TIDMHRG
RNS Number : 0359G
Hogg Robinson Group PLC
24 May 2017
24 May 2017
Hogg Robinson Group plc
('the Company' or 'the Group')
Preliminary Results for the year ended 31 March 2017
Strategic progress driving earnings growth
Summary of results
Years ended 31 March
Change
Change (constant
(actual exchange
exchange rates)
2017 2016 rates) (1)
Revenue GBP335.1m GBP318.3m +5% (4%)
Reported earnings
- Operating profit GBP45.5m GBP39.3m +16% +7%
- Operating profit margin 13.6% 12.3% +1.3pp
- Profit before tax GBP33.1m GBP26.7m +24% +12%
- Earnings per share 6.9p 5.8p +19%
Underlying earnings (2)
- Operating profit GBP49.4m GBP44.8m +10% +2%
- Operating profit margin 14.7% 14.1% +0.6pp
- Profit before tax GBP37.0m GBP32.2m +15% +4%
- Earnings per share 7.8p 7.2p +8%
Dividend per share 2.64p 2.51p +5%
Free cash inflow (3) GBP18.6m GBP28.9m (GBP10.3m)
Net debt (4) (GBP21.0m) (GBP33.6m) +GBP12.6m
Online adoption (5) 51% 50% +1pp
David Radcliffe, Chief Executive of Hogg Robinson Group plc,
said:
"This has been a successful year for Hogg Robinson Group. We
re-focused our growth strategy while also delivering a good
financial and operating performance in line with our expectations.
We are now seeing real gains in terms of improved efficiency, lower
operating costs and an enhanced service to our clients and end
customers. Against a backdrop of continuing macroeconomic and
geopolitical uncertainty, combined with previously flagged strong
competitor pricing activity, we have this year continued to expand
underlying operating profit margin and deliver earnings growth.
"As outlined at the half year, we have completed our review of
the strategy for the Group. This has reaffirmed our confidence in
the growth opportunities for HRG, our travel management business,
and Fraedom, our FinTech business. We have a clear strategy and a
defined route to accelerate and improve performance, underpinned by
our technology. We have already started and will continue to invest
in both businesses as we deliver our strategic objectives for
growth. Concurrent with our results statement and consistent with
our growth strategy, we have today announced the acquisition of
travel innovator eWings.com and we look forward to welcoming our
new colleagues to the Group."
Operational highlights
-- Re-focused our strategy with a clear pathway to generate and
accelerate growth across the Group
-- Achieved further operational efficiencies with annualised
savings of GBP17m after two years of the 3-year restructuring
programme
-- Rolled out new technology which is providing increased
efficiency and an enhanced client experience
Financial highlights
-- Encouraging earnings growth with underlying profit before tax
up 15%, up 4% at constant currency, driven by improved
profitability with underlying operating profit margin up from 14.1%
to 14.7%
-- Underlying basic EPS up 8% from 7.2p to 7.8p, with reported
basic EPS up 19% from 5.8p to 6.9p
-- HRG delivered a robust performance, with a 5% reduction in
constant currency revenues largely offset by an improvement in
operating margin with underlying operating profit broadly flat
year-on-year at constant currency
-- Fraedom performed strongly with revenue up 29% and underlying
operating profit up 39%, or up 13% and 22% respectively at constant
currency
-- Net debt further reduced to GBP21.0m, representing 0.3x
EBITDA, creating a platform to support strategic intent with
ongoing cash generation available to invest in the business
-- The Group's pension deficit increased by GBP6.9m to
GBP265.2m. An increase of GBP96.7m in liabilities resulting from a
decrease in the discount rate from 3.5% to 2.7% in the period was
largely offset as a result of a collaborative exercise with the
Trustees which refined the underlying demographic assumptions for
the members of the UK Defined Benefit Pension Scheme ('the UK
Scheme') and contributed to a reduction in the UK Scheme's
liabilities of GBP68.4m
-- Final dividend up 5% to 1.925p per share; full-year dividend
up 5% to 2.64p with underlying dividend cover of 3.0 times (2016:
2.9 times)
Key messages going forward
-- We have undertaken a comprehensive review of our business and
today announce our strategic plans which we are confident will see
significant growth in both HRG and Fraedom
-- Both businesses will receive targeted incremental investment
over the next three financial years as we invest a total of circa
GBP25m (excluding depreciation and amortisation) in operating
expenditure and circa GBP13m in additional capital expenditure
-- The Board believes the benefits will be significant,
resulting in a 3-year Group revenue CAGR of more than 4% with
underlying operating profit margin targeted to exceed 16% in the
medium term
-- FY18 will be a year of transition as we make our initial
incremental investments. Excluding these investments, we anticipate
FY18 would show modest growth in Group revenue and earnings
year-on-year
Current trading and outlook
-- Hogg Robinson Group has performed in line with management's
expectations since the year-end
-- The Board is excited about the re-focused strategy and is
confident in the investments that the Company is making and that
Hogg Robinson Group will make further good progress through the
rest of the year in line with its strategic plan and growth
targets
Notes:
(1) Local currency results for March 2017 have been translated
at March 2016 exchange rates.
(2) Before amortisation of acquired intangibles and exceptional
items.
(3) Free cash flow is the change in net debt before acquisitions
and disposals, Employee Benefit Trust purchases, dividends and the
impact of foreign exchange movements.
(4) A calculation of net debt is shown in Note 17 of the
Financial Statements.
(5) Online adoption is the proportion of total transactions
booked by clients via proprietary or third-party online booking
tools.
(6) Our financial statements disclose financial measures which
are required under IFRS. We also report additional financial
measures that we believe enhance the relevance and usefulness of
the financial statements. These are important for understanding
underlying business performance.
For further information contact:
Hogg Robinson Group +44 (0)1256 312 600
David Radcliffe, Chief
Executive
Michele Maher, Chief
Financial Officer
Angus Prentice, Head
of Investor Relations
FTI Consulting +44 (0)20 3727 1340
John Waples
Alex Le May
Notes to Editors
Hogg Robinson Group plc is a leading global B2B services company
specialising in travel, payments and expense management. We help
companies, governments and financial institutions manage and
control their expenditure. We combine high-quality service
delivered by experienced staff with the very latest digital
solutions based on our own technology. Our aim is to provide
superior service and technology solutions that add real value to
our clients and meet their unique requirements. Established in
1845, Hogg Robinson Group today consists of two market-leading and
dynamic divisions - Fraedom, our FinTech business and HRG, our
global travel management business. Our brands are seen across 120
countries where we provide innovative technology and superior
services that add real value to our clients.
www.hoggrobinson.com
A presentation for analysts and institutional investors will be
held at 0900h BST today at FTI Consulting, 200 Aldersgate,
Aldersgate Street, London EC1A 4HD. A conference call facility and
live webcast will also be available for analysts and institutional
investors unable to attend in person. Pre-registration for this
event is necessary to comply with security procedures at the venue.
To register your interest in attending the presentation, to obtain
conference call details and access to the live webcast, please
contact FTI Consulting on +44 (0)20 3727 1340.
A replay recording of the presentation via audio webcast and
podcast with audio commentary from the Company's presentation team
will be available at www.hoggrobinson.com by 1100h BST today or
soon thereafter.
This announcement may contain forward-looking statements with
respect to certain of the plans and current goals and expectations
relating to the future financial conditions, business performance
and results of Hogg Robinson Group plc. By their nature, all
forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances that are beyond the
control of the Company, including amongst other things, the
Company's future profitability, competition within the markets in
which the Company operates and its ability to retain existing
clients and win new clients, changes in economic conditions
generally or in the travel and airline sectors, terrorist and
geopolitical events, legislative and regulatory changes, the
ability of its owned and licensed technology to continue to service
developing demands, changes in taxation regimes, exchange rate
fluctuations, and volatility in the Company's share price. As a
result, the Company's actual future financial condition, business
performance and results may differ materially from the plans, goals
and expectations expressed or implied in these forward-looking
statements. The Company undertakes no obligation to publicly
update or revise forward-looking statements, except as may be
required by applicable law and regulation (including the Listing
Rules). No statement in this announcement is intended to be a
profit forecast or be relied upon as a guide to future
performance.
Chairman's Statement
I am delighted to report to you during a momentous period for
Hogg Robinson Group, one which has seen the appointment of new
Board members, including myself, continuing operational progress,
as well as a step-change in the Company's strategy as we aim to
generate and accelerate our growth. We are seeing substantial
changes taking place in our markets. Client and end-customer needs
are shifting rapidly towards better quality information for
decision making, speed of delivery, increased flexibility and ease
of use. Hogg Robinson Group has a deserved reputation for the
quality of its service and is viewed as an industry innovator. The
past year has been one of substantial change within the Group, and
I am both encouraged and excited by the new and significant
opportunities we have identified, and the progress being
achieved.
Hogg Robinson Group delivered a good financial performance
during the past year in line with market expectations. Helped by
favourable exchange rates, the Company saw revenue grow by 5% and
operating profit by 16% on a reported basis, whilst underlying
earnings and operating margin increased at constant currency.
Strong free cash generation resulted in a 38% reduction in net debt
to GBP21m at the financial year-end. This was underpinned by a
strong operational performance and significant strategic progress.
A more comprehensive analysis of business performance is provided
by David Radcliffe, Chief Executive, in his statement later in this
report.
It would be wrong of me not to mention that we continue to
operate in very challenging times. The macroeconomic and
geopolitical backdrop is uncertain and variable. Global confidence
has been shaken and trading conditions in our markets are typically
fragile. Given this, clients are understandably asking more of us.
Core to Hogg Robinson Group's business model as a B2B services
company is the delivery of superior, innovative services that solve
clients' commercial needs and deliver outstanding end-customer
experience. We achieve this by combining high-quality service
delivered by experienced staff with cutting-edge digital solutions
based on our technology. The Company's track record of consistent
year-on-year earnings growth is testament to the robustness of the
business model and its focus on delivering real value to our
clients.
In recent years, the Company has focused on restructuring the
business, driving efficiency and reducing net debt. Two years into
the 3-year restructuring programme, annualised savings of GBP17m
have been achieved. Year-end net debt has now reduced by more than
75% since 2013. These are very significant achievements,
positioning the business favourably and providing the platform for
growth. During the past year, an in-depth review of both HRG, our
travel management business, and Fraedom, our FinTech business, was
undertaken. The results are very encouraging and confirmed our
belief that market opportunities exist to grow both businesses
significantly. Our strategy to achieve this is clear and details on
the strategic initiatives to grow HRG and accelerate the growth of
Fraedom are provided later in this report.
Achieving this growth will require investment and in parallel
with the Company's strategy review, the Board also considered the
appropriate capital structure for the business during the next
phase of its development. The Board places great emphasis on
maintaining the flexibility to deliver on its strategy and
undertake the investment needed to achieve these growth plans.
Accordingly, the Board has determined to target year-end net debt /
EBITDA of less than 1.0 times, whilst being prepared to see
leverage rise to 2.0 times in the context of acquisition
opportunities to deliver growth. In addition, the Board will look
to continue to grow dividends. Based on the performance of the
Company during the year and our confidence in the strategy, we
propose an increase in the total dividend of 5% for the year ended
31 March 2017.
Ensuring that the Company demonstrates and adheres to the
principles of good corporate governance is one of my main
responsibilities as Chairman. This is certainly a theme on which
the Board devotes a considerable amount of time and energy. Proper
delivery of corporate governance starts at Board level and, in my
opinion, having breadth of experience amongst the Board's members
is fundamental to successful execution. To that end, we welcomed
two new members to the Board during the financial year. John
Krumins joined as a Non-Executive Director on 1 April 2016 and
Ashley Hubka was appointed Non-Executive Director with effect from
1 August 2016, both of whom bring extensive and valuable
experience. John and Ashley are both members of the Company's
Audit, Remuneration and Nominations Committees.
Hogg Robinson Group attaches the highest importance to corporate
governance matters, and continues to comply with the provisions and
apply the principles of the UK Corporate Governance Code. The Board
last conducted a formal review of its effectiveness during the
financial year ending 31 March 2014. A further review of its
operational effectiveness was deferred pending the change of
Chairmanship and additional Non-Executive appointments to the Board
which were completed in August 2016. With these changes now
complete, the Board will conclude a formal review of its
effectiveness and I look forward to reporting on that in due
course.
Finally, I would like to extend my thanks on behalf of the Board
to the senior management and staff who have contributed to the
Company's performance this year. We are at an exciting stage in the
growth and development of the business and I look forward to the
many positive challenges that lie ahead as we continue to deliver
value for clients, employees and shareholders.
Nigel Northridge
Chairman
Chief Executive's Statement
Overview
This was an exciting year for Hogg Robinson Group. Listening to
our clients and end customers, it's clear that the changes we have
been making in recent years to the delivery of our service and
deployment of our technology are providing real benefits. We have a
proud reputation as a market leader and have worked hard during the
past year to develop a strategy to deliver medium and long-term
growth. Our culture is one of innovation: we seek to disrupt the
norm. Our success continues to be driven by our ability to both
drive and respond to change. Given the rapid transformations taking
place in our markets and the opportunities that we see, we have
moved from a phase where we focused on managing margins to deliver
growth in profits to one where we believe we can generate and
accelerate both revenue and earnings growth over the coming years.
I provide more detail on this later in my report.
I am delighted with the foundations we have built during the
past year. We are now two thirds of the way through our three-year
restructuring programme and we have already achieved GBP17m of the
targeted GBP20m of annualised savings, with cumulative net
underlying exceptional costs of GBP7.5m. These savings have been
made as a result of numerous initiatives centred on a review of our
operational and overhead cost base, consolidating our service
delivery through hub locations as we reduce our property footprint,
as well as deploying technology to improve efficiency. The
estimated total cost over the three-year programme is approximately
GBP11m. As part of those foundations, this year we commenced a
major transformation programme aimed at modernising our core mid
and back-office systems and processes, while harmonising our
technology platforms across our European operations. When complete,
we anticipate significant benefits in terms of speed of processing,
quality of data and information delivered and, importantly, further
cost reduction.
