Final Results

Compass Group PLC 29 November 2005 Compass Group PLC PRESS RELEASE 29 November 2005 COMPASS GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2005 _____________________________________________________________________________ Financial summary Reported Constant For the year ended 30 September 2005 2004 movement currency ____________________________________________________________________________ Turnover Â£12,704m Â£11,772m 7.9% 8.3% Total operating profit - reported Â£302m Â£500m (39.6)% - underlying (1) Â£711m Â£775m (8.3)% (7.7)% Operating margin(2) 5.7% 6.8% (110)bps Profit before tax - reported Â£171m Â£370m (53.8)% - underlying(1) Â£581m Â£645m (9.9)% Basic earnings per share - reported 0.0p 8.3p - underlying (1) 19.1p 21.1p (9.5)% (8.6)% Free cash flow Â£348m Â£246m 41.5% 43.5% Return on capital employed 5.7% 6.4% (70)bps Dividend per ordinary share 9.8p 9.3p 5.4% _____________________________________________________________________________ Business highlights â€¢ Turnover Â£12.7 billion, up 7.0% on a like for like basis(3). â€¢ Strong growth in profit and ROCE in North America and Continental Europe and Rest of the World (excluding Middle East military business). Turnaround in UK progressing. â€¢ Free cash flow Â£353m at 2004 exchange rates, up 43.5%. â€¢ Final dividend of 6.5 pence per share, up 4.8%. â€¢ Sir Roy Gardner appointed Senior Independent Director from 1 October 2005, will replace Sir Francis Mackay as Chairman by summer 2006. â€¢ Recruitment of Group CEO underway. â€¢ Targets of 100 basis points of ROCE growth and Â£800 - Â£850m of free cash flow over the period 2006-2008 (post SSP disposal) reconfirmed. _____________________________________________________________________________ (1) Underlying performance excludes goodwill amortisation and exceptional items. (2) Operating margin excludes fuel, associates, goodwill amortisation and exceptional items. (3) Like for like growth excludes fuel and 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 2004. New Chairman and Senior Management Update Sir Roy Gardner joined the Board as Senior Independent Director and Chairman of the Nominations Committee on 1 October 2005 and will succeed Sir Francis Mackay as Chairman by the summer of 2006. Since joining the Board, Sir Roy has already spent time in the business, focusing on its strategy and financial performance. Sir Roy believes that there is significant opportunity to improve performance in the Group's core business. As Chairman of the Nominations Committee, Sir Roy's immediate priority is the recruitment of a new Group Chief Executive to replace Michael Bailey who has announced his intention to step down. The Nominations Committee has appointed head hunter Korn Ferry to conduct a full search and the process is being conducted expeditiously. Michael Bailey will continue as Chief Executive for as long as is required by the Board. The Board has agreed to appoint two new non-executive directors during 2006. Sale of Travel-Related Concessions Business The Group announced on 28 September 2005 its decision to sell its travel-related concessions business, primarily Select Service Partner (SSP). The formal sale process for SSP has commenced and an Information Memorandum has been circulated to interested parties. The sale is expected to be completed by mid-2006. SSP is the largest operator of travel concessions in Europe and Asia, providing catering for roadside, railway and airport concessions in over 20 countries. SSP includes brands such as, Upper Crust, Whistlestop, Millie's Cookies and Harry Ramsden's. In 2005, revenues (including fuel) of the businesses being sold were circa Â£1.8 billion (Â£1.3 billion excluding fuel), EBITDA (including fuel) was circa Â£160 million and EBIT (including fuel) was Â£115 million. Whilst the travel concessions market offers considerable further growth opportunities, the sale of the travel-related business will allow management to focus solely on the Group's core contract catering operations and the growth of the support services business. The Board considers that, in the longer term, this focus will improve the Group's financial performance and drive greater value for shareholders. UN Contracting On 21 October the Group announced that it had instructed Freshfields to conduct an investigation into the relationships between ESS, IHC and the United Nations. Ernst & Young are assisting Freshfields in the investigation, reporting to the Chairman of the Compass Group PLC Audit Committee. On 3 November the Group announced that the investigation raised serious concerns as to whether, within ESS, there had been in connection with IHC and the UN, improper conduct and a failure to comply with the Group's statement of business principles (which apply to all staff, whatever their seniority). As a result, three employees were dismissed. The investigation is ongoing and, as yet, no final conclusions have been reached. The Group continues to co-operate voluntarily and fully as appropriate with the UN and US authorities, including the Office of the United States Attorney for the Southern District of New York. UN contracts account for less than 0.5% of the Group's turnover and profits. Outlook In 2006, the Group anticipates continued strong trading in North America and the Rest of the World (excluding the impact of scaling back the Middle East military business). In Continental Europe, where the macro-economic climate is expected to continue to contribute to a difficult trading environment, the focus will remain on keeping a tight cost base and working to improve client retention. In the UK, cost pressures are expected to remain a significant challenge, however, actions are being taken to deliver a robust contract base with the aim of achieving a similar level of profit to that in 2005. Overall the Group will continue to focus on free cash flow and improving return on capital employed. Michael J Bailey, Group Chief Executive, said: 'Three out of our four geographies, North America, Continental Europe and the Rest of the World have performed to our expectations, with North America and the Rest of the Word (excluding the Middle East military business) delivering a particularly strong result this year. The performance of the UK has been unsatisfactory. However, we have gripped the issues and the turnaround of this business is underway. We have taken decisive action to improve our financial performance to meet our three year targets for free cash flow and return on capital employed. Everyone in the business is firmly focused on delivering for our clients, customers and shareholders' Enquiries: Compass Group PLC +44 (0) 1932 573000 Investors/Analysts: Sarah Ellis Media: Paul Kelly Brunswick +44 (0) 20 7404 5959 Simon Sporborg Pamela Small Website www.compass-group.com Presentation and teleconference details are in the attached notes. GROUP TRADING REVIEW The Group achieved 7% like for like turnover growth in 2005 with strong performances in North America and Rest of the World regions but difficult trading particularly in the UK and several European countries. Actions are underway to improve financial performance, with continued focus on delivery of strong free cash flow and improved returns on capital employed ('ROCE') over the medium term. The Group has announced medium-term (2006-2008) objectives to improve ROCE by 100 basis points and to generate free cash flow over the period of Â£800 - Â£850 million (post the disposal of SSP). As the market leader in a fragmented market place, the Group is well positioned to benefit from its strong presence in the key geographies, where significant opportunities remain. Group Performance The Group's reported financial summary for the year ended 30 September 2005 is set out below. Increase/ 2005 2004 (decrease) --------------------------------- --------- -------- --------- Turnover Â£12,704m Â£11,772m 7.9% Total operating profit - reported Â£302m Â£500m (39.6)% - underlying (1) Â£711m Â£775m (8.3)% Operating margin (2) 5.7% 6.8% (110)bps Profit before tax - reported Â£171m Â£370m (53.8)% - underlying (1) Â£581m Â£645m (9.9)% Basic earnings per share - reported 0.0p 8.3p - underlying (1) 19.1p 21.1p (9.5)% Free cash flow Â£348m Â£246m 41.5% Return on capital employed (3) 5.7% 6.4% (70)bps --------------------------- --------- -------- --------- (1) Underlying performance excludes goodwill amortisation and exceptional items. (2) Operating margin excludes fuel, associates, goodwill amortisation and exceptional items. (3) See below for basis of calculation. Turnover The main factors that affected the year on year change in turnover are summarised below. % -------------------------------------------- ---- Like for like growth 7 Contribution from acquisitions 2 Movements in translation rates (1) -------------------------------------------- ----- Total - excluding fuel 8 -------------------------------------------- ----- Like for like growth excludes fuel and 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 2004. Like for like turnover growth was achieved as a result of new contract gains of 11% offset by contract losses of 5% and positive throughput of 1%, driven by North America where the business has been focused on driving volumes within existing accounts