Strategic report. 7,000. Excellent teamwork. Always moving forward

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1 03 04 At a glance 06 Business model 08 Market report 10 CEO overview 12 Our integrated strategy 14 Our performance: key performance indicators 18 Summary overview: key actions and implementation 20 Financial review 24 Business line review 24 Workwear 28 Facility 32 UK Flat Linen 34 Manage for value 36 Principal risks and uncertainties 44 Our people 50 Corporate responsibility Strategic report. Always moving forward Excellent teamwork Key to our success in Workwear is to unlock the experience and knowledge accumulated within our company, and share it. Through this we are achieving both operational excellence and organic growth, our customers are responding positively to our services and they are staying for a long time. A good example is a recent partnership between our British and German colleagues, who combined excellent teamwork and sourcing skills to provide Airbus UK with the services needed. A good relationship with the German Airbus customer existed and resulted in a five-year contract with Airbus UK and 7,000 new wearers of our garments. Governance Financial statements 7,000 new workwear users in the UK means 35,000 individual pieces of garments handled by us. We continuously develop new garment products; implementing new functional technologies into the workwear. Our products add value to our customers through enhanced safety, functionality, comfort and effective branding.

2 04 At a glance Berendsen plc We are Europe s leading textile services business. Our business is managed by strategic segments which helps us to have a clear direction on investment. Continuing our track record for growth Revenue m +3% underlying 1,054.2m Adjusted operating profit* m +7% underlying 158.9m , ** 2013 Organised into two segments We manage our business lines in two clear strategic segments: core growth and manage for value. This allows us to focus our capital allocation more effectively within each segment, building a better overall business in line with our strategy. Core growth business lines in this segment are characteristic of higher revenue growth and return Key figures by strategic segment 29% 13% Manage for value The management focus for business lines in this segment is on cash generation and margin improvement Core growth Manage for value Adjusted earnings per share* pence +18% 59.8 pence ** 2013 Revenue 71% 87% Operating profit Return on Invested Capital (post-tax) % +9% 9.3% Key figures by business line: Workwear Revenue 305.8m (2012: 288.0m) % of group Operating profit* 29% 60.5m (2012**: 51.0m) % of group 35% Dividend per share pence +10% 28 pence Core growth Facility UK Flat Linen 243.3m (2012: 212.8m) 204.6m (2012: 196.7m) 23% 62.5m (2012: 54.1m) 19% 27.3m (2012**: 25.8m) 36% 16% Free cash flow m +11% 139.4m Manage for value Flat Linen (outside UK) Clinical Solutions and Decontamination 231.2m (2012: 218.0m) 69.3m (2012: 69.6m) 22% 18.2m (2012: 21.0m) 7% 4.5m (2012: 2.9m) 10% 3% *Before amortisation of customer contracts and exceptional items **Restated for the introduction of IAS 19 Employee Benefits (Revised)

3 05 Leading our markets with innovative products and services 250, ,000 15, Delivery addresses customers employees countries Core growth Manage for value Workwear Read more: Pages Facility Our facility business line is split into three areas: Read more: Pages UK Flat Linen Read more: Pages Flat Linen (outside UK) Read more: Pages Clinical Solutions and Decontamination Read more: Pages What we do: Products and services: Where we operate: We supply rental linen and laundering services to the hospitality and healthcare sectors outside the UK. Austria Germany Sweden What we do: Products and services: Where we operate: We provide a full range of specialist services to operating theatres. UK 9market-leader positions. What we do: Products and services: Where we operate: Workwear: Czech Rep. Denmark We rent, launder, maintain Finland Germany and deliver workwear to a wide range of private and Netherlands Norway public organisations. Poland Slovakia Sweden UK What we do: Products and services: Where we operate: Mats: Czech Rep. Denmark We provide floor protection mats Estonia Latvia for commercial users, reducing the dirt and moisture brought into their Lithuania Netherlands premises and delivering a saving Norway Poland on the overall cleaning costs. Slovakia Sweden Washroom: We enable commercial washrooms to achieve the highest standards of hygiene via a comprehensive range of marketleading products and services. Cleanroom: We deliver and service our Cleanroom customers with the highest expertise on a wide range of Cleanroom products. Denmark Netherlands Sweden Denmark Netherlands Sweden What we do: Products and services: Where we operate: We supply rental linen and laundering services to the hospitality and healthcare sectors in the UK. UK Latvia Norway Germany Russia Denmark Ireland Strategic report Governance Financial statements Market-leader position

4 06 Berendsen plc Business model We are focusing on value creation. We create value for our shareholders by providing added-value solutions and services for our customers, leveraging and managing these for greater efficiency. We add value by managing our two segments differently: Core growth Manage for value Business line characteristics: High-value Organic growth High-margin returns Growing our contract base by focusing on sales and marketing, undeveloped markets and acquisitions Business line characteristics: Stable margins Strong cash generation Maintaining a high volume and broad level of contracts Workwear Facility UK Flat Linen Flat Linen Clinical Solutions (outside UK) and Decontamination using our competitive strengths: Experience and expertise of our management teams Innovation to find and invest in solutions for our customers Scale and location to the benefit of our customers Development of expansion and consolidation strategies focusing on operational improvement: Commercial effectiveness Better buying power Working capital efficiency Best practice transfer...redeploying cash effectively: Cash returns Strengthening our balance sheet Debt management Returns to shareholders Progressive dividend policy Reinvesting in our business to reinforce our competitive strengths Bolt-on acquisitions Capital expenditure on tangible and intangible assets

5 07 Creating value for our clients Our business is intrinsically focused on adding value. We create value for our customers by providing specialist solutions to their non-core activities more cost-effectively and efficiently. Many of the services we provide for them are critical to keep their businesses moving. Therefore, alongside investment in sales and distribution capabilities, production plants and textiles, we also invest in our people, innovative solutions and relationships across the supply chain. This ensures that we differentiate our customer service, provide peace of mind and create value for them for the long term. This is demonstrated by our high customer retention rate. Creating value throughout the business We focus on operating as efficiently as possible, making the most of our scale, market leadership and geographical location. We use our scale to procure products as cost-effectively as we can, and manage our operations as Always moving forward Focus on things that matter We believe that through our focused business lines we can identify specific customer needs and deliver results. In 2013 we ran a focused campaign for a new toilet brush service line, selling 3,122 new brushes which is 2,000 more than previously. 3,122 toilet brushes sold by our new service line. effectively as possible by sharing best practice, standardising processes and drawing from our significant in-house management experience and expertise. Recent investments in a contract and commercial terms management programme and our focus on improved sales process and support is enabling us to identify and manage our contract base with appropriate returns. Creating value for our shareholders We are a returns focused and cashgenerative business. We are committed to maintaining a progressive dividend policy and this is one of our main group key performance indicators (KPI) targets. Our growth in dividend per share is important to our investors and we are mindful of the need for our capital allocation to meet the long-term aspirations of our shareholders. Dividend per share pence +10% 28 pence Return on Invested Capital (post-tax) % +9% 9.3% Peace of mind services We deliver peace of mind to our customers who know that they can rely on us to service essential parts of their business day in, day out. We manage around 153,000 contracts across our business areas Strategic report Governance Financial statements

6 08 Market report Berendsen plc We are well positioned for present and future opportunities. We make sure we understand the dynamics characteristic of our overall marketplace, so that we can identify the opportunities they provide and use these to achieve further growth. The market in which we operate Our business provides specialist service solutions to source, clean and maintain the textiles that our customers need to keep their business running. Typically, these services are non-core to our clients activities, who outsource these services to specialist providers, like us, who can provide cost-effective and efficient services. Market size and growth potential The value of the European textile rental market is estimated to be Euros 10.7 billion. The market experiences a continued increase in the outsourcing of textile services by organisations seeking to achieve efficiency gains in their non-core operations. This trend is further accelerated by companies merging to become global players with centralised sourcing processes and by some companies expanding into new geographic territories. In addition, the introduction of greater hygiene-related regulation coupled with greater awareness of the importance of hygiene and resource efficiency among many organisations has expanded the market for our services. Key market segments The European textile rental market in which we operate can be broken down into six key areas. We organise our business by strategic focus and not by market segment and our presence (by key business line) is summarised in the table below. Key figures by business line: Core growth Manage for value Workwear Facility UK Flat Linen Flat Linen (outside UK) Clinical Solutions and Decontamination Workwear Healthcare The supply side: Who and where? In terms of supply the market is still extremely fragmented. We compete with a small number of major players who, like us, operate across national boundaries. We also come up against a large number of small, local operators. Given the fragmented nature of supply, there has been a significant level of consolidation in recent years through acquisitions and we expect this trend to continue. Hotels and Washroom Restaurants services Mats Cleanroom The majority of market growth is still expected to come from the developed countries but the role of emerging economies is acknowledged and will become increasingly important in the longer term. Washroom services 12% Hotels and restaurants 22% Mats 10% Local operators Workwear is the largest European textile rental segment. We hold the leading position in: k Denmark k Netherlands k Norway k Poland k Sweden Healthcare 24% Other large players Workwear 32% Share of European textile rental market Market-leader position