I am also very pleased to report on a year of good financial
performance for the Group, in line with our expectations. The
financial year ended 31 March 2017 was challenging. The
macroeconomic and geopolitical conditions continued to have a
de-stabilising effect on many of the markets in which the Group
operates. However, under such conditions we found many
opportunities to work alongside our clients to offer real value
through innovative service solutions often delivered in conjunction
with our technology. Once again, the Group's business model proved
resilient, and we delivered earnings growth and margin gain
compared to prior year. These achievements were made despite the
predicted and continuing downward pressure on revenue caused by
ongoing aggressive competitor pricing, lost clients and the further
migration of our clients to online booking.
Strategy update
Hogg Robinson Group is a leading global B2B services company
specialising in travel, payments and expense management. We help
companies, governments and financial institutions manage and
control their expenditure. We combine high-quality service
delivered by experienced staff with the very latest digital
solutions based on our own technology. Our aim is to provide
superior service and technology solutions that add real value to
our clients and meet their unique requirements. During the past
three years, our strategy included two core elements: to grow our
managed travel business by increasing our business from existing
clients with new service offerings, entering new markets and
winning new business by leveraging our technology and service
delivery; and to develop a SaaS business focused on providing
travel, expense and payment solutions to existing and new clients,
either direct or through third party travel and payment
providers.
This strategy has proved to be the right one and, combined with
our proven business model, has enabled us to grow earnings
notwithstanding the challenging market conditions that have
prevailed through this period. However, our markets are continually
changing. Client needs have moved on with greater emphasis now on
added value, and improved data and information to aid
decision-making. Better service is required for the
traveller/end-customer in the digital space and the use of mobile
technology is increasingly important. With changes we see
opportunities and we are determined to take advantage of these
developments. Our aim is to innovate and disrupt, to lead in our
chosen markets, and to ensure that we benefit from the changes
taking place.
Our response to the changing market in recent years has been
focused on evolving the operational model and creating a more agile
business, driving greater efficiency and reducing net debt. We have
been very successful in this, continuing to deliver underlying
earnings growth through improved profitability and reducing net
debt by more than 75%. Our goal has been to consolidate our
operating platform in order to create efficiency and drive the
opportunity for future growth. We have worked hard to reduce our
operating costs, and our three-year restructuring programme,
combined with our technology, has been at the core of this
initiative and our consistent record of underlying operating profit
growth. Through tight cash management and ongoing free cash
generation, we have successfully deleveraged the business and
thereby created future investment capacity. In short, we believe
our business is now in good shape and we have the platform for
growth.
As we shifted our focus from operational effectiveness to
delivering long-term growth, we undertook a detailed review of the
Group's businesses and the markets in which they operate, to ensure
we continue to deliver real value to our clients and end customers,
while identifying the opportunities available to the Group. The
results of this review are very encouraging and reaffirm our belief
that we can significantly grow the Group's revenue over the medium
and long term without diluting profitability. Furthermore, we see
this being delivered through clear opportunities to grow HRG and at
the same time accelerate the growth of Fraedom.
The travel management industry continues to grow. Recent data
published by the World Travel & Tourism Council forecasts a 38%
increase in business travel expenditure over the next ten years. As
the industry changes in response to evolving client and
end-customer needs, we believe HRG's reputation for providing
superior service to its clients based on the knowledge and
experience of its staff combined with its technology provides it
with the necessary differentiation needed to take advantage of
these changes and the growth in the industry. Our ambition is to
create a seamless end-customer experience, superior travel content
and data functionality. In addition, a lower cost to serve and our
standardised operational model will deliver exceptional service to
our clients. We are already providing new, innovative ways to add
further value in our service to clients, and taking a leading
position in the travel management industry through our work with
suppliers to develop new distribution models.
The FinTech industry has seen explosive growth in recent years
both in terms of investment and areas of specialisation. There is
now great diversity in the industry and because of this, scale is
likely to be a pre-requisite for success along with focus on a
particular discipline. Fraedom is focused on the Payments segment,
providing technology solutions designed to maximise corporate card
spend for issuers such as Visa and SunTrust. According to
independent research, amongst the global population of roughly
25,000 banks, there are approximately 500 corporate card issuers.
This is exactly the space Fraedom is targeting. Beyond the
corporate issuer opportunities, there is further opportunity for
Fraedom to partner with retail banks serving SME customers to
provide white-label services including payment, expense and travel
management. Lloyds Banking Group is an example of a Fraedom client
in this category.
With our ambition for growth, we have therefore taken the
opportunity to update and develop the Company's strategy which can
now be summarised as:
-- To grow HRG through market leadership and innovation, and to
accelerate the growth of Fraedom through partnership and market
disruption, while driving shareholder value.
To deliver on our strategy, we will employ our people and
technology to deliver superior, innovative services that solve our
clients' commercial needs and deliver outstanding end-customer
experience.
Going forward, our clear focus is on significantly growing our
two businesses. To achieve this, we have identified a number of
strategic initiatives for each business as follows:
HRG
-- Build on technology innovations that increase service
efficiency and thereby lower operating cost, while enhancing our
service capability
-- Offer better quality data and actionable insight to our
clients and improve the end-customer experience
-- Align sales force scale and capabilities with new market
opportunities
-- Grow supplier revenue and margin, working more closely with
our key supplier partners using our technology
-- Implement new operational and productivity initiatives that
drive greater efficiency and lower operational costs
Fraedom
-- Work with our chosen partners to define and build
market-leading capabilities
-- Add new partners to accelerate market penetration
-- Build scale advantage in the Payments space through
investment in sales and support resources to grow revenue, and in
technology to improve the efficiency of client on-boarding and to
create unique value for our clients
-- Invest further in Fraedom's platform to ensure a mobile-first
approach to all technology development
-- Enable a 'touchless transaction' experience for Fraedom's
expense management user base
In order to deliver these strategic initiatives, we will make a
series of incremental investments across the two businesses over
the next three years, with the phasing weighted towards years two
and three. A significant proportion of these investments will
support the recruitment of additional sales and support resources
as well as investments in the development and roll-out of our
technology. Across the 3-year period, we anticipate incremental
operating expenditure totalling circa GBP25m (excluding
depreciation and amortisation) and circa GBP13m in additional
capital expenditure. The Board believes the financial benefits of
this investment will be significant, increasing overall 3-year
Group revenue CAGR to more than 4% with the underlying operating
profit margin targeted to exceed 16% in the medium term. This
reflects:
-- In HRG, a 3-year revenue CAGR of more than 2% per annum and
medium-term underlying operating profit margin in excess of 15%;
and
-- In Fraedom, revenue CAGR of circa 20% with underlying
operating profit margin maintained above 22% over the medium
term.
FY18 will be a year of transition as we absorb the roll-over
effect of FY17 losses and the slowdown in sales as well as build
our initial incremental investments to drive our growth strategy.
Excluding these investments, if we were not following our revised
strategy, we anticipate FY18 would show modest growth in Group
revenue and earnings year-on-year, but this would have relied on
HRG being more reliant on cost savings which would have made a
subsequent strategy for significant growth more difficult to pursue
in the medium term.
Consistent with the investment profile, the Board expects the
realisation of these returns to accelerate over the three-year
strategy period as initiatives are delivered and once the initial
costs have been absorbed.
In addition to these potential organic improvements, the Board
believes that growth could be further enhanced through selective
acquisitions. We see scope to acquire businesses capable of
bringing complementary capability and market reach to each of HRG
and Fraedom, and the Group's strong financial position provides us
with the flexibility to pursue these opportunities as they
arise.
Consistent with this philosophy is our acquisition announced
today of travel innovator eWings.com, a next-generation travel
management company offering a fast, easy online solution to digital
business travel, with a simple-to-start process and low cost
service model especially well suited to small businesses. Fitting
well with our technology platform, eWings.com provides HRG with a
developed solution as well as exciting new technology which is
highly complementary to our own technology.
Performance in FY17
On a reported basis, Group revenue rose by 5%. Underlying
operating profit was up 10% and underlying profit before tax rose
by 15% compared to prior year. We delivered further growth in
underlying operating profit margin, up 0.6 percentage points to
14.7%, driven by an increasing contribution from Fraedom as well as
improved profitability in the travel management business as a
result of the restructuring programme. Reported revenue and
earnings benefited from the effect of favourable foreign exchange
rate movements in the period as a proportion of our business is
transacted in non-sterling currencies. At constant exchange rates,
revenue was 4% lower than in prior year, while underlying operating
profit and profit before tax were 2% and 4% higher
respectively.
Cash generation remained strong and we achieved an excellent
level of free cash generation in the period. As a result of ongoing
tight cash management, the Company generated GBP18.6m in free cash
inflow and reduced net debt by GBP12.6m, or 38%, to GBP21.0m.
We took proactive measures in the year to improve the estimate
of the Group's pension liabilities. During the second half, in
collaboration with the Trustees of the UK Scheme, we commissioned a
Medically Underwritten Mortality Study (MUMS) to improve the
quality of demographic assumptions relating to the UK Scheme's
members. This valuable exercise contributed to a GBP68.4m benefit
to the year-end accounting deficit, which largely offset a GBP96.7m
increase in the UK Scheme liabilities as a result of a reduced
discount rate. As a result of this, as well as an increase in the
value of plan assets, the overall Group pension deficit increased
by GBP6.9m.
HRG showed a steady performance during the year growing
underlying operating profit margin by 0.3 percentage points to
13.6%. Market conditions during the first half of the financial
year remained broadly similar to the prior year, although the
second half saw some deterioration as the lack of clarity around
the effect of Britain's exit from the European Union made some UK
and Continental European companies act more cautiously. As
predicted, aggressive competitor pricing continued and together
with the effect of the ongoing trend of clients moving to online
booking, we experienced continued downward pressure on our revenue.
We also saw the effect of client churn from clients lost last year
as well as clients lost in the current year, particularly in the
second half. Against this backdrop, it was therefore encouraging to
see the results of management's actions to restructure operations
and align operating costs such that, whilst HRG's revenue was down
5% overall at constant currency, underlying operating profit
remained broadly unchanged.
We are very pleased to welcome a number of new HRG clients that
joined us during the year, including BearingPoint, Elekta, Estee
Lauder, Sidel, Tata Communications and WSP Parsons Brinkerhoff. We
also secured expanded contracts, in terms of service and geography,
with existing clients such as ABB, Tetra Laval, Politiet and VW
Group. Notable amongst clients renewing their contracts with HRG
were AIG, Bechtel, Centrica / Direct Energy, Deutsche Bank, Lloyds
Banking Group and Wells Fargo. Once again, these successes are
evidence of the huge diversity of HRG's client base across both
industries and geographies, which is one of the Group's key
strengths.
In line with our expectations, Fraedom continued to perform
well. Compared to prior year, revenue rose by 13% and underlying
operating profit by 22%, both at constant currency. Fraedom now
accounts for 10% of Group revenue and 17% of underlying operating
profit (2016: 8% and 13%, respectively), which is testament to its
growing importance within the Group. We invested in new staff and
office space during the first half of the financial year to support
the continued pace of growth and to accommodate some new banking
partners that began to generate incremental revenue during the
second half. During the year, we welcomed several new banking
partners including ING Bank, TD Bank and UMB Financial Corporation,
and extended our global contract with long time strategic partner,
Visa.
Towards the end of FY15, we launched the Fraedom brand to take
advantage of marketing all our Software as a Service (SaaS) and
non-travel related technology operations under one trade name.
Fraedom has grown rapidly and with that success we have since
aligned the Group's operations into two divisions: HRG, covering
our travel management operations, and Fraedom, our FinTech
business. HRG is operating in an industry where market forces are
continuing to drive change. We believe that travel management
companies like HRG that have their own proprietary technology are
likely to be the most successful. Fraedom's technology development
resources are now focused on its core payments and expense
management offerings, while continuing to offer plug-in
applications, including travel.
Capital structure update
One of our priorities in recent years has been to reduce net
debt and this remained a priority in the current year. Through
strong free cash generation and ongoing tight cash control, I am
pleased to report that we reduced year-end net debt by GBP12.6m
(38%) to GBP21.0m, equivalent to 0.3 times EBITDA for the last 12
months (2016: 0.6 times). During the year, we undertook a review to
consider the appropriate capital structure for the Company in the
context of our foreseeable plans for the business. The Board places
great emphasis on maintaining the flexibility to deliver on its
strategy and will undertake investment to increase growth in HRG
and accelerate growth in Fraedom. Accordingly, the Board has
determined to target year-end net debt / EBITDA of less than 1.0
times, whilst being prepared to see leverage rise to 2.0 times in
the context of acquisition opportunities. The Board will look to
continue to grow dividends.
Summary and outlook
This has been a very busy and exciting year for Hogg Robinson
Group, during which we undertook a detailed review of the
industries and markets in which our two businesses, HRG and
Fraedom, operate, and identified a wealth of opportunities for
growth for both. Consequently, we re-focused our strategy during
the period as we moved from an emphasis on operational efficiency
to manage margins, to one centred on growing HRG and accelerating
the growth of Fraedom. We plan to invest in both our businesses as
we implement our strategic objectives.