as well as achieving price increases. Throughput represents the movement in turnover in the existing estate, influenced by headcount changes, participation rates, price increases and average spend per head. Throughput varies by sector with Education and Healthcare, which are much less affected by the economic cycle, achieving positive throughput of 3% and 2% respectively in 2005. Business and Industry and Vending were broadly flat. Throughput in the Travel Concessions sector was also positive at 2%. The Group continues to focus on client retention, which was again high in the year at 95%. This was achieved as a result of continued investment in people, client account management and contract retention teams. The strong performance in like for like turnover growth was driven by new business wins across all sectors, with a continued trend to outsourcing in Healthcare and a high level of activity around the globe in Offshore and Remote supporting the buoyant extractive industries sector. The table below sets out like for like growth by sector for each geographic division and the Group total. North CE & America UK ROW Group % % % % --------------------------- -------- ------ ------- ------- Contract: Business and Industry 11 9 2 6 Defence, Offshore and Remote 28 13 8 10 Education 12 (1) 2 7 Healthcare 15 5 5 10 Sports and Leisure 17 3 5 9 --------------------------- -------- ------ ------- ------- Total Contract 13 6 4 8 Vending 4 19 2 4 Travel Concessions 20 4 4 6 --------------------------- -------- ------ ------- ------- Total 12 6 4 7 --------------------------- -------- ------ ------- ------- Travel Concessions principally comprises: Creative Host in North America; Moto, railway and airport concessions, Harry Ramsden's and Millie's Cookies in the UK; Rail Gourmet, Inflight, airport concessions and motorways (in France, Italy, Portugal, Germany and Japan) in Continental Europe and Rest of the World. Total operating profit The decline in total operating profit, before goodwill amortisation and exceptional items, of 8% resulted primarily from tough trading in the UK and the reduction in scale and profitability of the Group's Middle East military business. Trading conditions in Continental Europe remained difficult in France, Germany, the Netherlands and particularly Italy which saw a significant downturn in the Business and Industry sector. In North America, there has been a slight decline in the year on year operating margin mainly due to the impact of the National Hockey League strike and Hurricane Katrina but operating profit grew strongly at 9%. Profit before tax Profit before tax, goodwill amortisation and exceptional items for 2005 was Â£581 million (2004: Â£645 million). Basic earnings per share Basic earnings per share, before goodwill amortisation and exceptional items, were 19.1 pence (2004: 21.1 pence). Free cash flow Free cash flow for 2005 recovered strongly in the year to Â£348 million (2004: Â£246 million). Reduced operating profit and higher cash interest payments (including Â£20 million as a result of the 2004 swap monetisation) were more than offset by a stringent allocation of capital expenditure and improvements in working capital management. Free cash flow in 2004 of Â£246 million was adversely impacted by a significant working capital outflow offset in part by a one-off receipt of Â£104 million in respect of the monetisation of certain 'in the money' interest rate swaps. Return on capital employed Return on capital employed was 5.7% (2004: 6.4%) based on total operating profit before goodwill amortisation and exceptional items (excluding the Group's minority partners' share of total operating profit) net of tax at 30%, and an average capital employed for the year of Â£8,069 million (2004: Â£7,894 million). Average capital employed has been calculated by adding back net debt, goodwill written off to reserves and goodwill amortised through the profit and loss account. The capital employed in the business as at 30 September 2005 and 2004 is detailed in the table below. 2005 2004 Â£m Â£m ----------------------------------- ---------- ------ Net assets 2,284 2,482 Net debt 2,316 2,373 Goodwill written off to reserves 2,147 2,132 Goodwill amortised through the profit and loss account 1,382 1,021 ----------------------------------- ---------- ------ Capital employed 8,129 8,008 ----------------------------------- ---------- ------ International Financial Reporting Standards ('IFRS') The Group will report under IFRS for the year ending 30 September 2006. In May 2005, the Group provided an indication of the principal effects of IFRS on the Group. Further information, including restatement of the 2005 results under IFRS, will be presented prior to the announcement of the 2006 Interim Results. UK Client and Supplier Relationships A core part of the Group's strategy is to leverage its scale through purchasing efficiencies and to achieve this through building good, long-term and mutually beneficial relationships with all its suppliers. The UK business has been working hard with its suppliers to encourage investment in processes and systems to improve quality and traceability and to ensure that the Group has the right range and quality of products, at the most competitive prices to meet the needs of its client base. The success of this approach is reflected in the high levels of client satisfaction with contract retention in the UK at 95% and an average length of client relationship of over 9 years. The investment made last year in improving payment terms is reflected in the reduction of average creditor days to around 55 in 2005. Over the past year payables of over 90 days have never amounted to more than Â£1 million in a business with turnover of over Â£2 billion. Over 80% of suppliers (by invoice value) are now on Electronic Data Interchange ('EDI') and this has improved efficiency and speeded up payment. Of the UK suppliers who account for over 75% of total purchases, 95% have been supplying Compass for over four years. The Group's relationship with its clients and suppliers is governed by a strict, zero tolerance based Code of Ethics. Purchasing policies and practices are being enshrined in a Supplier Code of Conduct for buyers with a formal process for suppliers to escalate any complaints. Our People The Group has seen continued evidence of the success of its strategy to be recognised as a preferred employer. The most recent global workforce survey shows an increase in loyalty, pride in the company and the likelihood to recommend Compass as a place to work. Compass Group was named 7th best large company to work for in the annual Best Companies to Work For list produced by the Sunday Times, based on the paper's own independent survey of the Group's employees. Most recently, on 24 November, the Group won three awards at the Personnel Today Awards: Employer Branding; Best HR Strategy in Line with Business; and the Best Overall HR award. At the Culinary Olympics the Group won an outstanding 57 awards, including 3 gold, 32 silver and 14 bronze medals. In the aftermath of Hurricane Katrina the Group continued to service clients and customers in the affected regions. In anticipation of the hurricane, Eurest, along with their clients, had organised and prepared food services, water and basic living supplies for thousands of evacuees. Over 20,000 meals were served daily in affected areas and temporary 'tent cities' were established providing essentials for relief workers and victims, and Eurest supported six tent cities located in the Gulf States region. A relief centre was set up in Pascagoula, Mississippi that provided shelter and food for 15,000 evacuees. Four tent villages, supporting over 2,600 employees and families were also set up. Morrison Management Specialists teams stayed in place through the hurricane to assist in the evacuation of six hospitals and served 15,000 meals daily to patients and residents at four hospitals and two senior dining communities in the Gulf Coast states. DIVISIONAL TRADING REVIEW Constant Like Reported currency for like increase increase increase 2005 2004 % % % --------------------- ------ ------- -------- -------- -------- Turnover (Â£m) North America 3,937 3,531 11 15 12 UK 2,812 2,626 7 7 6 Continental Europe and Rest of the World 5,443 5,119 6 5 4 --------------------- ------ ------- -------- -------- -------- Total - excluding fuel 12,192 11,276 8 9 7 Fuel 512 496 3 3 3 --------------------- ------- ------- -------- -------- -------- Total 12,704 11,772 7 8 7 --------------------- ------- ------- -------- -------- -------- Constant Reported currency increase increase 2005 2004 % % ------------------------------------------ -------- ------ -------- -------- Total operating profit including fuel (Â£m) Subsidiary undertakings North America 207 190 9 12 UK 205 294 (30) (30) Continental Europe and Rest of the World 297 287 3 3 ------------------------------------------ -------- ------ -------- -------- 709 771 (8) (7) Associates 2 4 - - ------------------------------------------ -------- ------ -------- -------- Total 711 775 (8) (8) ------------------------------------------ -------- ------ -------- -------- Operating margin excluding fuel (%) North America 5.3 5.4 UK 7.0 10.9 Continental