7 09 The demand side: Why? Within each of our business lines there are market dynamics that will influence individual market segments (e.g., the closure of NHS laundries which could lead to revenue growth for private sector operators). These specific market trends are detailed in our Business Line review section on page 24. Here, we outline the five big picture trends, which will have a long-term influence on the demand for the outsourcing of our services. Mega-trend Client focus on efficiency 1 gains in non-core operations What does this mean for us? The overall long-term outsourcing trends remain extremely positive and, whilst, medium-term growth in the European textile service business remains moderate, we foresee considerable ongoing opportunities in our three core growth business lines: Workwear, Facility and UK Flat Linen. We will continue to focus, as a priority, in these areas and in our current geographical areas of operation where we have density, scale and a strong track record. By focusing, as a group, on the following four action areas, we aim to convert these market opportunities into increased revenue and returns for the business: General industrial consolidation and moving into new geographies, globalisation Compliance with Health & Safety regulations and more stringent hygiene standards and legislation Read more: Page 49 Environmental responsibility throughout the supply chain Read more: Pages Actions underpinning our potential for growth in revenue and returns: 1 Focus on sales effectiveness 2 Improvement in capital efficiency 3 Active portfolio management 4 Development of consolidation and expansion strategies However, we do recognise the importance of emerging markets and the role these are likely to play in the longer term. In addition to our core markets we are looking at opportunities elsewhere as is evidenced by entering the Russian market as a specialist. Why Berendsen? The specialist services we provide are predominantly non-core activities for our clients. Our density and scale in our key geographies allow us to provide an expert and cost-efficient service, meeting our client s needs and allowing them to free up capital to invest in their own business. As clients expand, we can expand with them, working efficiently across national boundaries. Our services may be non-core but they are often absolutely critical for the safe day-to-day running of our clients operations (e.g. food industry, R&D centres, hospitals). Our track record in understanding evolving standards and our ability to devise innovative products and service to meet them means we are a partner of choice in many industries. Our economies of scale means that we can launder and sterilise far more cost-effectively and efficiently than our clients. Our focus on reducing our use of water, electricity, chemicals, oil & gas and CO2 emissions (WECO) not only gives us a competitive advantage but also gives our clients the confidence to use us as part of their own environmental supply chain due diligence. Always moving forward Recognising growth potential Our biggest competitor, in most parts of our business, is the company that manages the services we offer themselves. In Workwear, for example, we estimate that the outsourced market represents only about one-third of the total market. Strategic report Governance Financial statements

8 10 Berendsen plc Chief Executive Officer s overview We are keeping our positive momentum. In 2013 we made further progress against our strategic objectives, building on the initiatives we have put in place. The results for the year reflect continued momentum. Key points in this section: Clearly managed business lines Our 2nd full year of operating under our new structure is bringing benefits across the group. Increased focus on sales efficiency 5 years Our sales pipeline is the strongest for five years. Investing in our people 2.24m training spend. ROIC continues to improve 9.3% Our ROIC continues to improve against our target. Group key financial performance indicators are set out on: Pages KPI KPI 2 KPI Further excellent progress We are pleased to report a strong set of results for the year, which reflected continued momentum towards achieving our strategic objectives. Reported revenue increased 7% compared to the same period last year with the underlying level up 3% for the group. In our core growth businesses underlying revenue growth was 4%. Adjusted operating profit was up 12%, representing 7% on an underlying basis. The adjusted operating margin for the group increased 60 bps to 15.1%. Adjusted earnings per share for the group were up 18% to 59.8 pence from 50.7 pence last year and we are increasing our full year dividend by 10%. We continued to deliver strong free cash flow in line with our strategic objectives. Free cash flow increased 11% to million ( million), a conversion of 137% of our adjusted profit after tax as a result of our continued focus on capital allocation and drive for capital efficiency. We also improved our key return on invested capital measure by 80bps from 8.5% in 2012 to 9.3% this year. Moving towards double digit returns remains a top strategic objective. Outlook We are pleased to have delivered a strong set of results, as we make progress towards our strategic objectives. Our focus remains on the many further opportunities to improve our business. The board expects to achieve another year of good progress in Progress implementing our strategic plan This has been a year of building on the momentum we built up in 2012 and further capitalising on the benefits of the business line structure. The energy that our change of management structure has generated and the focus on delivery cannot be underestimated. We continue to see this reflected in the excellent results we have posted was a year of faltering economic progress, marked by some uncertainty in our markets. As the year progressed we started to see the benefits of economic improvement in our hotel businesses, especially the UK where we ended the year with stronger volumes than we have seen for some time. Overall, however, it was a year where growth was hard to come by and delivered largely through self-help. I am particularly pleased to see that we increased our organic growth rates for both our Core businesses and the group overall beyond what we achieved in We have always been a company whose foundation is operational excellence. Ours is a leveraged model and the constant effort to manage our service more effectively and efficiently is a hallmark of the company. We can see again this year that we have improved our operating margins, once again hitting an all-time high for the company. As we improve efficiency we also increase the available capacity within our plants, managing further investment in new capacity and increasing our return. While the growth agenda has been key to our strategy, so has our ability to deliver this profitably with excellent levels of cash generation. Peter Ventress Chief Executive Officer

9 11 Making good progress The new Supply Chain and Procurement team will have a significant impact on the company. To meet our overall strategic objectives, we will deliver measurable savings, and innovate with expanded market knowledge and leveraged buying power. Claude Sada Group Supply Chain and Procurement Director Always moving forward Significant savings from a central approach In 2013, we have worked to re-organise our Supply Chain and Procurement function, focusing on both direct and indirect procurement. It is clear that we will benefit from a more centrally coordinated approach and, we believe that a strong focus on our 350 million addressable spend will deliver considerable savings. We have already made significant savings in many parts of our business. One example is procuring certain items directly from the supplier in Asia for Scandinavian Flat Linen. By meticulously categorising the products needed, getting samples from different suppliers and testing their materials to get the right quality, we have saved 450K on one project alone for our benefit and our customers. 450K saved by procuring certain items directly from the supplier in Asia for Scandinavian Flat Linen. 31% cut in costs and improved quality in container covers for our German linen carts. We have already come a long way. Recruiting the right people, making policies, analysing current contracts, implementing a contract management tool and much more. It is a continuous process. One Berendsen As well as focusing on delivering our results we are determined to build on already solid foundations to create a sustainable model of industry leadership. We have continued to build on the capabilities and potential of One Berendsen, supporting the delivery through focus that our business lines are striving for with targeted investments in capability. We have continued to invest in management capability, as you will read on pages 44 to 48, with a particular focus on identifying those management behaviours that are both the key to the current strength of the group but will also shape our development in facing future challenges. We seek to identify and develop the talent we have across the group with tailored programmes to support their progress. We increased the number of management trainees we brought in this year and it has been exciting to see their engagement and early contribution to ensuring we capture the models of best practice that our business lines are implementing. We have this year undertaken a comprehensive employee survey and it is clear from the results that our success is built on the engagement of our 15,000 employees day in, day out. At the same time it gives us good information into where we can do better and we are committed to capitalising on the valuable insights this provides. We recognise that the health and safety of our employees is of paramount importance. We will continue to invest in this area, and I know that the Operational Risk Management Group will diligently take forward the learnings from our independent external review of health and safety that is nearing completion. In April, a new Director of Group Procurement and Supply Chain joined us, bringing a new breadth of experience to the group. His primary objective will be to drive the next phase of development in our procurement strategy. It is clear there are opportunities available from further leveraging our scale in procuring textiles, pooling our buying of indirect products and services, streamlining our supply chain and improving the management of supplier performance. As one of our first strategic actions in 2011, we changed the name of the group to Berendsen plc, continuing to trade as Berendsen in Continental Europe but retaining the trading name of Sunlight for the UK. It is an expression of our One Berendsen theme that management in the UK decided to change the trading name of our UK textile businesses from Sunlight to Berendsen in A further milestone in the implementation of our strategy has been our move, in a very small way, into Russia where we will support an existing cleanroom customer. While international expansion has not been a priority for us, given the opportunities we see in existing markets, this will provide experience and knowledge of operating in faster growth, but more challenging markets beyond our existing footprint. The year ahead We prepare ourselves for another year of hard work in We do not yet see the full benefits of economic recovery and we remain focused to make sure we are disciplined in identifying risks and capturing the opportunities ahead of us. We do carry good momentum, however, into 2014 from the actions we have taken since we moved to a business line structure at the start of We recognise that there is still opportunity to make progress by further leveraging the experience we have across the group. This extends into all parts and the key to our future success remains those marginal improvements we make at local level that in aggregate make us stronger, smarter and fitter for the future. Strategic report Governance Financial statements

10 12 Berendsen plc Our integrated strategy We are integrating our long-term objectives around the group. Our seven strategic objectives guide our long-term focus from how we manage roles and CR to how we reward our directors Non-financial Integrated thinking Financial See how our remuneration measures are aligned with our strategy: Pages See how we are managing our business to achieve our strategic objectives: Pages See how our CR priority areas link with our strategic objectives: Pages 50-55

11 13 Financial Non-financial Delivering sustainable organic growth 4 We have very strong offerings in Workwear, Facility (including Mats, Washroom and Cleanroom) and in UK Flat Linen. We believe the opportunities for volume growth and winning new contracts remain in the medium and longer term, and there are significant virgin market opportunities within our European markets. 2 Improving capital efficiency We are a cash-generative business with a solid capital structure. We believe there is scope for improved margins and returns. Our historic five-year cash conversion range was 80% to 140%, and we are targeting at least 100% over the medium term. We are targeting a double-digit return on invested capital (ROIC) over the medium term. 3 Maintaining a sound financial position We believe in maintaining a sound financial position and working with our key banking relationships and other sources of finance, in particular our private placement investors. The majority of our financing requirements are available beyond 2016 at fixed rates of 5.1%. We operate well within our financial covenants (net debt to EBITDA <3x; EBITDA to net interest >3x). Improving financial returns by leveraging operational efficiency The highest returns are available where we have density and scale. Our experienced business teams drive for efficiency and to be the lowest cost provider in their markets. By further leveraging operational efficiency and widening the application of best practice, we will be able to achieve high single-digit earnings per share (EPS) growth and a progressive dividend policy. Maintaining health and safety as a priority The board and senior management prioritise the importance of maintaining a safe and healthy working environment for all of our employees and those others who work with us. The number of incidents reported remains relatively low but we continue to strive for the highest standards. Maintaining a motivated workforce driven by an experienced management team The responsibility for staff training and recruitment lies with our business line unit management but we are also developing group-wide programmes to support this. We focus on induction training at all levels, and individual development plans. Reducing our impact on the environment KPI: Organic revenue growth KPI: ROIC Free cash flow/ adjusted profit KPI: Net debt to EBITDA KPI: Adjusted earnings per share Dividend per share KPI: Major injury rate KPI: Senior management retention rate KPI: We understand the risks and opportunities associated with the environmental impact of Group CO2 our operations. Areas of particular importance to us include water use, energy consumption emissions (including our CO2 emissions), transport, and the use and disposal of detergents. Integration: Integration: Integration: Integration: Integration: Integration: Integration: Strategic report Governance Financial statements For more detail on our performance against KPIs: Pages Key: Remuneration measure CR measure Linked to principal risk

