk and rebalance and extend the maturity
profile of the Group's debt facilities.
As a result of the issuance of US notes, all Australian
dollar floating rate bank debt was repaid and cash on the
balance sheet has risen from $48.9 million at 30 June 2010 to
$106.9 million at 30 June 2011. This cash balance includes
approximately $50 million of cash surplus to working capital
requirements. The Company expects to utilise surplus cash
balances within the next 6 months by funding planned organic
growth (working capital and capital expenditure related to
new contracts) and the Company's investment in the new
business and IT platform.
It is therefore pleasing to update shareholders today on the
status of our $240 million syndicated debt facility. The
Company has received commitments from its banking syndicate
to extend its $240 million syndicated facility at the same
level of $240 million into the following tranches:
• a $90 million 364 day revolving facility;
• a $90 million three year tranche; and
• a $60 million five year tranche.
The refinanced debt will be priced approximately 50 basis
points below the Company's existing pricing. All other terms,
including banking covenants, remain generally unchanged. The
next major refinance is due in FY14.
Spotless continues to demonstrate cash flow generation and
conversion amid a period of investment in organic growth and
reinvestment. The ratio of gross operating cash flow to
EBITDA, adjusted for working capital investments, was 96 per
cent, compared to 108 per cent on a rolling 12 month basis at
31 December 2010.
Net interest expense was $25.5 million, compared with $22.6
million in the 2010 financial year. This reflects higher
average levels of gross debt arising from the issuance of the
US notes whilst the average cost of debt rose compared with
the prior year, a result of the extending the average debt
maturity of the Company from 3 years to 8 years. Reported
EBITDA interest cover was 6.5 times during the year, compared
with 7.2 times in the prior period.
The Underlying effective tax rate in 2011 was 33.2 per cent,
above the prior period of 29.5 per cent. The largest driver
of the change in tax rate was the use of investment
allowances in 2010.
The results delivered in 2011 led to the Directors declaring a final dividend of 6.0 cents per share (interim 5.0 cents), franked to 60 per cent, in line with the prior period. This dividend reflects a payout ratio of 67 per cent to Reported EPS and 57 per cent to Underlying EPS, compared with the Board's stated dividend policy of paying out between 50 per cent and 60 per cent of EPS. Spotless continues to retain a low level of franking credits.
2
ASX / NZX Announcement 18 November 2011 Safety
Turning now to a critically important issue for Spotless -
the safety of our people.
The Board and senior management team believe that all
injuries are preventable. Therefore, Spotless is committed to
achieving zero harm in the workplace. This target applies
wherever we work - at Spotless premises and at thousands of
client locations. Your company has strong governance, policy
and process frameworks to support this target and our
occupational health and safety plans. In 2011 safety
performance improved, and the Managing Director will comment
further on Spotless' safety metrics and wider occupational
health and safety efforts ahead of Australian legislative
changes planned to be effective from January 2012.
I would like to provide additional context to discussion of
current and future performance.
In the 2008 financial year the Board endorsed the Spotless
strategic plan to sustainably transform the business. Four
years into this transformative strategic plan, the Company
has:
• Improved governance frameworks, management accountability
and corporate transparency;
• Aligned the organisational structure and executive talent
bench strength to execute the strategic plan; and
• delivered profitable growth within Facility Services
We are now entering the final phase of this plan and setting
our sights on sustained future performance improvements. To
secure substantial profit margin and performance
improvements, Spotless is currently modernising its business
processes and IT systems.
Turning now to Transformation.
While Braiform's cost base has already been significantly
lowered from its migration to a common IT platform,
Australian and New Zealand IT systems remain costly to
operate.
Therefore, during 2011 the Board approved a plan to overhaul
this business and IT platform, with a strong focus on
unlocking the value in the Spotless business model and making
it simpler and cheaper to deliver growth.
This significant investment will simplify and consolidate
business processes and IT systems, with management estimates
for recurring annualised EBITDA benefits of $20 million to
$25 million once complete.
To unlock these substantial benefits the Company expects to
invest across 2012 and 2013. As noted earlier, Spotless has
significant financial capacity to fully fund the program.
Spotless takes a broad and long-term view of sustainability
through informed and balanced decision making processes,
considering Environmental, Social and Governance aspects.
Being sustainable influences how Spotless designs and
delivers products and services, employs people, purchases
goods and services, engages with local communities and
manages the environment.
Spotless embeds sustainable work practices to enhance
shareholder returns, deliver client outcomes, foster a safe
workplace and enduring supplier and local community
relationships.
There are many excellent and practical examples of Spotless'
approach to sustainability across its businesses in the 2011
sustainability report, available at spotless.com and within
the annual report.
Spotless takes the broadest possible view of sustainability, with diversity forming an important part of our sustainability focus.