We also made good operational and financial progress during the
year, delivering further savings from our restructuring programme,
while increasing underlying operating profit and free cash
generation. However, as previously predicted, we saw continued
migration by clients to online booking as well as ongoing
competitive pricing pressure during the year. With our focus on
only engaging in contracts which will be profitable for HRG or
which offer strategic benefit to the Group, these factors resulted
in some client losses in the period. Going forward, we anticipate
that the rollover effect of these losses and our absorption of the
initial costs of our strategic investments will mean that FY18 will
be a year of transition. Excluding these investments, we anticipate
FY18 would show modest growth in Group revenue and earnings
year-on-year. Thereafter, the Board expects the returns on these
investments to accelerate and deliver both revenue and earnings
growth in the medium term.
We are very excited about the prospects for the Group. We expect
macroeconomic and geopolitical uncertainties to continue to
influence our markets but we have confidence in our business model
and in our ability to make adjustments to mitigate any resulting
adverse effects or take advantage of emerging favourable
trends.
Since the year-end, Hogg Robinson Group has performed in line
with management's expectations. The Board is confident in the
investments that the Company is making and that Hogg Robinson Group
will make further good progress through the rest of the year in
line with its strategic plan and growth targets.
In closing, these results would not have been possible without
the commitment and professionalism of all my colleagues in Hogg
Robinson, to whom I would like to say a sincere thank you.
David Radcliffe
Chief Executive
Operational review
HRG
Change Change
(actual (constant
exchange exchange
Years ended 31 March 2017 2016 rates) rates)
---------- ---------- ---------- -----------
Revenue GBP302.0m GBP292.7m +3.2% (5.4%)
Share of Group revenue 90.1% 92.0% (1.9pp)
Operating profit GBP37.4m GBP33.9m +10.3% +3.5%
Underlying operating
profit (1) GBP41.2m GBP38.9m +5.9% (0.5%)
Share of Group underlying
operating profit 83.4% 86.8% (3.4pp)
Underlying margin (1) 13.6% 13.3% +0.3pp
Online adoption 51% 50% +1pp
(1) Before amortisation of acquired intangibles and exceptional
items
-- Revenue declined by only 5.4% at constant currency in spite
of a 7% year-on-year decline in client transaction activity
-- Underlying operating profit margin up from 13.3% to 13.6%
Client travel transaction activity declined by 7% year-on-year,
while client travel spend at constant currency fell by 10%. Air
travel bookings accounted for 46% of all bookings, rail 17% and
hotel 28%, all broadly in line with last year. For the 12-month
period, air bookings declined by 6%, while rail and hotel were down
by 9% and 7% year-on-year respectively.
HRG clients continue to focus on cost control and maximising
value for money from travel budgets. This is increasingly coupled
with introducing digital services to enhance the experience for
travellers.
Our clients implement ever more sophisticated savings strategies
to maximise the efficiency of travel and accommodation expenditure
in line with their corporate objectives. Leveraging consolidated
volumes to secure discounts is complemented by changing traveller
behaviour to take advantage of spot buying in order to benefit from
'lowest on the day' fares or rates. HRG continues to build
capability and demonstrate added value in this area, particularly
through stakeholder engagement and communication to highlight the
potential opportunity for savings through proprietary reporting and
analytics.
New savings strategies that are being implemented include
alternatives to travel (e.g. video conferencing, travelling less
frequently), and control of wider travel related expenses as they
relate to the total cost of each trip.
Such programme optimisation, as well as a growing demand for
outsourcing travel management solutions, provides additional
revenue opportunities for the Group, helping to offset the effect
on our revenue of clients moving online and increasingly
competitive pricing pressure. This also results in encouraging the
development of more strategic and higher margin relationships.
Self booking is growing more modestly, with organisations taking
a specific interest in broader content sources that complement the
traditional corporate travel market. This has created a growing
overlap between the corporate and leisure market. Online adoption
reached 51% from the previous 50% in FY16. Whilst revenue to HRG
may reduce in the short term as a result of this shift, once the
cost associated has been re-directed or taken out, we have seen our
margins increase.
Traveller experience solutions are increasingly central to many
procurement decisions. This can be described as the service
provided to the traveller before, during and after travel, and in
addition to simply making a booking or reservation. This
requirement is being fulfilled by interactive and contextual mobile
solutions, supported by offline service support when and where
appropriate.
Our continued focus on delivering added value management
solutions has resulted in a number of successful client retentions.
Like any global business, we lost some clients as our model is
mainly focused on profitability through client fees rather than
supplier volume. However, it is pleasing to report that during this
financial year HRG retained and/or expanded its relationship with
many clients including ABB, AIG, Bechtel, BMW, Centrica, Deutsche
Bank, Lloyds Banking Group, Politiet, Tetra Laval and Wells
Fargo.
HRG technology
During the year we consolidated all of our travel technology
resources within HRG and created a new team called hrgtec. This
team is focused solely on HRG and the transformation of our digital
end-customer experience.
Due to the rapidly changing market place in business travel,
with product consumerisation and the need to evolve our offering,
the development focus of our team is on a 'mobile first' strategy,
reflecting the change away from classic desktop-based enterprise
systems.
Our travel technology developments during the year include: our
new HRG travel app, delivering a range of itinerary-based
information and support for the enabled traveller; a refresh of our
global i-Suite travel portal; and a new look and feel for our
booking tool, HRG Online. All of these travel technology tools are
device agnostic and screen contextual, which means our products can
be viewed on any device screen of any size including mobile, tablet
and desktop. We have also commenced work on our enhanced 'Direct
Connect Platform' which will enable HRG to remain the market leader
as we enter the next phase of travel distribution. Within our
global branch network we have continued to deploy our 'smart'
booking app agent desktop and our unified communications strategy.
This paves the way for further enhancements as we create an
omni-channel digital end-customer platform to enable us to
communicate in multiple ways.
Data remained a critical focus during the year with a new back
end data structure and capture process being developed along with a
new more dynamic user interface being in its first trials. All of
these technology developments underpin our strategy for growth, and
enhanced service delivery to our clients and end customers.
Fraedom
Change Change
(actual (constant
exchange exchange
Years ended 31 March 2017 2016 rates) rates)
--------- --------- ---------- -----------
Revenue GBP33.1m GBP25.6m +29.3% +12.9%
Share of Group revenue 9.9% 8.0% +1.9pp
Operating profit GBP8.1m GBP5.4m +50.0% +31.5%
Underlying operating
profit (1) GBP8.2m GBP5.9m +39.0% +22.0%
Share of Group underlying
operating profit 16.6% 13.2% +3.4pp
Underlying margin (1) 24.8% 23.0% +1.8pp
(1) Before amortisation of acquired intangibles and exceptional
items
-- Strong revenue and earnings growth
-- Expansion in underlying profit margin
-- Release of new native apps
Fraedom has two channels or routes to market: (1) Partners -
typically banking partners, which use Fraedom's technology to build
and brand Payment and Expense products for their own business
customers, and (2) Direct - clients which buy Fraedom's technology
to use within their own business to help them implement Expense
solutions for their company.
Revenue increased by 13% on the prior year with underlying
operating profit up 22%, both at constant currency. Revenue from
Partners accounted for 79%, with 21% coming from Direct clients,
unchanged from prior year. Usage and hosting fees accounted for 74%
of revenue and development/implementation 26% (2016: 73% and 27%,
respectively). The geographic distribution of revenue in the period
was Americas 66%, AsPac 27% and Europe 7% (2016: 68%, 25% and 7%,
respectively).
New and existing banking clients continued to drive revenue
growth with a number of new banking partners signed over the course
of the year, including ING Bank, UMB Financial Corporation and TD
Bank, while at the same time strategic partner Visa extended its
global contract with Fraedom for an additional five years.
In our Direct business, we continued to focus sales efforts on
the Asia Pacific region, successfully signing a number of new
client contracts including George Weston Foods and Iluka
Resources.
Across the entire client base, the Fraedom platform managed over
192m transactions in FY17, an increase of 16.6% on the prior year.
During the course of the financial year, the Fraedom platform
managed transactions totalling GBP33.6bn, up 34% at constant
currency.
As the commercial payments arena becomes increasingly
consumerised, the desire for value-adding technology among banks
and their commercial clients has never been greater. As demand for
digital self-service tools along with more advanced payment and
expense capabilities continues to grow, Fraedom is well positioned
to capitalise on the B2B payments opportunity and will continue to
invest in these key areas as part of its strategy moving forward.
Specifically, trends in the areas of big data, artificial
intelligence and machine learning offer strong future potential for
the payments industry, while regulation looks set to drive a future
of more 'open banking', making API's and technology 'plug-ins' an
area of strategic focus for the Fraedom business.
Fraedom continues to invest in R&D and platform support with
a total of GBP10.3m for the year, up 47% from GBP7.0m last year,
principally due to investment by the business in new development
teams to progress the development of card management, ePayables and
expense management functionality. The team commenced rollout of the
new UX (User Experience) across the platform, as well as the
development and release of a mobile app to support both the direct
Expense module and Fraedom's white-labelled partner offerings.
In addition, new visual reporting solutions have been developed
and launched providing graphical insights into transactional spend.
These new product offerings were further supported by significant
investments into Fraedom's infrastructure and architectural
technologies.
This investment has been underpinned by a dual strategy to
provide native mobile apps alongside a responsive desktop website.
This approach has ensured that all new product offerings to the
market adhere to industry best practice and mobile-first design
principles. Notable milestones for the year include the concurrent
release of native apps to the market on both iOS and Android. These
mobile apps have subsequently been white labelled and delivered to
Fraedom's partners, with further work under way expanding this
offering to include other Fraedom product verticals such as
ePayables.
HRG - Regional activity
We should be mindful that all our regions exist to serve our
global capability and do not operate for the sake of separate
regional profitability. Below we provide trading detail on our
material travel management businesses.
Europe
Change Change
(actual (constant
exchange exchange
Years ended 31 March 2017 2016 rates) rates)
---------- ---------- ---------- -----------
Revenue GBP204.9m GBP201.9m +1.5% (5.3%)
Share of TM revenue 67.8% 69.0% (1.2pp)
Operating profit GBP25.9m GBP26.3m (1.5%) (6.5%)
Underlying operating
profit (1) GBP28.5m GBP30.3m (5.9%) (10.6%)
Share of TM underlying
operating profit 69.2% 77.9% (8.7pp)
Underlying margin (1) 13.9% 15.0% (1.1pp)
Online adoption 48% 46% +2pp
(1) Before amortisation of acquired intangibles and exceptional
items
-- Constant currency revenue lower due to price competition,
lost clients, ongoing adoption of online and lower trading
-- Overall performance impacted by re-tender restrictions with
the UK Government and some client losses
-- Underlying operating profit reduction largely in line with
fall in travel booking activity
Revenue was down by 5.3% while underlying operating profit
declined by 10.6%, both at constant currency. Client travel spend
decreased by 8% year-on-year in real terms and travel activity was
6% lower. Client adoption of online self-booking grew moderately
during the period, accounting for 48% of all bookings made in the
region, up from 46% last year.
UK
As noted at the half year, we were restricted from being able to
retain all of the UK Government business that we had historically
serviced. The resulting loss of several UK Government departments
along with a number of corporate losses and continued downtrading
in the Energy & Marine sector, has meant that client travel
spend and booking activity in the UK declined versus prior year by
9% and 11% respectively. However, during the second half of the
year we did see some growth in a number of existing clients. Online
adoption has remained relatively stable compared to prior year at
around 60%. Our success rate for new business in FY17 was not at
the levels we normally experience and we have taken steps to
further develop our proposition, as well as invest in additional
sales resource that will be in place for the start of FY18. This
has been a challenging year for client contract renewals, which is
reflected in some lost business but we are pleased to have secured,
renewed or extended contracts with a number of key clients,
including ABB, Centrica, Lloyds Banking Group and TSB. We have also
seen year-on-year travel activity and revenue growth in the UK
Government business that we retained last year and were also
pleased to win WSP Parsons Brinkerhoff as a new client, which will
commence trading early FY18. The challenging trading environment
has meant that our three-year cost restructuring programme has
remained a key priority. During the final quarter, we commenced a
project to consolidate our Leicester business travel operations
into Manchester, which will be completed by the summer. The global
standardisation of our agent booking platform has continued during
the year with completion expected by the end of 2017. The
centralisation of operational support tasks from the UK and other
European markets into Poland has been successful and plans to
expand this further during FY18 have commenced.
Nordics
Our Nordic business saw positive year-on-year growth in client
travel activity during the financial year, driven by Sweden,
Finland and Denmark, with Norway continuing to see a modest decline
due to ongoing weakness in the Energy & Marine market. However,
we did see signs of a recovery in Norway during H2 with booking
activity showing positive year-on-year growth. Overall client
booking activity across the region was 6% higher, while client
spend was broadly unchanged at constant currency. The Nordics have
had a successful year in winning new business with SSAB and Scania
starting trading in Q4 and we have extended contracts with Politiet
(including additional business) and Tetra Laval. Online adoption
levels continue to increase in the region from 55% last year to 60%
this year. Our Nordics Meetings, Groups & Events (MGE) business
continues to grow, driven by Sweden and Norway. The SME market
continues to be challenging with volume and revenue declines across
all markets, although this decline is now slowing. Given the
growing online adoption levels and pressure on margins, we remained
focused on reducing our cost base across the Nordic markets.
Staffing levels have decreased versus last year and we have
downsized our offices in Oslo, Stockholm and Helsinki in order to
drive operational efficiencies.
Germany
While German economic growth remains stable largely driven by
strong exports, we have seen automotive clients display a more
cautious and cost conscious approach compared to prior years. In
our German operations, client travel activity declined by 1%
year-on-year while client spend was 3% lower at constant currency.