12 14 Berendsen plc Our performance: key performance indicators Continued progress... We have set growth targets and assessed the key performance indicators which we use to measure progress against our objectives. 1 Delivering sustainable organic growth Measure: We believe that organic revenue growth, that is underlying growth excluding the impact of foreign currency translation and acquisitions, demonstrates that we are capturing the opportunities available to us in our existing markets. Performance: We increased our organic revenue growth rate to 3% for the group as a whole (2012: 2%) with the underlying revenue growth in our core growth businesses of 4% following a stronger second half. Linkage: Target: GDP +1%-2% Organic revenue growth % Definition: Revenue excluding the impact of foreign exchange and acquisition. 3% 3% 0% 2% 2% -4% Financial Improving capital efficiency 2 Target: Measure: Double-digit in ROIC (post-tax) We believe that a measure of return on invested capital that incorporates the value of goodwill and other intangible assets previously written off or amortised reflects the full use of our shareholders capital. This shows how efficiently and effectively we are allocating capital to our business. Key to management of our invested capital is to convert our growth to cash and therefore we believe that a cash conversion ratio expresses how effectively we are doing this. Performance: We delivered strong free cash flow delivery, up 11% on last year and with a conversion rate well above our target. By delivering improved returns through organic growth and higher margins, and converting our growth to cash, we have again increased our ROIC. Since 2010 we have improved our ROIC by 1.9%. Linkage: Cash conversion of at least 100% Return on capital Invested (post-tax) % 9.3% 7.1 Free cash flow/year s adjusted profit % 137% * 2013 *Restated for the introduction of IAS 19 Employee Benefits (Revised) Key: Remuneration measure CR measure Linked to principal risk Achieved Ongoing

13 15 Financial 4 3 Maintaining a sound financial position Measure: The financial covenants we have with our key banking relationships are expressed in terms of the ratio of net debt to EBITDA and EBITDA to net interest. We believe that the net debt to EBITDA best captures the sustainability and soundness of our financial position and by decreasing this ratio we reduce the financial risk to our business. Performance: Our strong free cash flow generation has allowed us to reduce net debt from million at the end of 2012 to 389 million in Linkage: Improving financial returns by leveraging operational efficiency Measure: Earnings per share and dividend per share best represent both the future returns available to shareholders and the current year cash returns from the improvements we are making to our business. Performance: We grew our adjusted earnings per share by 18% in 2013 and increased by 10% our proposed dividend per share. Linkage: Target: Within covenant level of 3.0 times Net debt to EBITDA times Definition: The ratio of net debt to earnings before interest, tax and depreciation and amortisation. 1.2 times Target: High single-digit % EPS growth Progressive dividend policy Adjusted earnings per share* pence +18% 39.4 Dividend per share pence +10% ** Strategic report Governance Financial statements *Before amortisation of customer contracts and exceptional items **Restated for the introduction of IAS 19 Employee Benefits (Revised)

14 16 Berendsen plc Our performance: key performance indicators Continuing to make good progress towards our non-financial goals. 5 Maintaining health and safety as a priority Measure: We have recorded and monitored our business unit, business line and group major injury rate for some years. This remains an area of significant focus throughout the group. Definition: We use the RIDDOR Reporting of Injuries, Diseases and Dangerous Occurrence Regulatory legislation in the UK, to define how incidents should be classified including what are major injuries. Performance: Due to more labour-intensive operations and more manual handling we have historically seen a higher major injury rate in our Flat Linen businesses compared to other business lines. Linkage: Target: Zero major injuries Major injury rate number Definition: (Number of deaths and major injuries/total hours worked) x 1,000, Non-financial 6 Maintaining a motivated workforce driven by an experienced management team Measure: Stable and experienced management strongly influences our ability to motivate and engage our workforce, which in turn supports our growth strategy. Definition: Measurement is the percentage of leavers from senior management positions in the calendar year, not including retirement or promotions. Senior management is defined as the top 130 positions, which includes business line management teams, country management teams, group and other designated senior roles. Target: Senior management retention rate of more than 90% Senior management retention rate % Definition: Percentage of managers retained in senior roles, excluding promotion and retirement. 96% Performance: The five-year trend shows that we have a strong senior management retention rate. This results in the benefit of continuity of company knowledge and expertise and reflects our continued investment in performance management and leadership development. This is complemented with the identification and development of future talent. Read more about how we motivate and engage our people: Pages Linkage: Key: Remuneration measure CR measure Linked to principal risk Achieved Ongoing

15 17 Non-financial 7 Reducing our impact on the environment Measure: Always moving forward Sustainable returns Improving returns on invested capital towards double-digit is a key performance measure. By growing organically and increasing our operating margins we improve returns: by generating more cash than profit we decrease our invested capital. Since 2010 we have improved our ROIC by 190 bps. We record and monitor scope 1 and scope 2 CO2 emissions from all of our plants and other sites, using the Greenhouse Gas Protocol methodology. Definition: Reporting just CO2 emissions is of limited value to our stakeholders, and so we show kg of CO2 per tonne of laundry shipped. Performance: In 2013 we are reporting a 2.2% reduction in kg of CO2/tonne of laundry shipped. We continue to move in the right direction and we are committed to further improvements in the future. Linkage: Group CO 2 emissions kg Increasing our talent pool Target: Ongoing reductions in the use of water, electricity, chemicals and fuel/oil/gas In 2013 we maintained our focus on succession planning and talent development. The Executive Board reviewed succession plans for the top 50 Berendsen roles. In addition, succession reviews at the business line level focused on the wider talent pool beyond the top 50 list. This pool, together with the Berendsen Management Trainee scheme combine to provide the pipeline of future management talent. Definition: Kg of CO 2 per tonne of laundry shipped. -2.2% Strategic report Governance Financial statements

16 18 Berendsen plc Summary overview: key actions and implementation We are moving ahead with our strategy. In 2010, following a strategic review, we identified 11 key actions (6 across the group and 5 within the business lines) on which we are focusing in order to meet our objectives. To achieve our objectives and meet our targets we have identified the following actions Six actions across the group: 1 Focus on sales effectiveness 2 Move to Business line structure 3 Actively manage our portfolio 4 Develop our expansion/consolidation strategies 5 Improve capital efficiency 6 Promote a One-Company vision Five actions within business lines: Core growth Manage for value Workwear Facility UK Flat Linen Flat Linen Clinical Solutions (outside UK) and Decontamination 1 Accelerate top-line growth in core business areas 2 Remuneration systems tied to strategic targets and appropriately rewarding different achievements 3 Clear examples of faster execution and delivery of results 4 More integrated group with strong interaction between constituents 5 Changed priorities in manage for value businesses Always moving forward Organic growth We increased the rate of organic growth to 3% in Our markets offered little assistance to growth through most of Most of the growth we delivered derives from the strategic initiatives we have undertaken. Entering new markets as a specialist Moving with current customers into emerging markets enables us to gain experience in a fast growing and challenging market, which gives us a platform to broaden our geographical footprint. When one of our big pharmaceutical customers decided to set up a new production plant in Russia, they asked us provide a laundry set-up to match their high quality production. Once our set-up with this customer is fully stabilised, we will look into new possibilities in this strongly emerging market. 1 DSM Group, Russian Marketing Analysts 10% is the yearly projected growth in the Russian pharmaceutical and healthcare industry until

17 19 We carefully monitor the progress made on the implementation of these actions Across the group: Short term Medium term Long term Name change Group-wide capital efficiency review k krealignment of organisation and management in place k kmore integrated group with strong interaction between constituents Underlying EPS growth: targeting high single-digit % growth k kfirst business established in new developing countries k kpool of strong management across the group with identified senior succession Within business lines: Core growth Manage for value Workwear Facility UK Flat Linen Flat Linen Clinical Solutions (outside UK) and Decontamination Short term Medium term Long term Building of sales and business development capabilities Remuneration systems tied to strategic targets and appropriately rewarding different achievements Clear examples of faster execution and delivery of results More integrated group with strong interaction between constituents Changed priorities in manage for value businesses k kimproved capital efficiency showing through in cash flow Market leadership in core business areas in key European markets Organic GDP growth of +1 2% ROIC achieving double-digits (post tax) Clear leader in European Textile Services with a targeted footprint outside Europe Sales growth momentum at sustainable returns High performance sales organisation supported by strong operational base Strategic report Governance Financial statements Key: Completed In progress

18 20 Financial review Berendsen plc We are improving our financial returns. This financial review should be read in conjunction with the Chairman s statement and the Chief Executive Officer s review which sets out the comments on revenue, profits, earnings and dividends. Key points in this section: Targeted capital expenditure 176.1m invested in tangible and intangible assets. Continued focus on cash generation 139.4m free cash flow. Efficiency programmes result in increased ROIC 9.3% ROIC improved to 9.3%. Sound debt management In 2013 we continued to operate well within our target covenant level. Prudent tax management and interest rate exposure Net interest 12% lower than Effective tax rate reduced in line with underlying country rates and low risk management actions. Group key financial performance indicators are set out on: Pages KPI 2 KPI KPI Cash flow We continue to generate strong cash flow, converting as much as possible of our profits to cash. Free cash flow, as set out in note 23 of the financial statements, was million (2012: million) which represents 137% (146%) of our adjusted profit for the year. Cash generated by our operations was million ( million). Interest and tax payments combined were 43.8 million, 0.9 million higher than Overall net cash generated from operating activities was million ( million). Of this cash generation we used million in our investing activities compared to last year when we invested million, principally reflecting lower acquisition activity 2.7 million ( 37.1 million). Capital expenditure on tangible and intangible assets was million ( million) and disposal of assets realised 6.2 million ( 3.9 million). Our investment in textiles and other rental assets was million ( million) and at 108% of depreciation, supports the higher underlying volumes experienced during the year. Expenditure on plant and equipment was 27.5 million ( 27.3 million) and we have continued to target investment towards the higher growth areas of the business such as the conversion of a further plant in UK Workwear to the best practice model we operate in Continental Europe. Cash used from financing activities was million compared to 99.4 million in Dividends paid to shareholders amounted to 44.8 million compared to 40.6 million in In 2013, we purchased Berendsen plc shares for 12.2 million ( 5.4 million) for the Employee Benefit Trust. These shares will be used to satisfy the potential settlement of share incentive awards that have been or are expected to be granted in the near term. Return on invested capital The group uses return on invested capital (ROIC) post-tax to measure its efficiency at using its capital allocations. We have increased our ROIC from 8.5% to 9.3% in 2013 as a result of the improvement in the adjusted operating profit and focused capital allocation. Increasing these returns towards double-digit remains a key part of our strategic focus. Finance costs Net finance costs for the year were 22.6 million compared with 25.6 million in 2012 and this principally reflects the impact of strong cash flow generation. Kevin Quinn Chief Financial Officer