3
ASX / NZX Announcement 18 November 2011
Spotless operates in thousands of regional and urban cities
across Australia and New Zealand employing over 35,000 staff
together with over 5,000 employees in Europe, the USA and
Asia.
A diverse workforce that is truly reflective of the
communities in which Spotless works is of utmost importance.
Many thousands of talented people are employed at Spotless
with a diversity of perspectives, skills, experience,
relationships, ethnicity, gender, age, sexual preference and
disability.
In 2011 your Board approved and adopted a diversity policy to
enable and encourage greater diversity. Sitting under the
policy is a strategy to guide daily management decisions.
Naturally, Spotless' actions in this area align with the ASX
Corporate Governance Council's Corporate Governance
Principles and Recommendations.
However, we focus on diversity because it is unquestionably
the right thing for Spotless. We want to employ the best
possible talent from all walks of life.
I would like to update shareholders on board composition and
governance activities.
The composition of your Board did not change in 2011, a first
since the turnaround of Spotless commenced.
Your Directors remained highly active in 2011, visiting
dozens of sites and meeting with all levels of management,
clients and suppliers under the Company's governance
frameworks and forums. The Board is assisted in this process
through a range of specialist forums including the Audit,
Finance & Risk Committee, the Operational Risk Committee, the
Human Resources Committee, the Information Technology
Committee and the Occupational Health, Safety & Environment
Committee.
Spotless' remuneration principles are to pay responsible,
market competitive remuneration that will enable the
attraction, development and retention of Directors and
executives. As mentioned at the 2010 Annual General Meeting
the Board reviewed remuneration across the Company during
2011. The review was carried out by the Board with the
assistance of independent advisors and proposed changes were
canvassed in discussions with major shareholders and proxy
advisors.
As a result of this process the LTI Share Plan will continue
to be a performance rights scheme with prospective changes
made to hurdle weightings and the EPS and Relative Total
Shareholder Return vesting hurdles. Director's fees will
rise
for the first time since 2007 and Committee fees will be
introduced to reflect work undertaken. This has been offset
by the restructuring of the Board since 2007 and total fees
are 30 per cent lower than the ceiling approved by
shareholders in
2007. I note that in 2011 the performance of the Company did
not fully meet Board target levels and therefore Short-Term
incentive outcomes for executives are well below target
levels. I will make more detailed comments on this
important
issue later in this meeting when shareholders consider the
remuneration report.
Turning now to an update on year to date trading in FY12 and
the Outlook for the balance of the financial year.
Our Australian and New Zealand Facility Services businesses
continue to develop new contracts and importantly the
profitability of new revenue streams secured in the prior
year continues to improve. However, we do face operating
headwinds and transitional costs relating to the new business
and IT platform.
Despite this, Facility Services EBIT year to date is above
the prior year and our transformation process is on track
with its implementation.
On balance, we expect that Australia and New Zealand Facility
Services will deliver earnings growth in FY12, weighted
towards the second half.
Our International Services business is focused on delivering
the London Olympics contract and we continue to expect a
positive EBIT contribution from this business in FY12.
4
ASX / NZX Announcement 18 November 2011
Braiform year to date EBIT has declined relative to this time
last year and may result in a small loss for the half.
Management has responded to this with cost control and margin
enhancement initiatives, which coupled with normal
seasonality, is expected to result in stronger second half
earnings. The full year FY12 earnings result for Braiform
will be influenced by the market environment prevailing in
the second half along with the impact of further internal
restructuring initiatives, but is expected to be a positive
result.
Therefore, in terms of the overall outlook for the Spotless
Group, and subject to no further major deterioration in
trading conditions, management continues to expect Spotless
Group to deliver an improvement in earnings in FY12 relative
to FY11.
On behalf of the Board I would like to thank our shareholders
for their continued support. I would also like to thank our
Managing Director and CEO Mr Josef Farnik, the executive team
and all our employees for their commitment to serving our
clients.
I will now hand over to Jo.
Good afternoon ladies and gentlemen.
Strategic Progress
In 2011 we continued to progress our strategy to grow the
company's portfolio of integrated services. Our competitive
advantage stems from the unique combination of service line
expertise and sector knowledge. Our Facility Services
business now accounts for 95 per cent of the company's EBIT
and over 90 per cent of revenue.
When I refer to 'integrated', I am not talking about bundling
multiple services. Spotless directly delivers a range of
services and re-engineers or tailors them by calling on our
accumulated sector knowledge and service line benchmarking.
We are able to provide true integration, which delivers
increased value to buyer and seller.
This afternoon I will review the 2011 performance of our
operating divisions, which are the foundation stones of our
integrated services capability. I'll conclude with an update
on the Outlook for the company.
As the Chairman outlined, the Spotless Group delivered a
strong financial result in 2011, including second half growth
in
Net Profit After Tax of 37 per cent.