This decline reflected the loss of KPMG and Novartis which ceased
trading during the second half of the year, whilst new client ABB
started trading. We were also pleased to be notified of a major new
client, BearingPoint, which will commence trading with us in Q2
FY18. Our Sports business has enjoyed a successful year delivering
strong revenue and earnings growth, as we benefited from work
related to the European Football Championships and Olympic games
last summer, as well as qualification matches for the 2018 World
Cup. As noted at the half year, we agreed to sell our shareholding
in our joint venture with Borussia Dortmund, which generated a
positive earnings benefit. Our German MGE business has also
delivered double-digit year-on-year revenue growth, on the back of
new client wins including Merck, Amgen and Samsung. Online adoption
is still relatively low in Germany but continues to increase, up
from 23% last year to 28% this year. This reflects new business
with higher than company average online adoption levels, plus
demand from existing clients to drive online bookings. During the
financial year as part of a wider European initiative, we
transitioned 24 hour services from Frankfurt to a new centralised
team based in Barcelona, as well as closing our Bonn office and
consolidating its operations into Cologne. We have already
successfully implemented airline direct connect solutions for a
large German client and see further demand for these solutions
going forward.
Switzerland
The loss of key client Novartis during the first half of the
financial year along with the continuation of the general downward
trend in trading has meant that Switzerland has seen a significant
year-on-year decline in both client spend, lower by 25% at constant
currency and client booking activity, lower by 18%. The resulting
decline in revenue has meant that the Swiss business has again had
to respond quickly to reduce its cost base. As well as reacting
quickly to reduce operational headcount, we have closed our offices
in both Lausanne and Winterthur, downsized office space in Zurich
and Basel whilst also continuing to increase home working
opportunities for employees. During the final quarter we also
transitioned operational support services to Poland as part of the
European centralisation programme. The SME sector remains an
important part of the Swiss market. We have focused on this segment
during the year and been successful in winning new clients in this
competitive area. Despite the loss of revenue associated with the
lost business, earnings in the period have been broadly maintained
versus prior year and we have taken steps to invest in new sales
resource in this market. The online adoption rate remains low
compared to other markets. However, it has increased from 18% last
year to 21% this year.
North America
Change Change
(actual (constant
exchange exchange
Years ended 31 March 2017 2016 rates) rates)
--------- --------- ---------- -----------
Revenue GBP80.0m GBP74.0m +8.1% (4.6%)
Share of TM revenue 26.5% 25.3% +1.2pp
Operating profit GBP12.1m GBP10.3m +17.5% +5.8%
Underlying operating
profit (1) GBP12.5m GBP10.9m +14.7% +3.7%
Share of TM underlying
operating profit 30.3% 28.0% +2.3pp
Underlying margin (1) 15.6% 14.7% +0.9pp
Online adoption 61% 59% +2pp
(1) Before amortisation of acquired intangibles and exceptional
items
-- Revenue down only 4.6% at constant currency in spite of an 8%
year-on-year reduction in client transaction activity
-- Earnings growth with underlying operating profit up 3.7% at
constant currency
-- Excellent margin increase with underlying operating margin up
from 14.7% to 15.6%
Client spend was down 12% at constant currency and activity
levels were lower by 8%. Adoption of online self-booking by clients
is well advanced in this market and accounted for 61% of all
transactions compared to 59% last year.
Although revenue was down by 4.6%, underlying operating profit
rose by 3.7%, both at constant currency. This increase in
underlying operating profit together with the expansion to
underlying margin of 0.9pp was underpinned by continued cost-saving
measures and efficiencies. During FY17, we downsized our Corporate
Head Office space in New York and continued to streamline overhead
costs and operational processes through the introduction of
technology to further optimise the booking process.
The business travel market in North America was generally
stable. However, we did experience a higher than usual impact from
client losses during FY17. Corporate client booking activity was
lower than in prior year, mainly due to business lost in H1, which
included Novartis, Yahoo, Discovery and DirectTV. We also lost
Disney in the final quarter of the financial year. Clients in the
Energy & Marine and Finance & Banking sectors have traded
down slightly this year, however with recent positive movements in
both interest rates and oil prices we have seen some modest
recovery in the volumes traded within these sectors.
North America remains a key area of growth opportunity for HRG.
We have strengthened our sales team accordingly during the
financial year and will continue to invest going forward in what
continues to be a key market. We won and implemented new business
from AIG TravelGuard and Duracell during the year and have recently
been advised of new business from WSP Parsons Brinkerhoff and
Sandvik that will commence trading in FY18. It was a busy year for
contract renewals during FY17 and we were pleased to secure
contract extensions with several important clients, including Wells
Fargo, Deutsche Bank, VW and BMW.
Our loyalty business saw year-on-year growth in activity levels
during the financial year as we successfully secured some important
existing clients. This included the renewal and expansion of our
contract with Scotiabank during the year and also the extension of
our contract with another key client, Expedia, whilst we finalise a
new three-year agreement. The new business pipeline continues to be
strong particularly within the Tier 1 banking sector. We won new
business from Points.com and ASA Nippon Airways during the year and
are currently working on a number of exciting opportunities to
expand this business segment further in North America.
Asia Pacific
Change Change
(actual (constant
exchange exchange
Years ended 31 March 2017 2016 rates) rates)
---------- ---------- ---------- -----------
Revenue GBP17.1m GBP16.8m +1.8% (11.3%)
Share of TM revenue 5.7% 5.7% -
Operating loss (GBP0.6m) (GBP2.7m) +GBP2.1m +GBP2.3m
Underlying operating +GBP2.6m
profit/(loss) (1) GBP0.2m (GBP2.3m) +GBP2.5m
Share of TM underlying
operating profit 0.5% (5.9%) +6.4pp
Underlying margin (1) 1.2% (13.7%) +14.9pp
Online adoption 41% 45% (4pp)
(1) Before amortisation of acquired intangibles and exceptional
items
-- Complete restructuring of our Australian operations
-- Significant improvement in operating profit resulting from
cost reduction actions
Revenue was down by 11% at constant currency in spite of client
travel spend falling by 21% year-on-year in real terms and travel
activity 21% lower. Underlying operating profit improved from a
loss of GBP2.3m last year to a profit of GBP0.2m this period
including a GBP0.1m adverse currency effect. Online self-booking of
travel in the Asia Pacific region accounts for 41% of all bookings,
down from 45% in prior year.
Australia
We continued to restructure our Australian business throughout
the financial year, in response to continuing weak economic
conditions in the domestic economy as well as a number of client
losses. Travel booking activity declined by 32% year-on-year with
travel spend reducing by 36% in real terms, and we have aligned the
cost base to this downturn in trading delivering a reduction in
FTEs of 45% compared to last year. The benefits from our cost
reduction actions were apparent with operating profit improving
significantly year-on-year and the business is now well placed to
capitalise on a recovering Australian economy. We have put in place
new management and have invested in additional sales resource in
order to grow the business going forward. We were also pleased to
extend a number of contracts with key clients including MMG, ABB,
Air Services Australia and National Broadband Network. Online
adoption in this mature online market remains at over 65%. The MGE
sector has performed strongly and we continue to see opportunities
to develop our MGE business on the back of some successful projects
for key clients. During the year we took the opportunity to
downsize our Sydney property and consolidate two offices into a new
location in Melbourne.
Financial Review
Overview
Revenue of GBP335.1m was up 5.3% as reported but down 4.0% at
constant exchange rates. Underlying operating profit, which is
before amortisation of acquired intangibles of GBP0.2m (2016:
GBP0.7m) and exceptionals of GBP3.7m (2016: GBP4.8m) increased by
GBP4.6m resulting in the margin increasing from 14.1% to 14.7%. The
10.3% rise in underlying operating profit included a 7.8% benefit
from currency movements. Underlying profit before tax was up by
14.9% to GBP37.0m while underlying EPS was up by 8.3% from 7.2p to
7.8p.
Reported operating profit increased by 15.8% to GBP45.5m (2016:
GBP39.3m). Reported profit before tax increased 24.0% from GBP26.7m
to GBP33.1m and EPS was up by 19.0% from 5.8p to 6.9p.
We continue to demonstrate strong cash flow generation with net
debt reducing by GBP12.6m. Year-end net debt of GBP21.0m
represented 0.3 times EBITDA for the last 12 months (2016: 0.6
times). This translates into a gearing of 9.6% (2016: 17.0%). We
continue to operate well within our banking covenants.
On an accounting basis, the Group-wide pre-tax pension deficits
have increased by GBP6.9m to GBP265.2m. The UK Defined Benefit
Scheme ('the UK Scheme') deficit increased by GBP9.7m to GBP247.3m
due to an increase in liabilities of GBP28.6m offset by an increase
in the fair value of plan assets of GBP18.9m. The rise in
liabilities was primarily due to the impact of a lower discount
rate (GBP96.7m) and higher inflation rate (GBP17.9m) partly offset
by the application of the latest publically available mortality
rate tables (GBP19.0m) and a refinement to the demographic
assumptions on the UK Scheme (GBP68.4m). On a post-tax basis, the
Group pension deficit at the year-end was GBP223.1m.
The next triennial valuation, based on actuarial values at 31
March 2017, is currently underway after which the Company will be
discussing with the Trustees the appropriateness of the existing
recovery plan. It is expected that the funding valuation performed
by the UK Scheme's actuary will factor in the latest demographic
assumptions. We will provide an update on the triennial valuation
at the time of the interim results announcement in November
2017.
The Board has declared a final dividend of 1.925p, up 5% on the
final payment a year ago. The dividend will be paid on 1 August
2017 to shareholders on the register at the close of business on 30
June 2017.
Revenue
Reported revenue increased by 5.3% to GBP335.1m, comprised of a
decrease of 4.0% at constant exchange rates more than offset by
9.3% favourable currency movements.
Operating expenses
Reported operating expenses increased by 3.8% to GBP289.6m.
Underlying operating expenses, which are before amortisation of
acquired intangibles and exceptional items, increased by 4.5% to
GBP285.7m. This represented a 5.0% decrease at constant exchange
rates, comprised of a 3.4% decrease in staff costs and 8.3%
decrease in other expenses.
Underlying operating profit
Underlying operating profit, which is before amortisation of
acquired intangibles and exceptional items, increased by 10.3% from
GBP44.8m to GBP49.4m, or by 2.5% at constant exchange rates.
Underlying operating profit margin increased from 14.1% to
14.7%.
Exceptional items
The cost of exceptional items was GBP3.7m (2016: GBP4.8m). These
related to GBP4.1m (2016: GBP3.8m) restructuring costs including
redundancy and property exit costs within Travel Management and
Fraedom as part of our planned cost restructuring programme, partly
offset by a pension curtailment gain of GBP0.4m (2016: GBPnil).
Prior year exceptional items also included a pension rectification
charge of GBP1.0m reflecting a GBP10.5m past service cost and
GBP2.3m legal fees offset by settlement monies received.
Net finance costs
Net finance costs decreased by GBP0.3m to GBP13.3m, reflecting a
reduction in interest on bank overdrafts and loans partly offset by
an increase in the finance costs relating to retirement benefit
obligations.
Taxation
The tax charge of GBP9.5m (2016: GBP7.4m) for the year
represents an overall effective tax rate (ETR) of 29% of the
reported profit before tax (2016: 28%). The underlying ETR was 28%.
We anticipate an underlying ETR of circa 28% in future years.
EPS
Underlying EPS rose by 8% from 7.2p to 7.8p. Basic EPS rose by
19% from 5.8p to 6.9p.
Return on capital employed
Return on capital employed is calculated by dividing underlying
operating profit plus net share of the results of associates and
joint ventures by average net assets. Average net assets are based
on each of the 12 month ends for the financial year and exclude net
debt, pension deficits and tax provisions. Average net assets
amounted to GBP227.2m (2016: GBP213.5m) compared with GBP223.5m at
the year-end (2016: GBP193.4m). The return for the year was 22.1%
(2016: 21.5%).
Cash flow
Free cash inflow, which is the change in net debt before
acquisitions and disposals, Employee Benefit Trust share purchases,
dividends and the impact of foreign exchange movements on net debt
balances, was GBP18.6m (2016: GBP28.9m).
Cash outflow in respect of working capital was GBP5.4m (2016:
GBP5.7m). The net cash outflow related to interest was GBP4.2m
(2016: GBP4.9m). Dividends received from equity accounted
investments were GBP0.7m (2016: GBP0.7m). Tax paid in cash was
GBP8.9m (2016: GBP5.4m), partly reflecting the increase in tax
payable on the pension rectification receipt. Capital expenditure,
which is primarily internal software development and office
equipment, was GBP11.0m (2016: GBP8.3m). Cash costs for pension
deficit reduction were GBP7.3m (2016: GBP7.3m). Of the GBP5.3m cash
outflow in respect of exceptional items, GBP3.2m was paid relating
to current year charges and GBP2.1m related to prior year
exceptional charges. Of the prior year GBP4.7m cash inflow in
respect of exceptional items, GBP4.4m related to cash outflow from
exceptional items and the balance related to cash inflow from the
pension rectification.
In addition to free cash flow, other cash flow items are related
to proceeds received on the disposal of interests in associates in
Germany of GBP0.5m, share purchases of GBP1.4m made by the Employee
Benefit Trust (2016: GBP1.3m), GBP8.2m of dividends paid to
shareholders during the year (2016: GBP7.7m) and GBP3.1m of
favourable foreign exchange related movements (2016: GBP1.2m).
Funding and net debt
The principal banking facility is a GBP150m multi-currency
revolving credit facility (RCF) that is committed until May 2018.
The RCF is used for loans, letters of credit and guarantees, with
interest based on the inter-bank lending rate for the appropriate
currency plus a margin. At the year-end, GBP35.6m of the facility
has been utilised. In addition the Group has a GBP20m fixed rate
loan, repayable by 2018, and additional uncommitted facilities
amounting to around GBP16m at the year-end.