19 21 Committed funding As at 31 Dec 2013 m As at 31 Dec 2012 m 535m revolving credit facility $250m US private placement notes $259m and 25m private placement notes Total Capital expenditure on tangible assets* 2013 m 2012 m Textile assets and washroom equipment Plant, machinery and vehicles Land and buildings Total *Based on note 10 of the group financial statements and includes finance lease additions Return on invested capital (average)* 2013 m 2012 restated** m Total equity Add back: Net debt Derivative financial instruments 7.2 ( 14.1) Retirement benefit obligations (0.9) 26.7 Goodwill previously written off intangibles amortisation, and other Average invested capital 1, ,237.8 Adjusted operating profit Add back: Pension interest less returns on investment (0.9) (0.6) Less tax at effective rates (39.5) (37.0) NOPAT return Return on invested capital 9.3% 8.5% *Based on 12-month average **Restated for IAS 19 Employee Benefits Taxation The tax charge of 27.2 million on profit before taxation compares with 21.3 million in Our effective rate on adjusted profit before tax was 25% (26.1%). We expect the effective tax rate to remain at this level in Borrowings We manage the group on a sound financial footing with a majority of our gross borrowings at fixed interest rates using interest rate swaps to achieve this where necessary. We currently have most of our gross borrowings in Continental European currencies which act as a hedge against the net assets of our operations in Continental Europe. At the year end we had drawn down 136 million of our revolving credit facility. At year end exchange rates we have total private placement notes of 334 million with maturities between 2014, when 31 million equivalent is due for payment, and Strategic report Governance Financial statements

20 22 Berendsen plc Financial review Fixed borrowings totalled approximately 306 million or 65% of gross borrowings with an average rate of interest of our debt as provided in note 15. Net debt at year end was 389 million ( million). Exchange rates reduced net debt by 2.1 million. Our ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) was 1.2 times compared to 1.5 times in This compares with a covenant level of not more than 3.0 times. Interest cover was 14.9 times EBITDA compared to 12.1 times in 2012 and this is well above our covenant level of not less than 3.0 times. Exceptional items Exceptional gains, before tax, in the year amounted to 1.8 million ( nil). The gain relates to the release of a surplus onerous contract provision which was initially established within our Decontamination business in Since then, substantial progress has been made in the turnaround of these contracts with one of these contracts returning to profitability ahead of schedule in The release of the provision in 2013 reflects this achievement along with the expectation that the remaining contract will break even, in line with plan, by the end of Pensions Actuaries to the group s defined benefit pension schemes in the UK, Ireland, Sweden and Germany continued to advise the respective Trustees on the required funding rates. In total the group has charged 16.7 million ( 15.2 million) for the year in respect of all pension arrangements for staff. Always moving forward Capital allocation We are disciplined in our allocation of capital in the business. We have seen excellent returns from the investments we have made in our plants in 2013 where the investment has been focused on generating operational efficiencies, reducing our energy usage and in the UK in converting our Workwear plants to a similar platform to that we use in Continental Europe. +4% margin improvement at Rainhill plant (UK). The principal UK Plan had its triennial valuation in February This showed a deficit of 13 million on an ongoing basis. We contributed 5 million to the principal UK pension fund in the year and a further 5 million is planned in 2014, in line with the funding plan agreed following the 2013 triennial valuation. We ended the year with a net retirement benefit asset for the group of 7.1 million ( 20.5 million liability) reflecting the increase we have seen in discount rates following the strengthening of bond yields, supplemented by improved asset performance. The main UK pension fund shows an asset of 38.2 million ( 18.8 million) on an IFRS accounting basis but a deficit at the triennial valuation for funding purposes, while our overseas pension funds show a liability of 31.1 million ( 40 million). These overseas plans are largely unfunded in line with local practice. As indicated in note 27 of the financial statements, the company adopted IAS 19 Employee Benefits, with effect from 1 January 2013 in line with required practice. As this is a change of accounting policy, the 2012 comparative figures presented have been restated with effect from 1 January The impact of the new standard is to reduce the 2012 reported profit after tax by 2.5m and to increase other comprehensive income for the year ended 2012 by the same amount. There is no impact on either the 2012 balance sheet or 2012 cash flow as a result of adopting the new standard.

21 23 Creating value Strong performance We delivered a strong performance in 2013, growing revenues 3%, improving margins 60bps and converting 137% of our profit after tax into free cash flow. Treasury policy The group uses foreign currency borrowings and financial instruments to finance its operations and to manage the interest rate and currency risks arising from those operations and sources of finance. The group s strategy for financing its operations and managing risk is summarised below. Financing The group finances its operations primarily through its banking facilities, private placement notes and cash generated from its operations. In planning the maturity of debt, the group s policy is to seek a balance between continuity of funding and flexibility. In addition the group has overdraft facilities with certain clearing banks. The group s UK current accounts are subject to set-off arrangements covered by cross guarantees and there is also a cash pooling arrangement taking in the cash generated by the Berendsen businesses. All the group s borrowings are unsecured. The group evaluates potential sources of funding on a continuous basis with a view to obtaining alternative sources when and where appropriate. The group was in compliance with its banking covenants. The main financial covenants relate to net debt to EBITDA and EBITDA to net interest. We seek to create value by increasing our return on invested capital (ROIC). Our strategic objectives summarise how we will achieve this aim: increasing our returns by growing revenues and increasing margins; and managing our invested capital by converting our growth to cash. In 2013 we increased our ROIC from 8.5% to 9.3%. Interest rates The interest rate exposure of the group arising from its bank borrowings has been managed by the use of derivative instruments as described above. The group s policy is not to use derivatives for trading purposes. Transactions are only undertaken if they relate to underlying exposures and are not speculative. Currency rates The majority of operations in the group invoice their revenues and incur their costs in the same functional currency. The group does face some currency exposure in respect of the procurement of textiles and capital equipment in nonfunctional currency by certain trading companies. These transactions are undertaken to capture purchase savings. A forward foreign exchange contract may be entered into by these companies to mitigate exchange risk and this would be dependent upon the certainty of the exposure as to timing and the exchange rate at the relevant time. Details of the group s foreign exchange forward contracts can be found in note 16 of the financial statements. It continues to be the group s policy not to hedge foreign currency exposures on the translation of its overseas profit to sterling. Where appropriate, borrowings are effectively arranged in currencies so as to provide a natural hedge against the investments in overseas net assets. Strategic report Governance Financial statements

22 24 Berendsen plc Business line review Workwear. The Workwear business line delivers and maintains workwear to many private and public organisations across Europe. Our service meets the needs of customers in many sectors allowing them to focus on their core business. Market overview The European textile maintenance market is very fragmented with only a small number of large players. The essence of our business is serving customers with a trouble-free supply of workwear for their employees. Our plants operate in focused geographical areas in order to guarantee a local approach towards our customers. For our customers, outsourcing of this service means that we take complete responsibility for all activities regarding Workwear from the start to the end of the cycle. The advantage for our customers is that they can save costs, free up time, improve image, space, personnel and capital resources. All these resources can be used by the customer to focus on their core business activities. Drivers and trends The core determinant of demand for workwear from our actual and potential customer base is economic activity. However, the trend towards outsourcing drives the maintenance segment of the market at a faster pace and the factors behind this conversion to rental are: Corporate image Presenting a consistent and identifiable image to customers. Health & Safety compliance Specialist garments to meet the regulatory requirements of different industries (EN/ISO standards). Operational efficiency Outsourcing non-core activities including laundering and maintenance. Free-up capital Allowing customers to invest in their own business. Economics The scale of larger and specialist operations (purchase and maintenance) drives lower unit costs. Product specification Technical support and tailor-made innovations. Environment Providing more environmentally friendly solutions. Always moving forward Building on strong foundations Our production concept of lean production and self-managed teams, which we brand CL2000, continues to deliver strong results. Now implemented in both Rainhill and Wakefield in the UK, this concept supports our strategic goal of reducing operating costs and improving customer focus and profitability. We now use our experience and expertise in this area for the benefit of our customers and our business. The highly- and multi-skilled teams operating in lines provide the ultimate in high quality, dependable and personalised service. The introduction has increased the quality of service, our employee satisfaction, our customer satisfaction and the retention of business. Peter Havéus Managing Director, Workwear

23 25 Empowerment gives better service The CL concept is highly focused on empowering employees. They become multi-skilled in order to be able to plan and take responsibility for each task, and they have direct contact with their customers. Performance 2013 m 2012** m Revenue 305.8m 288.0m Adjusted* operating profit Adjusted* operating margin 60.5m 51.0m 19.8% 17.7% *Before amortisation of customer contracts and exceptional items **Restated for the introduction of IAS 19 Employee Benefits (Revised) Strategic priorities We plan to increase our focus on utilising the market opportunities by further strengthening our competencies in the sales, product development and marketing to improve our momentum in growth according to our strategy. At the same time we will continue leveraging and harvesting through our operational excellence by enhancing best practice sharing across the business line. Substantial available market confirmed within our geographical footprint; Improve capabilities to define go to market strategies for existing and new attractive market sectors; Increase focus on key account sales including Pan-European accounts; and 100% delivery on financial targets since the implementation in our Rainhill plant. Contracts Long-term customer relationships are key for long-term cooperations and therefore contract management is a strategic area for us to manage in a professional way to our customers satisfaction. To build strong relationships and loyalty it is important that we continuously strive to deliver good service and quality, in combination with proactive customer service from all our dedicated front office colleagues. By again using best practice as the driver tool to share experience across the business line, we expect to improve our customer loyalty and by that long-term retention. The following components are key enablers to leverage on our business model to our customers satisfaction: Delivering on time with high quality products; Access to essential information about ongoing service from us, either via our customer service or web portals; Innovation, product and service development; Garment lead times when starting up a new customer or normal replacements of garments; Transparency regarding total cost of ownership; and At first I had some doubts whether this new concept would work. But today I feel much closer to my customers, I understand their individual needs and requirements and can respond to them quickly. Julie Hannon Laundry Operative, Rainhill Strategic report Governance Financial statements Continuous leverage and harvesting in operational excellence area and enhance best practice sharing further. Build stronger customer relationships and loyalty which underpins our growth further by determined colleagues with customer focus.

