Final Results

Compass Group PLC 29 November 2006 COMPASS GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2006 Transition year - benchmark to measure future improved performance â€¢ Group revenue from continuing operations Â£10.8 billion, 7% organic growth.(1) â€¢ Operating profit before exceptional items from continuing operations Â£508 million, up 2.4%.(3) â€¢ Free cash flow from continuing operations Â£265 million, up 16.7%. â€¢ Disposal programme yields net proceeds before tax of over Â£1.8 billion. â€¢ Dividend 10.1 pence per share, up 3.1%. â€¢ Â£500 million share buy back progressing well. â€¢ Group pension deficit reduced by half following Â£280 million cash injection. â€¢ UK business stabilisation continues. â€¢ Disposal of Selecta vending business announced. â€¢ Strategy remains sound, business largely stabilised, solid platform for future growth. Richard Cousins, Chief Executive Officer, said: 'The results for the year for the continuing business are in line with expectations, both in terms of operating profit and free cash flow. The disposals programme has yielded net proceeds before tax of over Â£1.8 billion enabling us to reduce the Group pension deficit by half, return Â£500 million to shareholders, acquire the remaining 51% interest in Levy Restaurants for Â£134 million and to paydown around Â£800 million of debt'. 'The sale of Selecta and the gradual withdrawal from a number of small countries will result in a much greater focus for the remaining business. We will aim to achieve a balanced use of the net sale proceeds. This will include an extension of the current share buy-back programme, whilst at the same time at least maintaining our existing credit ratings'. 'At this early stage of the new financial year, the business is trading as expected overall'. Sir Roy Gardner, Chairman, said: 'The results we have reported for 2006 are a benchmark from which to measure our future performance. Fundamental changes have been made during the year, including new leadership, a comprehensive review of the business and establishing clear strategic priorities for the future. We have improved financial discipline and governance across the Group and we are now well placed to leverage the significant opportunities our global platform gives us. These actions will, in the years ahead, improve our performance and deliver value for our shareholders'. -------------------------------------------------------------------------------- Financial summary Increase / For the year ended 30 September 2006 2005(2) decrease -------------------------------------------------------------------------------- Continuing operations before exceptional items Revenue Â£10,815m Â£10,073m 7.4% Operating profit(3) Â£508m Â£496m 2.4% Operating margin(4) 4.7% 4.9% -20bps Profit before tax - underlying (5) Â£363m Â£344m 5.5% - reported Â£374m Â£341m 9.7% Free cash flow Â£265m Â£227m 16.7% Basic earnings per share - underlying (5) 11.4p 10.9p 4.6% - reported 11.7p 10.7p 9.3% Total Group after exceptional items Basic earnings per share 13.3p 9.0p 47.8% Dividend per ordinary share 10.1p 9.8p 3.1% -------------------------------------------------------------------------------- (1) Organic growth (formerly referred to as like for like growth) is calculated by adjusting for acquisitions (excluding current year acquisitions and including a full year in respect of prior year acquisitions), disposals (excluded from both years) and exchange rate movements (translating the prior period at current period exchange rates) and compares the results against 2005 (2) Prior period figures have been restated from UK GAAP to IFRS (3) Includes share of profit of associates (4) Excludes share of profit of associates (5) Underlying profit before tax and basic earnings per share excludes exceptional items and income of Â£11m (2005: charge Â£(3)m) in respect of swaps and hedging translation gains/losses, and basic earnings per share excludes these items net of tax. -------------------------------------------------------------------------------- Mapping the Future Richard Cousins, Group Chief Executive, said: 'Compass is a good business with a sound strategy. We need to build on our strengths and correct our weaknesses. We have to create a management and performance culture that has at its core the delivery of profitable growth to maximise shareholder value. Aligning the business around this objective is the priority for me and my management team'. Business Strategy To be successful, we must deliver the highest quality and performance, whilst relentlessly driving to be the lowest cost, most efficient provider. Our focus going forward will be on the creation of real shareholder value delivered in a disciplined and sustainable way. Our core business will remain contract foodservice. We are focused on this activity and excited by the opportunities ahead. The accessible contract foodservice market is worth some Â£150 billion and, with outsourced penetration still at well under 50%, our market grows at around 5% per year. In addition to the trend to outsource support services generally, there is a growing trend for clients to want to source catering and other support services such as cleaning from a single provider. The support services outsourced market, including catering, is currently worth around Â£700 billion per year with circa 35% outsourced, growing at around 10% a year. We are ideally placed to leverage our existing client relationships to provide integrated food and support services offerings and these already account for around 10% of our revenues. We will continue to grow this business where it makes sense and enhances value for our shareholders. At the moment we trade in too many countries where scale and future growth prospects do not offer adequate returns. Over the next 12 months, we will reduce the number of countries in which we operate to around 60-65. Vending is an important ongoing part of our offering to clients. However, our highly successful and profitable European specialist vending business, Selecta, has a different strategy, financial model and target market to the rest of the Group. Selecta also derives only 9% of its revenues from our contract foodservice clients and, as a consequence of this, we have decided to sell the Selecta business. Value Drivers Our objective over the next 2-3 years will be to drive disciplined, profitable growth with the focus more on organic growth and like for like growth, rather than on acquisitions. Within that philosophy, we will drive performance by concentrating upon the five key profit drivers: Client Sales and Marketing: winning new business is, and will continue to be, a clear strength for Compass. However, as we improve discipline and focus on unit margins, organic growth rates may, for a period, slow a little before increasing back to trend rates. We will work harder with our existing clients to deliver like for like revenue growth, seeking to balance the needs of value for money, efficiency and a fair reward for a job well done. In the medium to long term, we will work harder to demonstrate the benefits of outsourcing to potential clients. Consumer Sales and Marketing: we will seek a more innovative approach to our consumers by improving the quality of our offering, restaurant designs and point of sale displays. Like for like volume growth will be a key area of focus and where we face inflationary cost pressures, we will seek reasonable price increases. Food Cost: we spend over Â£3.5 billion per year on food. Our objective must be to procure the optimal quality and range of food to meet the needs of our customers at the lowest cost. This means having an efficient supply chain that leverages our scale and being much more disciplined about rationalising our supplier and product base. Driving in-unit compliance with approved purchasing lists and a much more systematic approach to menu planning will be critical. Unit Costs: we spend nearly Â£6 billion per year on unit costs. We will work closely with clients and employees to improve labour scheduling and efficiency, contain wage and ancillary cost inflation and to reduce unit overheads. Above Unit Overheads: we spend too much of our unit profit on overheads. We need a simpler structure with fewer layers of management and less bureaucracy. This year we have achieved our target of Â£50 million of overhead cost savings. Going forward, the drive for overhead efficiency will continue. Focus on Management and Performance (MAP) We have dismantled the divisional structure, so that we have greater visibility of the underlying performance at a country by country level. This will deliver reduced cost and improved decision making. New monthly reporting processes and regular business reviews with country management teams will ensure that we are all constantly focused on the management and performance of the five value drivers outlined above. Local managing directors are empowered to get on with running their business, operating within a new simple, but clearly defined Group operating framework (called 'MAP') which encompasses the five key value drivers. Corporate Governance Compass is a relatively new organisation that has created its global scale through acquisitions. A number of processes are being put in place to ensure that Compass benefits from this scale and international reach. These new measures will lead to tighter discipline and sounder governance. Approval processes have been strengthened and remuneration policies reviewed. We have formed the Corporate and Social Responsibility Committee, a sub committee of the Board, to oversee all aspects of health and food safety, environmental impacts, governance and its reporting. Management Today the Group has made a separate announcement about Board changes. United Nations This has been an unfortunate episode in the Group's history. The Board has instituted a number of changes as a result of the lessons we have learned. In March 2006, two competing food companies brought US lawsuits totalling some Â£600 million against ESS, Compass and various ESS staff. Although these claims would have been resolutely defended, we decided that it was in the best interests of the ongoing business and the shareholders to settle these claims without prolonged litigation. In October, with no admission of legal liability, we reached final settlement of all claims for less than Â£40 million. We continue to cooperate fully with the relevant UN and US authorities in their on-going investigation. Our People This has been another tough year for our people. They have supported one another as we have taken the actions necessary to improve our performance and restore our reputation. They have also continued to act professionally to produce the highest level of service to our customers. Enquiries: Compass Group PLC +44 (0)1932 573000 Investors/Analysts Andrew Martin Media Chris King Website: www.compass-group.com For presentation and teleconference details refer to the notes on pages 14 and 15. GROUP TRADING REVIEW Compass Group today announces its preliminary results for the year ended 30 September 2006. These results are presented in accordance with International Financial Reporting Standards ('IFRS') and comparative figures for 2005 have been restated accordingly, as previously reported on 1 March 2006. -------------------------------------------------------------------------------- Financial summary Increase / For the year ended 30 September 2006 2005(1) decrease -------------------------------------------------------------------------------- Continuing operations before exceptional items Revenue Â£10,815m Â£10,073m 7.4% Operating profit (2) Â£508m Â£496m 2.4% Operating margin(3) 4.7% 4.9% -20bps Profit before tax - underlying (4) Â£363m Â£344m 5.5% - reported Â£374m Â£341m 9.7% Free cash flow Â£265m Â£227m 16.7% Basic earnings per share - underlying (4) 11.4p 10.9p 4.6% - reported 11.7p 10.7p 9.3% Total Group after exceptional items Basic earnings per share 13.3p 9.0p 47.8% Dividend per ordinary share 10.1p 9.8p 3.1% -------------------------------------------------------------------------------- (1) Prior