We have a robust medium to long-term finance structure in place
with liquidity available for our growth strategy.
Net external interest costs of GBP4.2m were covered 14.5 times
by underlying EBITDA (2016: 11.3 times).
Net debt decreased from 31 March 2016 by GBP12.6m to GBP21.0m
and was equivalent to 0.3 times EBITDA for the last 12 months
(2016: 0.6 times).
We continue to operate well within our banking covenants. The
principal covenants continue to be measured semi-annually, at the
end of March and the end of September, against EBITDA. The
covenants require that net interest is covered at least 4.0 times
by EBITDA and net debt is less than 3.0 times EBITDA, both on a
rolling 12-month basis. The definition of EBITDA for covenant
purposes is not materially different from the definition used in
these financial statements.
Pensions
The Group-wide pension deficits under IAS 19 have increased by
GBP6.9m to GBP265.2m before tax.
The UK Scheme deficit increased by GBP9.7m to GBP247.3m due to
an increase in liabilities of GBP28.6m offset by an increase in the
fair value of plan assets of GBP18.9m.
In the second half of the year, the Company commissioned a
Medically Underwritten Mortality Study (MUMS) in collaboration with
the UK Scheme's Trustees, an exercise that uses actual health data
provided by a sample of the UK Scheme members to improve the
quality of demographic assumptions. As a consequence, the MUMS
results contributed to a reduction in the accounting
liabilities/deficit at the year-end of GBP68.4m. The positive
financial impact of the MUMS study is included within the GBP28.6m
increase in the UK Scheme's liabilities. Excluding this reduction,
the UK Scheme liabilities have increased by GBP97.0m, primarily
driven by a 0.8% decrease in the discount rate and a higher
inflation rate assumption partly offset by the adoption of the
latest mortality rates. The Company contributed a further GBP3.7m
to the UK Scheme in the second half of the year in line with the
existing deficit recovery plan. For several years, the UK Scheme
has been closed to new entrants and has capped increases in
pensionable salary. The UK defined benefit section was closed to
future accrual on 30 June 2013 and replaced with a defined
contribution section.
The overseas schemes are primarily in Germany and Switzerland,
where the deficit decreased by GBP2.8m to GBP17.9m. The overseas
schemes' deficit decrease of GBP2.8m includes an increase of
GBP1.7m relating to foreign exchange. Excluding foreign exchange,
the overseas schemes' deficit decreased by GBP4.5m, driven by a
decrease in the schemes' liabilities of GBP3.8m, including the
effect of a GBP1.0m curtailment gain in Switzerland and an increase
in schemes' assets of GBP0.7m. The net deficit of the overseas
schemes primarily relates to the German scheme GBP16.3m (2016:
GBP14.8m).
At the year-end, there was a deferred tax asset of GBP42.0m
(2016: GBP42.8m) relating to the UK deficit and an asset of GBP0.1m
(2016: GBP1.1m) relating to the overseas schemes.
Related parties
Related party disclosures are provided in note 27 to the
financial statements.
Share price
The closing mid-market price at the year-end was 69.5p (2016:
62p). During the year, the price ranged from 62p to 77p per
share.
Summary income statement
Years ended 31 March 2017 2016
GBPm GBPm
-------- --------
Revenue 335.1 318.3
EBITDA before exceptional items 60.7 55.5
Depreciation and amortisation (1) (11.3) (10.7)
---------------------------------------------------------- -------- --------
Underlying operating profit 49.4 44.8
Amortisation of acquired intangibles (0.2) (0.7)
Exceptional items (3.7) (4.8)
---------------------------------------------------------- -------- --------
Operating profit 45.5 39.3
Share of associates and joint ventures 0.9 1.0
Net finance costs (13.3) (13.6)
Profit before tax 33.1 26.7
Taxation (9.5) (7.4)
Profit for the period 23.6 19.3
---------------------------------------------------------- -------- --------
Summary balance sheet
As at 31 March 2017 2016
GBPm GBPm
-------- --------
Goodwill and other intangible assets 256.9 242.1
Property, plant, equipment and investments 12.5 12.5
Working capital (43.0) (46.8)
Current tax liabilities (net) (5.2) (6.1)
Deferred tax assets (net) 41.6 44.7
Net debt (21.0) (33.6)
Pension liabilities (pre-tax) (265.2) (258.3)
Provisions and other items (2.9) (4.4)
Net liabilities (26.3) (49.9)
---------------------------------------------------------- -------- --------
Summary cash flow statement
Years ended 31 March 2017 2016
GBPm GBPm
-------- --------
EBITDA before exceptional items 60.7 55.5
Cash (outflow)/inflow from exceptional items (5.3) 4.7
Working capital movements (excluding exceptional items) (5.4) (5.7)
Net interest paid (4.2) (4.9)
Dividends received from equity accounted investments 0.7 0.7
Tax paid (8.9) (5.4)
Net capital expenditure (11.0) (8.3)
Pension funding in excess of EBITDA charge (7.3) (7.3)
Other movements (0.7) (0.4)
Free cash inflow 18.6 28.9
Acquisitions and disposals 0.5 -
Employee Benefit Trust share purchases (1.4) (1.3)
Dividends paid to external shareholders (8.2) (7.7)
Currency translation and other 3.1 1.2
---------------------------------------------------------- -------- --------
Reduction in net debt 12.6 21.1
---------------------------------------------------------- -------- --------
(1) Excluding amortisation of acquired intangibles
Hogg Robinson Group plc
Consolidated Income Statement
For the year ended 31 March 2017
Years ended 31
March
------------------
Notes 2017 2016
GBPm GBPm
Revenue 1 335.1 318.3
Operating expenses 2 (289.6) (279.0)
Operating profit 45.5 39.3
Analysed as:
Underlying operating
profit 49.4 44.8
Amortisation of acquired
intangibles 8 (0.2) (0.7)
Exceptional items 2 (3.7) (4.8)
Operating profit 45.5 39.3
Share of results of associates
and joint ventures 0.9 1.0
Finance income 4 - 0.1
Finance costs 4 (13.3) (13.7)
Profit before tax 33.1 26.7
Income tax expense 5 (9.5) (7.4)
Profit for the financial
year 23.6 19.3
Profit attributable to:
Owners of the Company 22.3 18.7
Non-controlling interests 1.3 0.6
23.6 19.3
Years ended 31
March
------------------
2017 2016
Earnings per share pence pence
Basic 6 6.9 5.8
-------------------------------- ------ -------- --------
Diluted 6 6.7 5.6
-------------------------------- ------ -------- --------
Hogg Robinson Group plc
Consolidated Statement of Comprehensive Income
For the year ended 31 March 2017
Year ended Year ended
31 March 31 March
----------------------------------- -----------------------------
Other Retained Other Retained
reserves deficit 2017 reserves deficit 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Profit for the financial
year - 23.6 23.6 - 19.3 19.3
------------ ------------- ------ --------- ---------- ------
Other comprehensive income/(expense)
Items that will not be subsequently
reclassified to profit or loss
Remeasurements on defined
benefit pension schemes - (5.0) (5.0) - 13.1 13.1
Deferred tax movement on
pension liability - 0.6 0.6 - (2.5) (2.5)
Deferred tax movement on
pension liability attributable
to impact of UK rate change - (2.3) (2.3) - (4.6) (4.6)
Items that may be subsequently
reclassified to profit or
loss
Currency translation differences 14.3 0.5 14.8 6.0 - 6.0
Amounts charged to hedging
reserve 0.2 - 0.2 0.2 - 0.2
Other comprehensive income/(expense)
for the year, net of tax 14.5 (6.2) 8.3 6.2 6.0 12.2
------------ ------------- ------ --------- ---------- ------
Total comprehensive income
for the year 14.5 17.4 31.9 6.2 25.3 31.5
------------ ------------- ------ --------- ---------- ------
Total comprehensive income
attributable to:
Owners of the Company 14.5 16.1 30.6 6.1 24.7 30.8
Non-controlling interests - 1.3 1.3 0.1 0.6 0.7
------------ ------------- ------ --------- ---------- ------
14.5 17.4 31.9 6.2 25.3 31.5
------------ ------------- ------ --------- ---------- ------
Hogg Robinson Group plc
Consolidated Balance Sheet
As at 31 March 2017
As at 31
March
------------------
Notes 2017 2016
GBPm GBPm
Non-current assets
Goodwill and other intangible
assets 8 256.9 242.1
Property, plant and equipment 9 8.4 8.8
Investments accounted for
using the equity method 4.1 3.7
Trade and other receivables 0.3 -
Deferred tax assets 45.2 50.8
314.9 305.4
----------------------------------- ------ -------- --------
Current assets
Trade and other receivables 106.5 93.3
Financial assets - derivative
financial instruments 0.3 0.2
Current tax assets 0.7 1.7
Cash and cash equivalent
assets 35.1 43.8
-------- --------
142.6 139.0
----------------------------------- ------ -------- --------
Total assets 1 457.5 444.4
----------------------------------- ------ -------- --------
Non-current liabilities
Financial liabilities -
borrowings (45.6) (66.4)
Deferred tax liabilities (3.6) (6.1)
Trade and other payables (1.5) (1.5)
Retirement benefit obligations 12 (265.2) (258.3)
Provisions 11 (2.1) (2.5)
-------- --------
(318.0) (334.8)
----------------------------------- ------ -------- --------
Current liabilities
Financial liabilities -
borrowings (10.1) (10.0)
Financial liabilities -
derivative financial instruments (0.3) (0.8)
Current tax liabilities (5.9) (7.8)
Trade and other payables (148.3) (138.6)
Provisions 11 (1.2) (2.3)
(165.8) (159.5)
----------------------------------- ------ -------- --------
Total liabilities (483.8) (494.3)
-------- --------
Net liabilities (26.3) (49.9)
=================================== ====== ======== ========
Equity
Share capital 3.3 3.3
Share premium 179.4 179.3
Other reserves 24.7 10.2
Retained deficit (234.8) (243.3)
----------------------------------- ------ -------- --------
Attributable to owners of
Hogg Robinson Group plc (27.4) (50.5)
Attributable to non-controlling
interests 1.1 0.6
Total equity (26.3) (49.9)
=================================== ====== ======== ========
Hogg Robinson Group plc
Consolidated Statement of Changes in Equity
For the year ended 31 March 2017
Attributable to
equity holders
of the Company
----------------------------------------
Share Share Other Retained Non-controlling Total
capital premium reserves deficit Total interests Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 April 2016 3.3 179.3 10.2 (243.3) (50.5) 0.6 (49.9)
-------- -------- --------- --------- ------- ---------------- -------
Retained profit for
the year - - - 22.3 22.3 1.3 23.6
Total other comprehensive
income/(expense) - - 14.5 (6.2) 8.3 - 8.3
Transactions with owners:
Dividends - - - (8.2) (8.2) (0.8) (9.0)
Shares purchased by
Employee Benefit Trust - - - (1.4) (1.4) - (1.4)
Share-based incentives
- charge for year - - - 1.8 1.8 - 1.8
Deferred tax movements
on cumulative share-based
incentive costs - - - 0.2 0.2 - 0.2
New shares issued to
satisfy share-based
incentives - 0.1 - - 0.1 - 0.1
Total transactions with
owners - 0.1 - (7.6) (7.5) (0.8) (8.3)
-------- -------- --------- --------- ------- ---------------- -------
Balance at 31 March
2017 3.3 179.4 24.7 (234.8) (27.4) 1.1 (26.3)
-------- -------- --------- --------- ------- ---------------- -------
Attributable to
equity holders
of the Company
----------------------------------------
Share Share Other Retained Non-controlling Total
capital premium reserves deficit Total interests Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 April 2015 3.2 179.3 4.1 (260.3) (73.7) 0.9 (72.8)
-------- -------- --------- --------- ------- ---------------- -------
Retained profit for
the year - - - 18.7 18.7 0.6 19.3
Total other comprehensive
income - - 6.1 6.0 12.1 0.1 12.2
Transactions with owners:
Dividends - - - (7.7) (7.7) (1.0) (8.7)
Shares purchased by
Employee Benefit Trust - - - (1.3) (1.3) - (1.3)
Share-based incentives
- charge for year - - - 1.3 1.3 - 1.3
New shares issued to
satisfy share-based
incentives 0.1 - - - 0.1 - 0.1
Total transactions with
owners 0.1 - - (7.7) (7.6) (1.0) (8.6)
-------- -------- --------- --------- ------- ---------------- -------
Balance at 31 March
2016 3.3 179.3 10.2 (243.3) (50.5) 0.6 (49.9)
-------- -------- --------- --------- ------- ---------------- -------
Hogg Robinson Group plc
Consolidated Cash Flow Statement
For the year ended 31 March 2017
Years ended
31 March
----------------
Notes 2017 2016
GBPm GBPm
Cash flows from operating activities
Cash generated from operations 14 42.9 48.1
Interest paid (4.2) (5.0)
Tax paid (8.9) (5.4)
Cash flows generated from operating
activities - net 29.8 37.7
------- -------
Cash flows from investing activities
Purchase of property, plant
and equipment (3.3) (2.1)
Purchase and internal development
of intangible assets 8 (7.7) (6.3)
Proceeds from sale of property,
plant and equipment - 0.1
Interest received - 0.1
Dividends received from associates
and joint ventures 0.7 0.7
Disposals of associates, joint
ventures and other investments 0.5 -
Cash flows used in investing
activities - net (9.8) (7.5)
------- -------
Cash flows from financing activities
Repayment of borrowings (22.0) (25.0)
New borrowings - 9.0
Cash effect of currency swaps 0.6 (0.5)
Proceeds from issue of share
capital 0.1 -
Purchase of own shares by the
Employee Benefit Trust (1.4) (1.3)
Dividends paid to external shareholders (8.2) (7.7)
Dividends paid to non-controlling
interests (0.8) (1.0)
Cash flows used in financing
activities - net (31.7) (26.5)
------- -------
Net (decrease)/increase in cash
and cash equivalents (11.7) 3.7
Cash and cash equivalents at
beginning of the year 43.7 38.4
Exchange rate effects 3.0 1.6
Cash and cash equivalents at
end of the year 35.0 43.7
======= =======
Cash and cash equivalent assets 35.1 43.8
Overdrafts (0.1) (0.1)
Cash and cash equivalents at
end of the year 35.0 43.7
======= =======
Additional Financial Information
General information and basis of preparation
The financial information which comprises the Consolidated
Income Statement, the Consolidated Statement of Comprehensive
Income, the Consolidated Balance Sheet, the Consolidated Statement
of Changes in Equity and the Consolidated Cash Flow Statement and
related notes does not constitute the Company's Consolidated
Financial Statements for the years ended 31 March 2017 and 2016,
but is derived from those financial statements. The auditors have
reported on the Group's Consolidated Financial Statements for each
of the years ended 31 March 2017 and 31 March 2016. Their reports
were unqualified, did not draw attention to any matters by way of
emphasis and did not contain statements under s498(2) or (3) of
Companies Act 2006 or equivalent preceding legislation. The
Consolidated Financial Statements for the year ended 31 March 2016
have been delivered to the Registrar of Companies and the
Consolidated Financial Statements for the year ended 31 March 2017
will be filed with the registrar in due course.
