Operating performance
The strong momentum from previous years continued in 2007 as we had another successful year due to a combination of organic growth, good performance from acquisitions made in 2006 and increased acquisition spend. Although some currencies were marginally stronger than in 2006, the translation effect of the weaker US dollar resulted in overall currency movements significantly reducing the reported growth rates of revenue and operating profit. The operations, including the relevant growth rates, are therefore reviewed below at constant exchange rates to remove the distorting translation impact of these currency movements and, unless stated otherwise, in this review references to operating profit are to operating profit before intangible amortisation. Changes
in the level of revenue and profits at constant exchange rates have been calculated by retranslating the results from 2006 at the average exchange rates used for 2007.
Overall revenue was £3,581.9 million (2006: £3,333.2 million) and operating profit was £242.9 million (2006: £226.3 million), in each case up 12% at constant exchange rates. While the reported operating profit margin was steady at 6.8%, the margin, excluding the impact of currency exchange and acquisitions, moved
up to 6.9%. At constant exchange rates revenue in North America rose by 5% and operating profit increased 2%, with the lower level of
profit increase largely due to the impact of lower margin acquisitions. UK & Ireland showed a 28% increase in revenue and a 25% rise in operating profit resulting from good organic growth and the positive impact of recent acquisitions. In Continental Europe revenue
and operating profit increased by 12% and 21% respectively at constant exchange rates due to good organic growth, continued improvement
in operating margins and the positive impact of current year acquisitions. At constant exchange rates the Rest of the World experienced a 10% increase in both revenue and operating profit.
Adjusted earnings per share, after eliminating the effect of intangible amortisation, were 45.1p (2006: 41.7p), an increase of 13% at constant exchange rates, while basic earnings per share were 39.8p (2006: 37.8p), an increase of 10% at constant exchange rates. Return on average operating capital remained consistently high at 60.9%. After expenditure on acquisitions and the share buy back, partly offset by strong operating cash flow, net debt increased by £236.9 million to £667.6 million resulting in
a net debt to EBITDA ratio of 2.5 and interest cover of 9 times.
Acquisitions
Spend on acquisitions rose to £197 million, primarily as a result of a major expansion in the Benelux, four noteworthy investments in the UK and Ireland, an entry into the promising Spanish market and two further acquisitions in North America. As a result we not only expanded the Group into new countries but also extended our product offering and customer base in our existing operations.
In January we announced two acquisitions
in North America. Tec Products, a New Jersey based redistribution business with revenue of $14 million in 2006, is principally engaged in the supply of jan/san and associated products while Westgate, also a New Jersey based redistribution business with revenue of $18 million in 2006, supplies personal protection equipment in the eastern US and Canada.
We entered the exciting, and so far unconsolidated, Spanish market in February with our acquisition of Iberlim, a cleaning and hygiene business based near Barcelona with 2006 revenue of €9 million. In August we acquired King Benelux, with pro forma revenue in 2006 of €125 million, which is principally engaged in the distribution of products to the healthcare and contract cleaning sectors in the Netherlands and the foodservice, retail and healthcare sectors in Belgium. This company
is an excellent addition to our successful business in the Netherlands and also provides
a significant business in Belgium.
We announced in August the first of four UK & Ireland acquisitions with the purchase of Coffee Point, a London based business engaged in the sale and operation of vending machines and associated services for a broad customer base. This business, with revenue of £45 million in the year ended March 2007, substantially increased the size of our vending business to the point that we are now the largest vending operator in the UK. In October we completed the acquisition of Irish Merchants, a business based in Dublin with revenue of €45 million in the year ended March 2007, which is involved in the distribution of foodservice disposables, janitorial supplies and beverage systems to the horeca, healthcare and retail sectors throughout Ireland. The acquisition of this company, which was formerly associated with King Benelux, is
a good strategic fit as it significantly increases the size of our business in Ireland and strengthens our position there. Finally, in December we acquired Care Shop, a Bolton based business which is a leading national supplier of consumables to the independent care and nursing homes market and which
had revenue of £19 million in the year ended March 2007, and Rafferty, a distributor of guest amenity products to hotels throughout Ireland with revenue of £9 million in the year ended October 2007.
Since the year end we have announced two further acquisitions. Günter Guest Supplies
was acquired in January. Based in Bremen, Germany, it supplies guest amenity products
to hotels throughout Europe and had revenue
of
€9 million in 2007. In February we purchased Prot Cap, a leading national supplier of personal protection equipment based in São Paulo, which represents our first move into the large and rapidly growing Brazilian market. It had revenue in 2007 of R$118 million.
Prospects
The strong performance of the Group has continued into 2008 due to good organic growth bolstered by the positive impact from acquisitions. Despite the current uncertainties in the wider economic environment, the combination of firm product prices, especially in paper, and new customer wins is supporting our underlying growth rates in the coming period.
In North America we believe that our business model, which sells a high proportion of our products to food related sectors, is resilient and should develop well. In addition the acquisitions made in previous periods are continuing to improve their profitability.
We anticipate that the UK & Ireland business will continue to experience high growth rates driven by good organic growth resulting from new customer gains and the integration of acquisitions made in the second half of last year. The synergies arising from the acquisitions of Coffee Point and Irish Merchants are already being realised.
In Continental Europe the broad based good organic growth across the business area
and the operational improvements made
in France should continue to bolster our
results moving forward. The integration of
King Benelux is ongoing and progressing well and Iberlim, our entry into Spain, is trading ahead of expectations.
In the Rest of the World, our larger businesses in Australasia are performing well and we expect improved results from our smaller healthcare business. Our latest acquisition, Prot Cap in Brazil, will positively impact this year’s results.
The continued strengthening of the Group in
the international markets in which we compete and the opportunity for further growth through acquisitions, give us confidence that the prospects are good and that our business
will continue to grow successfully.