Europe and Rest of the World 5.5 5.6 ------------------------------------------ -------- ------ -------- -------- Total 5.7 6.8 ------------------------------------------ -------- ------ -------- -------- Certain minor reclassifications have been made to the previously reported analysis of Divisional performance to align with the Group's current management structures. Total operating profit is before goodwill amortisation of Â£269 million (2004: Â£275 million), a goodwill impairment charge of Â£95 million (2004: Â£ nil) and an exceptional operating charge of Â£45 million (2004: Â£ nil). Fuel turnover comprises Â£480 million in the UK and Â£32 million in Continental Europe and Rest of the World (2004: Â£466 million and Â£30 million respectively). Profit from subsidiary undertakings includes Â£8 million in the UK and Â£ nil in Continental Europe and Rest of the World from fuel (2004: Â£8 million and Â£ nil respectively). Operating margin is based on turnover and total operating profit excluding fuel, associates, goodwill amortisation and exceptional items. North America 32% of Group turnover, excluding fuel (2004: 31%) 2005 has been another successful year in North America, both in terms of turnover and profit growth, extending across all the primary business sectors. Reported turnover increased to Â£3,937 million (2004: Â£3,531 million) and by 12% on a like for like basis, well ahead of last year's 7%. In Healthcare, Morrison's and Crothall's like for like turnover growth was 15%. Our position in the important Healthcare market was further strengthened by the acquisition of HDS Services, the only significant acquisition in the year, which was completed in January 2005 for Â£16 million. Sports and Leisure has had another very strong year with like for like growth of 17%, reflecting the success of our Levy Restaurants business in delivering not only strong contract gains, but also increased customer spend at our venues. The Business and Industry and Education sectors delivered solid performances. Growth was driven by new business wins in conjunction with improved throughput. A significant success has been the concerted drive to increase participation and spend per head, including passing on price increases. Vending showed a more modest increase of 4% on a like for like basis. Total operating profit, excluding associates, goodwill amortisation and exceptional items, increased by Â£17 million to Â£207 million (2004: Â£190 million). There has been a slight decline in the operating margin to 5.3% (2004: 5.4%), mainly due to the impact of the National Hockey League strike and Hurricane Katrina towards the end of the year. UK 23% of Group turnover, excluding fuel (2004: 23%) Reported turnover, excluding fuel, increased to Â£2,812 million (2004: Â£2,626 million) and by 6% on a like for like basis, broadly in line with last year. In Contract, like for like turnover increased by 6% to Â£1,930 million (2004: Â£1,794 million) with strong performances in all sectors except Education where sales declined by 1%. Most contract caterers in the Education sector have been impacted by declining participation during the year following recent negative publicity regarding the standard of school meals. Healthcare has again had a strong year benefiting from new contract gains, renewals and extensions to the range of services offered. This resulted in growth of 5% on a like for like basis. We have continued to see good growth in the Business and Industry sector, helped by the mobilisation of a significant contract for managed services with one of our large banking clients. Travel Concessions achieved turnover growth of 4% on a like for like basis, increasing from Â£775 million in 2004 to Â£814 million in 2005, despite the impact of the London bombings on our railway station operations. The M&S Simply Food concept roll-out continued at our motorway and railway sites and was well received in the year. Total operating profit, including fuel but excluding associates, goodwill amortisation and exceptional items, was Â£205 million (2004: Â£294 million). The decline is due in part to cost pressures affecting, in particular, the Business and Industry sector and the impact of the London bombings. The remainder of the decline is the result of increased pension costs, lower disposal profits of Â£16 million, significant restructuring costs, the sale of the Gatwick Meridien hotel Â£4 million and the Â£5 million impact on profits of reduced capital spend. The overall margin, excluding fuel, achieved in the year was 7.0% (2004: 10.9%). In Contract and Vending, operating margins were 5.9% (2004: 8.6%) and operating profit, excluding associates, goodwill amortisation and exceptional items, was Â£117 million (2004: Â£160 million) Travel Concessions operating margins were 9.8% (2004: 16.3%) and operating profit, excluding associates, goodwill amortisation and exceptional items, decreased to Â£80 million (2004: Â£126 million). Continental Europe and Rest of the World 45% of Group turnover, excluding fuel (2004: 46%) Reported turnover, excluding fuel, increased to Â£5,443 million (2004: Â£5,119 million) with like for like turnover growth of 4%. Strong performances in Rest of the World, particularly Australasia and South America, were partly offset by more challenging trading conditions in France, Germany, the Netherlands and Italy and a scaling down of our Middle East military business. In Continental Europe, overall like for like turnover grew by 2%, with flat like for like growth in Contract. Market conditions in Northern Europe continued to be difficult with client site closures and headcount reductions holding back growth in Germany, France, the Netherlands and Italy in particular. We have strengthened our management teams in these countries to focus on client retention and drive throughput via participation and spend per head. Spain and Switzerland again performed strongly growing by 7% and 6% respectively. Scandinavia continues to perform well and benefited from high levels of activity in the Travel Concessions sector and the oil and gas business. Rest of the World like for like turnover growth of 8% reflects the strength of the Remote Site sector in Australasia as the extractive industries continue to meet the high demand for crude oil and minerals. In South America, we also continue to see good business growth led by Brazil where Business and Industry and Remote Site operations are particularly buoyant. The Group continues to scale down its Middle East military business with turnover reducing to Â£170 million in 2005 (2004: Â£250 million). There are still opportunities for military business in the Middle East but increasingly, the Group is choosing not to participate in this work because the margin is becoming less attractive relative to the complexity of the operations and associated risks. Excluding the Middle East military business, like for like turnover growth was 14%. Total operating profit, excluding associates, goodwill amortisation and exceptional items, has increased by 3% to Â£297 million (2004: Â£287 million) and operating margin is broadly in line with 2004 at 5.5% (2004: 5.6%). In Continental Europe, total operating profit, excluding associates, goodwill amortisation and exceptional items, increased by 7% to Â£190 million (2004: Â£178 million). The operating profit improvement results from a strong turnaround in the Travel Concessions business, particularly in Germany, France and Scandinavia. Operating margin in Continental Europe increased to 5.3% in 2005 (2004: 5.2%). Rest of the World total operating profit, excluding associates, goodwill amortisation and exceptional items, reduced by 2% to Â£107 million (2004: Â£109 million) and operating margin has moved back slightly to 5.7% (2004: 6.3%) reflecting the impact of scaling back our Middle East military business where operating profit, before exceptional items, was Â£35 million (2004: Â£50 million). Excluding this, total operating profit, excluding associates and goodwill amortisation was Â£72 million (2004: Â£59 million), a 22% increase. Operating margin was 4.2% (2004: 4.0%), driven by good conversion of incremental sales to incremental profit in Australasia and South America. Interest Net debt at 30 September 2005 was Â£2,316 million (2004: Â£2,373 million). Net interest expense for the year was Â£130 million (2004: Â£130 million). The average cost of funding for the year was 4.8% (2004: 4.8%). Interest cover for 2005 was 5.5 times total operating profit before goodwill amortisation and exceptional items. Higher dollar borrowing costs are expected to increase the net interest expense to nearer Â£140 million in 2006 (before the impact of proceeds from disposals and the adoption of IFRS). Profit before taxation Profit before taxation, goodwill amortisation and exceptional items decreased by 9.9% from Â£645 million to Â£581 million. Taxation The overall Group tax charge was Â£134 million giving an effective tax rate on profit on ordinary activities before taxation, goodwill amortisation and exceptional items of 23.1% (2004: 23.6%), which is below the UK corporate tax rate of 30%. The main reasons for the low overall rate in 2005 are prior year adjustments representing the recognition of reliefs associated