Chief Executive’s interview
We are looking to the future – building on progress and focusing on new opportunities.
G4S is one of just 20 FTSE 100 companies that have delivered consecutive earnings growth over the past five years.
This demonstrates the inherent strength of our business strategy and market positions. It also means we are well placed for
improved growth as global economies recover.
Nick Buckles, Chief Executive Officer
How would you summarise the performance of the group in 2010?
In 2010 we achieved our sixth consecutive year of underlying revenue, profit and dividend growth since the group was formed in 2004, despite the significant economic uncertainties of the last two years.
We delivered strong organic revenue growth of 7% in developing markets, which now account for 29% of the group’s revenue and 33% of profits. We are encouraged by signs of economic recovery in our larger developed markets of the US and the UK. In addition, our “integrated solutions” strategy is helping us to build market share with major global customers.
G4S is one of just 20 companies in the FTSE 100 that have continued to deliver earnings growth year-on-year over the past five years – a great result against a difficult set of circumstances and we are proud of everyone in the organisation who has played their part in enabling us to continue the earnings growth trend throughout that time.
What changes have you had to make as a result of the economic pressures of the last 18 months?
We continually review our key processes to make sure they are efficient and that we are not carrying unnecessary costs – so very little direct change has taken place as a result of the crisis.
One of the largest costs to the group is pay – with one of the largest private workforces in the world, it is a key consideration for us. As a result of the economic downturn we have awarded modest pay rises in economies where growth continues (generally in line with RPI), but elsewhere, in more challenging countries we have implemented pay freezes to ensure that pay remains in line with business performance and economic growth rates. As growth was challenging in the year, we had to implement some workforce reduction programmes in a few countries. However, overall we’ve increased our employee numbers by 30,000 during the year.
Unfortunately, we lost a number of contracts in the year. Some of the losses were the result of specific issues such as US and British troops withdrawing from Iraq and therefore no longer needing our support. Others were lost as the result of a competitive tender process. Losing contracts is obviously disappointing, but we aim to learn from such losses to develop our future bidding capabilities and improve service.
Towards the end of 2010, we implemented a new management structure – not as a result of the economic crisis, but more with an eye on the future and making sure we have the right management operating at the appropriate level to drive the business forward.
We have created four major regions and one major division all with a Regional or Divisional CEO with responsibility for around £1.5bn revenues in each. Each of the CEOs has created an executive management team which reflects the same structure as the group executive, represented by key operational and strategic functions.
We have also extended the group executive team to include the key functional areas of corporate communications and business development to ensure that these topics are given the highest profile and to input to the group strategy as it continues to develop.
These changes have provided us with the opportunity to ensure we have very high quality management in all of the key positions and, where necessary, we have brought new people on board. I’m very excited about the opportunities this brings both in terms of strategic development for the business, but also for succession planning and best practice sharing.
What were the biggest challenges that you faced in the year?
One of the key challenges was a slight shift in focus of some of our key customers – naturally in a time of economic uncertainty, thoughts switch to short-term issues and cost control, which can stifle creativity and longer term strategic thinking. Some customers are delaying decisions about the long term, and in particular on outsourcing, until they feel they have come through the worst of the current crisis. I have no doubt that this will be back on the agenda soon, but we have sensed an overall slowing in customers making strategic decisions in the last 12 months.
The change of government in the UK market created some challenges for our UK business in the year. As part of the Comprehensive Spending Review, we were tasked with helping key UK Government departments to achieve significant savings which would assist in relieving the UK budget pressures. In November 2010, we announced that we had reached agreement on a number of cost saving initiatives with the UK Government, achieved largely through specification amendments on existing contracts. In the longer term, we believe there are a number of areas where the private sector can deliver further cost savings to government as a result of opportunities for more extensive outsourcing to the private sector.
In the cash solutions division the lowest interest rates on record for many years in some countries had a short-term impact on our ability to grow the cash solutions business at the historically high levels of the past few years. Low interest rates remove the imperative for the cash cycle to operate at maximum efficiency and this has impacted our growth. That said, the great work that our cash experts have done in terms of managing the costs during the year has meant that the businesses have still performed very well despite these issues.
Continuing to keep the workforce motivated and looking to the future has been challenging during the year, when everywhere they turn there is talk of recession and crisis, but I am glad to say that we have a dedicated and hard working employee base who have continued to deliver the results despite this.
What were the highlights in terms of business performance?
We performed well on all of the key financial metrics. Organic turnover growth was 2.1%, operating profits were up by more than 4%, margins were maintained at 7.1% and we achieved our operating cash flow target of 85% of PBITA.
We announced our entry into the Brazilian market in June 2010, with the acquisition of Instalarme, a specialist security systems company. This was closely followed by the further acquisition of systems integrator, Plantech. Brazil is one of the largest security markets in the world, with excellent growth prospects and has been a priority market for us for some time.