period figures have been restated from UK GAAP to IFRS (2) Includes share of profit of associates (3) Excludes share of profit of associates (4) Underlying profit before tax and basic earnings per share excludes exceptional items and income of Â£11m (2005: charge Â£(3)m) in respect of swaps and hedging translation gains/losses, and basic earnings per share excludes these items net of tax. -------------------------------------------------------------------------------- Discontinued Operations On 15 June 2006, Compass completed the sale of its travel concession catering business, Select Service Partner, including Creative Host Services in the US (together, 'SSP'), for net consideration after transaction costs of Â£1,798 million. SSP's revenue and operating profits in 2005 were Â£1,804 million and Â£112 million respectively on an IFRS basis. During the period, the Group also completed the sale of its European Inflight catering business for net consideration after transaction costs of Â£65 million, the RA Patina public restaurants business in the US and the Strand Palace Hotel in London for a total of Â£85 million and a number of other small travel concessions related businesses for a total of Â£7 million. The revenue and operating profits of these businesses in 2005 were Â£342 million and Â£12 million respectively. The results of all these businesses are treated as discontinued operations and are therefore excluded from the results of continuing operations in 2006. The 2005 results have been restated on a consistent basis. The results of the Selecta vending business are reported within continuing operations. The Group has completed the withdrawal from its Middle East military catering operations. The revenue and operating profits before exceptional items in 2005 from these activities were Â£175 million and Â£34 million respectively. The results of these operations are also treated as discontinued operations and are therefore excluded from the results of continuing operations in 2006. The 2005 results have been restated on a consistent basis. Revenue Overall, the Group delivered revenue growth of 7% on a reported basis, 6% on a constant currency basis and 7% organic growth (previously referred to as like for like growth). The main factors that affected the period on period change in revenue are summarised below: Continuing Operations % Organic growth 7 Acquisition and disposal adjustments (1) Movements in translation rates 1 Total 7 The table below sets out organic growth by sector for each geographic segment. Organic growth is calculated by adjusting for acquisitions (excluding current year acquisitions and including a full year in respect of prior year acquisitions), disposals (excluded from both years) and exchange rate movements (translating the prior period at current period exchange rates), and compares the results against 2005. ----------------- -------- ------- ------- ------- ----------- NA CE UK ROW Total Group Continuing Operations % % % % % ----------------- -------- ------- ------- ------- ----------- Contract: Business & Industry 12 1 0 9 5 Healthcare 12 3 (2) 13 8 Education 11 0 (4) 14 6 Sports & Leisure 26 7 2 2 14 Defence, Offshore & Remote 45 18 3 24 22 ----------------- -------- ------- ------- ------- ----------- Total Contract 14 2 0 14 8 Vending (2) 1 0 - (1) Travel Concessions (1) - 4 - (14) (10) ----------------- -------- ------- ------- ------- ----------- Total 12 2 0 13 7 ----------------- -------- ------- ------- ------- ----------- (1) Residual travel concessions principally comprises: motorways in Japan and Portugal. The table below summarises the performance of the Group's continuing operations by geographic segment and for the Group on an underlying basis. -------------------------------------------------------------------------------- Segmental performance Constant Year ended 30 September 2006 Reported currency Organic change change growth 2006 2005 % % % -------------------------------------------------------------------------------- Continuing Operations Revenue (Â£m) North America 4,290 3,761 14 11 12 Continental Europe 2,863 2,830 1 2 2 United Kingdom 1,957 1,982 (1) (1) - Rest of the World 1,705 1,500 14 14 13 ----------------- -------- ------- ------- ------- ------- Total 10,815 10,073 7 6 7 ----------------- -------- ------- ------- ------- ------- Operating profit(1) (Â£m) North America 245 218 Continental Europe 169 169 United Kingdom 114 114 Rest of the World 55 53 Unallocated overheads (77) (58) Associates 2 - ----------------- -------- ------- Total 508 496 ----------------- -------- ------- Operating margin(2)(%) North America 5.7 5.8 Continental Europe 5.9 6.0 United Kingdom 5.8 5.8 Rest of the World 3.2 3.5 ----------------- -------- ------- Total 4.7 4.9 ----------------- -------- ------- (1) Operating profit includes share of profit of associates North America Â£1m (2005: Â£nil) & UK Â£1m (2005: Â£nil). (2) Operating margin is based on revenue and operating profit excluding share of profit of associates. North America - 40% Group revenue (2005: 37%) North America enjoyed another successful year delivering 12% organic revenue growth to Â£4,290 million (2005: Â£3,761 million). Revenue growth has been strong across all of the contract sectors. The Healthcare sector, with organic growth of 12%, has benefited from the continuing success of the support services business, Crothall, which has won a number of large contracts often with a significant cleaning and laundry component. The Business and Industry sector, with organic growth of 12%, has continued to win a number of important new clients and to drive like for like sales from existing contracts. Levy Restaurants, which operates our Sports and Leisure business, has shown very strong organic growth of 26%, in part reflecting the sporting success of many of the teams who are our clients. In April 2006, we completed the acquisition of the remaining 51% of Levy for $250 million (Â£134 million) taking our total investment in Levy to $337 million. The negative revenue growth in Vending reflects our strategy to operate on a franchise basis in areas where we do not have sufficient scale and density which helps improve profitability. Total operating profit on continuing activities increased to Â£245 million (2005: Â£218 million). The contract catering business generally performed well across all sectors. Rising fuel costs impacted the business as a whole, and vending in particular. The disposal of 75% of Au Bon Pain in the second half of 2005 also resulted in a Â£4 million negative impact on operating profit in 2006. In 2007, we expect to see continuing good revenue growth but at lower levels than those seen in 2006. A 5 cent movement in the average US dollar to Sterling exchange rate impacts annual revenue by circa Â£100 million and operating profit by circa Â£7 million. Continental Europe - 26% Group revenue (2005: 28%) Revenue in Continental Europe grew by 2% on an organic basis to Â£2,863 million (2005: Â£2,830 million). This lower level of growth reflects our being both more selective on the new business we take on and the continued focus to improve the performance of lower margin contracts or to exit these where appropriate. The Nordic region grew well, with organic growth of 7% driven by strong demand from the oil and gas sector. Spain and Switzerland also showed good organic growth of 11% and 5% respectively. Operating profit for the year was Â£169 million (2005: Â£169 million). We have made some good progress in France, Nordic and the Netherlands, which are all showing signs of improving performances. Italy performed less well and is in the early stages of recovery. In 2007, we expect to see similar levels of overall revenue growth as we continue to be selective on new business. With the significant reorganisation activity undertaken in 2006 we would expect to begin to see some margin progression. A 5 cent movement in the average Euro to Sterling exchange rate impacts annual revenue by circa Â£90 million and operating profit by circa Â£4 million. UK - 18% Group revenue (2005: 20%) In the UK, revenue was flat at Â£1,957 million (2005: Â£1,982 million). We are continuing to make good progress in addressing lower margin contracts. This initiative contributed towards the higher than normal level of lost business, in-line with our expectations. Parts of the Education sector continue to be challenging, with organic revenue declining by 4% overall. This is largely a result of reduced participation particularly in state secondary schools as the take up on healthier options remains slow. We have also exited a number of poorer performing contracts in the state sector. Operating profit for the year was in line with last year at Â£114 million (2005: Â£114 million). We expect business to remain challenging in the UK in 2007 particularly in the Education sector. We will, however, continue to simplify the business to generate cost efficiencies and focus on improving the margin on poorer performing contracts in particular. Rest of the World - 16% Group revenue (2005: 15%) In the Rest of the World, revenue grew by 13% to Â£1,705 million (2005: Â£1,500 million) with all sectors performing well. 35% of the business in the Rest of the World is in the Defence, Offshore and Remote sector. This sector grew by 24%, benefiting from the buoyant oil and gas and mining sectors around the world, particularly in Australia up 26% and Latin America up 15%. Organic growth in Japan was 4%, in part held back by the continued exit from the retail business. Operating profit for the year was Â£55 million (2005: Â£53 million). We have seen good organic growth in Australia, in particular. The Group has completed the exit from Middle East military catering operations. In 2007, we expect to see more moderate revenue growth but would now expect to begin to see some margin progression. Unallocated Overheads Unallocated overheads for the year were Â£77 million (2005: Â£58 million). These include restructuring costs at a Head Office level carried throughout the year and the strengthening and addition of certain central functions. In 2007 we expect to see a small reduction in unallocated overheads. Operating Profit Operating profit from continuing operations including associates was Â£508 million (2005: Â£496 million) an increase of 2.4%. Finance Cost Net finance cost for the year was Â£134 million (2005: Â£155 million) including Â£11 million non cash income arising on the revaluation of interest rate hedging instruments that do not qualify for hedge accounting under IAS 39 (2005: charge Â£(3) million). Excluding these IAS 39 revaluations the underlying net finance cost for the year is Â£145 million (2005: Â£152 million). We currently anticipate underlying net finance costs to be around Â£105-Â£110 million for 2007 principally reflecting a full year's benefit of the net disposal proceeds received during the course of 2006. Profit before Tax Profit before tax from continuing operations before exceptional items is Â£374 million (2005: Â£341 million) up 9.7%. On an underlying basis, before including revaluation gains and losses on swaps and hedging instruments, profit before tax from continuing operations increased by 5.5% to Â£363 million (2005: Â£344 million). Income Tax Expense The overall Group tax charge before exceptional items for the year is Â£113 million (2005: Â£96 million), giving an effective tax rate of 30% (2005: 28%). We expect the Group's effective tax rate to average around the 30% level for the foreseeable future. Basic Earnings per Share Basic earnings per share are 13.3 pence (2005: 9.0 pence) up 47.8%. Excluding exceptional items and discontinued operations, basic earnings per share on an underlying basis (before including revaluation gains and losses on swaps and hedging instruments) are 11.4 pence (2005: 10.9 pence) up 4.6%. Attributable profit and basic earnings per share are reconciled below. Attributable profit Basic earnings per share 2006 2005 2006 2005 Â£m Â£m Pence Pence Change -------------------------------------------------------------------------------- Reported 285 195 13.3 9.0 47.8% Discontinued operations and exceptional items (34) 36 (1.6) 1.7 Hedge ineffectiveness - after tax (7) 4 (0.3) 0.2 -------------------------------------------------------------------------------- Underlying 244 235 11.4 10.9 4.6% -------------------------------------------------------------------------------- Dividends The recommended final dividend is 6.7 pence per share resulting in a total dividend of 10.1 pence per share for the year (2005: 9.8 pence), a year on year increase of 3.1% over 2005. Dividend cover for 2006 was 1.1 times underlying earnings. Whilst we remain committed to continue to grow the dividend in real terms, our objective over the medium term remains to move the dividend cover more towards the 2 times level. Acquisitions The acquisition of the remaining 51% interest in Levy Restaurants not already held was completed on 18 April 2006 for $250 million (Â£134 million). The Group's strategic focus continues to be on the organic development of its existing core businesses. As a result, only a small number of minor acquisitions were completed where these reinforced sectoral presence in certain areas. The Group does not currently anticipate any significant new acquisitions during 2007 and payments of deferred consideration in respect of past acquisitions and the buyout of minority interests is currently expected to total around Â£30 million in 2007. Discontinued Operations On 15 June 2006, the Group completed the sale of its travel concessions catering business, Select Service Partner, including Creative Host Services in the US. The Group has also completed the exit from its Middle East military catering operations. During the period, the Group completed the sale of a number of its other non-core concessions businesses, including its European Inflight catering business, the RA Patina public restaurants business in the US, the Strand Palace Hotel in London, the Italian motorways business and Krispy Kreme in the US. The results of these operations have also been classified as discontinued. Operating profit before tax and exceptional items for the period from these discontinued operations was Â£23 million (2005: Â£158 million). The loss after tax and exceptional items from discontinued operations was Â£(30) million (2005: profit Â£73 million). The profit after tax on disposal of net assets of discontinued operations is Â£20 million (2005: Â£nil million). Disposal of Selecta The Group announced today its intention to dispose of its Selecta vending businesses operating in 21 countries in Continental Europe and in the UK. These businesses generated revenue of Â£476 million, earnings before interest and tax (EBIT) of Â£45 million and earnings before interest, tax and depreciation (EBITDA) of Â£87 million in 2006. Net capital expenditure in 2006 totalled Â£46 million. Pensions The Group now accounts for pensions in accordance with IAS 19. Significant one off contributions were made to the two main UK defined benefit schemes during the year totalling Â£280 million following the disposal of the SSP business and the Strand Palace Hotel. As a result, the total pensions deficit was significantly reduced at 30 September 2006 to Â£282 million (2005: Â£555 million). The Group has reviewed its pension assumptions and continued to move to more prudent assumptions in determining the deficit including life expectancy assumptions which have again been increased in 2006. For example in the UK, life expectancy assumptions for a pensioner at age 65 has been increased to 19.7 years (male), 22.6 years (female) (2005: 17.8 years (male), 20.7 years (female)) and for non-pensioners life expectancy assumptions have been increased to 20.9 years (male), 23.7 years (female) (2005: 19.4 years (male), 22.4 years (female)). The total pensions charge in the year was Â£33 million (2005: Â£26 million) for defined contribution schemes and Â£35 million (2005: Â£53 million) for defined benefit schemes. Of the defined benefit scheme costs, Â£11 million (2005: Â£14 million) was charged to net finance cost. Return on Capital Employed Return on Capital Employed (ROCE) was 10.7% (2005: 10.7%) based on the continuing business before exceptional items, excluding the Group's minority partner's share of total operating profit, net of tax at 30% and using an average capital employed for the year of Â£3,232 million (2005: Â£3,137 million) calculated from the IFRS balance sheet. Under UK GAAP, included within average capital employed was goodwill previously written off to reserves, now extinguished under IFRS, and goodwill amortised prior to 30 September 2004, the date at which the net book value of goodwill was frozen under IFRS. Including these adjustments, average capital employed for the year (for the continuing businesses) would have been Â£6,294 million (2005: Â£6,051 million) and return on capital employed for the continuing business would have been 5.9% (2005: 5.9%). Financial Targets The Group's three year targets for the continuing business for 2006 - 2008 remain unchanged at: â€¢ 100 basis points improvement in ROCE â€¢ free cash flow from continuing operations of Â£800 million - Â£850 million. Cash Flow Free cash flow from the continuing business totalled Â£265 million (2005: Â£227 million). The major factors contributing to the increase were: Â£24 million reduction in net capital expenditure and Â£44 million lower working capital outflow, offset by Â£14 million higher net interest payments and Â£29 million higher net tax payments. Net capital expenditure, which 2 years ago exceeded Â£300 million will, for the next 2-3 years, be at a level of around 2% of revenues post the disposal of the Selecta vending business. We are working hard at improving our working capital performance and now expect to see an average annual outflow of approximately Â£20 million. Given the scale of the working capital balances, there are however likely to be fluctuations between years. The Group's cash tax rate for the year was 27% (2005: 20%), based on underlying profit before tax. We expect the average cash tax rate to remain at a similar level for the foreseeable future, but again with some potential fluctuations between years. The net interest outflow of Â£174 million in 2006 includes an outflow of Â£20 million over and above the income statement charge relating to the swap reversal transactions carried out in 2004. Acquisition payments were Â£167 million (2005: Â£121 million) comprising the acquisition of the remaining 51% interest in Levy Restaurants which was completed on 18 April 2006 for $250 million (Â£134 million), Â£8 million from the buyout of half of the remaining 10% of Onama in Italy, Â£8 million of deferred consideration in respect of prior years transactions and Â£18 million in respect of other sundry acquisitions less Â£1 million of cash acquired. Disposal proceeds net of transaction costs comprises consideration of Â£1,955 million less Â£118 million of cash disposed and Â£45 million consideration deferred to future periods, plus Â£15 million of deferred consideration received in the year relating to prior years transactions. Outlook The results we have reported for 2006 are a benchmark from which to measure our future performance. Fundamental changes have been made during the year, including new leadership, a comprehensive review of the business, and establishing clear strategic priorities for the future. We have improved financial discipline and governance across the Group and we are now well placed to leverage the significant opportunities our global platform gives us. These actions will, in the years ahead, improve our performance and deliver value for shareholders. Richard Cousins Sir Roy Gardner Chief Executive Chairman NOTES (a) The results for the year ended 30 September 2006 were approved by the Directors on 29 November 2006 and have been have been derived from the Company's statutory accounts for that year. The Auditors' Report on these accounts was unqualified and did not contain statements under section 237(2) or 237(3) of the Companies Act 1985. The preliminary results do not comprise statutory accounts within the meaning of section 240 of the Companies Act 1985. These statutory accounts will be delivered to the Registrar of Companies following the Company's Annual General Meeting. Financial information for the year ended 30 September 2005, set out as comparative figures in this announcement, has been restated from UK Generally Accepted Accounting Principles ('UK GAAP') on the basis of accounting policies set out in 'Adoption of International Financial Reporting Standards 'IFRS': Preliminary restatement of 2005 financial information', a separate document published in the Investor Relations section of the Group website (www.compass-group.com) on 1 March 2006 and which is also available on request. The Annual Report for the year ended 30 September 2005, which was prepared under UK GAAP, has been filed with the Registrar of Companies. (b) Forward looking statements This Press Release contains forward looking statements within the meaning of Section 27A of the Securities Act 1933, as amended, and Section 21E of the Securities Exchange Act 1934, as amended. These statements are subject to a number of risks and uncertainties and actual results and events could differ materially from those currently being anticipated as reflected in such forward looking statements. The terms 'expect', 'should be', 'will be', 'is likely to' and similar expressions identify forward looking statements. Factors which may cause future outcomes to differ from those foreseen in forward looking statements include, but are not limited to: general economic conditions and business conditions in Compass Group's markets; exchange rate fluctuations; customers' and clients' acceptance of its products and services; the actions of competitors; and legislative, fiscal and regulatory developments. (c) The timetable for the proposed dividend of 6.7 pence per share is as follows: Ex dividend date: 7 February 2007 Record date: 9 February 2007 Payment date: 5 March 2007 (d) A presentation for analysts and investors will take place at 9:30 am (GMT/ London) on Wednesday 29 November 2006 at Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1 The live presentation can also be accessed via webcast and dial-in teleconference starting at 9:30 am (London time): â€¢ To listen to the live presentation via teleconference, dial (UK) +44 (0) 20 7138 0818 â€¢ To view the presentation slides and/or live webcast of the presentation, go to www.compass-group.com or www.cantos.com. â€¢ Please note that remote listeners will not be able to ask questions during the Q&A session. A replay recording of the presentation will also be available via teleconference and webcast: â€¢ A teleconference replay of the presentation will be available for five working days, until 5th December 2006. To hear the replay, dial (UK) +44 (0) 20 7806 1970 or (US) +1 718 354 1112. The replay passcode is 9420257#. â€¢ A webcast replay of the presentation will be available for six months, at www.compass-group.com and www.cantos.com. Enquiries: Compass Group PLC 01932 573000 Investors/analysts Andrew Martin Media Chris King Website www.compass-group.com. Compass Group is the world's largest foodservice company with annual revenue of c. Â£11 billion. For more information visit www.compass-group.com. CONSOLIDATED INCOME STATEMENT for the year ended 30 September 2006 ------------------- ----- ------- ------ ------- ------ -------- -------- Notes Before Exceptional Before Exceptional exceptional items Total exceptional items Total items (Note 2) 2006 items (Note 2) 2005 Â£m Â£m Â£m Â£m Â£m Â£m ------------------- ----- ------- ------ ------- ------ -------- -------- Continuing operations: Revenue 1 10,815 - 10,815 10,073 - 10,073 Operating costs (10,309) - (10,309) (9,577) (108) (9,685) ------------------- ----- ------- ------ ------- ------ -------- -------- Operating profit 1 506 - 506 496 (108) 388 Share of profit of associates 2 - 2 - - - ------------------- ----- ------- ------ ------- ------ -------- -------- Total operating profit 508 - 508 496 (108) 388 Finance income 3 15 - 15 4 - 4 Finance costs 3 (160) - (160) (156) - (156) Hedge ineffectiveness 3 11 - 11 (3) - (3) ------------------- ----- ------- ------ ------- ------ -------- -------- Profit before tax 374 - 374 341 (108) 233 Income tax expense 4 (113) 44 (69) (96) (1) (97) ------------------- ----- ------- ------ ------- ------ -------- -------- Profit for the year from continuing operations 1 261 44 305 245 (109) 136 Discontinued operations: Profit /(loss) for the year from discontinued operations 5 17 (27) (10) 114 (41) 73 ------------------- ----- ------- ------ ------- ------ -------- -------- Profit for the year 278 17 295 359 (150) 209 ------------------- ----- ------- ------ ------- ------ -------- -------- Attributable to: Equity shareholders of the Company 268 17 285 345 (150) 195 Minority interest 10 - 10 14 - 14 ------------------- ----- ------- ------ ------- ------ -------- -------- 278 17 295 359 (150) 209 ------------------- ----- ------- ------ ------- ------ -------- -------- Basic earnings per share 6 From continuing operations 13.7p 5.7p From discontinued operations (0.4)p 3.3p ------------------- ----- ------- ------ ------- ------ -------- -------- From continuing and discontinued operations 13.3p 9.0p ------------------- ----- ------- ------ ------- ------ -------- -------- Diluted earnings per share 6 From continuing operations 13.7p 5.7p From discontinued operations (0.4)p 3.3p ------------------- ----- ------- ------ ------- ------ -------- -------- From continuing and discontinued operations 13.3p 9.0p ------------------- ----- ------- ------ ------- ------ -------- -------- CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 30 September 2006 ------ ------ -------- Notes 2006 2005 Â£m Â£m ------------------------------------- ------ ------ -------- Fair value movement on cash flow hedges 4 7 Currency translation differences (7) 14 Actuarial losses on post-employment benefits 15 (37) (157) Tax on items taken directly to equity 3 33 ------------------------------------- ------ ------ -------- Net loss recognised directly in equity (37) (103) Transfer to profit or loss from equity of cumulative translation differences on discontinued activities 2 - Transfer to profit or loss from equity on cash flow hedges (6) - ------------------------------------- ------ ------ -------- Net expense recognised directly in equity 16 (41) (103) Profit for the financial year 16 295 209 ------------------------------------- ------ ------ -------- Total recognised income and expense for the year 254 106 ------------------------------------- ------ ------ -------- Attributable to: Equity shareholders of the Company 248 92 Minority interest 6 14 ------------------------------------- ------ ------ -------- 254 106 ------------------------------------- ------ ------ -------- CONSOLIDATED BALANCE SHEET as at 30 September 2006 ------------------------------------- ------ ------ ------ Notes 2006 2005 Â£m Â£m ------------------------------------- ------ ------ ------ Assets Non-current assets Goodwill 8 3,451 4,220 Other intangible assets 9 152 168 Property, plant and equipment 10 756 1,657 Interests in associates 39 45 Other investments 9 6 Deferred tax assets 237 198 Trade and other receivables 11 117 140 Derivative financial instruments 22 44 ------------------------------------- ------ ------ ------ 4,783 6,478 ------------------------------------- ------ ------ ------ Current assets Inventories 212 253 Trade and other receivables 11 1,424 1,574 Overseas tax recoverable 10 9 Derivative financial instruments 9 2 Cash and cash equivalents 848 281 ------------------------------------- ------ ------ ------ 2,503 2,119 ------------------------------------- ------ ------ ------ Total assets 7,286 8,597 ------------------------------------- ------ ------ ------ Liabilities Current liabilities Short-term borrowings 12 (119) (150) Derivative financial instruments (2) (20) Current tax liabilities (357) (334) Trade and other payables 13 (1,990) (2,437) Provisions 14 (65) (10) ------------------------------------- ------ ------ ------ (2,533) (2,951) ------------------------------------- ------ ------ ------ Non-current liabilities Long-term borrowings 12 (1,835) (2,580) Derivative financial instruments (18) (2) Post-employment benefit obligations 15 (282) (555) Provisions 14 (242) (143) Deferred tax liabilities (18) (17) Other liabilities 13 (46) (71) ------------------------------------- ------ ------ ------ (2,441) (3,368) ------------------------------------- ------ ------ ------ Total liabilities (4,974) (6,319) ------------------------------------- ------ ------ ------ Net assets 2,312 2,278 ------------------------------------- ------ ------ ------ Equity Share capital 16 210 216 Share premium account 16 96 94 Capital redemption reserve 16 15 9 Less: own shares 16 - (1) Other reserves 16 4,288 4,137 Retained earnings 16 (2,303) (2,204) ------------------------------------- ------ ------ ------ Total equity shareholders' funds 2,306 2,251 Minority interests 16 6 27 ------------------------------------- ------ ------ ------ Total equity 2,312 2,278 ------------------------------------- ------ ------ ------ Approved by the Board of Directors on 29 November 2006 and signed on their behalf by Richard J Cousins, Director Andrew D Martin, Director CONSOLIDATED CASH FLOW STATEMENT for the year ended 30 September 2006 ------------------------------------- ----- ------ ------ Notes 2006 2005 Â£m Â£m ------------------------------------- ----- ------ ------ Cash generated from operations 18 754 699 Interest paid (186) (161) Interest element of finance lease rentals (3) (3) Tax received 4 23 Tax paid (101) (91) ------------------------------------- ----- ------ ------ Net cash from operating activities for continuing operations 468 467 Net cash from operating activities for discontinued operations 29 181 ------------------------------------- ----- ------ ------ Net cash from operating activities 497 648 ------------------------------------- ----- ------ ------ Cash flow from investing activities Purchase of subsidiary companies and investments in associated undertakings (167) (121) Proceeds from sale of subsidiary companies and associated undertakings 1,807 75 Contribution of disposal proceeds to pension plans (280) - Purchase of property, plant and equipment (206) (248) Proceeds from sale of property, plant and equipment 27 35 Purchase of intangible assets (30) (20) Dividends received from associated undertakings 2 4 Interest received 15 4 ------------------------------------- ----- ------ ------ Net cash from / (used in) investing activities by continuing operations 1,168 (271) Net cash used in investing activities by discontinued operations (59) (65) ------------------------------------- ----- ------ ------ Net cash from / (used in) investing activities 1,109 (336) ------------------------------------- ----- ------ ------ Cash flow from financing activities Issue of ordinary share capital 2 1 Purchase of own shares (net) (148) - Net decrease in borrowings (647) (32) Repayment of obligations under finance leases 19 (15) (16) Equity dividends paid (213) (205) Dividends paid to minority interests (11) (15) ------------------------------------- ----- ------ ------ Net cash used in financing activities by continuing operations (1,032) (267) Net cash used in financing activities by discontinued operations - (1) ------------------------------------- ----- ------ ------ Net cash used in financing activities (1,032) (268) ------------------------------------- ----- ------ ------ Net increase in cash and cash equivalents 574 44 Cash and cash equivalents at beginning of the year 281 233 Exchange gains and losses on cash and cash equivalents (7) 4 ------------------------------------- ----- ------ ------ Cash and cash equivalents at end of the year 19 848 281 ------------------------------------- ----- ------ ------ RECONCILIATION OF FREE CASH FLOW FROM CONTINUING OPERATIONS for the year ended 30 September 2006 ------------------------------------- ----- ------ ------ 2006 2005 Â£m Â£m ------------------------------------- ----- ------ ------ Net cash from operating activities for continuing 468 467 operations Purchase of property, plant and equipment (206) (248) Proceeds from sale of property, plant and equipment 27 35 Purchase of intangible assets (30) (20) Dividends received from associated undertakings 2 4 Interest received 15 4 Dividends paid to minority interests (11) (15) ------------------------------------- ----- ------ ------ Free cash flow - continuing operations 265 227 ------------------------------------- ----- ------ ------ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 -------------------- ------- ------- ------- ------- ------- ------- 1 Segmental reporting North America Continental United Kingdom Rest of Central Total Europe activities Â£m Â£m Â£m the World Â£m Â£m Â£m -------------------- ------- ------- ------- ------- ------- ------- Year ended 30 September 2006 Revenue Total revenue 4,437 3,283 2,805 1,777 - 12,302 Less : inter-segment revenue - (21) - (17) - (38) -------------------- ------- ------- ------- ------- ------- ------- Revenue from external clients 4,437 3,262 2,805 1,760 - 12,264 Less: discontinued (147) (399) (848) (55) - (1,449) -------------------- ------- ------- ------- ------- ------- ------- Revenue from external clients - continuing operations 4,290 2,863 1,957 1,705 - 10,815 -------------------- ------- ------- ------- ------- ------- ------- Result Total operating profit 247 181 129 49 (77) 529 Less: discontinued (2) (12) (15) 6 - (23) -------------------- ------- ------- ------- ------- ------- ------- 245 169 114 55 (77) 506 Share of profit of associates 1 - 1 - - 2 -------------------- ------- ------- ------- ------- ------- ------- Segment result - continuing operations 246 169 115 55 (77) 508 -------------------- ------- ------- ------- ------- ------- Finance income 15 Finance costs (160) Hedge ineffectiveness 11 -------------------- ------- ------- ------- ------- ------- ------- Profit before tax 374 Income tax expense (69) -------------------- ------- ------- ------- ------- ------- ------- Profit for the year from continuing operations 305 -------------------- ------- ------- ------- ------- ------- ------- Year ended 30 September 2005 Revenue Total revenue 3,937 3,554 3,254 1,680 - 12,425 Less : inter-segment revenue - (26) - (5) - (31) -------------------- ------- ------- ------- ------- ------- ------- Revenue from external clients 3,937 3,528 3,254 1,675 - 12,394 Less: discontinued (176) (698) (1,272) (175) - (2,321) -------------------- ------- ------- ------- ------- ------- ------- Revenue from external clients - continuing operations 3,761 2,830 1,982 1,500 - 10,073 -------------------- ------- ------- ------- ------- ------- ------- Result Total operating profit 221 211 193 87 (58) 654 Less: discontinued (3) (42) (79) (34) - (158) -------------------- ------- ------- ------- ------- ------- ------- 218 169 114 53 (58) 496 Share of profit of associates - - - - - - -------------------- ------- ------- ------- ------- ------- ------- Segment result - continuing operations before exceptional items 218 169 114 53 (58) 496 Exceptional items (note 2) 2 (107) (1) - (2) (108) -------------------- ------- ------- ------- ------- ------- ------- Segment result - continuing operations after exceptional items 220 62 113 53 (60) 388 -------------------- ------- ------- ------- ------- ------- Finance income 4 Finance costs (156) Hedge ineffectiveness (3) -------------------- ------- ------- ------- ------- ------- ------- Profit before tax 233 Income tax expense (97) -------------------- ------- ------- ------- ------- ------- ------- Profit for the year from continuing operations 136 -------------------- ------- ------- ------- ------- ------- ------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 ------------------------------------- -------- --------- 2 Exceptional items 2006 2005 Â£m Â£m ------------------------------------- -------- --------- Continuing operations : Charged within operating profit : Impairment of goodwill - Italy - (107) Loss on disposal of businesses - (1) ------------------------------------- -------- --------- - (108) ------------------------------------- -------- --------- Credited / (charged) within income tax expense (note 4): Current tax 5 - Adjustment in respect of prior years 17 - Current year deferred tax 22 - Tax charge on loss on disposal of businesses - (1) ------------------------------------- -------- --------- 44 (1) ------------------------------------- -------- --------- Continuing operations 44 (109) ------------------------------------- -------- --------- Charged within discontinued activities: Profit after tax on disposal of businesses (note 5) 20 - Settlement of UN contract claims and related expenses (39) - Middle East military catering business (8) (45) Tax credit on discontinued activities - 4 ------------------------------------- -------- --------- Discontinued activities (27) (41) ------------------------------------- -------- --------- Total 17 (150) ------------------------------------- -------- --------- The exceptional tax credits arise in respect of previously unrecognised tax losses and tax deductions in respect of pension prepayments in the UK tax group that originated in previous years. In 2006, Â£39 million has been charged to complete investigations and settle lawsuits for lost profits brought by two competitors of the Group, ES-KO International Inc and Supreme Foodservice AG in relation to contracts awarded to Eurest Support Services by the UN. The Group has discontinued its military catering operations in the Middle East, which were formerly part of the Rest of the World geographical segment. In 2006, Â£8 million has been provided to settle claims arising in 2005. Related asset write-downs and provisions resulted in an exceptional charge of Â£45 million in 2005. The goodwill relating to Onama in Italy (which forms part of the Continental Europe geographical segment) was impaired in 2005 following a review of the profitability of the underlying business. Value in use was calculated by discounting cash flows at a pre-tax rate of 9.7%. In 2005, the Group also disposed of 75% of the Au Bon Pain business in North America and 100% of its interest in the Gatwick Meridien Hotel in the UK and paid further costs relating to previous disposals resulting in an overall net loss of Â£1 million. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 ----------------------------------------- ------- ------- 3 Finance income and costs 2006 2005 Â£m Â£m ----------------------------------------- ------- ------- Finance income Bank interest 15 4 ----------------------------------------- ------- ------- Finance costs Bank loans and overdrafts 35 42 Other loans 107 91 Finance lease interest 3 3 ----------------------------------------- ------- ------- 145 136 Unwinding of discount on put options held by minority 4 6 shareholders Interest on pension scheme liabilities net of expected return on 11 14 scheme assets (note 15) ------- ------- ----------------------------------------- 160 156 ----------------------------------------- ------- ------- Hedge ineffectiveness Unrealised net gains on financial instruments 11 1 Unhedged translation losses on foreign currency borrowings - (4) ----------------------------------------- ------- ------- 11 (3) ----------------------------------------- ------- ------- ----------------------------------------- ------ ------- 4 Tax 2006 2005 Â£m Â£m ----------------------------------------- ------- ------- Recognised in the income statement : income tax expense on continuing operations Current year 158 115 Adjustment in respect of prior years (39) (52) ----------------------------------------- ------ ------- Current tax expense 119 63 ----------------------------------------- ------ ------- Current year deferred tax (4) 24 Adjustment in respect of prior years (2) 9 ----------------------------------------- ------ ------- Deferred tax (credit) / expense (6) 33 ----------------------------------------- ------ ------- Income tax expense on continuing operations before exceptional items 113 96 Exceptional items (note 2): Current tax (credit) / expense (22) 1 Deferred tax (credit) / expense (22) - ----------------------------------------- ------ ------- Income tax expense on continuing operations 69 97 ----------------------------------------- ------ ------- The income tax expense for the year is based on the United Kingdom statutory rate of corporation tax of 30% (2005: 30%). Overseas tax is calculated at the rates prevailing in the respective jurisdictions. ------------------------------------------ ------ ------- Reconciliation of the income tax expense on continuing operations before exceptional items 2006 2005 Â£m Â£m ------------------------------------------ ------ ------- Profit before tax from continuing operations before exceptional items 374 341 ------------------------------------------ ------ ------- Notional income tax expense at the UK statutory rate on the profit before tax 112 102 Effect of different tax rates of subsidiaries operating in other 17 18 jurisdictions Permanent differences 21 15 Impact of share-based payments 3 9 Tax on profit of associates (1) (1) Utilisation of previously unrecognised tax losses (7) (12) Unrelieved current year tax losses 8 7 Prior year items (41) (43) Other 1 1 ------------------------------------------ ------ ------- Income tax expense on continuing operations before exceptional items 113 96 ------------------------------------------ ------ ------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 5 Discontinued operations Following the decision to focus on its core contract catering business the Group disposed of its Inflight catering operations, which operated principally in Continental Europe on 19 December 2005 and its travel concession catering business, Select Service Partner, including Creative Host Services in the US (together, 'SSP') on 15 June 2006. Gross proceeds from the sale of SSP were Â£1,865 million and costs incurred were Â£67 million. In addition, the Group has discontinued its Middle East military catering operations and withdrawn from or disposed of various other businesses, shown as 'other' below. Details of net assets disposed of and disposal proceeds are as follows. ------------------------------------- ------ ------ ------ SSP Other 2006 Â£m Â£m Â£m ------------------------------------- ------ ------ ------ Goodwill 798 51 849 Intangible assets 10 - 10 Property, plant and equipment 755 125 880 Investments 5 3 8 Inventories 29 9 38 Trade and other receivables 74 49 123 Cash at bank 94 24 118 ------------------------------------- ------ ------ ------ Gross assets disposed of 1,765 261 2,026 ------------------------------------- ------ ------ ------ Trade and other payables (208) (51) (259) Post-employment benefit obligations (10) (4) (14) Tax (6) (6) (12) Minority interest (1) (5) (6) Other liabilities - (5) (5) ------------------------------------- ------ ------ ------ Gross liabilities disposed of (225) (71) (296) ------------------------------------- ------ ------ ------ Net assets disposed of 1,540 190 1,730 Liabilities retained 88 21 109 Cumulative exchange translation loss recycled on disposals 2 - 2 Profit/(loss) on disposal 168 (54) 114 ------------------------------------- ------ ------ ------ Consideration, net of costs 1,798 157 1,955 Consideration deferred to future periods (37) (8) (45) Cash disposed of (94) (24) (118) ------------------------------------- ------ ------ ------ Cash inflow from current year disposals 1,667 125 1,792 Deferred consideration relating to previous disposals - 15 15 ------------------------------------- ------ ------ ------ Cash inflow from disposals 1,667 140 1,807 ------------------------------------- ------ ------ ------ -------------------------------- ------ ------ ------ ------- Financial performance of discontinued operations SSP Other 2006 2005 Â£m Â£m Â£m Â£m ------------------------------------- ------ ------ ------ External revenue 1,238 211 1,449 2,321 Operating costs (1,209) (217) (1,426) (2,163) Exceptional operating costs (note 2) - (47) (47) (45) -------------------------------- ------ ------ ------ ------- Profit before tax 29 (53) (24) 113 Income tax expense (see below) (7) 1 (6) (40) -------------------------------- ------ ------ ------ ------- Profit after income tax from discontinued operations 22 (52) (30) 73 -------------------------------- ------ ------ ------ ------- Reported as exceptional (note 2) Profit on disposal of net assets of discontinued operations 170 (54) 116 - Cumulative translation exchange loss (2) - (2) - -------------------------------- ------ ------ ------ ------- Profit on disposal before tax 168 (54) 114 - Tax (99) 5 (94) - -------------------------------- ------ ------ ------ ------- Total profit after income tax on disposal of net assets of discontinued operations 69 (49) 20 - -------------------------------- ------ ------ ------ ------- Profit / (loss) for the year of discontinued operations 91 (101) (10) 73 -------------------------------- ------ ------ ------ ------- -------------------------------- ------ ------ ------ ------- Tax from discontinued operations SSP Other 2006 2005 Â£m Â£m Â£m Â£m -------------------------------- ------ ------ ------ ------- Income tax expense on discontinued operations: -------------------------------- ------ ------ ------ ------- Current tax (9) 1 (8) (44) Deferred tax 2 - 2 - Exceptional tax credit (note 2) - - - 4 -------------------------------- ------ ------ ------ ------- (7) 1 (6) (40) -------------------------------- ------ ------ ------ ------- Tax on disposal of net assets of discontinued operations: Current tax (117) 11 (106) - Deferred tax 18 (6) 12 - -------------------------------- ------ ------ ------ ------- (99) 5 (94) - -------------------------------- ------ ------ ------ ------- Tax from discontinued operations (106) 6 (100) (40) -------------------------------- ------ ------ ------ ------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 ---------------------------------------- ------ ------ 6 Earnings per share Attributable Attributable profit profit 2006 2005 Â£m Â£m ---------------------------------------- ------ ------ Profit for the year attributable to equity holders of the Company 285 195 Add back loss/(profit) for the year from discontinued operations 10 (73) ---------------------------------------- ------ ------ Attributable profit for the year from continuing operations 295 122 Exceptional items net of tax (note 2) (44) 109 ---------------------------------------- ------ ------ Attributable profit for the year from continuing operations before exceptional items 251 231 Hedge ineffectiveness net of tax (7) 4 ---------------------------------------- ------ ------ Attributable underlying profit for the year from continuing operations before exceptional items 244 235 ---------------------------------------- ------ ------ Ordinary shares Ordinary shares of 10p each of 10p each 2006 2005 Millions Millions ---------------------------------------- ------ ------ Average number of shares for basic earnings per share 2,147 2,156 Dilutive share options 3 2 ---------------------------------------- ------ ------ Average number of shares for diluted earnings per share 2,150 2,158 ---------------------------------------- ------ ------ Earnings per Earnings per share share 2006 2005 pence pence ---------------------------------------- ------ ------ Basic earnings per share From continuing and discontinued operations 13.3 9.0 From discontinued operations 0.4 (3.3) ---------------------------------------- ------ ------ From continuing operations 13.7 5.7 Exceptional items (net of tax) (2.0) 5.0 ---------------------------------------- ------ ------ From continuing operations before exceptional items 11.7 10.7 Hedge ineffectiveness (0.3) 0.2 ---------------------------------------- ------ ------ From underlying continuing operations before exceptional