with past acquisitions and also the successful resolution during the course of the year of several significant issues, principally overseas. A reconciliation of the effective current tax rate for the year (i.e. the overall rate excluding deferred tax and prior year adjustments) is included in note 4 to the financial statements. This reconciliation summarises the reasons why the Group's effective current tax rate of 28% was below the UK corporate tax rate of 30%. The main reasons were the benefit arising from the tax deductibility of part of the Group's goodwill (2%), losses brought forward (2%) and other items (a net benefit of 1%) offset by the impact of higher overseas tax rates (3%). The overall Group effective tax rate for 2006 onwards (when the Group will report under IFRS) is expected to move to around 30%. This increase reflects the fact that the earnings benefit of the tax deduction for goodwill in the US will no longer be recognised through the profit and loss account (although there is no cash tax impact). The Group's cash tax rate for 2005 was 19% (2004: 17%). For 2006 onwards, the cash tax rate is likely to average out, over time, in a range from the mid to high 20's. Goodwill amortisation and exceptional items The goodwill amortisation charge for the year was Â£269 million (2004: Â£275 million) and an additional charge of Â£95 million in respect of the impairment of goodwill carried on the Italian business was incurred. The decline in scale of the Group's Middle East military business in 2005, with turnover down from Â£250 million in 2004 to Â£170 million in 2005 and with operating profit, before exceptional items, down from Â£50 million in 2004 to Â£35 million in 2005, is likely to continue into 2006, with operating profit expected to be no more than Â£5 million. In the light of this quicker than expected scaling back in activity, asset write-downs and provisions of Â£45 million have been reported as an exceptional item in 2005. The Group also disposed of 75% of Au Bon Pain in North America, the Gatwick Meridien hotel in the UK and paid further costs relating to previous disposals resulting in a net exceptional loss on disposal of businesses of Â£1m. There were no exceptional items in 2004. Earnings per share Basic and diluted earnings per share on a reported basis were both nil pence (2004: 8.3 pence). Basic earnings per share before goodwill amortisation and exceptional items for the year was 19.1 pence (2004: 21.1 pence). Attributable profit and basic earnings per share are reconciled below. Attributable Profit Basic Earnings Per Share --------------------------------------------------------- 2005 2004 2005 2004 Â£m Â£m Pence Pence Growth -------------------- -------- -------- -------- -------- ------- Reported 1 180 - 8.3 Goodwill amortisation 269 275 Exceptional items 141 - -------------------- -------- -------- -------- -------- ------- Underlying (1) 411 455 19.1 21.1 (9.5)% Currency translation - (4) -------------------- -------- -------- -------- -------- ------- Constant currency 411 451 19.1 (20.9) (8.6)% -------------------- -------- -------- -------- -------- ------- (1) Underlying performance excludes goodwill amortisation and exceptional items. Dividends The recommended final dividend is 6.5 pence per share resulting in a total dividend for the year of 9.8 pence per share, an increase of 5.4% on 2004, reflecting confidence in the Group's ability to generate strong free cash flow. Dividend cover for 2005 was 1.9 times profit before goodwill amortisation and exceptional items. In the short term, earnings and cash dividends cover will be impacted by IFRS, the increase in the cash tax rate and the disposal of SSP. Whilst we remain committed to continue to grow the dividend in real terms, our objective over the medium term will be to move the dividend cover more towards the 2 times level. Acquisitions The Group's strategic focus continues to be on the organic development of its existing core businesses. During the year there have been a small number of acquisitions either to strengthen the Group's geographic coverage or to reinforce its sectoral presence in certain areas. The Group purchased businesses for Â£39 million in 2005 and purchased further shares in subsidiary companies not wholly owned for Â£66 million. Â£4 million of the aggregate purchase price is deferred consideration payable in the future. In aggregate, the net liabilities acquired had a provisional fair value of Â£8 million, including Â£2 million of net cash, resulting in goodwill of Â£113 million. Details of the acquisitions are given in note 15 to the financial statements. The acquisition of other minority interests and the payment of deferred consideration is currently expected to amount to around Â£150 million in 2006. The Group does not currently anticipate any significant new acquisitions during 2006. Pensions In total, the Group charged Â£78 million (2004: Â£70 million) to profit before tax in respect of its pension arrangements, of which Â£52 million (2004: Â£48 million) relates to defined benefit schemes and Â£26 million (2004: Â£22 million) relates to defined contribution schemes. Actuaries to the Group's defined benefit pension arrangements advise the Pension Trustees on the funding rates required by the Group. In total, the Group paid Â£100 million (2004: Â£74 million) during the year to the pension providers in order to enable the pension funds to fulfil their obligations. Disclosure in accordance with FRS 17: Retirement Benefits is provided in note 16 to the financial statements. This shows that, at 30 September 2005, there was an unprovided pension deficit, net of deferred tax, of Â£222 million (2004: Â£131 million). Had the Group adopted FRS 17, the charge to the profit and loss account, before interest and tax, would have been Â£63 million (2004: Â£56 million, net of a Â£6 million one-off curtailment credit). The corresponding financing charge recorded to interest expense would have been Â£15 million (2004: Â£19 million) giving a total charge of Â£78 million (2004: Â£75 million). Free cash flow Free cash flow of Â£348 million (2004: Â£246 million) reflects reduced operating profit and higher cash interest payments (including a Â£20 million outflow as a result of the 2004 swap monetisation), more than offset by a stringent allocation of capital expenditure and improvements in working capital management. Payments in respect of provisions for liabilities and charges absorbed Â£40 million (2004: Â£73 million). Â£31 million was spent on insurance, pensions and other post-employment benefits, Â£6 million on settling onerous contracts and Â£3 million in respect of legal and other claims. Interest payments absorbed a net Â£159 million (2004: Â£131 million, before a one-off derivatives monetisation receipt of Â£104 million). The net tax paid of Â£108 million (2004: Â£107 million) represents 19% of profit before tax (2004 : 17%), goodwill amortisation and exceptional items and is significantly less than the total tax charge for the year of Â£134 million. The main reasons for this difference are deductions allowable for tax but which are not charged to the profit and loss account, tax losses brought forward and utilised in the year, capital allowances in excess of depreciation and the timing of tax payments. Net capital expenditure absorbed Â£291 million (2004: Â£329 million). Including the Â£12 million of fixed assets acquired under finance lease contracts (2004: Â£9 million), net capital expenditure represents 2.5% of turnover excluding fuel (2004: 3.0%). The Group has stringent controls on capital expenditure that are monitored centrally. There are fixed authority limits at each subsidiary company level and internal rate of return criteria that each project must achieve to obtain approval. Acquisition payments were Â£124 million, comprising Â£105 million of consideration paid, less Â£2 million of cash acquired and Â£21 million of deferred consideration and costs paid in respect of previous acquisitions. In aggregate, deferred consideration payable at 30 September 2005 amounted to Â£28 million (2004: Â£41 million). In 2005, dividend payments totalled Â£205 million (2004: Â£249 million). 