In terms of Divisional performance Cleaning Services revenue
rose 34.7 per cent to $433.8 million. Growth was skewed to
the first half due to the Cleanevent acquisition and the
growth in our Australian operations. Excluding the Cleanevent
acquisition, organic revenue grew by 26 per cent.
There continues to be intense competition for new cleaning
contracts so its pleasing that Spotless secured a number of
key contracts during 2011. Disappointingly, Spotless was not
successful in retaining the NSW Schools cleaning contract, as
a result annual revenue will reduce by over $60 million,
effective 1 July 2011.
Reported EBIT only grew by 1.4 per cent on the prior
corresponding period, to $14.1 million, after expensing $1.3
million
in mobilisation costs. Profit growth was further limited due
to increased labour costs and reduced scope of some contracts
as our clients responded to tougher business conditions. In
particular the New Zealand market has been slow to recover
from the Global Financial Crisis and natural disasters have
created additional margin pressures.
In 2011 Food Services revenue increased 8.2 per cent to $591
million.
5
ASX / NZX Announcement 18 November 2011
Within the Hospitality and Retail Catering segment there was
a 12 per cent increase in stadia revenue due to additional
football events and concert tours. However, the business was
adversely impacted by environmental factors, particularly the
Christchurch earthquakes. Our long standing MCG catering
contract was also renewed until 2016.
Spotless operates 92 airport retail outlets and in 2011 this
segment grew by 8.5 per cent as new outlets opened and
passenger numbers and customer spend rates increased.
The other focus for our food business is catering services to
the business, education and aged care sectors. We have
525 client sites and they operate under the Alliance Catering
brand. This business generated 2.4 per cent revenue growth in
2011.
Overall Food Services EBIT rose by 7 per cent to $19.8
million. Turning now to Laundry Services.
Revenue rose 6.7 per cent during the year to $248.8 million.
This growth was driven by volume increases in the healthcare
sector and the acquisition of a laundry operation from a
major hospital group.
Health and Accommodation sectors are the key sources of
revenue for this business and in 2011 we secured a number of
new contracts. Demand for Garment rental services remains
soft due to less activity at client sites - which is
disappointing given the higher margins associated with these
services.
Laundry Services EBIT declined 1.4 per cent to $28.8 million,
after expensing approximately $2 million in start-up costs
relating to the new Brisbane laundry.
Our Managed Services business provides facilities management,
asset maintenance and integrated services. In 2011 revenue,
excluding pass through, rose 5.4 per cent to $1.1
billion.
We saw pleasing revenue growth in the Resources and Defence
sectors and throughout our New Zealand operations, which now
includes services to the New Zealand Defence Force,
Department of Corrections and Housing New Zealand. The
company also expanded our maintenance contract with New South
Wales Schools, which has partly offset the loss of cleaning
revenue with this client.
Managed Services Reported EBIT rose by 17.7 per cent in 2011
to $37.3 million. This growth was after expensing
mobilisation costs for a number of integrated contracts and
EBIT margins strengthened as the year progressed.
Our ability to manage complex multi-service mobilisations and
provide quantifiable outcomes, gives Spotless competitive
advantage and our Managed Services division is a great
example of our strategy in action.
Perhaps the most compelling example of the company's business
model is Public Private Partnerships; part of the
Managed Services portfolio. Spotless is a leading provider to
PPP contracts in Australia.
We have secured nine PPPs. This month the new Royal
Children's Hospital was opened and commissioned in Melbourne.
Spotless is responsible for preserving and extending the
asset life for the next 25 years - and our team played an
important part in the design of the facility with our
consortium partners.
Spotless also secured the new Royal Adelaide Hospital PPP in
2011. When this hospital is commissioned in 2016, it will be
the largest and most technologically advanced hospital in
Australia. Essentially Spotless will have total
responsibility for non-clinical support services, and will
protect the condition and useful life of the hospital to
return to the State in 2046.
The current annual revenue from our PPP portfolio is
approximately $60 million. This will more than double when
the new Royal Adelaide Hospital comes online. PPPs provide a
certain pool of revenue, and importantly, a wealth of
knowledge that can be transferred across market sectors.
At 30 June 2011 the Managed Services revenue order book stood
at $11.2 billion, up from $7.7 billion at 30 June 2010.
6
ASX / NZX Announcement 18 November 2011 International Services
Turning now to International Services - our Facility Services
operations outside Australia and New Zealand.
International Services generated revenue of $63.8 million in
FY11. These operations were not owned by Spotless in the
prior corresponding period.
During the first half of FY11, Spotless completed the
integration of Cleanevent and we acquired a UK based catering
firm. Spotless invested $1.8 million during the first half to
establish the business platform, and integrate the new
businesses
into the Group.
Prior to start-up costs, International Services generated an
Underlying EBIT of negative $0.7 million in 2011 but improved
significantly in the second half.