items 11.4 10.9 ---------------------------------------- ------ ------ Diluted earnings per share From continuing and discontinued operations 13.3 9.0 From discontinued operations 0.4 (3.3) ---------------------------------------- ------ ------ From continuing operations 13.7 5.7 Exceptional items (net of tax) (2.0) 5.0 ---------------------------------------- ------ ------ From continuing operations before exceptional items 11.7 10.7 Hedge ineffectiveness (0.3) 0.2 ---------------------------------------- ------ ------ From underlying continuing operations before exceptional items 11.4 10.9 ---------------------------------------- ------ ------ The calculation of earnings per share is based on earnings after tax and the weighted average number of shares in issue during the year. The adjusted underlying earnings per share figures have been calculated to show the underlying trading performance of the Group and are based on earnings excluding the effect of goodwill impairment charges, other exceptional items, hedge ineffectiveness and discontinued activities. ---------------------------------- ------ ------ ------ ------ 7 Dividends 2006 2006 2005 2005 pence per share Â£m pence per share Â£m ---------------------------------- ------ ------ ------ ------ Amounts recognised as distributions to equity shareholders during the year: Final dividend for the prior year 6.5 140 6.2 134 Interim dividend for the current year 3.4 73 3.3 71 ---------------------------------- ------ ------ ------ ------ 9.9 213 9.5 205 ---------------------------------- ------ ------ ------ ------ A final dividend in respect of 2006 of 6.7 pence per share is to be proposed at the Annual General Meeting on 16 February 2007, giving a total dividend in respect of 2006 of 10.1 pence per share. These financial statements do not include the accrual for this dividend. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 8 Goodwill Â£m ------------------------------------------- -------- Cost At 1 October 2005 4,327 Currency adjustment (66) Additions arising from acquisitions 152 Reclassified (6) Disposals (849) ------------------------------------------- -------- At 30 September 2006 3,558 ------------------------------------------- -------- Impairment At 1 October 2005 107 Impairment loss recognised in the year ended 30 September 2006 - ------------------------------------------- -------- At 30 September 2006 107 ------------------------------------------- -------- Net book amounts ------------------------------------------- -------- At 30 September 2006 3,451 ------------------------------------------- -------- At 30 September 2005 4,220 ------------------------------------------- -------- ------------------------------- --------- -------- -------- 9 Other intangible assets Contract Computer Total related software Â£m Â£m Â£m ------------------------------- --------- -------- -------- Cost At 1 October 2005 81 173 254 Currency adjustment (6) (3) (9) Additions 16 15 31 Disposals (3) - (3) Business acquisitions (1) - (1) Business disposals (3) (20) (23) Reclassified 10 - 10 ------------------------------- --------- -------- -------- At 30 September 2006 94 165 259 ------------------------------- --------- -------- -------- Amortisation At 1 October 2005 23 63 86 Currency adjustment (2) (1) (3) Charge for the year 13 25 38 Disposals (1) - (1) Business disposals - (13) (13) ------------------------------- --------- -------- -------- At 30 September 2006 33 74 107 ------------------------------- --------- -------- -------- Net book amounts ------------------------------- --------- -------- -------- At 30 September 2006 61 91 152 ------------------------------- --------- -------- -------- At 30 September 2005 58 110 168 ------------------------------- --------- -------- -------- Contract related intangible assets generally arise when it is economically more efficient for a client to purchase assets used in the performance of a contract and the Group funds these purchases. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 --------------------------- -------- ------- -------- -------- 10 Property, plant and equipment Land and Plant and Fixtures and Total buildings machinery fittings Â£m Â£m Â£m Â£m --------------------------- -------- ------- -------- -------- Cost At 1 October 2005 973 1,346 768 3,087 Currency adjustment (19) (41) (12) (72) Additions 22 193 69 284 Disposals (19) (75) (77) (171) Business acquisitions - - 4 4 Business disposals (679) (328) (283) (1,290) Reclassified 15 (59) 28 (16) --------------------------- -------- ------- -------- -------- At 30 September 2006 293 1,036 497 1,826 --------------------------- -------- ------- -------- -------- Depreciation At 1 October 2005 220 800 410 1,430 Currency adjustment (8) (26) (7) (41) Charge for the year 24 152 67 243 Disposals (9) (75) (52) (136) Business disposals (112) (171) (127) (410) Reclassified (3) (7) (6) (16) --------------------------- -------- ------- -------- -------- At 30 September 2006 112 673 285 1,070 --------------------------- -------- ------- -------- -------- Net book amounts --------------------------- -------- ------- -------- -------- At 30 September 2006 181 363 212 756 --------------------------- -------- ------- -------- -------- At 30 September 2005 753 546 358 1,657 --------------------------- -------- ------- -------- -------- The net book amount of the Group's property, plant and equipment includes, in respect of assets held under finance leases, land and buildings Â£5 million (2005: Â£9 million), plant and machinery Â£39 million (2005: Â£37 million) and fixtures and fittings Â£6 million (2005: Â£3 million). ----------------------------- ------- ------- ------- -------- 11 Trade and other receivables Current 2006 Current 2005 Â£m Non-current Â£m Non-current Â£m Â£m ----------------------------- ------- ------- ------- -------- Trade receivables 1,212 4 1,334 5 Less: provision for the impairment of receivables (41) - (53) - ----------------------------- ------- ------- ------- -------- Net trade receivables 1,171 4 1,281 5 Amounts owed by associates - 1 1 2 Other receivables 151 100 128 117 Prepayments and accrued income 102 12 164 16 ----------------------------- ------- ------- ------- -------- 1,424 117 1,574 140 ----------------------------- ------- ------- ------- -------- Book value of trade receivables approximates to their fair value because of the short-term nature of the receivables. There is limited concentration of credit risk with respect to trade receivables due to the diverse and unrelated nature of the Group's customer base. Debtor days at 30 September 2006 were 40 days (2005: 38 days). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 -------------------------------------- -------- ------- 12 Short-term and long-term borrowings 2006 2005 Â£m Â£m -------------------------------------- -------- ------- Short-term Loan notes 33 84 Bank loans 15 16 Bank overdrafts 56 33 Finance leases 15 17 -------------------------------------- -------- ------- 119 150 -------------------------------------- -------- ------- Long-term Bonds 1,350 1,416 Loan notes 421 493 Bank loans 22 628 Finance leases 42 43 -------------------------------------- -------- ------- 1,835 2,580 -------------------------------------- -------- ------- All amounts due under bonds, loan notes and bank facilities are shown net of unamortised issue costs. Bonds are unsecured and consist of the following: - Euro Eurobond with nominal value â‚¬750 million redeemable in 2009 and bearing interest at 6.0% per annum. - Sterling Eurobond with nominal value Â£200 million redeemable in 2010 and bearing interest at 7.125% per annum. - Sterling Eurobond with nominal value Â£325 million redeemable in 2012 and bearing interest at 6.375% per annum. - Sterling Eurobond with nominal value Â£250 million redeemable in 2014 and bearing interest at 7.0% per annum. The bond redeemable in 2014 is recorded at its fair value to the Group on acquisition. The Group has fixed term, fixed interest private placements totalling US$830 million (Â£444 million) at interest rates between 5.11% and 7.955%. US$465 million (Â£249 million) is repayable in 5 to 10 years. Bank overdrafts principally arise as a result of uncleared transactions. Interest on bank overdrafts is at the relevant money market rates. Borrowing facilities The Group had the following undrawn committed facilities available at 30 September 2006, in respect of which all conditions precedent had then been met. -------------------------------------- -------- ------- 2006 2005 Â£m Â£m -------------------------------------- -------- ------- Expiring between two and five years 960 997 -------------------------------------- -------- ------- 960 997 -------------------------------------- -------- ------- Subsequent to the year end, the facility available has been reduced to Â£644 million. The maturity profile at 30 September 2006 of the carrying amount of the Group's borrowings (excluding finance leases) was as follows: -------------------------------------- -------- ------- 2006 2005 Â£m Â£m -------------------------------------- -------- ------- Within one year, or on demand 104 133 Between one and two years 7 58 Between two and three years 606 62 Between three and four years 228 635 Between four and five years 72 755 In more than 5 years 880 1,027 -------------------------------------- -------- ------- 1,897 2,670 -------------------------------------- -------- ------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 -------------------------------- ------- -------- ------- ------- 13 Trade and other payables Current 2006 Current 2005 Â£m Non-current Â£m Non-current Â£m Â£m -------------------------------- ------- -------- ------- ------- Trade payables 777 4 993 3 Amounts owed to associates - - 2 1 Social security and other taxes 176 - 213 - Other payables 210 28 280 35 Deferred consideration on 20 3 12 15 acquisitions Liability on put options held by minority equity partners 9 8 147 17 Accruals and deferred income 798 3 790 - -------------------------------- ------- -------- ------- ------- 1,990 46 2,437 71 -------------------------------- ------- -------- ------- ------- The directors consider that the carrying amount of trade payables approximates to their fair value. Creditor days at 30 September 2006 were 55 days (2005 : 57 days). Insurance Provisions in Onerous Legal and other Environmental Total respect of contracts claims disposed businesses 14 Provisions Â£m Â£m Â£m Â£m Â£m Â£m ---------------------- ------- ------- ------- -------- ------- ------- At 1 October 2005 59 - 24 59 11 153 Reclassified 67 - 14 (10) (1) 70 Expenditure in the year (40) (1) (1) (5) - (47) Charged to profit and loss account 45 109 8 - - 162 Credited to profit and loss account - - (1) (5) - (6) Transferred to post-employment benefit obligations (20) - - - - (20) Currency adjustment (4) - - (1) - (5) ---------------------- ------- ------- ------- -------- ------- ------- At 30 September 2006 107 108 44 38 10 307 ---------------------- ------- ------- ------- -------- ------- ------- Provisions analysed as follows : ------------------------------------------ ------- ------- 2006 2005 Â£m Â£m ------------------------------------------ ------- ------- Non-current 242 143 Current 65 10 ------------------------------------------ ------- ------- 307 153 ------------------------------------------ ------- ------- Insurance relates to the costs of self-funded insurance schemes and is essentially long-term in nature. Provisions in respect of disposed businesses relate to estimated amounts payable in connection with onerous contracts and claims arising from disposals completed during the year. The final amount payable remains uncertain as, at the date of approval of these financial statements, there remains a further period during which claims may be received. The timing of any settlement will depend upon the nature and extent of claims received. Onerous contracts represent the liabilities in respect of short-term and long-term leases on unoccupied properties and other contracts lasting under 5 years. Legal and other claims relate principally to provisions for the estimated cost of litigation and sundry other claims. The timing of the settlement of these claims is uncertain. Environmental provisions are in respect of potential liabilities relating to the Group's responsibility for maintaining its operating sites in accordance with statutory requirements and the Group's aim to have a low impact on the environment. These provisions are expected to be utilised as operating sites are disposed of or as other events arise. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 15 Post-employment benefit obligations ------------------------------------------------- The amounts recognised in the income statement are as follows : 30 September 30 September 2006 2005 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ UK US Other Total UK US Other Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------------ ------ ------ ------ ------ ------ ------ ------ ------ Current service 19 3 16 38 21 3 15 39 cost Past service credit - (2) - (2) - - - - Curtailment credit (6) (6) - (12) - - - - ------------------ ------ ------ ------ ------ ------ ------ ------ ------ Charged/(credited) to operating expenses 13 (5) 16 24 21 3 15 39 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ Amount charged to pension liability 59 9 8 76 54 8 9 71 Expected return on plan (54) (5) (6) (65) (46) (4) (7) (57) ------------------ ------ ------ ------ ------ ------ ------ ------ ------ Charged to finance costs 5 4 2 11 8 4 2 14 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ Total pension costs/(credits) 18 (1) 18 35 29 7 17 53 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ The movements in the fair value of pension plan assets recognised in the balance sheet are as follows: 2006 2005 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ UK US Other Total UK US Other Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------------ ------ ------ ------ ------ ------ ------ ------ ------ At 1 October 812 71 157 1,040 672 60 140 872 Currency adjustment - (4) (8) (12) - 2 2 4 Expected return on plan 54 5 6 65 46 4 7 57 assets Actuarial gain/ 27 - 12 39 74 2 (1) 75 (loss) Employee 5 - 4 9 6 - 4 10 contributions Employer 314 5 10 329 45 11 11 67 contributions Asset transfer from Granada scheme 3 - - 3 - - - - Benefits paid (41) (9) (6) (56) (31) (8) (7) (46) (Disposals)/ acquisitions - - (9) (9) - - 1 1 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ At 30 September 1,174 68 166 1,408 812 71 157 1,040 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ The movements in the present value of defined benefit obligations recognised in the balance sheet are as follows: 2006 2005 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ UK US Other Total UK US Other Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------------ ------ ------ ------ ------ ------ ------ ------ ------ At 1 October 1,179 166 250 1,595 952 143 222 1,317 Currency adjustment - (9) (9) (18) - 4 3 7 Total expense charged in the income statement 72 4 24 100 75 11 24 110 Actuarial loss 55 5 16 76 177 16 39 232 Employee 5 - 4 9 6 - 4 10 contributions Benefits paid (41) (9) (6) (56) (30) (8) (7) (45) Benefits paid by the Group (1) - (6) (7) (1) - (7) (8) Disposals - - (23) (23) - - (8) (8) Transfer(to)/from provisions - - 20 20 - - (20) (20) Reclassified - (2) (4) (6) - - - - ------------------ ------ ------ ------ ------ ------ ------ ------ ------ At 30 September 1,269 155 266 1,690 1,179 166 250 1,595 ------------------ ------ ------ ------ ------ ------ ------ ------ ------ The history of experience adjustments is as follows: --------------------------------------- -------- ------ 2006 2005 Â£m Â£m --------------------------------------- -------- ------ Present value of defined benefit plan liabilities 1,690 1,595 Fair value of plan assets (1,408) (1,040) --------------------------------------- -------- ------ Net deficit 282 555 --------------------------------------- -------- ------ Experience adjustments on plan liabilities - (loss) (14) (8) --------------------------------------- -------- ------ Experience adjustments on plan assets - gain 39 75 --------------------------------------- -------- ------ In accordance with the transitional provisions for the amendments to IAS 19 'Employee Benefits' issued on 16 December 2004, the disclosures above are determined prospectively from the 2005 reporting period. The Group made total contributions of Â£329 million in the year, including special contributions of disposal proceeds to pension plans of Â£280 million, and expects to make regular ongoing contributions of Â£45 million in 2007. The expected return on plan assets is based on market expectations at the beginning of the period. The actual return on assets was Â£104 million (2005: Â£132 million). The cumulative actuarial loss recognised in the statement of recognised income and expense was Â£194 million (2005: Â£157 million). An actuarial loss of Â£37 million (2005: Â£157 million) was recognised during the year. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 Attributable to equity shareholders of the Company -------------------- ------ ------ ------ ------ ------ ------ ------ ------ 16 Reconciliation of Share Share premium Capital Own Other Retained Minority Total movements in equity capital account redemption shares reserves earnings interests reserve Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m -------------------- ------ ------ ------ ------ ------ ------ ------ ------ At 1 October 2005 216 94 9 (1) 4,137 (2,204) 27 2,278 Total recognised income and expense - - - - (12) 260 6 254 Issue of shares - 2 - - - - - 2 Fair value of share-based payments - - - - 25 - - 25 Share buy back (6) - 6 - - (149) - (149) Transfer on exercise of put options - - - - 138 3 (10) 131 Other changes - - - 1 - - (6) (5) -------------------- ------ ------ ------ ------ ------ ------ ------ ------ 210 96 15 - 4,288 (2,090) 17 2,536 Dividends paid to Compass shareholders - - - - - (213) - (213) Dividends paid to minority interest - - - - - - (11) (11) -------------------- ------ ------ ------ ------ ------ ------ ------ ------ At 30 September 2006 210 96 15 - 4,288 (2,303) 6 2,312 -------------------- ------ ------ ------ ------ ------ ------ ------ ------ The analysis of other reserves is shown below. Share-based Merger Translation Hedging Equity Total other payment reserve reserve reserve reserve adjustment for reserves put options Other reserves Â£m Â£m Â£m Â£m Â£m Â£m --------------------------- ------ ------ ------ ------ ------ ------ At 1 October 2005 105 4,170 16 1 (155) 4,137 Total recognised income and expense - - (11) (1) - (12) Fair value of share-based payments 25 - - - - 25 Transfer on exercise of put options - - - - 138 138 --------------------------- ------ ------ ------ ------ ------ ------ At 30 September 2006 130 4,170 5 - (17) 4,288 --------------------------- ------ ------ ------ ------ ------ ------ The merger reserve arose in 2000 following the demerger from Granada Compass plc. The equity adjustment for put options arose on the accounting for the options held by the Group's minority partners requiring the Group to purchase those minority interests. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 17 Business combinations ------------------------------------------------- Businesses acquired during the year are shown below. Adjustments have been made to reflect the provisional fair value of assets and liabilities acquired as follows: Consideration Net assets Adjustment on Fair value of Goodwill and costs acquired acquisition assets acquired Dates Â£m Â£m Â£m Â£m Â£m ------------------------- ------- ------- ------ ------- ------- Onama minority interest purchase (5%) December 2005 8 - - - 8 Levy minority interest purchase (51%) April 2006 134 9 - 9 125 Others 18 5 - 5 13 ------------------------- ------- ------- ------ ------- ------- Total acquisitions in the year 160 14 - 14 146 ------------------------- ------- ------- ------ ------- ------- Adjustments to prior periods: Deferred consideration payable 5 - - - 5 Adjustments to net assets acquired - (1) - (1) (1) ------------------------- ------- ------- ------ ------- ------- 5 (1) - (1) 6 ------------------------- ------- ------- ------ ------- ------- 165 13 - 13 152 ------------------------- ------- ------- ------ ------- ------- Net assets acquired and fair value to the Group Â£m -------------------------------------- ------------- Intangible assets (1) Property, plant and equipment 4 Current assets 10 Current liabilities (9) Non-current liabilities - Minority interests 9 -------------------------------------- ------------- 13 -------------------------------------- ------------- Adjustments made to the fair value of assets of businesses acquired in 2006 are provisional and will be finalised within twelve months of the acquisition date. From the dates of acquisition to 30 September 2006 these acquisitions contributed Â£10 million to revenue and Â£1 million to operating profit. If the acquisitions had occurred at the start of the reporting period, Group revenue from continuing operations would have been Â£10,825 million and Group operating profit from continuing operations would have been Â£507 million. There was no material difference between operating profits arising from acquisitions and cash flows contributed by those acquisitions. ------------------------------------------ ------ ----- 2006 2005 Â£m Â£m ------------------------------------------ ------ ----- Cash consideration and costs payable 160 105 Deferred consideration payable 5 4 ------------------------------------------ ------ ----- 165 109 ------------------------------------------ ------ ----- Cash consideration and costs paid 160 105 Cash acquired (1) (2) ------------------------------------------ ------ ----- 159 103 Deferred consideration and costs relating to previous 8 21 acquisitions ------ ----- ------------------------------------------ Cash outflow on current and past acquisitions 167 124 ------------------------------------------ ------ ----- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 ------------------------------------------ ------ ------ 18 Reconciliation of operating profit to cash generated by operations 2006 2005 Â£m Â£m ------------------------------------------ ------ ----- Operating profit from continuing operations 506 388 Adjustments for: Exceptional items - 108 Depreciation of property, plant and equipment 193 203 Amortisation of intangible fixed assets 38 21 Loss/(gain) on disposal of property, plant and equipment 5 (7) Decrease in provisions (39) (57) Share-based payments 21 42 ------------------------------------------ ------ ------ 724 698 Increase in inventories (3) (7) Increase in receivables (19) (109) Increase in payables 52 117 ------------------------------------------ ------ ------ Cash generated by operations 754 699 ------------------------------------------ ------ ------ ------------------------ ------ ------ ------ ------- ----- ------ 19 Analysis of net debt 1 Oct 2005 Cash flow Exchange Acquisitions Other 30 Sep 2006 movements and disposals (excluding cash non-cash and overdrafts) changes Â£m Â£m Â£m Â£m Â£m Â£m ------------------------ ------ ------ ------ ------- ----- ------ Cash and cash equivalents 281 574 (7) - - 848 ------------------------ ------ ------ ------ ------- ----- ------ Bank overdrafts (33) (27) 3 1 - (56) Bank and other borrowings (2,637) 674 71 (1) 52 (1,841) ------------------------ ------ ------ ------ ------- ----- ------ (2,670) 647 74 - 52 (1,897) ------------------------ ------ ------ ------ ------- ----- ------ Finance leases (60) 15 2 1 (15) (57) Derivative financial instruments 24 - - - (13) 11 ------------------------ ------ ------ ------ ------- ----- ------ Gross debt (2,706) 662 76 1 24 (1,943) ------------------------ ------ ------ ------ ------- ----- ------ Net debt (2,425) 1,236 69 1 24 (1,095) ------------------------ ------ ------ ------ ------- ----- ------ The table above is presented as additional information to show movement in net debt, defined as derivative financial instruments, overdrafts, bank and other borrowings and finance leases, net of cash and cash equivalents. 