The Consolidated Financial Statements have been prepared in
compliance with International Financial Reporting Standards (IFRS)
as endorsed and adopted for use by the European Union, IFRS
Interpretations Committee (IFRS IC) interpretations and with those
parts of the Companies Act 2006 applicable to companies reporting
under IFRS. The Consolidated Financial Statements have been
prepared under the historical cost convention, as modified by the
use of valuations for certain financial instruments, share-based
payment incentives and retirement benefits.
Critical accounting policies and forward-looking statements
The preparation of the IFRS financial statements requires the
use of estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses during
the year.
The Operational Review should be read in conjunction with the
audited Consolidated Financial Statements. The discussions contain
forward-looking statements that appear in a number of places and
include statements regarding the Group's intentions, beliefs or
current expectations concerning, among other things, results of
operations, revenue, financial condition, liquidity, growth,
strategies, new products and the markets in which the Group
operates. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve
risks and uncertainties.
Non-GAAP measures
Underlying operating profit is calculated as operating profit
before amortisation of acquired intangibles and exceptional
items.
Earnings Before Interest, Taxation, Depreciation and
Amortisation (EBITDA) is calculated as operating profit before
exceptional items before net finance costs, income taxes,
depreciation, amortisation and impairment.
The Directors believe that the presentation of underlying
operating profit and EBITDA enhances an investor's understanding of
the Group's financial performance. However, underlying operating
profit and EBITDA should not be considered in isolation or viewed
as substitutes for retained profit, cash flow from operations or
other measures of performance as defined by IFRS. Underlying
operating profit and EBITDA as used in this announcement is not
necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of
calculation and are unaudited line items but are derived from
audited financial information. The Directors use underlying
operating profit and EBITDA to assess the Group's operating
performance and to make decisions about allocating resources among
various reporting segments.
1 Segment information
The Chief Operating Decision Maker has been identified as the
Executive Management Team, which reviews the Group's internal
reporting in order to assess performance and allocate resources.
The Executive Management Team has determined the operating segments
based on these reports.
The Executive Management Team considers the business from the
perspective of two core activities, Travel Management (HRG), which
is analysed into three distinct geographic segments and includes
Fraedom Travel, and FinTech (Fraedom) which includes the Fraedom
Payments and Expense operations. The Group's internal reporting
processes do not distinguish between the numerous sources of income
that comprise revenue for Travel Management. The performance of the
operating segments is assessed based on a measure of operating
profit excluding items of an exceptional nature. Interest income
and expenditure and income tax expense are not included in the
result for each operating segment that is reviewed by the Executive
Management Team. Except as noted below, other information provided
to the Executive Management Team is measured in a manner consistent
with that in the financial statements.
Total segment assets exclude cash and cash equivalent assets,
current tax assets, financial assets and deferred tax assets which
are managed on a central basis. These are included as part of the
reconciliation to total Consolidated Balance Sheet assets.
HRG Fraedom
----------------------------------- --------
North Asia
Europe America Pacific Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
Year ended 31 March
2017
Revenue from external
customers 204.9 80.0 17.1 302.0 33.1 335.1
Underlying operating
profit 28.5 12.5 0.2 41.2 8.2 49.4
Amortisation of acquired
intangibles - (0.2) - (0.2) - (0.2)
------- -------- -------- ------ -------- ------
Operating profit
before exceptional
items 28.5 12.3 0.2 41.0 8.2 49.2
Exceptional items (2.6) (0.2) (0.8) (3.6) (0.1) (3.7)
Operating profit
/ (loss) 25.9 12.1 (0.6) 37.4 8.1 45.5
------- -------- -------- ------ -------- ------
Underlying operating
margin 13.9% 15.6% 1.2% 13.6% 24.8% 14.7%
------- -------- -------- ------ -------- ------
Year ended 31 March
2016
Revenue from external
customers 201.9 74.0 16.8 292.7 25.6 318.3
Underlying operating
profit / (loss) 30.3 10.9 (2.3) 38.9 5.9 44.8
Amortisation of acquired
intangibles (0.1) (0.3) - (0.4) (0.3) (0.7)
------- -------- -------- ------ -------- ------
Operating profit
/ (loss) before exceptional
items 30.2 10.6 (2.3) 38.5 5.6 44.1
Exceptional items (3.9) (0.3) (0.4) (4.6) (0.2) (4.8)
Operating profit
/ (loss) 26.3 10.3 (2.7) 33.9 5.4 39.3
------- -------- -------- ------ -------- ------
Underlying operating
margin 15.0% 14.7% -13.7% 13.3% 23.0% 14.1%
------- -------- -------- ------ -------- ------
There is no material inter-segment revenue.
External revenue from clients by origin (where the Group's
operations are located) is not materially different from external
revenue from clients by geographical area (where the client is
located) disclosed above.
A reconciliation of operating profit to total profit before
income tax expense is provided in the Consolidated Income
Statement.
HRG Fraedom
----------------------------------- --------
North Asia
Europe America Pacific Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
------- -------- -------- ------ -------- ------
Total segment
assets
31 March 2017 261.3 86.5 11.6 359.4 16.8 376.2
31 March 2016 244.8 81.1 9.7 335.6 12.3 347.9
Reported segments' assets are reconciled to total assets as
follows:
Years ended
31 March
--------------
2017 2016
GBPm GBPm
Total segment assets 376.2 347.9
Cash and cash equivalent
assets 35.1 43.8
Current tax assets 0.7 1.7
Financial assets - derivative
financial instruments 0.3 0.2
Deferred tax assets 45.2 50.8
457.5 444.4
------ ------
Capital expenditure by geographical location:
HRG Fraedom
----------------------------------- --------
North Asia
Europe America Pacific Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
------- -------- -------- ------ -------- ------
Capital expenditure
31 March 2017 5.3 0.5 0.3 6.1 5.0 11.1
31 March 2016 4.9 0.2 0.2 5.3 3.7 9.0
2 Operating expenses
Years ended 31
March
-----------------
2017 2016
GBPm GBPm
Underlying operating expenses
Staff costs (note 3) 196.1 184.5
Amortisation of intangible assets
other than acquired intangible
assets 7.0 6.8
Depreciation of property, plant
and equipment 4.3 3.9
Auditors' remuneration for audit
services 1.1 1.0
Operating lease rentals - buildings 11.4 10.8
Operating lease rentals - other
assets 0.5 0.5
Currency translation differences 0.1 0.3
Other expenses 65.2 65.7
--------------------------------------- ------- --------
285.7 273.5
--------------------------------------- ------- --------
Amortisation of acquired intangibles:
Amortisation of client relationships 0.2 0.4
Amortisation of other acquired
intangible assets - 0.3
--------------------------------------- ------- --------
0.2 0.7
--------------------------------------- ------- --------
Exceptional items:
Restructuring costs:
- Staff costs (note 3) 2.7 3.7
- Other expenses 1.0 0.1
--------
3.7 3.8
------- --------
Pension rectification:
- Past service cost (note 12) - 10.5
- Legal fees - 2.3
- Settlement - (11.8)
------- --------
- 1.0
3.7 4.8
--------------------------------------- ------- --------
Total operating expenses 289.6 279.0
======================================= ======= ========
Included within underlying operating expenses above is GBP2.4m
relating to research (2016: GBP1.5m).
EXCEPTIONAL ITEMS
Total exceptional costs of GBP3.7m have been incurred in the
year. These costs relate to planned cost reduction programmes in
HRG and Fraedom and are in respect of redundancy costs and onerous
lease provisions totalling GBP4.1m, partly offset by a GBP0.4m
pension curtailment gain that arose as a result of the cost
restructuring programme in Switzerland (note 12).
Total exceptional costs of GBP4.8m were incurred in respect of
the year ended 31 March 2016, representing GBP3.8m of restructuring
costs and GBP1.0m relating to pension rectification.
During the year ended 31 March 2016, the High Court granted
rectification of a deed of amendment dated 8 September 1999 in
respect of the UK pension scheme due to a mistake that had been
made in the original drafting of that deed of amendment. As a
result of the High Court confirming the correct rate of increase
for any period of deferment for pensionable service between 8
September 1999 and 28 September 2006, a past service cost of
GBP10.5m (note 12) together with associated legal costs of GBP2.3m
was incurred. This amount was materially offset by the settlement
of a claim in respect of this mistake.
SERVICES PROVIDED BY THE COMPANY'S AUDITORS
The cost of services provided by the Company's auditors,
PricewaterhouseCoopers LLP (PwC), and its associates is set out
below:
Years ended 31
March
-----------------
2017 2016
GBPm GBPm
Charged to operating expenses:
Fees paid to the Company's auditor
for the audit of the Parent Company
and Consolidated Financial Statements 0.3 0.3
Fees payable to the Company's
auditor and its associates for
other services:
Audit of the Company's subsidiaries
pursuant to legislation 0.8 0.7
---------------------------------------- -------- -------
Auditors' remuneration for audit
services 1.1 1.0
Audit related assurance service 0.1 0.1
Tax compliance services 0.2 0.1
---------------------------------------- -------- -------
1.4 1.2
======================================== ======== =======
In addition to the above services, the Company's auditors acted
as auditors to the Hogg Robinson (1987) Pension Scheme ('The UK
Scheme'). The appointment of auditors to the UK Scheme and the fees
paid in respect of that audit are agreed by the Trustees of the
scheme, who act independently from the management of the Group. The
aggregate fees paid to the Group's auditors for audit services to
the UK Scheme during the year were less than GBP0.1m (2016: less
than GBP0.1m).
3 Staff costs
Years ended 31 March
------------------------------------------
2017 2017 2017 2016
Before
exceptional Exceptional
items items
GBPm GBPm GBPm GBPm
Wages and salaries 167.5 - 167.5 157.0
Social security costs 18.0 - 18.0 17.3
Other pension costs 8.6 (0.4) 8.2 19.2
Redundancy and termination
costs 0.2 3.1 3.3 3.9
Share-based incentives 1.8 - 1.8 1.3
196.1 2.7 198.8 198.7
------------------------------- ------------ ------------ ------ ------
Other pension costs comprise:
Defined benefit schemes
(note 12):
- Current service charge
and administration expenses 2.2 - 2.2 2.1
- Curtailment gain (0.6) (0.4) (1.0) -
- Past service cost - - - 10.5
Defined contribution schemes 7.0 - 7.0 6.6
8.6 (0.4) 8.2 19.2
------------------------------- ------------ ------------ ------ ------
Years ended
31 March
----------------
2017 2016
Average monthly number of staff employed
by the Group including Key Management number number
HRG 4,360 4,704
Fraedom 262 235
4,622 4,939
------- -------
4 Finance income and finance costs
Years ended
31 March
----------------
2017 2016
GBPm GBPm
Finance income - bank interest - 0.1
Interest on bank overdrafts and loans (3.5) (4.3)
Amortisation of issue costs on bank
loans (0.6) (0.6)
Net interest expense on retirement
obligations (8.5) (8.1)
Other finance charges (0.7) (0.7)
Finance costs (13.3) (13.7)
--------------------------------------- ------- -------
Net finance costs (13.3) (13.6)
======================================= ======= =======
5 Income tax expense
Years ended
31 March
--------------
2017 2016
GBPm GBPm
Current tax:
Tax on profits of the financial
year 7.4 7.0
Adjustments in respect of previous
years 0.3 (2.3)
Total current tax 7.7 4.7
--------------------------------------- ------ ------
Deferred tax:
Origination and reversal of temporary
differences 2.5 0.3
Adjustments in respect of previous
years (0.9) 2.2
Impact of UK rate change 0.2 0.2
Total deferred tax 1.8 2.7
--------------------------------------- ------ ------
Taxation charge 9.5 7.4
======================================= ====== ======
The tax charge is split as follows:
Years ended
31 March
--------------
2017 2016
GBPm GBPm
United Kingdom 1.6 1.5
Overseas 7.9 5.9
Taxation charge 9.5 7.4
================= ====== ======
Years ended
31 March
--------------
2017 2016
GBPm GBPm
------ ------
On underlying business 10.4 8.4
Tax on amortisation of acquired
intangibles (0.1) (0.2)
Exceptional items (0.8) (0.8)
Taxation charge 9.5 7.4
================================= ====== ======
The tax assessed for the year differs from the standard rate of
corporation tax in the UK of 20% (2016: 20%) as explained
below:
Years ended
31 March
--------------
2017 2016
GBPm GBPm
Profit before tax:
Continuing operations 33.1 26.7
------------------------------------------ ------ ------
Profit before tax multiplied by the
standard rate of corporation tax in
the UK of 20% (2016: 20%) 6.6 5.3
Effects of:
Impact of UK rate change on net deferred
tax assets 0.2 0.2
Utilisation of unrecognised losses (0.4) (1.0)
Non recognition of deferred tax assets
- losses 0.5 0.3
Expenses not deductible for tax purposes 0.3 0.5
Overseas tax rate differential 2.9 1.8
Adjustments in respect of previous
years (0.6) (0.1)
Other - 0.4
Taxation charge 9.5 7.4
========================================== ====== ======
The Group makes maximum use of all brought forward losses and
other available reliefs in mitigating current tax payable.