2004 reflected the payment of three dividends as the Group accelerated the timing of dividend payments. Net proceeds from the sale of 75% of Au Bon Pain and the Gatwick Meridien hotel were Â£75 million (proceeds from disposals in 2004: Â£86 million). The net cash inflow for the year was Â£94 million, before Â£1 million of proceeds on the issue of ordinary shares, Â£12 million of new finance leases and a translation loss on net debt for the year of Â£26 million, principally as a result of the closing US dollar rate moving from 1.81 to 1.77 over the year, and the closing Euro rate moving from 1.46 to 1.47 over the year. Closing net debt as at 30 September 2005 was Â£2,316 million (2004: Â£2,373 million). Outlook In 2006, the Group anticipates continued strong trading in North America and the Rest of the World (excluding the impact of scaling back the Middle East military business). In Continental Europe, where the macro-economic climate is expected to continue to contribute to a difficult trading environment, the focus will remain on keeping a tight cost base and working to improve client retention. In the UK, cost pressures are expected to remain a significant challenge, however, actions are being taken to deliver a robust contract base with the aim of achieving a similar level of profit to that in 2005. Overall the Group will continue to focus on free cash flow and improving return on capital employed. Michael J Bailey Sir Francis H Mackay Chief Executive Chairman NOTES (a) The results for the year ended 30 September 2005 were approved by the Directors on 29 November 2005 and have been prepared on the basis of accounting policies disclosed in the 2004 Annual Report. The financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 30 September 2005 or 30 September 2004 but is derived from those accounts. The auditors have reported on these accounts; their reports were unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The 2005 accounts will be delivered to the Registrar of Companies following the Company's Annual General Meeting. (b) Forward looking statements This Preliminary Statement 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 final dividend of 6.5p per share is as follows: Ex dividend date: 8 February 2006 Record date: 10 February 2006 Payment date: 6 March 2006 (d) A presentation for analysts and investors will take place at 9:30 am (GMT/ London) on Tuesday 29 November 2005 at the Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ. The live presentation can also be accessed via both a webcast and dial-in teleconference starting at 9:30 am: â€¢ To listen to the live presentation via teleconference, dial (UK) +44 20 7365 1854. â€¢ To view the presentation slides and/or listen to a live audio 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 6 December 2005. To hear the replay, dial (UK) +44 20 7784 1024 or (US) +1 718 354 1112. The replay passcode is 3149869#. â€¢ A webcast replay of the presentation will be available for six months, at www.compass-group.com and www.cantos.com. For North American based investors, there will be a question and answer conference call starting at 1:00pm (EST/New York) â€¢To participate in the live question and answer session via conference call, dial (US) +1 718 354 1158. â€¢A teleconference replay of the call will be available for five working days, until 6 December 2005. To hear the replay, dial (US) +1 718 354 1112. The replay passcode is 8794285#. â€¢The North American investor conference call will also be audio webcast live, and archived for replay, at www.compass-group.com and www.cantos.com. Enquiries: Compass Group PLC + 44 (0) 1932 573000 Investor/Analysts: Sarah Ellis Media: Paul Kelly Brunswick + 44 (0) 20 7404 5959 Simon Sporborg Pamela Small Website www.compass-group.com. Compass Group is the world's largest foodservice company with annual revenues of over Â£12 billion. Compass Group has some 400,000 employees working in more than 90 countries around the world. For more information visit www.compass-group.com. NOTES A selection of recent contract gains and renewals is set out below. Contract Business & Industry â€¢ Switzerland - World Health Organisation (OMS) awarded Eurest Switzerland a new three year contract with annual turnover of Â£2.5 million. â€¢ Switzerland - Zurich-Kloten Airport renewed its contract with Compass Group (Suisse) SA for a further seven years with annual turnover of Â£6.3 million. Healthcare â€¢ UK - Nottinghamshire Hospitals PFI renewed and extended its contract with Medirest for a further six and a half years with an annual turnover of Â£8.3 million. â€¢ USA - Desert Regional Medical Center (CA) awarded Morrison Management Specialists a new five-year contract with annual turnover of Â£3.0 million. â€¢ USA - University of Kentucky Hospital (KY) awarded Morrison Management Specialists a new three-year contract with annual turnover of Â£2.9 million. Education â€¢ USA - Thunderbird The Garvin School of International Management (AZ) awarded Compass Group The Americas in conjunction with Chartwells, FLIK and Canteen a new three-year contract with annual turnover of Â£3.6 million. â€¢ USA - Rochester City Schools (NY) awarded Chartwells a new one-year contract with annual turnover of Â£3.5 million. Sports & Leisure â€¢ UK - Imperial War Museum North awarded Milburns a new five-year contract with annual turnover of Â£0.6 million. â€¢ USA - The Bradley Center awarded Levy Restaurants a new seven-year contract with annual turnover of Â£5.4 million. Travel Concessions â€¢ USA - Long Beach Airport (CA) awarded Creative Host Services a new ten-year contract with annual turnover of Â£ 3.5 million. â€¢ Jamaica - Montego Bay Airport awarded Creative Host Services a new ten-year contract with annual turnover of Â£2.9 million. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 30 September 2005 Before goodwill Goodwill amortisation amortisation and and goodwill exceptional exceptional Total amortisation Goodwill Total items items 2005 Before amortisation 2004 Notes Â£m Â£m Â£m Â£m Â£m Â£m ------- ------- ------ ------- ------- ------ Turnover 1 Continuing operations 12,636 - 12,636 11,772 - 11,772 Acquisitions 68 - 68 - - - ------- ------- ------ ------- ------- ------ Total turnover 12,704 - 12,704 11,772 - 11,772 Operating costs (11,995) (409) (12,404) (11,001) (275) (11,276) ------- ------- ------ ------- ------- ------ Operating profit Continuing operations 708 (409) 299 771 (275) 496 Acquisitions 1 - 1 - - - ------- ------- ------ ------- ------- ------ 709 (409) 300 771 (275) 496 Share of profits of associated undertakings Continuing operations 1 2 - 2 2 - 2 Discontinued operations 1 - - - 2 - 2 ------- ------- ------ ------- ------- ------ Total operating profit: Group and share of associated undertakings 1 711 (409) 302 775 (275) 500 ------- ------- ------ ------- ------- ------ Loss on disposal of businesses 2 - (1) (1) - - - ------- ------- ------ ------- ------- ------ Interest receivable and similar income 4 - 4 5 - 5 Interest payable and similar charges 3 (134) - (134) (135) - (135) ------- ------- ------ ------- ------- ------ Net interest (130) - (130) (130) - (130) ------- ------- ------ ------- ------- ------ Profit on ordinary activities before taxation 581 (410) 171 645 (275) 370 Tax on profit on ordinary activities 4 (134) - (134) (152) - (152) ------- ------- ------ ------- ------- ------ Profit on ordinary activities after taxation 447 (410) 37 493 (275) 218 Equity minority interests (36) - (36) (38) - (38) ------- ------- ------ ------- ------- ------ Profit for the financial year 411 (410) 1 455 (275) 180 Equity dividends 5 (211) - (211) (200) - (200) ------- ------- ------ ------- ------- ------ Amount transferred to/(from) reserves 14 200 (410) (210) 255 (275) (20) ======= ======= ====== ======= ======= ====== Basic earnings per ordinary share 6 0.0p 8.3p ====== ====== Basic earnings per ordinary share - excluding goodwill amortisation and exceptional items 6 19.1p 21.1p ======= ======= Diluted earnings per ordinary share 6 0.0p 8.3p ====== ====== Diluted earnings per ordinary share - excluding goodwill amortisation and exceptional items 6 19.0p 21.0p ======= ======= CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 30 September 2005 2005 2004 Â£m Â£m Profit for the financial year 1 180 Currency translation differences 9 1 Tax in profit and loss reserve relating to currency 2 (18) translation -------- -------- Total gains and losses recognised in the year 12 163 ======== ======== RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS For the year ended 30 September 2005 2005 2004 Â£m Â£m Profit for the financial year 1 180 Dividends (211) (200) -------- -------- (210) (20) Currency translation differences 9 1 Tax in profit and loss reserve relating to currency translation 2 (18) Issue of shares 1 10 Repurchase of shares - (69) Purchase of own shares - (1) -------- -------- Net reduction in shareholders' funds (198) (97) Opening shareholders' funds 2,482 2,579 -------- -------- Closing shareholders' funds 2,284 2,482 ======== ======== CONSOLIDATED BALANCE SHEET As at 30 September 2005 Notes 2005 2004 Â£m Â£m Fixed assets Intangible assets 7 3,969 4,223 Tangible assets 8 1,777 1,805 Investments 9 51 30 -------- -------- 5,797 6,058 -------- -------- Current assets Stocks 263 279 Debtors: amounts falling due within one year 10 1,692 1,568 amounts falling due after more than one year 10 276 287 Cash at bank and in hand 318 266 -------- -------- 2,549 2,400 Creditors: amounts falling due within one year 11 (3,000) (2,872) -------- -------- Net current liabilities (451) (472) -------- -------- Total assets less current liabilities 5,346 5,586 Creditors: amounts falling due after more than one year 12 (2,591) (2,665) Provisions for liabilities and charges 13 (398) (385) Equity minority interests (73) (54) -------- -------- Net assets 2,284 2,482 ======== ======== Capital and reserves Called up share capital 216 216 Share premium account 14 94 93 Capital redemption reserve 14 9 9 Merger reserve 14 4,170 4,170 Profit and loss reserve 14 (2,204) (2,005) Less: own shares (1) (1) -------- -------- Total equity shareholders' funds 2,284 2,482 ======== ======== CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2005 2005 2004 ----------------------------------- Â£m Â£m Â£m Â£m Net cash