PETER MULLINS Chief Executive Officer
I'd like to start my first CEO's report by acknowledging the vital role played by Andrew Dutton and the Board during the 2014-15 financial year. This has been a year of significant change, and I am immensely appreciative of the Board's support as I transitioned into the role of CEO.
Since November, I've been immersing myself in all aspects of the Company's operations, visiting a number of the 29 countries in which we operate, and meeting many of our widespread and hugely talented staff. I'd like to thank each and every one of them for their enthusiasm and support in welcoming me, and for their efforts over the past 12 months.
The Company embarked on an extensive change programme in the second half of the year. I will expand on that programme later in this report, but it has put huge demands on senior management over and above their day jobs. Given that, and the wide-ranging
distractions as a result of the approach from Pacific Equity Partners, I was very pleased that we still managed to increase our underlying EBITDA by 17.9% to $126.3m. At a statutory level, EBITDA rose 10.9% to $103.5m, the difference being accounted for by significant items of $22.8m. These are detailed in the financial statements, but included costs incurred in responding to the approach by Pacific Equity Partners and setting up the Company for growth through a number of operational initiatives.
Revenue rose by 3.8% to $547.7m and benefited from the weaker Australian dollar. Improving organic revenue growth is the major focus of our strategy.
During the year we introduced a number of operational efficiency initiatives which resulted in improved productivity. Underlying costs were kept flat year on year and resulted in a 280 basis point improvement in underlying EBITDA margin to 23.1%.
Overall, the Company's operational performance in FY15 was mixed. Whilst the Company made good progress in improving profitability, organic revenue growth was not strong enough.
The majority of our business units grew revenue by an acceptable 6.3%. However, this was dragged back by our Compliance eLearning business and our Australian Assurance business.
The operating divisions grew underlying EBITDA from $122.1m in FY14 to $143.6m in FY15, an increase of 17.6%. Corporate Services costs increased from $15.0m to $17.3m as a result of the weaker Australian dollar and initiatives to improve IT governance processes.
Overall, the Company achieved an EBITDA before significant charges of $126.3m, up 17.9% on FY14.
The Assurance Services division achieved revenue growth of 6.6% to $205.7m equivalent to 2.6% on a constant currency basis. The result reflects strong momentum with second-half growth of 3.4% compared to 1.8% in the first half. The performance across our key markets was mixed, although we made good progress servicing food sector businesses, one of our targeted areas of growth.
Asia increased by more than 9%, driven through continued growth in its Food business. Similarly, EMEA delivered over 6% growth with an improved second-half performance as the Food business gained a new major global fast food retailer client. The Americas region also delivered robust growth with revenues up over 8%. As anticipated, the Australian business was down year on year. We improved the performance in the Australian management systems auditing business in the second half compared to the first. The decline in demand for Learning services associated with the soon to be replaced 9001 Standard also impacted sales for this division. An improved performance is expected in FY16.
Overall, EBITDA was up by 19.6% to $39.7m at a margin of 19.3%, compared to 17.2% in the previous corresponding period. This improvement of over 200 basis points in EBITDA margin reflects the impact of ongoing efficiency improvement initiatives across all regions. On a constant currency basis EBITDA was up 16.6%.
In July 2014 we acquired the business of OCICERT Mexico SA de CV. This acquisition adds scale to our existing management system business in Mexico and will help us to better serve global clients in Latin America.
The Compliance division delivered revenue growth of 5.2% and a substantial 35.9% increase in EBITDA compared to FY14. On a constant currency basis revenue reduced 3.3% and EBITDA increased by 23.7%. The improved profitability reflects the operational efficiency initiatives which have seen operating margins improve from 26.9% in FY14 to 34.8% this year. This strong improvement is ahead of the "mid-thirties" margin that we targeted by the end of FY16.
The Governance, Risk and Compliance (GRC) operations performed well, achieving robust revenue and EBITDA growth. As expected, the Learning business saw revenue reduce in constant currency terms but achieved much improved EBITDA. We expect this business to return to growth in FY16.