24 26 Berendsen plc Business line review Always moving forward Lowering our service costs We want to deliver a more effective and cost-efficient solution to our customers than they can provide themselves. In 2013 we have worked on many projects to continue to secure this. We have re-designed our customer service model in the UK which has led to a 20% efficiency improvement overall and significant improvement in first-time resolution of customer queries. We have developed a very efficient customer contact-planning tool based on criteria such as satisfaction score, contract end date etc. With this we are proactively predicting our customers need for contact in advance, rather than reacting to incoming customer calls. 20% efficiency improvement after our customer service model s redesign. Operational highlights Revenue was up 6% in the period at million (2012: million), with adjusted operating profit 19% ahead at 60.5 million (2012: 51.0 million). Underlying constant currency growth was 3% for revenue and 15% for adjusted operating profit. The adjusted operating margin increased 210bps to 19.8%. We continue to make progress in delivering the benefits of best practice transfer and in implementing the key elements of our standard business model. Our international collection, where we have taken the best design elements from different markets, is selling well and has reduced material cost lead times further compared to locally sourced collections. Salesforce efficiency continued to improve, particularly in national accounts, through our focus on sales management and better coaching methods delivered by our Sales Academy programme. Our operational excellence programme, supported by focused improvement reviews, has delivered productivity improvements of almost 5% in aggregate across the business line. At the same time, we have delivered service and quality improvements with consistently higher customer satisfaction scores. Our focus on textile management, based on best practices and workflow optimisation which we defined last year, delivered significant savings in textile purchases in the first year of the programme. A key element of our margin increase has been the improvement in Germany and the UK where the opportunities for best practice transfer are greatest. We delivered in aggregate a 3% increase in revenue and a 22% increase in operating profit, resulting in a margin improvement of 200bps. We have made good strides towards moving these countries towards the margin potential we see in our best practice reference countries. In the UK, we have continued to deliver significant benefits at our Rainhill plant since the conversion to the same production model we use in Continental Europe, which is based on the principles of lean production and self-managed teams, internally branded as CL2000. Productivity at the plant is up and its margin increased by almost 4% over the year. We are also taking the opportunity to consolidate production in 2014 and we are consulting on the closure of one of our smaller plants into Rainhill to drive for further productivity improvements. There is a modest cost of exit, which will be reported in the segment result in the first half of In October 2013, we completed, on schedule, the conversion of a second plant, at Wakefield, and have already seen productivity improvement in line with our plan. In Germany, our revenue growth was almost 8% following significant new contract wins and this was a key driver of our excellent profit growth in the business, the highest for the business line. Economic activity in Denmark and Sweden was mixed and while this held back top line growth in Sweden overall, we did see a stronger second half with Denmark ending the year with growth of 5%. Our Dutch business, also a best practice reference operation, made good progress in tough local conditions, growing revenue by 3%. Despite an economic environment which is still challenging, these countries also benefited from operational improvements and in aggregate their margins increased significantly. Plans for 2014 In 2014 we will be focused on keeping the business growing and leveraging our operational excellence to deliver improved results. Specific areas of focus will be capturing best practice opportunities to close the differences in margin between countries; working to improve organic revenue growth rates; and building best-in-class customer service processes to improve our retention rate.

25 27 High level of motivation Our employees are responding very positively to our new service model. Clear areas of responsibility and direct contact to customers, combined with their expert knowledge, has motivated our employees to offer the best possible service. New ipad Workwear application We have made the showing of our service offering and our garments easier and more involving. With a few sweeps we can show the customer a complete solution for their specific needs. 50% From 5% to 50% improvement in first-time resolution of customer queries. Strategic report Governance Financial statements

26 28 Business line review Berendsen plc Facility. Our Facility business line covers our Mats and Washroom operations, addressing the needs of a very broad customer base, and our Cleanroom operations focus on ensuring that our customers meet the highest quality standards. Mats Market overview The Mats business addresses a very broad customer base which includes retailers, wholesalers, restaurants, garages and all kinds of offices, industrial premises and government facilities. The average customer size is relatively small. The largest customers are typically cleaning companies and other facility companies where we are engaged in different forms of partnerships. In general the cost of Mats services is relatively low and therefore price sensitivity is more limited than in some other sectors. Drivers and trends A Mats service is sold rather than bought. Few customers know of the service and most have managed to operate without it. An active and efficient field sales force is the determining factor in growing the market. The key factors in marketing the concept are: Corporate image presenting a consistent and identifiable image to customers. Health & Safety compliance preventing accidents and maintaining a good environment for users including clean floors. Market development up-selling of higher specification products over time. Economics the benefits of outsourcing non-core activities. Washroom Market overview As every kind of business requires washroom facilities, the market has very few limits. Customers include retailers, restaurants, garages and the full range of offices, public sector organisations and industry, with the average customer size being relatively small. In general, the average cost of outsourced washroom facilities is higher. The chosen segments are all away from home washrooms where normal hand washing/hygiene standards are required. The largest customers are typically cleaning companies or other facility service companies where we are engaged in various commercial agreements. Drivers and trends Serviced washroom solutions are sold rather than bought. Potential customers will invariably have an existing solution or be managing their own sourcing and supplies. The key factors in marketing the concept are: Hygiene standards research indicates that hygiene standards in shared washrooms is an increasing concern for users. Our products and services are designed to secure personal hygiene in a shared washroom. Health & Safety compliance almost 80% of all bacteria spreads from the washroom due to poor sanitation or lack of washroom products, and low levels of hand washing. Product innovation washroom solutions are not only the logical hygienic choice; many of our products are also designed to combine industrial practice with exclusive design. We want to give our customers the opportunity to personalise their washrooms. Cleanroom Market overview Whereas ordinary Workwear relates to protecting people against the working environment, cleanroom is also about protecting the environment against people. The particles associated with humans can harm products and production processes, and the businesses of many of our customers depend on meeting the highest quality standards. Many customers need a combination of cleanroom services and regular Workwear services to meet hygiene requirements, such as those stipulated by ISO certification. A cleanroom supplier is typically a vital part of a quality management system that meets the needs of external regulation, and therefore difficult to replace. This has resulted in high profitability in this segment to provide the necessary returns for our investments in technology. Drivers and trends The core drivers are similar to those of our Workwear business. Factors include: The international expansion of pharmaceutical and high-tech companies. Stricter regulatory requirements. Product specification technical support and tailored innovations. Economics larger and specialist operations (purchase and maintenance) drive lower unit costs. Corporate image presenting a consistent and identifiable image to customers.

27 29 Always moving forward State-of-the-art sales tool A new ipad-based sales tool has added considerable speed to market, and a highly professional touch, to our sales process. We have added all relevant data for the sales representatives into one single application. The material is centrally updated, which means that prices and marketing material are always up to date. Offers and contracts are filled out and can be signed on the spot, making us able to increase our speed to market considerably and decrease the amount of paperwork for our customer service employees. Less wasted time for internal procedures, less administrative work for customer service employees and less errors due to direct system integration. Performance Christian Ellegaard Managing Director, Facility 2013 m 2012** m Revenue 243.3m 212.8m Adjusted* 62.5m 54.1m operating profit Adjusted* operating margin 25.7% 25.4% *Before exceptional items and amortisation of customer contracts **Restated for the introduction of IAS 19 Employee Benefits (Revised) Strategic priorities Our strategic priorities remain unchanged. Facility offers our largest opportunity for the higher margin and return from each incremental sale. It is a sales-driven business and we continue to invest in educating our salesforce and increase the effectiveness in order to continue our market leadership. In Cleanroom, we are a leader in customer-driven solutions focused on extending existing propositions to new customers while expanding our service offering to existing customers. Underpinning our market development is our expertise in operations and distributions. Extend our market-leading positions in mats and washroom with product innovation; Drive performance improvement in sales in mats and washroom; Extend propositions to new customers in Cleanroom; and Best practice development in operations and distribution. This tool makes my work life easier. It has increased my efficiency with my customers, and I spend much less time on deskwork. The ability to send them a detailed offer even before I leave the first meeting is great! Kristian Bligaard Sales Representative, Denmark Contracts Mats We typically supply mat services to a customer s specific requirements based upon one-to three-year contractual agreements with provision for annual cost increases and self-renewing contracts. Billing typically reflects a low invoice value and is usually determined by the following factors: Frequency of service provided; Number of products served; Range of products served; and Length of contract. Strategic report Governance Financial statements

28 30 Business line review Berendsen plc We want our products to stand out We have a unique washroom design using colours, shown in 3D in the new sales tool. Having a coloured soap dispenser increases the number of hand washes by up to 50%. 2weeks improved lead time from a signed contract to the first delivery generates a positive return on investment. Washroom We typically supply washroom services to a customer s specific requirements based upon three- to five-year contractual agreements with provision for annual cost increases and selfrenewing contracts. Billing typically reflects: Frequency of service provided; Supply of consumables and other maintenance services; Some contracts are all-inclusive with full service while others charge services separately; and There is a broad range of products that can be used to service the washroom. Cleanroom We typically supply rental Workwear to a customer s own specification based upon three-year contractual agreements with provision for annual cost increases and residual value payments in the event of early contract termination. The billing of Workwear services is usually determined by the following factors: Specification of garment; Size of workforce/number of users; Frequency of cleaning/replacement; Delivery locations; and Length of contract. Operational highlights Facility Revenue was 14% ahead of last year at million (2012: million) and adjusted operating profit at 62.5 million (2012: 54.1 million) was up 16%. The adjusted operating profit margin was 30bps higher than last year at 25.7%. On an underlying constant currency basis excluding acquisitions, revenue grew 5% and adjusted operating profit was up 9%. We are encouraged by the increase in the organic growth rate of this segment in the second half, which was 5% for the full year and 3% at the half year. We believe that the opportunities for growth in Facility are strong as a large proportion of our existing customers are not taking a fully outsourced service in Mats and Washroom. The potential to expand or enhance the level of services to existing customers is significant.