Going forward our International Services business will focus
on preferred geographies, such as the UK and will exit
operations in the Middle East.
At the moment the team is preparing to support the 2012
London Olympic Games. Spotless will recruit and manage the
accreditation of approximately 5,000 staff. We will provide
cleaning, housekeeping, linen supply and laundry services for
the athletes' village and to venues that have a combined
capacity of 370,000 people.
Moving now to Braiform.
In 2011 hanger unit volumes declined by 5.8 per cent. This
metric is a key driver in revenues and profitability. In US
dollar terms, FY11 sales revenue declined 0.8 per cent on the
prior corresponding period to US$219.3 million. When reported
in Australian dollars, revenue fell 11.1 per cent to $222.8
million.
In US dollar terms, EBITDA decreased by 6.0 per cent to
US$20.4 million. Higher non-cash depreciation and
amortisation charges contributed to an EBIT decline to US$5.0
million from US$7.4 million in the prior year. When reported
in Australian dollars, EBIT declined 42.9 per cent to $4.8
million.
Braiform has maintained the benefits of prior year efficiency
initiatives. However, as noted previously, Braiform's volumes
and revenues are subject to the health of retail markets. As
you will hear in the Outlook, the timing and extent of a
global economic recovery remains unclear.
The Chairman spoke earlier about our investment in a new
business and IT platform. I'd like to make a couple of
additional comments.
This investment will produce more timely, better quality
management support as well as contract delivery at a lower
cost. It is really exciting to see an organisation go through
the journey of integrating best practice processes, which
will help us convert data to facilitate better operational
management.
Safety continues to be a critically important issue for
Spotless. From the Board and management through to a casual
employee working a single shift the philosophy remains
unchanged - all injuries are preventable.
During 2011 the company achieved a 12.4 per cent reduction in
the Group's Reportable Injury Frequency Rate.
Our groupwide safety program and management framework, known
as safety@spotless, is well aligned to meet the requirements
of the Harmonisation of OH&S laws and legislation in
Australia in 2012.
Safety@spotless is founded on the belief that every
individual has a safety obligation - our staff, our clients,
our contractors and the people that we engage with
day-to-day. The program has been externally certified.
Our growth and continued operational excellence will only be
possible because of our people. Therefore, their welfare,
safety and ongoing training is paramount. For example, more
than 1,300 Spotless people are currently undertaking a
7
ASX / NZX Announcement 18 November 2011traineeship or apprenticeship to help ensure that our business has qualified, safe and appropriately remunerated employees for the long term.
Outlook
Turning now to the Outlook for the balance of the financial
year.
Our Facility Services business continues to strengthen across
key market sectors. For example; last month we delivered food
services to the Rugby World Cup, recently we mobilised a
5-year integrated village services and maintenance contract
with ERA and right now we are delivering integrated cleaning
and catering services to the 2011 Presidents Cup.
Overall, our new business pipeline is strong, although due to
the timing of large integrated contract tenders new
mobilisations have slowed. This means we expect less
mobilisation costs in the first half relative to the prior
year.
Key contracts mobilised last financial year are performing
broadly in-line with our expectations. However, market
competition and tight margins, and the investment in our new
business & IT platform, is placing pressure on earnings.
Clients in some sectors, namely retail and manufacturing, are
exercising caution, which is resulting in less discretionary
spending in certain contracts.
Year to date Facility Services EBIT, including International
Services, is above the prior corresponding period. The
London
Olympics contract and strong new business pipeline will drive
a second half skew in our International Services results. On
balance, we expect Facility Services to deliver earnings
growth in FY12, weighted to the second half.
Macroeconomic conditions for Braiform are extremely soft and
unpredictable. Retailers continue to report sales declines
and this has created a further reduction in working capital
and inventories throughout the supply chain. Year to date
EBIT for Braiform has declined relative to this time last
year which is indicating a possible small loss for the first
half.
Braiform earnings are skewed to the second half because of
the northern hemisphere summer and we expect this will be
amplified in FY12 by further cost control and margin
enhancement initiatives that we have put in place. The full
year FY12 earnings result for Braiform will be largely
influenced by the retail environment but we expect a positive
result.
Therefore, in terms of the overall outlook for the Spotless
Group, and subject to no further major deterioration in
trading conditions, management continues to expect Spotless
Group to deliver an improvement in earnings in FY12 relative
to FY11.
The most critical building block in our journey is sustained,
profitable organic growth and as I said at the outset we are
making good progress on our strategy.
In FY12 we will continue to drive our sector focus and we
will invest in the Spotless brand and the associated value
that comes from 65 years of deep service line expertise,
commitment to innovation and incredible geographical
reach.
On a personal note, thank you to Peter Smedley the Chairman,
the Board, shareholders and the Spotless team for the support
and contribution in 2011.
I will now hand back to the Chairman. ENDS
8