During the period the GRC business completed a major release of Compliance 360 (C360) to introduce a number of significant changes and improved functionality, all of which has greatly enhanced the user experience and appeal of the product. These changes include a complete overhaul of the user interface and user experience and the addition of significant new functionality in response to market needs. During FY16 we are adding international functionality (e.g. multi-date formats, currencies and languages), and introducing an improved reporting and business intelligence capability. This will dramatically improve the geographic reach of this impressive platform.
Management has improved and stabilised our legacy learning management systems (LMS) and, as a result, the Company has seen a significant improvement in client retention rates. Management has also reassessed our Learning strategy in relation to the LMS and has concluded that whilst an LMS is an important element of any learning solution, there is no strategic advantage in continuing to develop a proprietary system. Recently developed and commercially available third party LMS are good quality and offer the flexibility we require. In addition, an increasing number of clients have their own LMS and therefore only want SAI Global's learning content. As a result of these changes in the market, we will in future focus on our industry leading content, rather than seeking to compete as a system provider.
We are therefore placing greater focus on refreshing and modernising our most popular courses.
This business distributes technical and business information such as Standards, legislation and other technical information, and also provides internally developed intellectual property such as bibliographic databases and information workflow solutions.
The Standards and Technical Information business grew its revenue by 3.0%. Revenue growth in the APAC region of 5.5% was partially offset by a decline in EMEA. This decline relates predominantly to the ASME Pressure Vessel Code which is published every two years and caused a spike in EMEA publication revenue in the prior year. Revenue was also impacted by the downward pressure on oil prices resulting in oil and gas clients renewing subscriptions at a lower value. Despite these headwinds, this business grew underlying EBITDA by 3.7%. On a constant currency basis EBITDA was up 1.1%.
Operations associated with the Publishing Licence Agreement between Standards Australia and SAI Global continue to operate effectively.
SAI Global's Property Services division provides two core areas of services: business process outsourcing (focused on mortgage services), and information broking and data services.
The Property business achieved revenue growth of 1.5% (4.9% if the government authority fee pass-through component of revenue is excluded) and EBITDA growth of 18.7%. EBITDA margins increased by 2.4% to 16.9% compared to the previous corresponding period. This strong performance has been driven by the continued buoyant property market in Australia as well as the full impact of recent new business wins from HSBC, Bankwest WA and Commonwealth Bank WA and continued efficiency initiatives in our national operations group.
In late October 2014, the Property division acquired the exclusive licence to the Encompass software in Australia which it sold previously under a revenue sharing agreement. In the second half of FY15, this was launched in conjunction with a new bundled report, combining the strength of Search Manager with the Encompass platform, to deliver a unique Company Dynamic Report to the market. This information brokerage and data services initiative is Property's first foray into the lucrative value-added content market with the objective of winning market share from existing participants.
Settlement Room was launched during the first half of FY15 enabling Conveyancing Manager clients and banks to electronically validate and track bank settlement details prior to settlement. Feedback from clients has been positive, with more than 8,000 legal conveyancing and legal practitioners having used Settlement Room in FY15. In June we announced a strategic partnership with Rundl. When Rundl is combined with our electronic Settlement Room, we are able to add value to all parts of the mortgage process. Rundl provides a secure communications eco system which allows the buyer and seller to be central to the communication needed for a property transaction. We see this as a significant step forward in putting the client at the centre of the transaction and significantly improving the transparency of what can be a very stressful process.
Winning the NAB Broker mortgage settlements contract represents a significant win for SAI Global, meaning that we will soon be performing mortgage processing services for all four of the major Australian banks.
Within our Property division, we have created an exceptionally strong operational capability. This capability is transferable to adjacent markets and we are investigating opportunities to expand into other business process outsourcing areas.