29 31 The separation of the three operations of Mats, Washroom and Cleanroom is facilitating the development of our business models. We have been particularly encouraged in the second half by the progress we have made in Washroom offerings, adding a number of service ranges and seeing good market acceptance for our fixed billing package concepts which grew 20% in the year. Overall, our sales efficiency increased, especially in Washroom, with momentum picking up throughout the year with sales in the second half of the year well ahead of those in the first half. The number of new larger customers in Cleanroom has also been encouraging with a further increase in the average number of services sold to each customer. We expanded our contract base in each of our Mats and Washroom businesses, with the volume of mats placements in particular increasing 6% in the period. Promising potential We recently acquired a small German Cleanroom laundry facility, and subsequently invested in both organisation and production, boosting the overall capacity heavily. From the beginning, this new laundry facility has exceeded our expectations and been a role model for realising and managing growth. With a great ambition and a high level of motivation, this new facility realised the order take target set for 2013 in only four months, by a combination of large and small orders from new customers. One of these new customers also created an opening for our other services like garments, clogs and our cleaning system. The potential to develop the customer base from this facility is very promising. We delivered a good level of new sales, which were ahead of plan. This has more than offset any reduction in volume per contract and price pressure, although this eased through the second half of the year. Norway in particular delivered good growth in revenue and operating profit. In the emerging markets, where we have revenues of over 30 million, we saw double-digit revenue growth in aggregate with the newer territories of the Baltics and Czech Republic growing strongly. There was a good level of growth in Poland, our larger and more established business, and with the operating margin above 20%, this is converting well to profit. Our Baltic business is delivering improved operating margins, up 7ppt in the period to 12%, with further opportunities for improvement. Our Cleanroom business combined excellent organic growth with the contribution of the German business we acquired in April 2012, to produce revenue growth of 16% with improved margins. Growing customers in new regions One of the new contracts in 2013 included a garments solution to a site in Zagreb, from our existing plant in Germany, creating our first delivery to Croatia. The level of new business in Germany, in particular, has been very strong, with the added focus now to improve operational leverage and move the margin closer to the average for this part of the business. In May we contracted to assist one of our major Danish pharmaceutical customers in establishing a plant in the Moscow area. We will manage its Cleanroom textile operations from within the customer plant once this is completed, which is expected to be later in While the revenue and scale of operations will initially be small, it will further develop our relationship with a key customer and build some experience of operating in the faster growing, emerging economies in line with our strategy. Plans for 2014 Looking ahead, Facility has good growth opportunities. Our management team will work on developing a best practice model for Washroom, optimise distribution and capture opportunities from our partnership with ISS. All these will help to extend our contract base. 70% volume increase in an acquired German laundry facility was the promising result after our solid optimisation efforts. What is a cleanroom? A cleanroom is a business production environment with a very low level of dust, microbes and particles. Our services help to ensure that the high standard is kept through supplying not only work garments but also shoes, goggles and mops. Strategic report Governance Financial statements

30 32 Berendsen plc Business line review UK Flat Linen. Our UK Flat Linen business (so called because a large part of the offering are the sheets, pillowcases, tablecloth etc. that are ironed flat) covers Hotel and Healthcare customers where we hold the market-leading position. Hotels Market overview Large hotel groups are attractive customers, as lower unit prices are offset by the larger unit size, economies of volume and reduced seasonality. On average, a large hotel equates to the size of seven small independents, which are characterised by higher transport and service costs, greater seasonality and some in-house capabilities. Large independents also offer scale advantages. Berendsen UK is the leader in hotel linen provision and serves most of the UK, although regional firms unite in associations to compete for national contracts. Drivers and trends The UK hotel market continues to grow. Closures of some small hotels in the independent sector, notably in coastal holiday areas, have been more than offset by new openings by hotel groups in London and the larger cities. Nationally, the pipeline of new hotel projects, where construction has already commenced for 2014 opening, stands at over 10,000 new rooms, of which 4,800 are in London. Healthcare Market overview For the NHS, purchasing of linen and laundry services has been simplified by frameworks that set core prices and run mini-competitions for those suppliers eligible to bid for NHS contracts. This development has significantly reduced the timelines from the issue of documentation to the implementation of new contracts. Although the business is not seasonal, activity can fall during peak holiday periods due to a reduction in elective surgery and outpatient appointments. Drivers and trends In 2013, two NHS laundries closed. In 2014, two further closures are expected, increasing the revenue available to private sector operators by 1 million per annum. As in 2013, we do not expect significant investment in new hospital capacity in Facility management providers play an increasingly important role in the market and we expect this trend to continue in Always moving forward Together we are strong In July Sunlight changed its name to Berendsen. We accompanied this with a customer communication programme to re-emphasise, but also broaden, the underlying values and commitments of the business. Informing customers about the change of name has given us an extra opportunity to tell our customers that the pace of innovation in products, services and processes will increase and introduce new initiatives to help deliver even better service. Speaking to our employees during the re-branding process really gave me an indication of the commitment our employees are showing. It was great to see the enthusiasm with which the process was embraced, and the understanding of the benefits. Steve Finch Managing Director, UK Flat Linen

31 33 An exciting future We are developing our products, our processes, our communications and many other aspects of our business. Adopting the Berendsen name throughout our company sends a strong signal to our customers that the company is changing and growing stronger. The practicalities of a re-brand We have been very pragmatic and cost-efficient in our re-branding process. Stationery, factory signage and business cards have been changed, while logos on trucks are being changed one by one when they need to be re-painted anyway. We also used the opportunity to launch a new website combining both the Workwear and the Flat Linen websites for the benefit of future business. Performance 2013 m 2012** m Revenue 204.6m 196.7m Adjusted* operating profit 27.3m 25.8m Adjusted* operating margin 13.3% 13.1% *Before amortisation of customer contracts and exceptional items **Restated for the introduction of IAS 19 Employee Benefits (Revised) Strategic priorities We plan to develop our strategic customer relationships through innovation, quality and service to further differentiate our offering. As market leader we also seek to be the supplier of choice for tenders or new outsourcing, especially in Healthcare. Growing strategic relationships; Supplier of choice for new outsourcing; Service innovation; and Managing operational excellence. Contracts Hotels A typical initial contractual agreement lasts for two or three years. Many of our customers have been with us for well over a decade. Some larger clients have bespoke terms in their contracts. 2,000 hits are received per day on our customer portal at: Healthcare NHS contracts are typically set for a period of three to five years, with occasionally the possibility of gaining extension periods of up to two years. This is longer than the contract period in the private sector, which tends to be nearer three years. Operational highlights Revenue was 4% ahead of last year at million (2012: million) and adjusted operating profit was 6% higher at 27.3 million (2012: 25.8 million). The adjusted operating margin was up 20bps at 13.3%. We are pleased with the increase in revenue growth rate to 4% (2% in the year to 31 December 2012), which has been driven by a combination of higher underlying volumes, new contract wins and price increases. The business continues to place innovation at the heart of its customer service proposition. In Hotels we are seeing clear signs of recovery in the UK economy with a 4% increase in underlying volumes in our group customers compared to the same period last year and a particularly strong end to the year. Our salesforce continues to improve its sales management processes, particularly with the introduction of a new customer relationship management (CRM) system leading to greater efficiency. The competitive environment remains tough, however, and we did experience a higher level of contract churn in the second half, which management is focused on reversing. Although gas prices remained at a higher level than expected we were able to partially offset these through productivity gains in the second half. In Healthcare, we are also investing in innovation in service and product enhancements. In Healthcare, we saw little change in underlying volumes but we benefited from new contract wins, add-on sales from our innovations in product and services to the hospitals, and contractual price increases. We remain well-placed to capture further outsourcing and we are in dialogue with a number of prospects. Plans for 2014 In 2014 our UK Flat Linen business management will focus on extending our contract base. Differentiating our products and service offerings from the competitors, enhancing efficiency within our textile management processes and developing the customer service further will be key areas of focus. Strategic report Governance Financial statements

32 34 Berendsen plc Business line review Manage for value. Our focus in the Manage for value businesses is on maximising the opportunities of these good businesses from their existing footprint, managing capital investment, increasing cash deliveries and improving returns. Flat Linen outside the UK Market overview Although our Hotels and Healthcare businesses outside the UK are relatively strong in their own markets, with many operating as market leaders, we do not currently plan for them to deliver sustained significant growth or to achieve higher levels of return. End markets are more challenging but our management teams remain focused on improving their businesses. Value drivers Strong businesses in their own markets These businesses are well-invested with a strong contract base Operational efficiencies and contract management to increase margins Cash conversion in excess of 100% Actions We manage our non-uk Flat Linen businesses under a separate management structure, combining hotels in Sweden and Denmark We will drive for operational efficiencies and undertake restructuring to ensure competitiveness Clinical Solutions and Decontamination Market overview The outsourcing of integrated linen, consumables and instrument decontamination services for the sterile environment of the hospital operating theatre provides opportunities for the UK health service to meet its current challenges and objectives. Value drivers Greater volume to leverage our well-established infrastructure Further contract wins Actions We engage with our customers to deliver the returns anticipated by the two decontamination contracts We are tendering for new contracts and volumes in sterile consumables We drive for service improvements and efficiencies in our reusable linen contracts Always moving forward A result of many years of dedicated service When Scandic Sweden was looking for a new supplier to their 76 hotels they engaged with us. We have a long track record of high standards of delivery to Scandic Denmark, and our strategy to unify the management of Denmark and Sweden supported our ability to also deliver high quality products and service offerings in Sweden. We were consequently chosen as their new supplier. Our logistics analysis and set-up will save Scandic Sweden approximately 15% of time spent on room cleaning. We deliver our products directly to the hotel room. We provide a linen cart with the exact amount of products needed for each floor of the hotels. By delivering this, considerable time is freed up for the room attendant, making them able to focus on their primary job.