During the year, we have continued to develop our ability to offer international contracts to major customers, ensuring high levels of security for operations across international borders. Some of our major contract wins include large international banking groups, technology organisations and pharmaceutical companies.
At the same time, as part of our strategy development, we have created a group of key sector experts, with the ability to spread expertise and knowledge and to act as a catalyst to drive business development in key sectors. This has resulted in strong results, with aviation sector revenues up by nearly 30%, ports up by 64% and the oil and gas sector growing by 35% in 2010.
There were some key contract wins during the year including GSK internationally, Brussels airport, Baghdad airport, the Swedish Parliament, Lukoil in Iraq and multiple contracts for our CASH360 product, to name but a few.
In order to continue to share best practice, develop our management and continue to plan for future succession, we created a Strategic Leadership Network; a group of around 25 senior managers and directors responsible for a significant proportion of the group’s revenues. By investing in the development of this group of leaders, we can drive forward the delivery of the group’s strategy over the longer term.
Outside of the direct business performance, we were pleased to be a founder signatory to an industry-wide International Code of Conduct (the “Code”) in November 2010, which sets out principles for security operations in so-called “complex environments” – areas experiencing or recovering from disaster or unrest and where governments and the rule of law are weak. We hope that the Code will help to drive up standards across the industry as the private sector is called upon to provide increased levels of services to governments and businesses in difficult environments and continues to touch the lives of millions of people worldwide.
What is the current business strategy for the group and has that changed in the last 12 months?
There have been no changes to the business strategy. We still believe there is long-term value to be derived from creating security solutions which solve customer problems, using our cash cycle expertise to drive changes in banking policy, working closely with governments and leveraging our strong market positions in developed and New Markets. We believe that this will drive outsourcing, reduce commoditisation of security services and deliver strong results for the group.
What progress have you made on delivering the group strategy during 2010?
Overall, what pleases me most is that customers are recognising that G4S can add real value to their organisation. Our positioning has moved significantly and many more of our conversations with customers are taking place at the boardroom level, and are covering aspects of risk and reputation rather than basic security needs. It could partly be a result of the world we now live in, but I get a strong feeling that customers are recognising that we can positively influence their own strategy – whether that’s increasing their own revenue, managing their cost base, reducing their risk or helping to improve the service that they provide to their direct customers.
We have also made good progress in key sectors, with our sector specialists bringing together group-wide capability and expertise to enable us to bid for and win key contracts in areas such as aviation, major events, justice services and defence – something which wouldn’t have been possible two to three years ago.
What are the short-term priorities for the group – perhaps for the next 12 to 18 months?
We saw some improvements in the second half of 2010, but whilst some economies are making a slow recovery, others such as Ireland and Romania have slipped further into negative territory and have proved even more challenging. Overall, we have continued to grow the business despite GDP being negative overall – a strong achievement against the economic backdrop of the recent past.
So, in 2011, we will continue to drive the group strategy forward whilst bedding in the new group structure which will help us to make faster, better decisions and ensure we continue to have good controls across the business.
It would be great to win some major contracts in the first half of 2011 and we have made an excellent start by being appointed the official security services provider for the London 2012 Olympic and Paralympic Games. I know our business development teams are working hard to ensure that we have a strong contract pipeline going forward.
We expect to step up our acquisition activities, with a particular focus on growing our presence in the fast growing New Markets. We should spend around £200m in 2011.
What targets are you setting yourself and your senior management team?
Our targets are unchanged. We expect profits to grow well ahead of worldwide GDP and over the longer term, will continue to focus on improving our post tax return on invested capital, a good measure of strategic performance. We expect organic growth to return to high single digit levels as economies improve.
How would you summarise the general outlook for the group in the mid-term?
The group achieved strong results in 2010, with businesses performing well across all markets, service lines and customer segments. We are confident that our strategic plan, which enhances our ability to meet increasingly sophisticated customer needs by adding new capabilities and technologies to our offer, has put the group in a strong position. It allows us to maintain our longer term growth momentum as we pursue attractive global opportunities in our key target sectors.
We will continue to build on our successes and remain confident about the outlook for 2011, when we expect to deliver an improved organic revenue growth performance whilst continuing to maintain our discipline on margins and cash generation.
New roles in Executive management team
In 2010, four new Regional CEO roles were created to represent a new geographic continental management structure that will further underpin the group's global strategic development.
- Grahame Gibson Chief Operating Officer and Regional CEO – Americas
- David Taylor-Smith Regional CEO – UK and Africa
- Willem van de Ven Regional CEO – Europe
- Dan Ryan Regional CEO – Asia Middle East
Key senior functional roles for business development and corporate communications were also added to the Executive management team.
- Debbie McGrath - Group Communications Director
- Graham Levinsohn - Group Strategy and Development Director
See our Executive management team for a list of all roles.