inflow from operating activities 931 735 (note I) Dividends from associated undertakings 4 4 Returns on investments and servicing of finance Interest received 4 5 Interest paid (161) (134) Proceeds from termination of interest rate - 104 swaps Interest element of finance lease rental (2) (2) payments Dividends paid to minority interests (29) (30) ------- ------- Net cash outflow from returns on investments and (188) (57) servicing of finance Taxation Tax received 23 5 Tax paid (131) (112) ------- ------- Net tax paid (108) (107) Capital expenditure and financial investment Purchase of tangible fixed assets (339) (365) Sale of tangible fixed assets 48 36 ------- ------- Total capital expenditure and financial (291) (329) investment ------- ------- Free cash flow 348 246 ------- ------- Acquisitions and disposals (note IV) Purchase of subsidiary companies and investments in (124) (167) associated undertakings Net proceeds from businesses held for resale - 19 Sale of minority interest - 3 Sale of subsidiary companies and associated undertakings 75 64 ------- ------- Total acquisitions and disposals (49) (81) Equity dividends paid (205) (249) ------- ------- (254) (330) ------- ------- Net cash inflow/(outflow) before management of liquid resources and financing 94 (84) Financing Issue of ordinary share capital 1 10 Repurchase of share capital - (91) Purchase of own shares, net - (1) Debt due within one year: Decrease in bank loans and loan notes (61) (26) Debt due after one year: Increase in bank loans and loan notes 11 270 Capital element of finance lease rentals (16) (21) ------- ------- Net cash (outflow)/inflow from financing (65) 141 ------- ------- Increase in cash in the year 29 57 ======= ======= Reconciliation of net cash flow to movement in net debt (note II) Increase in cash in the year 29 57 Cash outflow/(inflow) from change in debt and lease 66 (223) finance ------- ------- Change in net debt resulting from cash flows 95 (166) Loans acquired with subsidiaries and changes in (12) (19) finance leases Effect of foreign exchange rate changes (26) 120 ------- ------- Movement in net debt in the year 57 (65) Opening net debt (2,373) (2,308) ------- ------- Closing net debt (2,316) (2,373) ======= ======= NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2005 I Reconciliation of operating profit to net cash inflow from operating activities: 2005 2004 Â£m Â£m Operating profit before goodwill amortisation and exceptional items 711 775 Depreciation excluding exceptional items 293 258 -------- -------- EBITDA 1,004 1,033 Profit on disposal of fixed assets (9) (8) Profit on disposal of businesses - (10) Share of profits of associated undertakings (2) (4) Expenditure in respect of provisions for liabilities and charges (40) (73) Amounts charged in respect of provisions 29 28 Increase in stocks (4) (57) Increase in debtors (119) (110) Increase/(decrease) in creditors 72 (64) -------- -------- Net cash inflow from operating activities before exceptional items 931 735 ======== ======== II Analysis of net debt: Acquisitions (excluding Other 1 October Exchange cash and non-cash 30 September 2004 Cash flow movements overdrafts) changes 2005 Â£m Â£m Â£m Â£m Â£m Â£m Cash at bank and 266 48 4 - - 318 in hand Overdrafts (14) (19) - - - (33) ------ ------ -------- -------- ------ -------- 252 29 4 - - 285 ------ ------ -------- -------- ------ -------- Debt due within (85) 61 - - (77) (101) one year Debt due after (2,486) (11) (29) - 77 (2,449) one year Finance (54) 16 (1) - (12) (51) leases ------ ------ -------- -------- ------ -------- (2,625) 66 (30) - (12) (2,601) ------ ------ -------- -------- ------ -------- Total (2,373) 95 (26) - (12) (2,316) ====== ====== ======== ======== ====== ======== NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) For the year ended 30 September 2005 III Purchase and disposal of subsidiary companies and investments in associated undertakings: 2005 2005 2004 2004 Â£m Â£m Â£m Â£m Purchases Disposals Purchases Disposals Net assets acquired/(disposed of): Tangible fixed assets - (57) 28 (1) Investments 3 - 7 (47) Stocks - (3) 4 (1) Debtors 8 (8) 25 (1) Cash 2 - 21 - Loans - - (7) - Leases - - (3) - Creditors (10) 10 (56) 1 Provisions (3) - (5) - Tax - (2) 6 - Minority interests (6) - 6 - -------- ------- ------- ------- (6) (60) 26 (49) Loss on disposal - 1 - 2 Goodwill acquired/(disposed of) 115 (31) 162 (17) -------- ------- ------- ------- 109 (90) 188 (64) ======== ======= ======= ======= Satisfied by: Cash consideration payable/(receivable) 105 (75) 169 (64) Investment in associated undertaking - (15) - - Deferred consideration payable 4 - 19 - -------- ------- ------- ------- 109 (90) 188 (64) ======== ======= ======= ======= IV Analysis of net flow of cash in respect of the purchase and disposal of subsidiary companies and investments in associated undertakings: 2005 2005 2004 2004 Â£m Â£m Â£m Â£m Purchases Disposals Purchases Disposals Cash consideration paid/(received net of liabilities settled) 105 (75) 169 (64) Cash acquired (2) - (21) - -------- ------- ------- ------- 103 (75) 148 (64) Deferred consideration and costs relating to previous acquisitions 21 - 19 - -------- ------- ------- ------- 124 (75) 167 (64) ======== ======= ======= ======= The cash effect of the disposals consists of Â£48 million net cash consideration on the disposal of 75% of Au Bon Pain in North America, Â£30 million net cash consideration on the disposal of the Gatwick Meridien hotel in the UK and Â£3 million of costs relating to previous disposals. NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2005 1. Turnover and operating profit Continuing operations Acquisitions 2005 2004 Â£m Â£m Â£m Â£m Turnover Foodservice: Geographical analysis: - North America 3,885 52 3,937 3,531 - United Kingdom 3,292 - 3,292 3,092 - Continental Europe and Rest of the World 5,459 16 5,475 5,149 ------- ------- ------ ------ 12,636 68 12,704 11,772 Total operating profit: Group and share of associated undertakings Before goodwill amortisation and exceptional items Foodservice: - The Company and its subsidiary undertakings Continuing 708 1 709 771 - Associated undertakings Continuing 2 - 2 2 Discontinued - - - 2 ------- ------- ------ ------ 710 1 711 775 ======= ======= ====== ====== Geographical analysis: - North America The Company and its subsidiary undertakings 206 1 207 190 - United Kingdom The Company and its subsidiary undertakings 205 - 205 294 Associated undertakings 1 - 1 1 - Continental Europe and Rest of the World The Company and its subsidiary undertakings 297 - 297 287 Associated undertakings Continuing 1 - 1 1 Discontinued - - - 2 ------- ------- ------ ------ 710 1 711 775 ------- ------- ------ ------ Amortisation of goodwill - continuing operations - North America (49) - (49) (48) - United Kingdom (157) - (157) (156) - Continental Europe and Rest of the World (63) - (63) (71) ------- ------- ------ ------ (269) - (269) (275) ------- ------- ------ ------ Exceptional items - continuing operations - Continental Europe and Rest of the world (140) - (140) - Total goodwill amortisation and exceptional items (409) - (409) (275) ------- ------- ------ ------ Total operating profit: Group and share of associated undertakings 301 1 302 500 ======= ======= ====== ====== Total operating profit after goodwill amortisation for the year ended 30 September 2005 relates to foodservice analysed as North America Â£158 million, UK Â£49 million and Continental Europe and Rest of the World Â£95 million (2004: Â£142 million, Â£139 million and Â£219 million respectively). Certain minor reclassifications have been made to the previously reported geographical analysis of operations to align with the Group's current management structures. NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 2. Exceptional items 2005 2004 Â£m Â£m Charged within operating profit: Exceptional operating items - continuing operations Middle East military catering operations 45 - Impairment of goodwill - Italy 95 - ------- ------ 140 - ======= ====== Charged after operating profit: Exceptional loss - disposal of businesses 1 - ======= ======= The Group is reducing the scale of its military catering operations in the Middle East. Related asset write-downs and provisions have resulted in an exceptional charge of Â£45 million. In addition, the goodwill arising on the acquisition of Onama in Italy was impaired following a review of the profitability of the underlying business. The Group also disposed of 75% of Au Bon Pain in North America and the Gatwick Meridien hotel in the UK and paid further costs relating to previous disposals resulting in a net loss of Â£1m. 3. Interest payable and similar charges 2005 2004 Â£m Â£m Bank loans and overdrafts 23 34 Other loans 109 99 Finance lease interest 2 2 -------- -------- 134 135 ======== ======== 4. Tax on profit on ordinary activities 2005 2004 Â£m Â£m UK corporation tax at 30% (2004: 30%) 51 49 Overseas tax 109 105 UK tax on share of profits of associated undertakings 1 1 Overseas tax on share of profits of associated undertakings 1 2 -------- -------- Current tax charge on profit before goodwill amortisation and exceptional items 162 157 UK deferred tax 8 18 Impact of discounting UK deferred tax (1) (1) Overseas deferred tax 27 17 Impact of discounting overseas deferred tax (12) (12) -------- -------- 184 179 -------- -------- Adjustments in respect of prior years: UK corporation tax (8) 10 Overseas tax (51) (32) UK deferred tax 4 (2) Overseas deferred tax 5 (3) -------- -------- (50) (27) -------- -------- Total tax charge before exceptional items 134 152 -------- -------- Exceptional items: UK corporation tax (2) - UK deferred tax 5 - Impact of discounting UK deferred tax (2) - Overseas tax 3 - Overseas deferred tax (4) - -------- -------- Total exceptional tax - - -------- -------- Tax on profit on ordinary activities after exceptional items 134 152 ======== ======== NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 4. Tax on profit on ordinary activities (continued) The main factors affecting the future tax charge are addressed in the section headed Taxation on page 11. 