20 Contingent liabilities On 21 October 2005 the Company announced that it had instructed Freshfields Bruckhaus Deringer to conduct an investigation into the relationships between Eurest Support Services ('ESS') (a member of the Group), IHC Services Inc. ('IHC') and the United Nations. Ernst & Young assisted Freshfields Bruckhaus Deringer in this investigation. On 1 February 2006 it was announced that the investigation had concluded. The investigation established serious irregularities in connection with contracts awarded to ESS by the UN. The work undertaken by Freshfields Bruckhaus Deringer and Ernst & Young gave no reason to believe that these issues extended beyond a few individuals within ESS to other parts of ESS or the wider Compass Group of companies. IHC's relationship with the UN and ESS is part of a wider and on-going investigation into UN procurement activity being conducted by the United States Attorney's Office for the Southern District of New York, and with which the Group is co-operating fully. These investigators have access to sources unavailable to the Group, Freshfields Bruckhaus Deringer and Ernst & Young, and further information may emerge which is inconsistent with or additional to the findings of the Freshfields Bruckhaus Deringer investigation, which could have an adverse impact on the Group. The Group has however not been contacted by or received further requests for information from the United States Attorney's Office for the Southern District of New York or the UN in connection with these matters since January 2006. No provision has been made in the financial statements in respect of these matters and it is not currently possible to quantify any potential liability which may arise. The directors currently have no reason to believe that any potential liability that may arise would be material to the financial position of the Group. The Group, through a number of its subsidiary undertakings, is, from time to time, party to various other legal proceedings or claims arising from its normal business. Provisions are made as appropriate. None of these proceedings is regarded as material litigation. The Group has provided guarantees to certain minority shareholders and joint venture partners over the level of profits which will accrue to them in future periods. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 21 Post balance sheet event On 29 November 2006, the Group announced its intention to dispose of its Selecta vending businesses operating in 21 countries in Continental Europe and in the UK. These businesses generated revenue of Â£476 million, earnings before interest and tax (EBIT) of Â£45 million and earnings before interest, tax and depreciation (EBITDA) of Â£87 million in 2006. 22 IFRS transitional adjustments The previously published financial statements under UK GAAP were restated on an IFRS basis in the document 'Adoption of International Financial Reporting Standards 'IFRS': preliminary restatement of 2005 financial information' published on 1 March 2006. This is available in the Investor Relations section of the Compass Group website (www.compass-group.com) and includes presentational changes and detailed adjustments by line item. A reconciliation of equity at 1 October 2004 and 30 September 2005 and of profit for the financial year to 30 September 2005 is provided below with an explanation of the transitional adjustments. 30 September 1 October 2005 2004 Equity reconciliation Â£m Â£m --------------------------------------- -------- -------- Total equity under UK GAAP 2,284 2,482 Minority interest as part of equity 73 54 --------------------------------------- -------- -------- 2,357 2,536 Transitional adjustments : IFRS 3 Business combinations - treatment of goodwill 260 - IAS 10 Post balance sheet events - dividend on paid basis 140 134 IAS 31 Interests in joint ventures (45) (39) IAS 19 Employee benefits - defined benefit pensions (283) (161) IAS 19 Employee benefits - other (4) (5) IAS 32 Financial instruments : presentation - put options (163) (215) IAS 39 Financial instruments : recognition and measurement (10) (16) IFRS 2 Share-based payments 16 16 IAS 12 Income taxes 11 20 Other (1) (1) --------------------------------------- -------- -------- Total equity under IFRS 2,278 2,269 --------------------------------------- -------- -------- 30 September 2005 Retained profit reconciliation Â£m --------------------------------------------- -------- Profit for the year under UK GAAP 37 Transitional adjustments : IFRS 3 Business combinations - amortisation of goodwill 269 IAS 36 Impairment of assets (12) IAS 31 Interests in joint ventures (23) IAS 19 Employee benefits - defined benefit pensions 1 IAS 19 Employee benefits - other 1 IAS 32 Financial instruments : presentation - put options (6) IAS 39 Financial instruments : recognition and measurement (4) IFRS 2 Share-based payments (46) IAS 12 Income taxes (8) --------------------------------------------- -------- Profit for the year under IFRS 209 --------------------------------------------- -------- There is no significant change to the cash flow statement as reported under UK GAAP. Explanation of significant differences between UK GAAP and IFRS which affect the Group IFRS 3 Business combinations and IAS 36 Impairment of assets Under IFRS 3, goodwill is considered to have an indefinite life and hence is not subject to amortisation. Instead, it is reviewed for impairment annually. The goodwill amortisation charge under UK GAAP in 2005 of Â£269 million is therefore reversed but the impairment charge recognised is increased by Â£12 million to take account of the higher amount of the related goodwill under IFRS. IAS 10 Post balance sheet events Dividends declared after the balance sheet date are not recognised as a liability because there is no present obligation at the balance sheet date. Accordingly, no accrual is made in the September 2005 balance sheet for the proposed final dividend of Â£140 million. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 30 September 2006 22 IFRS transitional adjustments (continued) IAS 31 Interests in joint ventures The Group has interests in a number of companies where it shares control with partners. Under UK GAAP, the Group consolidated 100% of the turnover, results, assets and liabilities where the Group actually exercised dominant influence, with the partner's share being shown as minority interest. Under IFRS, the concept of 'actual exercise of dominant influence' is not relevant and the Group is required to follow the legal form of the agreements more closely and in certain instances consolidates only its share of turnover, results, assets and liabilities. Although this changes the presentation of the income statement, there is no effect on profit for the financial period attributable to equity shareholders in the Group. IAS 19 Employee benefits Under IFRS, the full pension surplus or deficit in respect of defined benefit schemes is recognised on the balance sheet. This is calculated as the difference between the market value of the pension fund assets set against the value of future pension liabilities. This recognition results in the recognition of a liability of Â£445 million at 1 October 2004 representing an incremental liability of Â£192 million compared with that recorded previously. At 30 September 2005, this liability had increased to Â£555 million, primarily due to changes in actuarial assumptions representing an incremental liability of Â£302 million. The impact on total equity is after the offset of adjustments to prepayments and related deferred tax. The Group is required to calculate the pension cost for defined benefit pension schemes and other post employment benefits using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. The Group applies the option within the amendment to IAS 19 that permits immediate recognition of all actuarial gains and losses in the period in which they occur in the statement of recognised income and expense. The current and past service pension costs are shown as a charge to operating profit. The unwinding of the discount on pension liabilities each year and the expected return on pension assets are presented as finance costs. The application of IAS 19 increases operating profit by Â£15 million and increases net finance charges by Â£14 million resulting in a reduction in the underlying charge of Â£1 million. The Group had accrued additional liabilities of Â£5 million for holiday pay and similar entitlements as at 30 September 2005. IAS 32 Financial instruments : presentation The Group has entered into arrangements with minority shareholders to potentially acquire their interests at some point in the future. These arrangements include both call options that enable the Group to acquire interests and put options that enable minority shareholders to require the Group to buy out their interests. Under IAS 32 the present value of put options is recorded as a financial liability, and is reflected as a deduction from equity. The discounted value of liabilities in respect of put options was Â£215 million at 1 October 2004. As at 30 September 2005, this had fallen to Â£163 million as a result of certain options having being exercised. The majority of the remaining liability for put options was extinguished during the year to 30 September 2006 on completion of the acquisition of the remaining interest in Levy Restaurants in the United States. IAS 39 Financial instruments : recognition and measurement The Group uses currency denominated borrowings and derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. The Group does not acquire or hold derivatives for trading purposes. Under IAS 39, derivatives are recognised initially at cost and are subsequently required to be measured at fair value. The fair value is determined by reference to market values for similar financial instruments, or by discounted cash flows. Where derivatives do not qualify for hedge accounting, any gains or losses on measurement are immediately recognised in the income statement. Where hedge accounting is permitted to be employed, recognition of any resulting gain or loss depends on the nature of the hedge relationship and the item being hedged. Under UK GAAP, derivatives were not held at fair value so there were no movements in value to account for. IFRS 2 Share-based payments IFRS 2 'Share-based payments' requires the Group to record a charge for all share-based payments equivalent to the fair value of the award as at the date of grant. An expense is recognised to spread the fair value of each award over its vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The Group has applied IFRS 2 to all unvested share awards as at the transition date. Under UK GAAP, the Group recorded a charge for employee share incentive awards based on the intrinsic value of the award, being the difference, if any, between the option price of the conditional award and the share price on the date of grant. The Group also utilised the exemption available within UITF Abstract 17 from reporting a charge to profits for UK Inland Revenue approved SAYE schemes and equivalent overseas schemes. As the Group's share options have an option price equal to the market price on the date of grant no charge was required to be recorded under UK GAAP. The application of IFRS 2 has resulted in an incremental charge to profits in 2005 of Â£46 million. IAS 12 Income taxes Under IAS 12 'Income Taxes', certain temporary differences that previously were not recognised under UK GAAP will be recognised. In addition, IAS 12 does not allow discounting of deferred tax balances, previously adopted by the Group under UK GAAP. This results in a higher tax charge under IFRS. Generally, the Group's effective tax rate under IFRS is expected to be somewhat more volatile than under UK GAAP. This information is provided by RNS The company news service from the London Stock Exchange

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