6 Earnings per share
Earnings per share attributable to equity holders of the Company
were as follows:
Years ended 31
March
-----------------
2017 2016
pence pence
Earnings per share
Basic 6.9 5.8
Diluted 6.7 5.6
Years ended 31
March
-----------------
2017 2016
GBPm GBPm
Earnings for the purposes of earnings
per share:
Profit for the financial year 23.6 19.3
Less: amount attributable to non-controlling
interests (1.3) (0.6)
Total 22.3 18.7
============================================== ======== =======
Basic earnings per share (EPS) is calculated by dividing the
earnings attributable to equity holders of the Company by the
weighted average number of Ordinary shares outstanding during the
year, excluding those purchased by the Company's Employee Benefit
Trust.
For diluted earnings per share, the weighted average number of
Ordinary shares in issue is adjusted to assume conversion of all
dilutive potential Ordinary shares.
The following amounts have been used in the calculation of
earnings per share:
Years ended 31
March
------------------------------------
2017 2016
number number
m m
Weighted average number of Ordinary
shares in issue
Issued (for basic EPS) 323.7 324.2
Effect of dilutive potential Ordinary
shares - share-based incentives 7.9 7.7
For diluted EPS 331.6 331.9
======================================= =========================== =======
Underlying earnings per share
Underlying earnings per share attributable to equity holders of
the Company were as follows:
Years ended 31
March
-----------------
2017 2016
pence pence
Underlying earnings per share
Basic 7.8 7.2
Diluted 7.6 7.0
Underlying earnings per share is calculated on the profit
attributable to equity holders of the Company before amortisation
of acquired intangibles and exceptional items after charging
taxation associated with those profits.
Years ended 31
March
-----------------
2017 2016
GBPm GBPm
Earnings for the purposes of underlying
earnings per share:
Profit before tax from continuing
operations 33.1 26.7
Add: amortisation of acquired intangibles 0.2 0.7
Add: exceptional items 3.7 4.8
--------- ------
Underlying profit before tax 37.0 32.2
Underlying income tax expense (10.4) (8.4)
--------- ------
Underlying profit for the financial
year 26.6 23.8
Less: amounts attributable to non-controlling
interests (1.3) (0.6)
Total 25.3 23.2
--------- ------
Underlying earnings are earnings before amortisation of acquired
intangibles, exceptional items and related income tax expense.
7 Dividends per share
The dividends to the Company's shareholders in the year ended 31
March 2017 were:
Years ended
31 March
------------------------------------------------
2017 2016
GBPm GBPm
Final dividend in respect of year
ended 31 March 2016
1.83p per share (31 March 2015:
1.69p per share) 5.9 5.5
Interim dividend in respect of
year ended 31 March 2017
0.715p per share (31 March 2016:
0.68p per share) 2.3 2.2
Total dividends to the Company's
shareholders 8.2 7.7
=================================== ======================= =======================
A final dividend in respect of the year ended 31 March 2017 of
1.925p per Ordinary share, amounting to a final dividend of
GBP6,216,454 is to be proposed at the Annual General Meeting on 27
July 2017. The Employee Benefit Trust has waived its rights to
dividends.
8 Goodwill and other intangible assets
Years ended
31 March
2017 2016
GBPm GBPm
Goodwill 235.9 223.0
Other intangible
assets 21.0 19.1
256.9 242.1
------ ------
Computer
software
Externally Internally Client
Goodwill acquired generated relationships Total
GBPm GBPm GBPm GBPm GBPm
Cost
At 1 April 2015 242.9 18.6 47.5 36.1 345.1
Additions - 0.5 5.8 - 6.3
Disposals - (0.3) - - (0.3)
Exchange differences 6.5 0.4 0.2 2.1 9.2
At 31 March 2016 249.4 19.2 53.5 38.2 360.3
--------- ----------- ----------- -------------- ------
Additions - 0.8 6.9 - 7.7
Disposals - (0.3) (3.2) - (3.5)
Exchange differences 12.9 1.6 2.9 3.9 21.3
At 31 March 2017 262.3 21.3 60.1 42.1 385.8
--------- ----------- ----------- -------------- ------
Accumulated amortisation
and impairment losses
At 1 April 2015 26.4 16.7 29.7 35.5 108.3
Amortisation charge
for the year - 1.1 6.0 0.4 7.5
Disposals - (0.3) - - (0.3)
Exchange differences - 0.4 0.2 2.1 2.7
At 31 March 2016 26.4 17.9 35.9 38.0 118.2
--------- ----------- ----------- -------------- ------
Amortisation charge
for the year - 0.7 6.3 0.2 7.2
Disposals - (0.3) (3.2) - (3.5)
Exchange differences - 1.4 1.7 3.9 7.0
At 31 March 2017 26.4 19.7 40.7 42.1 128.9
--------- ----------- ----------- -------------- ------
Carrying amount
At 1 April 2015 216.5 1.9 17.8 0.6 236.8
--------- ----------- ----------- -------------- ------
At 31 March 2016 223.0 1.3 17.6 0.2 242.1
--------- ----------- ----------- -------------- ------
At 31 March 2017 235.9 1.6 19.4 - 256.9
--------- ----------- ----------- -------------- ------
The amortisation charge for the year of GBP7.2m (2016: GBP7.5m)
is comprised of GBP0.2m (2016: GBP0.7m) in respect of intangible
assets acquired via business combinations, GBP7.0m (2016: GBP6.8m)
which relates to amortisation of software purchased and internally
generated by existing businesses. There are GBP0.9m of assets in
the course of construction included within internally generated
assets at 31 March 2017 (2016: GBPnil).
Impairment of goodwill
The recoverable amount used in the assessment of goodwill for
all cash generating units comprises the higher of value in use and
fair value less costs to sell. During the year the Group reviewed
its discount rate and long term growth rates and these have been
applied in the assessment. The value in use has been calculated by
discounting at 14% per annum (2016: 11% per annum) the anticipated
pre-tax cash flows. The forecasts are prepared from management
information taking into account historical trading performance and
anticipated changes in future market conditions. The detailed
forecasts cover a period of three years from the balance sheet
date; cash flows are projected beyond that period based on market
consensus for GDP growth of 2% for HRG (2016: 2%) and 5% for
Fraedom (2016: 5%).
Goodwill consists of the following amounts related to cash
generating units of the Group:
Years ended
31 March
2017 2016
GBPm GBPm
HRG
Europe 174.3 167.9
North America 54.1 47.7
Asia Pacific 2.0 1.9
------ ------
230.4 217.5
Fraedom 5.5 5.5
235.9 223.0
------ ------
The key assumptions used in the impairment testing were as
follows:
-- Discount rates
-- Rates of growth in cash generating units beyond 3 years
-- Cash flow forecasts for years 1 to 3
Discount rate
The discount rate reflects management's estimate of the pre-tax
cost of capital employed for the Group's cash generating units
listed above. The same rate is applied to all cash generating
units, and reflects the Group's funding arrangements where all
units have equal access to the Group's treasury functions and
borrowing lines to fund their operations. None of the Group's cash
generating units demonstrate levels of risks that are significantly
different from those experienced by the Group generally, and all
have similar funding profiles and therefore the discount rate
applied is deemed to be justified.
Rates of growth in cash generating units beyond 3 years and cash
flow
Management have reviewed corporate travel industry and payment
industry forecasts and consider that the market consensus for GDP
growth of 2% for Travel Management and 5% for FinTech is reasonable
for the purposes of the assessment of goodwill.
Goodwill impairment
Management believes that no reasonable change in the key
assumptions would cause any of the identified cash generating units
to become impaired.
9 Property, plant and equipment
Plant
Property and equipment Total
GBPm GBPm GBPm
Cost
At 1 April 2015 9.1 41.6 50.7
Additions for the year 0.3 2.4 2.7
Disposals for the year (0.4) (1.6) (2.0)
Exchange differences 0.1 1.6 1.7
At 31 March 2016 9.1 44.0 53.1
Additions for the year 0.3 3.1 3.4
Disposals for the year (0.6) (3.5) (4.1)
Exchange differences 0.7 4.8 5.5
At 31 March 2017 9.5 48.4 57.9
========= =============== ======
Accumulated depreciation
At 1 April 2015 7.5 33.4 40.9
Depreciation charge for
the year 0.4 3.5 3.9
Disposals for the year (0.4) (1.6) (2.0)
Exchange differences 0.1 1.4 1.5
At 31 March 2016 7.6 36.7 44.3
Depreciation charge for
the year 0.5 3.8 4.3
Disposals for the year (0.6) (3.4) (4.0)
Exchange differences 0.6 4.3 4.9
At 31 March 2017 8.1 41.4 49.5
Carrying amount
At 1 April 2015 1.6 8.2 9.8
--------- --------------- ------
At 31 March 2016 1.5 7.3 8.8
--------- --------------- ------
At 31 March 2017 1.4 7.0 8.4
========= =============== ======
Property is comprised of leasehold properties and leasehold
improvements. Plant and equipment is comprised of IT and office
equipment.
Years ended
31 March
--------------
2017 2016
GBPm GBPm
------------------------------------ ------ ------
Carrying amount of property, plant
and equipment held under finance
leases 0.4 0.9
------------------------------------- ------ ------
10 Net debt
Years ended
31 March
----------------
2017 2016
GBPm GBPm
------- -------
Total financial liabilities -
borrowings 55.7 76.4
Add back: Unamortised loan issue
costs 0.4 1.0
Cash and cash equivalent assets (35.1) (43.8)
Net debt 21.0 33.6
======= =======
Analysis by currency after currency swaps
Years ended
31 March
--------------
2017 2016
GBPm GBPm
------ ------
Sterling 38.1 53.9
Euro (8.0) (6.4)
Swiss Franc (1.7) (2.5)
Other European currencies (4.0) (6.2)
Canadian Dollar 0.6 3.1
US Dollar 0.2 (5.6)
Other currencies (4.2) (2.7)
------
21.0 33.6
====== ======
11 Provisions
Restructuring Other Total
GBPm GBPm GBPm
At 1 April 2015 2.7 2.7 5.4
Additional provisions made in the
year charged in the Consolidated
Income Statement 4.1 0.1 4.2
Additional provisions made in the
year in respect of property dilapidations
included in property, plant and
equipment - 0.2 0.2
Amounts used during the year (4.6) (0.2) (4.8)
Unused provisions reversed (0.1) (0.3) (0.4)
Exchange differences 0.2 - 0.2
-------------- ------ ------
At 31 March 2016 2.3 2.5 4.8
-------------------------------------------- -------------- ------ ------
Additional provisions made in the
year charged in the Consolidated
Income Statement 4.3 0.2 4.5
Amounts used during the year (5.5) (0.2) (5.7)
Unused provisions reversed - (0.5) (0.5)
Exchange differences 0.1 0.1 0.2
At 31 March 2017 1.2 2.1 3.3
============================================ ============== ====== ======
Restructuring provisions represent redundancy and office closure
costs in a number of Group companies and are disclosed as current
liabilities because they are likely to give rise to payment within
one year of the balance sheet date. At 31 March 2017, GBP1.1m
(2016: GBP2.2m) was held against restructuring provisions in
respect of exceptional items.
Other includes provisions for onerous contracts, property
dilapidations and litigation, which are likely to give rise to
payment after more than one year of the balance sheet date, ranging
from 2 to 8 years.
Provision has been made for the present value of property lease
commitments in respect of properties surplus to operational
requirements. Allowance has been made for anticipated sublet rental
income, and costs to restore premises to their original condition
upon vacating them where such an obligation exists under the
lease.
12 Retirement benefit obligations
Defined benefit pension arrangements
The Group's principal defined benefit pension arrangement is the
Hogg Robinson (1987) Pension Scheme (the UK Scheme). The UK Scheme
is registered and subject to the statutory scheme-specific funding
requirements outlined in UK legislation, including the payment of
levies to the Pension Protection Fund as set out in the Pension Act
2004. The UK Scheme is established under trust and the
responsibility for its governance lies jointly with the Trustees
(Hogg Robinson (1987) Pension Scheme Trustee Limited) and the
Group.
The UK Scheme was closed to new members in March 2003, with
benefits based on final pensionable salary. The increase in final
pensionable salary since 31 March 2003 is predominantly limited to
the lower of the increase in inflation and 5% per annum. The latest
actuarial valuation of the UK Scheme was carried out as at 31 March
2014 by an independent qualified actuary.
Following a consultation process with active members, the UK
defined benefit section was closed to future accrual on 30 June
2013 and replaced with a defined contribution section.
The Group also operates defined benefit schemes in Switzerland,
Germany, Italy and France. The defined benefit scheme in Norway was
closed in the year to 31 March 2016.