2005 2004 % % Reconciliation of the UK statutory tax rate to the effective current tax rate Tax charge on profit on ordinary activities before goodwill amortisation and exceptional items at the UK statutory rate of 30 30 30% Increase/(decrease) resulting from: Permanent items 2 1 Amortisation of tax deductible goodwill (2) (2) Overseas taxes at higher rates 3 2 Losses bought forward (2) (5) Capital allowances for the period in excess of depreciation - (1) charged Tax credits (1) - Other timing differences (2) (1) -------- -------- Current tax rate on profit before goodwill amortisation and exceptional items 28 24 Non-deductible goodwill amortisation and exceptional items 67 18 -------- -------- Current tax rate on profit before taxation 95 42 ======== ======== 5. Dividends Per 2005 Per 2004 share Â£m share Â£m Dividends on ordinary shares of 10p each: Interim 3.3p 71 3.1p 66 Proposed final 6.5p 140 6.2p 134 -------- -------- -------- -------- 9.8p 211 9.3p 200 ======== ======== ======== ======== NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 6. Earnings per share Average Average Attributable number Earnings Attributable number of Earnings profit of shares per share profit shares per share 2005 2005 2005 2004 2004 2004 Â£m Millions Pence Â£m Millions Pence ------------------- -------- ------ ------- -------- ------ ------ Basic earnings per share 1 2,156 0.0 180 2,158 8.3 Effect of dilutive share options - 2 0.0 - 7 0.0 ------------------- -------- ------ ------- -------- ------ ------ Diluted earnings per share 1 2,158 0.0 180 2,165 8.3 ------------------- -------- ------ ------- -------- ------ ------ Reconciliation of earnings per share to exclude goodwill amortisation and exceptional items Basic earnings per share 1 2,156 0.0 180 2,158 8.3 Effect of goodwill amortisation (net of tax) 269 - 12.6 275 - 12.8 Effect of goodwill impairment (net of tax) 95 - 4.4 - - - Effect of exceptional items (net of tax) 46 - 2.1 - - - ------------------- -------- ------ ------- -------- ------ ------ Basic earnings per share excluding goodwill amortisation and exceptional items 411 2,156 19.1 455 2,158 21.1 ------------------- -------- ------ ------- -------- ------ ------ Diluted earnings per share 1 2,158 0.0 180 2,165 8.3 Effect of goodwill amortisation (net of tax) 269 - 12.5 275 - 12.7 Effect of goodwill impairment (net of tax) 95 - 4.4 - - - Effect of exceptional items (net of tax) 46 - 2.1 - - - ------------------- -------- ------ ------- -------- ------ ------ Diluted earnings per share excluding goodwill amortisation and exceptional items 411 2,158 19.0 455 2,165 21.0 ------------------- -------- ------ ------- -------- ------ ------ Earnings per share excluding goodwill amortisation and exceptional items has been shown to disclose the impact of these on underlying earnings. 7. Intangible fixed assets Goodwill Â£m Cost At 1 October 2004 5,244 Additions arising from acquisitions 115 Disposal (43) Currency adjustment 35 -------- At 30 September 2005 5,351 -------- Amortisation At 1 October 2004 1,021 Charge for the year 269 Impairment 95 Disposal (12) Currency adjustment 9 -------- At 30 September 2005 1,382 -------- Net book amount At 30 September 2005 3,969 ======== At 30 September 2004 4,223 ======== Additions to goodwill arising from acquisitions relates to the acquisitions shown in note 15. Goodwill on acquisitions is being amortised over periods of up to 20 years which are considered to be the estimated useful lives. NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 8. Tangible fixed assets Freehold Long Short Plant Fixtures land and leasehold leasehold and and buildings property property machinery fittings Total Â£m Â£m Â£m Â£m Â£m Â£m Cost At 1 October 2004 493 61 391 1,447 770 3,162 Currency adjustment - - 5 18 8 31 Additions 14 1 21 203 112 351 Disposals (9) (3) (7) (154) (46) (219) Business disposals - - (25) (53) (6) (84) Transfer between categories - 1 5 (18) 12 - ------------------- ------- ------- ------- ------- ------- ------- At 30 September 2005 498 60 390 1,443 850 3,241 ------------------- ------- ------- ------- ------- ------- ------- Depreciation At 1 October 2004 95 7 69 796 390 1,357 Currency adjustment - - 2 10 4 16 Charge for the year 11 2 14 177 89 293 Exceptional - - - 5 - 5 Disposals - - (1) (133) (46) (180) Business disposals - - (3) (21) (3) (27) Transfer between categories - 1 5 (6) - - ------------------- ------- ------- ------- ------- ------- ------- At 30 September 2005 106 10 86 828 434 1,464 ------------------- ------- ------- ------- ------- ------- ------- Net book amount At 30 September 2005 392 50 304 615 416 1,777 ------------------- ------- ------- ------- ------- ------- ------- At 30 September 2004 398 54 322 651 380 1,805 ------------------- ------- ------- ------- ------- ------- ------- The net book amount of the Group's tangible fixed assets includes, in respect of assets held under finance leases, freehold buildings and long and short leasehold property Â£9 million (2004: Â£9 million), plant and machinery Â£37 million (2004: Â£34 million) and fixtures and fittings Â£3 million (2004: Â£3 million). 9. Investments held as fixed assets Investment in associated undertakings Â£m Cost At 1 October 2004 30 Additions 4 Investment in associated undertaking retained on disposal of subsidiary 15 Share of retained profits less losses - Dividends received (4) Currency and other adjustments 6 --------- At 30 September 2005 51 ========= Investment in associated undertakings includes Â£15 million being the remaining 25% of the Group's share of Au Bon Pain which is incorporated in the USA and is unlisted. NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 10. Debtors 2005 2004 Â£m Â£m Amounts falling due within one year Trade debtors 1,318 1,186 Amounts owed by associated undertakings 2 1 Overseas tax recoverable 9 12 Other debtors 141 153 Prepayments and accrued income 222 216 -------- -------- 1,692 1,568 ======== ======== Amounts falling due after more than one year Other debtors 199 189 Overseas tax recoverable - 3 Deferred tax 77 95 -------- -------- 276 287 ======== ======== The closing total deferred tax balance is analysed as follows: 2005 2004 Â£m Â£m Deferred tax analysis Deferred tax assets: UK capital allowances in excess of depreciation (10) (10) UK short-term timing differences 73 72 UK other timing differences (7) - Overseas tax deductible intangible assets (80) (80) Overseas tax depreciation in excess of book (18) (17) depreciation Overseas short-term timing differences 46 60 Discount on UK and overseas timing differences 73 70 -------- -------- 77 95 Deferred tax liabilities: Overseas tax depreciation in excess of book (17) - depreciation -------- -------- Net deferred tax 60 95 ======== ======== Â£m The movements on total deferred tax are as follows: At 1 October 2004 95 Arising from acquisitions (1) Arising from disposals (3) Charged to profit and loss account (30) Credited to profit and loss reserve 3 Other movements (4) -------- At 30 September 2005 60 ======== Deferred tax assets of Â£80 million (2004: Â£73 million) have not been recognised as the timing of recovery is uncertain. NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 11. Creditors - amounts falling due within one year 2005 2004 Â£m Â£m Loan notes 82 19 Bank loans 19 66 Bank overdrafts 33 14 Obligations under finance leases 15 16 Trade creditors 1,035 926 Amounts owed to associated undertakings 2 2 Corporation tax 232 211 Overseas tax 101 142 Other tax and social security costs 220 203 Other creditors 258 264 Deferred consideration 13 14 Accruals and deferred income 850 861 Proposed dividend 140 134 ------- ------- 3,000 2,872 ======= ======= 12. Creditors - amounts falling due after more than one year 2005 2004 Â£m Â£m Bonds 1,339 1,348 Loan notes 487 550 Bank loans 623 588 Obligations under finance leases 36 38 Other creditors 40 44 Deferred consideration 15 27 Accruals and deferred income 51 70 ------- -------- 2,591 2,665 ======= ======== 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 in 2000. The Group has fixed term, fixed interest private placements totalling US$991 million (Â£560 million) at interest rates between 5.11% and 7.955%. US$618 million (Â£349 million) is repayable in five to ten years. Maturity of financial liabilities and other creditors falling due after more than one year as at 30 September 2005 is as follows: NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 12. Creditors - amounts falling due after more than one year (continued) 2005 2004 ------------------------------------------- ------------------------------------------ Bonds and loan Loans and Other Total Bonds and loan Loans and Other Total notes overdrafts Â£m Â£m notes overdrafts Â£m Â£m Â£m Â£m Â£m Â£m In more than one year but not more than two years 30 29 98 157 75 5 79 159 In more than two years but not more than five years 818 589 35 1,442 627 574 82 1,283 In more than five years 978 5 9 992 1,196 9 18 1,223 ------- ------- ------- ------- ------- ------- ------ ------ 1,826 623 142 2,591 1,898 588 179 2,665 In one year or less, or on demand 82 52 28 162 19 80 30 129 ------- ------- ------- ------- ------- ------- ------ ------ 1,908 675 170 2,753 1,917 668 209 2,794 ======= ======= ======= ======= ======= ======= ====== ====== 2005 2004 Â£m Â£m Bank loans: Repayable by instalments in more than five years 5 9 Repayable by instalments within five years 24 23 Less: amounts falling due within one year (5) (5) --------- --------- Amounts repayable by instalments falling due after more than one 24 27 year ========= ========= Repayable otherwise than by instalments within five years 613 622 Less: amounts falling due within one year (14) (61) --------- --------- Amounts repayable otherwise than by instalments falling due after 599 561 more than one year ========= ========= 13. Provisions for liabilities and charges Pensions and other post Legal and employment Onerous other Deferred benefits Insurance contracts claims Environmental tax Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 October 2004 253 38 31 52 11 - 385 Arising from acquisitions 2 - - 1 - - 3 Expenditure in the year (26) (5) (6) (3) - - (40) Charged to profit and loss account 19 6 - 4 - - 29 Credited to profit and loss account (1) - (2) (1) - (1) (5) Reclassified 4 (1) - 1 - 18 22 Currency adjustment 2 - 1 1 - - 4 ------- ------ ------ ------ --------- ------ ----- At 30 September 2005 253 38 24 55 11 17 398 ======= ====== ====== ====== ========= ====== ===== Pensions and other post-employment benefits and insurance relate to the costs of self-funded pension schemes or statutory retirement benefits and self-funded insurance schemes respectively and are essentially long-term in nature. Onerous contracts represent the liabilities in respect of short and long term leases on non-utilised properties and other contracts lasting under five years. Legal and other claims relate principally to provisions for the cost of litigation and other claims. The timing of the settlement of these claims is uncertain. Environmental provisions are in respect of 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. 14. Reserves Consolidated profit and loss reserve ------------------------------------ Capital Share premium redemption Merger Before goodwill Goodwill account reserve reserve written off written off Total Â£m Â£m Â£m Â£m Â£m Â£m At 1 October 2004 93 9 4,170 127 (2,132) (2,005) 2004 Currency translation differences - - - 24 (15) 9 Tax on currency translation differences - - - 2 - 2 Premium on ordinary shares issued, net of expenses 1 - - - - - Amount transferred from reserves - - - (210) - (210) ------ ------- ------ ------- ------- ------ At 30 September 2005 94 9 4,170 (57) (2,147) (2,204) ====== ====== ====== ======= ======== ======= Currency translation differences are net of Â£26 million of exchange losses on loans which have been offset in reserves against gains of Â£35 million on retranslation of overseas net assets. Goodwill written off represents the excess of the consideration for the operations acquired prior to 1 October 1998 over the fair value of the net assets acquired. The goodwill has been written off to profit and loss reserve on consolidation. NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 15. Acquisitions 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 Fair value Accounting Fair value Goodwill and costs acquired adjustments policy of assets realignment aquired Â£m Â£m Â£m Â£m Â£m Â£m -------------- -------- ------ ------- ------- ------- ------- Further purchase of 30% of Onama 42 (15) - - (15) 57 HDS 20 (2) (1) - (3) 23 Others 43 14 (1) (3) 10 33 -------------- -------- ------ ------- ------- ------- ------- Total acquisitions in the year 105 (3) (2) (3) (8) 113 -------------- -------- ------ ------- ------- ------- ------- Adjustments to prior periods: Deferred consideration payable 4 - - - - 4 Adjustments to net assets acquired - - 2 - 2 (2) -------- ------ ------- ------- ------- ------- 4 - 2 - 2 2 -------- ------ ------- ------- ------- ------- 109 (3) - (3) (6) 115 ======== ====== ======= ======= ======= ======= Net assets Fair value Accounting Fair value to acquired adjustments policy the Group realignment Â£m Â£m Â£m Â£m Tangible fixed assets 1 (1) - - Investments 4 (1) - 3 Debtors 6 2 - 8 Cash 2 - - 2 Creditors (9) (1) - (10) Provisions (1) (2) - (3) Tax - 3 (3) - Minority interests (6) - - (6) -------- -------- -------- -------- (3) - (3) (6) ======== ======== ======== ======== All acquisitions were accounted for under the acquisition method of accounting. Fair value adjustments principally relate to asset valuation adjustments, recognising pension commitments and other liabilities not previously recorded. Adjustments made to the fair value of assets of businesses acquired in 2005 are provisional owing to the short period of ownership. Adjustments to prior year acquisitions relate to the restatement of the values of assets and liabilities in the light of knowledge arising from a more extended period of ownership and additional consideration and costs, all in respect of acquisitions made during the year ended 30 September 2004. There was no material difference between operating profits arising from acquisitions and cash flows contributed by those acquisitions. 16. Pensions The assets and liabilities of the major schemes operated by the Group and the effect that adoption of FRS 17 would have had on the Group's profit and loss reserves are shown below: UK schemes US schemes Other schemes Total schemes 30 September Long term Long term Long term Long term 2005 expected rate expected rate expected rate expected rate of return Â£m of return Â£m of return Â£m of return Â£m -------------------------------------------------------------------------------------------------- Equities 7.5% 496 8.3% 53 6.2% 44 7.5% 593 Bonds 4.5% 310 5.0% 17 3.4% 65 4.3% 392 Other 4.0% 18 3.9% 1 3.0% 48 3.3% 67 assets -------- ------ -------- ------ -------- ----- -------- ------ Market 824 71 157 1,052 value Liabilities (1,179) (166) (239) (1,584) ------ ------ ------ ----- Deficit (355) (95) (82) (532) Deferred tax asset 107 33 29 169 ------ ------ ----- ------ Net FRS 17 liability (248) (62) (53) (363) ====== ====== ===== ====== Net FRS 17 liability (363) Reverse existing provisions/ass ets net of deferred tax 175 Reverse existing SSAP 24 prepayment for Group pension schemes (34) ------ Net adjustment which would result from the adoption of FRS 17 (222) Profit and loss reserve as reported (2,204) ------ Profit and loss reserve on a FRS 17 basis (2,426) ====== The FRS 17 deficit has increased during the year ended 30 September 2005 as set out below: Â£m As at 1 October 2004 (426) Current service costs (37) Contributions paid 73 Other financial costs (15) Actuarial losses (124) Exchange rate losses (3) ------ As at 30 September 2005 (532) ====== NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2005 17. Contingent Liabilities On 21 October, the Group announced that it had instructed Freshfields to conduct an investigation into the relationships between ESS, IHC and the United Nations. Ernst & Young are assisting Freshfields in the investigation, reporting to the Chairman of the Compass Group PLC Audit Committee. On 3 November, the Group announced that the investigation raised serious concerns as to whether, within ESS, there has been in connection with IHC and the UK, improper conduct and a failure to comply with the Group's statement of business principles (which apply to all staff, whatever their seniority). As a result, three employees have been dismissed. The investigation is ongoing and, as yet, no final conclusions have been reached. The Group will continue to co-operate voluntarily and fully as appropriate with the UN and US authorities, including the Office of the United States Attorney for the Southern District of New York. UN contracts account for less than 0.5% of the Group's turnover and profits. No provision has been made in these 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. 18. Exchange rates Exchange rates for major currencies used during the period were: 2005 2004 2005 2004 Average Average Closing Closing Rate Rate Rate Rate Australian Dollar 2.42 2.47 2.32 2.50 Canadian Dollar 2.26 2.37 2.05 2.29 Danish Krone 10.83 10.94 10.95 10.84 Euro 1.46 1.47 1.47 1.46 Japanese Yen 198.34 194.98 200.51 199.44 Norwegian Krone 11.76 12.32 11.54 12.18 Swedish Krona 13.35 13.43 13.67 13.17 Swiss Franc 2.25 2.28 2.28 2.26 US Dollar 1.85 1.79 1.77 1.81 This information is provided by RNS The company news service from the London Stock Exchange

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