33 35 Performance 2013 m Considerable savings We have clear evidence that our knowledge has brought considerable savings to hotel chains. Our customers always know exactly what they are paying for, which supports their confidence in us. 2012** m Flat Linen outside UK Revenue 231.2m 218.0m Adjusted* operating profit 18.2m 21.0m Adjusted* operating margin 7.9% 9.6% Clinical Solutions and Decontamination Revenue 69.3m 69.6m Adjusted* operating profit 4.5m 2.9m Adjusted* operating margin 6.5% 4.2% *Before amortisation of customer contracts and exceptional items **Restated for the introduction of IAS 19 Employee Benefits (Revised) Operational highlights Flat Linen outside the UK Revenue in our Flat Linen businesses outside the UK was up 6% at million (2012: million) but adjusted operating profit was down 13% to 18.2 million (2012: 21.0 million). On an underlying constant currency basis, revenue grew 2% and adjusted operating profit was down 15%. The adjusted operating margin decreased to 7.9%. The businesses within this segment have demonstrated that they have opportunities within their markets, notwithstanding the pricing pressure in Swedish and German Healthcare, which impacted margin. Underlying revenues increased with good new contract wins in Healthcare in Germany and Austria and in Scandinavian hotels. These, in addition to a number of other significant contract wins towards the end of the year, will deliver full year benefit in The margins on this new business will grow over the next few years but there will be significant start-up costs for new business of this scale in the first year of operation. Clinical Solutions and Decontamination Revenue was largely unchanged at 69.3 million (2012: 69.6 million) but adjusted operating profit increased significantly to 4.5 million compared to 2.9 million last year, an increase of 55%. Weaker sales of single-use surgical drapes and gowns followed the loss of a significant customer as a result of changes in its circumstances. Although revenues were held back by this, we increased significantly our profit in the period with the completion of our turnaround plan for our sterile consumables business. We continue to improve the performance of our decontamination contracts. The key actions of our turnaround plan are largely delivered with new volume from the existing 15,020 Swedish Scandic hotel beds (76 hotels) serviced by us. contracts and the start-up of a significant new contract contributing to a reduction in the loss for the period to 0.9 million compared to 2.2 million last year. Our service is strong and we continue to make operational improvements with an increase in underlying volumes in the second half of the year. One of the two core contracts is now operating at a small profit and we are therefore able to release 1.8 million of the provision that we made in 2010 that relates to this contract. We have separately disclosed this release as an exceptional item in the Income Statement. We retain 0.5 million of the provision to absorb future losses on the second contract where work continues to move this to a breakeven position by the end of Plans for 2014 In 2014 our Flat Linen businesses outside the UK will be commissioning the significant volume we have won in new contracts, especially in Sweden, and defending our market position in contract tenders. Additionally, our management teams will focus on improving operational and capital efficiency. Within both Clinical Solutions and Decontamination we expect to add new contracts to our base and deliver additional sales and service into existing contracts. Additionally, we aim to achieve breakeven in our second largest decontamination contract. The best service possible In order for our customers to derive the maximum benefit from our services, we regularly deliver benchmark calculations analysing each hotel s usage of our linen, towels, uniforms and mats. Strategic report Governance Financial statements

34 36 Berendsen plc Principal risks and uncertainties Continuing to maintain robust risk management. The key actions identified from our strategic review in 2010 continue to drive our approach to risk management. The involvement of management and employees at all levels is critical to the success of this approach. The identification of the most significant risks that face the group is the responsibility of the board. Each of the group s strategic objectives are considered in the risk identification process. The development of mitigation plans and actions to manage these risks is delegated to the executive board and other senior management. The board Sets strategic objectives Agrees key risk appetite, identifies key risks and ensures they are appropriately managed Sets delegation of authority Approves group policy and procedures Mitigation plans and actions required are communicated to business unit management who are responsible for their implementation. Business unit management teams are responsible for the identification, evaluation and management of local risks, so that, where possible, risks are reduced to acceptable levels. Executive board Monitors performance and changes in key risks facing the business, and provides regular reports to the board Agrees key actions to manage risks Risk management assistance Guidance and advice to business line and business unit management to help them with the following: Risk, identification procedures, quantification and mitigation plans Health and Safety Fire management Insurance Audit committee Monitors assurance and risk management arrangements Business line and business unit management Management and employees are responsible for the identification, assessment, management and reporting of local risks Maintenance of local risk registers Implementation of key risk mitigation plans Effectiveness of risk and control processes Reviews of the effectiveness of key risk management and control processes through: Internal audit External audit Group insurer property Risk surveys 1 Business line and business unit management Assurance lines of defence 2 3 Group support Independent assurance David Lawler Company Secretary

35 37 Our focus in 2013 In March 2013 an external independent review of the group s risk management systems was performed. Findings from this review were discussed with the board on 25 April 2013 and priorities for further work were identified. Our initial focus is on enhancements to the completeness of our risk identification procedures using an activity-based approach. Following this review we have assessed the key inherent risk attributes of our business and the associated dangers that they might represent if not appropriately managed. In 2013 we reviewed, updated and improved key operational group policies on health and safety (including fire management), business continuity planning and building asset management. In addition in quarter four 2013 and quarter one 2014, we have instigated an independent review of our health and safety management systems. Plants in 6 countries are being visited, to identify opportunities for further improvement. Always moving forward Understanding risk independent review The independent review of risk management that we completed in the first quarter of 2013 engaged with people throughout the organisation, including executive and non-executive directors and senior management. This concluded that in terms of the effectiveness of our risk management processes we are within the top quartile of organisations with similar risk profiles. Inherent attributes The organisation is strongly process orientated; There is a relatively stable management team; The group is made up of a large number of plants which lowers the impact to the group should problems occur in a specific plant; The group operates predominantly in Western Europe, with its welldeveloped business culture; and We have an open communication culture where it is normal practice to escalate issues promptly. We are highly focused on the effectiveness of our business continuity planning arrangements in order that we can provide continuous supply to our customers. A further desktop scenariobased test of our business continuity planning arrangements was carried out at a key UK location, and our first overseas test was completed in Denmark in January We continue to strive for improved systems and procedures to share best practice around the group. The Operational Risk Management Group meets twice each year to discuss emerging risk management issues and to identify opportunities for us to share best practice. This group comprises a number of senior management from across the group. Ongoing process for risk identification, evaluation and management The board is responsible for determining the nature and extent of significant risks it is willing to take in achieving its strategic objectives. At the February, June and December 2013 board meetings the board reviewed the most significant risks facing the group. Culture The group maintains an open style of communication. This is designed to identify any problems and issues early so that appropriate action is taken quickly to minimise any impact on the business. The characteristics of our group culture are supported by our group intranet, the Berendsen Universe. This provides an extensive platform for our employees to keep updated with the latest news, the key group policies and procedures and to share best practice with others. Our vision and values continue to complement and drive the characteristics of our culture. Strategic report Governance Financial statements

36 38 Berendsen plc Principal risks and uncertainties Throughout 2013 and up to the date of the approval of these financial statements, there has been an ongoing process for the identification, evaluation and management of the most significant risks faced by the group. This process has included the following: Appropriate delegation of authorities approved by the board that include formal authorisation procedures for all investments (as well as clear guidelines on appraisal techniques); Clear responsibilities of line and financial management for the maintenance of strong financial controls and the production and review of detailed, accurate and timely financial management information; A comprehensive financial review cycle, which includes a rolling threeyear planning process, an annual budget approved by the board, review of monthly variances against budget and quarterly re forecasting of annual performance; Provision to management and the board of relevant, accurate and timely information, including key performance indicators, based on reliable management information systems which are regularly improved and updated; Monthly reports to the board from the Chief Executive Officer, Chief Financial Officer and the Managing Directors of the Workwear, Facility and UK Flat Linen business lines; Regular business unit management board meetings, executive board meetings and company board meetings. At these meetings existing, new and emerging operational, financial and other risks are discussed, together with appropriate actions to manage these risks being agreed and followed up; Regular performance reviews by the Chief Financial Officer and the Group Financial Controller with the Managing Directors of the Workwear, Facility and UK Flat Linen business lines, often attended by the Chief Executive Officer who also has one-to-one meetings with the Managing Directors; Discussion of any identified significant issues or control weaknesses and, if considered necessary, their inclusion in reports to the executive board and the board; Maintenance of a group risk register and schedule of key controls which is regularly updated and reviewed by the board, which sets out the most significant risks facing the group, the actions being taken in mitigation including future plans; Maintenance of business unit risk registers; and A structured and approved programme of internal audit visits with the implementation of recommendations made being monitored as part of a continuous programme of improvement. Internal control The board also has responsibility for maintaining sound risk management and internal control systems, and at least annually reviewing the effectiveness of these systems. These internal control systems are designed to manage rather than eliminate the risk of failing to achieve a business objective. They can therefore only provide reasonable and not absolute assurance against material misstatement or loss. Read more about the board s annual assessment of the effectiveness of internal control systems on page 78. Always moving forward Managing Business Continuity Planning Risk UK Flat Linen has recently carried out BCP desktop scenario based tests at two plants. Key lessons learned have been collected and the Operational Risk Management Group will ensure these are shared throughout the group. Further tests will be completed at a key site in each business line during 2014.