The costs associated with running the Company's headquarters in Australia are recorded as Corporate Services, and include the costs associated with maintaining an appropriate governance regime for an ASX200 listed entity with a portfolio of international businesses. The main categories of expenses relate to the CEO and Non-Executive Directors, Information Technology, Finance, Human Resources, Company Secretariat, Legal, Treasury, Investor Relations, Internal Audit and External Audit fees. Costs which can be attributed to an operating division are recharged as corporate allocations as disclosed in the segment note (Note 4).
The increase in Corporate Services' costs relates to the impact of the weaker Australian dollar and the ongoing implementation of recommendations from the Capgemini information technology review.
Purpose, Vision and Values
To succeed and grow as a company, it's fundamentally important for us to be aligned behind a common Purpose, Vision and Values. In other words, why the company exists, where it is heading and how we, as its employees, are going to conduct ourselves on that journey.
We define our Purpose, the reason we exist, as "Creating Trust in a Complex World".
There are two key words in our Purpose, "Trust" and "Complex". Building Trust is the cornerstone of our purpose - we need to build trust with our clients, and critically, we need to help our clients build trust with their customers. Undoubtedly the challenge of risk management is becoming more and more complex for our clients and a cornerstone of our purpose is to simplify their complex world.
Our Vision, the direction in which we are heading, is "To be the fastest growing and most trusted risk management solutions business".
Both of our operating divisions, Property Services and Risk Management Solutions, help their clients to manage and reduce risk in their businesses. In the modern business environment there is an increasing emphasis on risk management and risk mitigation and, whilst this is potentially onerous for businesses, it also creates competitive advantage for those who manage it effectively. As we help our clients to realise this opportunity we will see significant growth in our own business.
Our behaviours are guided by our values, which were re-visited and refreshed in 2015. They are:
Our new structure
From 1 July SAI Global moved to a new structure of two operating divisions namely, Property Services and Risk Management Solutions which was formed from Standards & Technical Information, Compliance and Assurance. This structure enables SAI Global to more effectively service our clients' needs across the risk management lifecycle by offering bundled products.
The sales, marketing and product management teams have been combined under the leadership of Paul Butcher, Chief Commercial Officer. Our product lines are now organised in four families: Risk, Learning, Assurance and Knowledge, each with its own Product Manager focused on driving revenue growth on a global basis for their portfolio.
The operations teams that deliver the services sold by the Commercial team have been re-organised on regional lines under three Regional Directors covering the Americas, EMEA and Asia Pacific and are working closely with the respective regional sales leaders to drive profitable revenue growth in their respective geography.
The IT teams around the world have been unified in a single team reporting to our Global Chief Information Officer, Malcolm Pascoe. Finance and Human Resources leaders report functionally to the Group CFO and Global Head of Human Resources respectively and provide services to the regional businesses.
To put the new structure in place by 1 July of this year, a number of work streams were established, including one which we called "Customer Experience". The members of this group conducted 79 interviews with major clients to test the hypothesis that we could and should sell bundled solutions to clients. As an example, instead of just selling, say, a Standard, we would also sell training in meeting that Standard's requirements, and certification of the organisation as meeting the Standard. Our hypothesis was soundly endorsed through this research process, and the second half of FY15 was spent in refining the new structure, appointing internal and external candidates to a number of new roles, and identifying what activities were core to our strategy, and therefore best performed by us, and what activities we could leverage through partners.
Most affected by this new approach was the IT division. In June we announced that we had signed a major outsourcing contract with the leading Indian firm HCL. As a result, around 90 IT positions around the world will be transferred to HCL. My most sincere thanks go to these people for their professionalism during the transition period.
I am excited by the opportunity ahead of us. While it will take time for the new structure to bed down properly, and to cross-train the sales teams so that they can identify the possibility for a bundled solution, I am confident that we will have begun to see the initial impact of this new approach by the second half of FY16 and that momentum will continue to build as we release the full potential which lies within SAI Global.
Chief Executive Officer