The following amounts have been included in the Consolidated
Income Statement in respect of all defined benefit pension
arrangements:
Years ended
31 March
--------------
2017 2016
GBPm GBPm
Current service charge 2.2 2.1
Curtailment gain (0.6) -
------ ------
Charge to underlying operating
profit 1.6 2.1
Charge to exceptional items - pension
rectification (note 2) - 10.5
Charge to exceptional items - curtailment
gain (note 2) (0.4) -
Charge to operating profit 1.2 12.6
------ ------
Interest cost on pension scheme
liabilities 17.6 17.1
Interest return on pension scheme
assets (9.1) (9.0)
Charge to finance costs 8.5 8.1
------ ------
Total charge to Consolidated Income
Statement 9.7 20.7
====== ======
In respect of the year ended 31 March 2016 a past service cost
of GBP10.5m arose in the UK as a result of the correction of a
mistake in the drafting of a deed of amendment. Further detail is
provided in note 2.
A curtailment gain of GBP1.0m arose in the year ended 31 March
2017 in respect of leavers of the Switzerland scheme. GBP0.4m is
included within exceptional items and GBP0.6m is included in
underlying operating profit.
The following amounts have been recognised as movements in
equity:
Years ended
31 March
------------------
2017 2016
GBPm GBPm
Actual return/(loss) on scheme
assets 29.8 (3.4)
Less: amounts included in interest
income (9.1) (9.0)
-------- --------
20.7 (12.4)
Experience gains and losses arising
on scheme liabilities 0.3 1.5
Changes in assumptions underlying
the present value of scheme liabilities:
- Demographic 86.8 2.8
- Financial (112.8) 21.2
(5.0) 13.1
Exchange rate movement (1.7) (1.6)
Movement in the year (6.7) 11.5
======== ========
Cumulative amount recognised in
the Consolidated Statement of
Comprehensive Income since the
transition date to IFRS, 1 April
2003 (208.1) (201.4)
======== ========
The key assumptions used for the UK Scheme were:
Years ended 31
March
----------------------
2017 2016 2015
------ ------ ------
Rate of increase in final
pensionable salary 2.90% 2.60% 2.60%
Rate of increase in pensions
in payment - accrued before
1999 5.00% 5.00% 5.00%
Rate of increase in pensions
in payment - accrued after
1999 3.40% 3.10% 3.10%
Discount rate 2.70% 3.50% 3.30%
Inflation - RPI 3.40% 3.10% 3.10%
Inflation - CPI 2.60% 2.40% 2.40%
The assumptions for the schemes in Switzerland, Germany, Italy
and France do not produce materially different results from the
assumptions used for the UK Scheme.
The net present value of the defined benefit obligations of the
UK Scheme is sensitive to both the actuarial assumptions used and
to market conditions. If the discount rate assumption was 0.1%
lower, the obligations would be expected to increase by GBP11.2m
and if it was 0.1% higher, they would be expected to decrease by
GBP10.9m. If the inflation assumption was 0.1% lower, the
obligations would be expected to decrease by GBP5.0m and if it was
0.1% higher, they would be expected to increase by GBP3.1m. The
inflation assumption sensitivity factors in the impact of inflation
on the rate of increase in final pensionable salary and rate of
increase in pensions in payment accrued after 1999 assumptions.
During the year the Group commissioned a review, in
collaboration with the UK Scheme's Trustees, of the statistical
mortality assumptions underpinning the UK Scheme's liabilities.
This review called a Medically Underwritten Mortality Study (MUMS)
seeks to better understand the specific health profile of the UK
Scheme's membership. A sample of members aged 55 to 80 was
selected, representing 13% of the UK Scheme's total membership by
headcount and 39% by liability value. These members were asked to
complete and return a health questionnaire and follow-up interviews
were conducted where clarification was needed. Approximately two
thirds of targeted members responded, representing 24% of the UK
Scheme's total liabilities. The responses were analysed by
mortality underwriting specialists who translated them into
mortality assumptions. The results from the sample were then
extrapolated using a postcode differential to calculate the UK
Scheme's IAS19 liabilities. The methodology used was compliant with
the relevant technical Actuarial Standards in force published by
the Financial Reporting Council.
The mortality assumptions for the UK Scheme are based on SAPS /
CM1(2016) tables (2016: SAPS / CM1(2013) tables) with 'medium
cohort' projections and a 1.25% underpin in the rate of future
improvements in mortality. Life expectancy at the age of 65 is
assumed to be:
Years ended
31 March
--------------
2017 2016
------ ------
Current pensioners
Male 21.4 24.0
Female 23.6 26.4
Future retirements
Male 22.8 25.9
Female 25.1 28.4
The UK liability is based on the assumption that active and
deferred members will take 25% of the value of their pension as a
lump sum on retirement.
The net present value of the defined benefit obligations of the
UK Scheme are sensitive to the life expectancy assumption. If there
was an increase of one year to this assumption the obligations
would be expected to increase by GBP25.9m.
The provision included in the Consolidated Balance Sheet arising
from obligations in respect of all the Group's defined benefit
schemes is as follows:
Years ended
31 March
------------------
2017 2016
GBPm GBPm
Present value of defined benefit
obligations
Unfunded scheme 17.5 15.8
Wholly or partly funded schemes 567.7 539.1
-------- --------
585.2 554.9
Fair value of scheme assets (320.0) (296.6)
-------- --------
265.2 258.3
======== ========
The net present value of defined benefit obligations has moved
as follows:
2017 2016
GBPm GBPm
At beginning of year 554.9 563.8
Current service cost 2.2 2.1
Curtailment gain (1.0) -
Past service cost - pension rectification - 10.5
Interest cost 17.6 17.1
Contributions by plan participants 0.6 0.6
Actuarial losses 25.7 (25.5)
Foreign currency exchange changes 5.5 3.0
Benefits paid (20.3) (16.7)
At end of year 585.2 554.9
======= =======
The fair value of scheme assets has moved as follows:
Years ended
31 March
----------------
2017 2016
GBPm GBPm
At beginning of year 296.6 305.2
Interest income 9.1 9.0
Actual return on assets excluding
amounts included in interest income 20.7 (12.4)
Foreign currency exchange changes 3.8 1.5
Contributions by the employer 9.5 9.4
Contributions by plan participants 0.6 0.6
Benefits paid (20.3) (16.7)
At end of year 320.0 296.6
======= =======
The assets held in defined benefit schemes were as follows:
Years ended
31 March
-------------------
2017 2016
GBPm GBPm
Equity instruments
UK Scheme
Developed World Hedge
Fund 28.2 24.3
Global Absolute Return
Fund 44.9 41.2
Private Equity 10.5 9.6
Broad Opportunities Fund 25.4 24.9
----------- ------
109.0 100.0
Overseas Schemes 16.1 13.6
----------- ------
125.1 113.6
Debt instruments
UK Scheme
UK Equity Linked Gilts 17.7 14.6
Overseas Equity Linked
Gilts 33.6 29.1
Credit Fund 30.4 29.5
Fixed Income Global Opportunities 21.6 20.6
----------- ------
103.3 93.8
Overseas Schemes 18.5 15.8
----------- ------
121.8 109.6
Property
UK Scheme
Long Lease Property Fund 30.2 28.1
Partners Fund 27.2 25.2
Real Estate Fund 4.4 9.1
----------- ------
61.8 62.4
Overseas Schemes 6.6 7.0
----------- ------
68.4 69.4
Cash and cash equivalents
UK Scheme 4.6 3.6
Overseas Schemes 0.1 0.4
----------- ------
4.7 4.0
320.0 296.6
=========== ======
None of the plan assets are represented by financial instruments
of the Group. None of the plan assets are occupied or used by the
Group. The majority, GBP278.3m (2016: GBP253.2m) of the schemes'
assets are held in active markets with quoted market prices, the
remaining GBP41.7m (2016: GBP43.4m) is invested in small company
shares held in private equity funds and illiquid funds.
For several years, the UK Scheme has been closed to new
entrants, has capped increases in pensionable salary and was closed
to future accrual from 30 June 2013 following a consultation
process with active members. Following the most recent triennial
valuation, effective April 2014, the Trustees agreed deficit
reduction payments totalling GBP8.3m for the year ending 31 March
2018, this represents a future economic benefit. The weighted
average duration of the defined benefit obligation is 22 years.
Through its defined benefit schemes the Group is exposed to a
number of risks, the most significant of which are detailed
below:
Asset volatility - the scheme liabilities are calculated using a
discount rate set with reference to corporate bond yields, if plan
assets underperform this yield this will create a deficit. In
mitigation, the schemes hold a significant proportion of equities,
which are expected to outperform corporate bonds in the long-term
but which may result in volatility and risk in the short-term. To
avoid undue concentration of asset volatility risk in any one asset
class, certain assets are held in a matching portfolio, consisting
of corporate bonds and index-linked gilts, designed to mirror
movements in corresponding liabilities.
The Group believes that due to the long-term nature of plan
liabilities and the strength of supporting Group, a level of
continuing equity investment is an appropriate element of the
Group's long-term strategy to managed the plans efficiently.
Interest rate risk - liabilities are sensitive to movements in
interest rates, a decrease in corporate bond yields will increase
plan liabilities, although this will be partly offset by an
increase in the plans' bond holdings.
Inflation risk - liabilities are sensitive to movements in
inflation, with higher inflation leading to an increase in the
valuation of liabilities (within the limits set by the scheme).
Life expectancy - liabilities are sensitive to life expectancy,
with increases in life expectancy leading to an increase in the
valuation of liabilities.
The obligations and assets are split as follows:
Years ended 31 March
------------------------------------------------------------
2017 2017 2017 2016 2016 2016
UK Overseas Total UK Overseas Total
GBPm GBPm GBPm GBPm GBPm GBPm
Defined benefit
obligations (526.0) (59.2) (585.2) (497.4) (57.5) (554.9)
Fair value of
plan assets 278.7 41.3 320.0 259.8 36.8 296.6
Deficit (247.3) (17.9) (265.2) (237.6) (20.7) (258.3)
-------- --------- -------- -------- --------- --------
The UK Scheme deficit increased by GBP9.7m to GBP247.3m driven
by an increase in the UK Scheme liabilities of GBP28.6m partly
offset by a GBP18.9m increase in the fair value of plan assets.
During the year a MUMS was carried out looking into the health of
the UK Scheme's members in order to refine the mortality
assumptions. The GBP28.6m increase in the UK Scheme liabilities is
net of the positive financial impact of the MUMS on the year end
pension valuation amounting to GBP68.4m. Excluding this reduction,
the UK Scheme liabilities have increased by GBP97.0m primarily
driven by a 0.8% decrease in discount rate, GBP96.7m, higher
inflation rate assumption, GBP17.9m, partly offset by the
application of the latest mortality rates, GBP19.0m.
The overseas schemes' deficit decreased by GBP2.8m and includes
an increase of GBP1.7m relating to foreign exchange. Excluding
foreign exchange the overseas schemes deficit have decreased by
GBP4.5m, driven by a decrease in the schemes' liabilities of
GBP3.8m, including the effect of a GBP1.0m curtailment gain in
Switzerland and an increase in schemes' assets of GBP0.7m. The net
deficit of the overseas schemes primarily relates to the German
scheme GBP16.3m (2016: GBP14.8m).
Five year experience
Years ended 31 March
------------------------------------------------
2017 2016 2015 2014 2013
GBPm GBPm GBPm GBPm GBPm
Defined benefit
obligations (585.2) (554.9) (563.8) (462.3) (423.4)
Fair value of
plan assets 320.0 296.6 305.2 281.9 264.0
Deficit (265.2) (258.3) (258.6) (180.4) (159.4)
Experience gains/(losses)
on plan liabilities 0.3 1.5 5.3 (0.1) (0.2)
on plan assets 20.7 (12.4) 15.3 8.0 14.5
-------- -------- -------- -------- --------
Pension funding in excess of the charge to operating profit is
shown in the Consolidated Cash Flow Statement as follows:
Years ended
31 March
--------------
2017 2016
GBPm GBPm
Contributions less service cost (7.3) (7.3)
====== ======
DEFINED CONTRIBUTION ARRANGEMENTS
The Group also operates defined contribution plans which receive
fixed contributions from group companies. The Group's legal or
constructive obligation for these plans is limited to the
contributions. The expense recognised in the current period in
relation to these contributions was GBP7.0m (2016: GBP6.6m).
13 Contingent liabilities
In 1994 Compagnie Dens Ocean NV (CDO), an indirectly owned
subsidiary, received a claim from the Belgian Customs authorities
resulting in a liquidator being appointed in 1995. Civil litigation
is in process with criminal proceedings being considered pending
the final outcome of the civil action. The liquidator is defending
the civil action vigorously and the Directors continue to believe,
on the basis of legal advice received, that any future impact on
the net assets of the Group would not be material.
14 Cash generated from operations
Years ended
31 March
---------------
2017 2016
GBPm GBPm
Profit before tax from continuing
operations 33.1 26.7
Adjustments for:
Depreciation and amortisation
(note 8 and 9) 11.5 11.4
Net increase in provisions 4.0 3.8
Share of results of associates
and joint ventures (0.9) (1.0)
Net finance costs (note 4) 13.3 13.6
Pension curtailment gain (1.0) -
Pension past service cost - 10.5
Share-based incentives 1.8 1.3
Other timing differences (0.5) -
------ -------
61.3 66.3
Cash expenditure charged to provisions
(note 11) (5.7) (4.8)
Change in trade and other receivables (7.0) 14.9
Change in trade and other payables 1.6 (21.0)
Pension funding in excess of charge
to operating profit (7.3) (7.3)
Cash generated from operations 42.9 48.1
======================================== ====== =======
This information is provided by RNS
The company news service from the London Stock Exchange
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