Financial Review
CENTRAL COSTS
Central costs, before one-off items, increased by 6.3% over the prior year. This primarily reflects inflation and the accounting costs of the new long-term incentive plan. Savings have been implemented in a number of head office functions although these will be offset in 2007 by the initial set-up costs of a UK shared service centre and other initiatives. Over the medium-term, these offer the prospect of improved administrative efficiency in many UK businesses.
In 2006, the principal one-off item was a £14.0 million curtailment credit arising out of the closure to future accrual of the UK defined benefit pension scheme at the end of August. In 2005, one-off costs largely related to defence of the approach from Raphoe. This had been treated as an exceptional cost but was reclassified this year as a one-off item to improve comparability. One-off items also included redundancy and restructuring charges in both years.
PROFITS
Operating profit from continuing operations before one-off items and amortisation of intangible assets reduced by £22.2 million to £298.6 million. Amortisation of intangible assets of £25.9 million (2005: £20.2 million) and one-off items of £23.6 million (2005: £30.5 million) resulted in operating profit of £249.1 million (2005: £270.1 million). At constant 2005 exchange rates, before one-off items and amortisation of intangible assets, operating profit fell by 4.4%.
EXCEPTIONAL ITEMS
Exceptional items recorded in the first quarter relating to the closure of the UK linen and workwear business in April 2006 have now been transferred to discontinued operations. In the year ended 31December 2005, the costs of defending the takeover approach from Raphoe amounting to £10.9 million were treated as an exceptional item. This and other items shown in 2005 as exceptional items have also been transferred to discontinued operations or included as continuing operations and reclassified as one-off items as appropriate in order to improve comparability.
ONE-OFF ITEMS
One-off items primarily relate to the group’s restructuring programme and consist of the profit on the sale of the former head office, consultancy, reorganisation and redundancy costs and a pension curtailment credit. These have been separately identified because they are not considered to be “business as usual” expenses and, although many of them are small, they are numerous and have a varying impact on different businesses and reporting periods. Whilst not large enough to be classified as exceptional items, in aggregate they make it difficult to understand underlying trends in performance unless they are separately identified.
Across the group, the net cost of one-off items in 2006 was £23.6 million compared with £30.5 million in 2005. In 2006, the closure of the UK defined benefit scheme to future accrual resulted in a reduction of the scheme’s liabilities by approximately 1.4% with the resultant non-cash credit of £14.0 million taken to operating profit in the second half of 2006 and treated as a one-off item. Excluding this credit, one-off items in 2006 totalled a net charge of £37.6 million, the bulk of which were incurred in the Textiles and Washroom Services division. This relates primarily to restructuring activities in UK Washroom and German Textiles. In addition, the Pest Control division incurred one-off costs of £6.8 million in 2006, mostly relating to redundancy and reorganisation activity in the UK.
Rationalisation costs of up to £10 million may be incurred during 2007 on initiatives underway or under consideration. This includes £1.5 million for the completion of the changes in UK Washroom and UK Pest Control. In addition, around half of the £12 million Target Express anticipated integration costs will be incurred in 2007, although synergy benefits will not be realised until 2008.