37 39 Risks to achieving our strategic objectives Detailed below are the principal risks and uncertainties facing the group for the next 12 months. The change in the significance of each risk is also shown. Of the 12 risks below, four are reducing; in particular in relation to the performance of the Decontamination business. Exchange rate movements provided benefit for us in 2013, but the risk that they might work against us in 2014 is slightly increased based on movements since the year end. How we see our principal risks Impact 1 Risk Low Moderate Major High Delivering sustainable organic growth a New sales model fails to deliver the necessary new contract wins (volume and price levels) to drive targeted organic growth Potential impact k Reduction in future profitability and cash flow. k Failure to deliver targeted growth in revenue. KPI likely to be affected k Revenue growth Read more detail: Page 14 g Low Moderate Major High Likelihood of risk occurring/significance of management focus For a full description of each risk please see the tables below j c d Mitigation in 2013 k Business line organisational structure in place which gives us more focus on growth areas; k Central sales directors for Workwear, Cleanroom, Mats and Washroom and UK Flat Linen (core growth areas). These target local business line sales teams to add focus and speed of response; k Commencement of group-wide sales development work and establishment of sales director group to follow up and improve sales processes; k Pricing network implemented with pricing managers for each business unit, business line and the group; k Commencement of commercial terms and pricing education programme for managers and frontline personnel across the group; k Reporting system provides monthly progress against business line budgets, including key performance indicators; and k Monthly management accounts distributed to the board include key performance indicators on organic revenue growth, contract gains and customer losses. e f l b k i h a As well as narrative description of the principal risks and uncertainties facing the group, we use a risk mapping technique to highlight the potential impact and likelihood/significance of management focus of each risk. These are assessed using established criteria and metrics. The board focuses their discussions on those risks regarded as potentially having the most significance, and also to identify risks where their significance is potentially increasing or decreasing. The table below details the risks shown in the risk map opposite. Each risk is clearly linked to the strategic objective and KPIs which it is likely to affect. We also highlight our mitigation for each risk and further progress planned for Further progress planned for 2014 k Group-wide commission and sales scheme being implemented; and k Continuation of commercial terms and pricing education programme for managers and frontline personnel across the group, including tender training. Change Stable Strategic report Governance Financial statements

38 40 Berendsen plc Principal risks and uncertainties Risks to achieving our strategic objectives Risk 2 3 Improving capital efficiency Maintaining a sound financial position b Further economic uncertainty Potential impact k Reduction in future profitability and cash flow; k Adverse pressure on pricing and margins; k Revenue growth below expectations; and k Limit to ability to complete strategy. KPIs likely to be affected Return on invested capital Free cash flow/adjusted profit for the year Net debt to EBITDA Read more detail: Pages Mitigation in 2013 k Long range plans for business lines to 2016 prepared; k Tight and closely monitored controls over capital expenditure and working capital including capital efficiency review; and k Monitoring of various lead indicators against previous experience, including Hotel and Workwear volumes. Further progress planned for 2014 k Continued monitoring of lead indicators, including hotel and Workwear volumes; and k Continued tight and closely monitored controls over capital expenditure and working capital. Change Reducing Risk c Movements in exchange rates adversely affect the translation of our group results into UK sterling Potential impact k Unexpected variations in group net earnings. Mitigation in 2013 k Borrowings in currencies to provide hedge against the cash flows of majority of overseas net assets in euro, DKK and SEK (no exposure to investments in Greece, Italy, Turkey, Spain or Portugal). Further progress planned for 2014 k High level of balance sheet hedging will continue (no plans for income statement hedging at this stage). Change Slightly increased KPI likely to be affected Adjusted earnings per share Read more detail: Page 15 Risk d Return on Invested Capital (ROIC) is not sufficiently greater than the group s cost of capital Potential impact k Lack of funds for future investments; and k Reduction in future profitability and cash flow. KPI likely to be affected Mitigation in 2013 k ROIC target set at 10% for the medium term. Reported monthly by business line to the board in group management accounts; k Delegations of authority reviewed and updated in January 2014; k Post-acquisition procedure to monitor returns on investments made, compared to those targeted; and k Ongoing Capital Efficiency Programme to reduce levels of working capital. Further progress planned for 2014 k Continued focus on generation of free cash flow; and k Continuation of Capital Efficiency Programme. Change Slightly decreased Return on invested capital Read more detail: Page 14

39 41 4 Improving financial returns by leveraging operational efficiency Risk e Failure to improve the performance of the Decontamination business during 2014 Potential impact k Reduction in future profitability and cash flow; k Need for further provisions for losses on contracts; k Failure to deliver targeted growth in revenue; and k Potential loss of management reputation and credibility. KPI likely to be affected k Adjusted earnings per share/ dividend per share Read more detail: Page 15 Risk f Unforeseen loss of operational/ IT capacity Potential impact k Inability to service customer requirements; and k Adverse impact on reputation. KPIs likely to be affected k Adjusted earnings per share k Revenue growth Read more detail: Pages Risk g One of our major textile suppliers is unexpectedly unable to meet our textile requirements Potential impact k Shortage of textiles; and k Inability to service new and existing customer requirements. KPIs likely to be affected k Adjusted earnings per share k Revenue growth Read more detail: Pages Mitigation in 2013 k The board receives regular updates on progress from UK management. This recognises good levels of customer service, improved efficiency and interest from potential new customers; k Efficiency initiatives put in place reducing losses 2013 loss 900k (2012 loss 2.4 million, million, 2010 loss 5.4 million); k Ongoing discussions regarding future options; k No further significant investments planned; and k Release of 1.8 million provision. Mitigation in 2013 k Documented and evaluated business continuity plans including identification of alternative production locations updated Group Business Continuity Planning Policy approved by the executive board and distributed to all businesses in April 2013; k Fire protection/security procedures and regular audits of compliance; k Independent surveys to assess the design and effectiveness of plant fire protection, security and business continuity arrangements, including targeted desktop scenario-based testing; and k Comprehensive Property Damage and Business Interruption insurance. Mitigation in 2013 k Regular risk assessment of our major textile suppliers considering social, political and economic factors; k Identification of alternative production sources; k Purchase of stock up to three months prior to delivery to reduce risk; and k Secured availability of alternative stocks in the event of serious interruption to supply. Further progress planned for 2014 k Continued focus on the identification and implementation of efficiency initiatives to further reduce losses; k Working with our customers to achieve a streamlining of processes; and k Identification of new volumes using existing footprint. Further progress planned for 2014 k Further targeted desktop scenario-based testing of business continuity planning arrangements; k Continued monitoring of fire protection and security systems, including responding to the results of our regular independent survey programme; and k Maintenance of appropriate Property Damage and Business Interruption insurance cover for our individual businesses. Further progress planned for 2014 k Current approach to the management of this risk will continue. Change Significantly reduced Change Stable Change Stable Strategic report Governance Financial statements

40 42 Berendsen plc Principal risks and uncertainties Risks to achieving our strategic objectives 5 Risk Maintaining health and safety and other governance matters as a priority h Breach of health and safety regulations Potential impact k Damage to our reputation; and k Loss of licence to operate. KPI likely to be affected k Major injury rate Read more detail: Page 16 Mitigation in 2013 k Updated Group Health and Safety Policy approved by the executive board and distributed to all businesses in April 2013; k Commencement of independent review of health and safety management; k Local health, safety and fire management systems; k Regularly updated and monitored cleaning and maintenance programmes; k Prompt incident reporting procedures to senior management with subsequent monitoring; and k Regular board review of major incidents and statistics. Further progress planned for 2014 k Completion of independent review of health and safety management; k Further focus to target a reduction in group major injury rate; and k Reporting to the board on major incidents and statistics to continue. Change Stable Risk i Non-compliance with laws and regulations Potential impact k Damage to our reputation; and k Loss of licence to operate. KPIs likely to be affected Mitigation in 2013 k Group Policy and Guidance being developed; k Prompt incident reporting procedures to senior management with subsequent monitoring; and k Regular board review of major incidents and statistics. Further progress planned for 2014 k Ongoing training programme for employees. Change New risk k Adjusted earnings per share k Revenue growth Read more detail: Pages Maintaining a motivated workforce driven by an experienced management team Risk j Inadequate talent management and inability to recruit and retain sufficiently qualified and experienced senior management Potential impact k Lack of internal succession to key management roles within the group in the event of unexpected departure; k Short/medium-term disruption to the business; k Loss of key personnel; and k Shortage of appropriately skilled management. KPI likely to be affected k Senior management retention rate Read more detail: Page 16 Mitigation in 2013 k Succession plans in place with identified succession for the top 50 roles; k Wider talent pool below the top 50 identified and development planning in place; k Executive board and business line succession reviews held twice yearly; k LEAD leadership framework introduced and integrated into performance management process; k Berendsen Academy as in-house vehicle for furthering company knowledge, expertise and leadership development; k Management Trainee scheme expanded by 50% for future building of management pipeline; k Group recruitment policy introduced with focus on consistent and raised standards for management recruitment; and k Short and long-term management incentive plans fully aligned with business line and group targets. Further progress planned for 2014 k Introduction of LEAD Development Centres aimed at building further competency in the leadership framework; and k 50 managers will participate in LEAD Development Centres in Change Further reduced

41 43 7 Reducing our impact on the environment Risk k Textile suppliers are found not to be adopting appropriate employment and human rights practices Potential impact k Loss of licence to operate, loss of goodwill and/or damage to reputation; and k Significant stakeholder concern. KPI likely to be affected k Adjusted earnings per share Read more detail: Page 15 Risk l Discovery of historic environmental issues at laundries Potential impact k Emergence of unaccounted for liability; k Adverse impact on cash flow and retained earnings; and k Damage to our reputation. KPI likely to be affected k Adjusted earnings per share Read more detail: Page 15 Mitigation in 2013 k Regular visits to major suppliers by experienced internal personnel and external parties to assess suppliers compliance with appropriate working practices; and k Prompt incident reporting procedures to senior management and subsequent monitoring. Mitigation in 2013 k Established incident reporting procedures to senior management with subsequent monitoring; k Indemnities with previous owners that cover a number of acquired sites; k The extent and coverage of these indemnities are reviewed with the relevant third-party as appropriate; and k Defence of these indemnities continues to be vigorously prosecuted. Further progress planned for 2014 k We have appointed a single assurance provider responsible for carrying out detailed audits of our major suppliers of directly sourced production; k Continued assessment of our other overseas textile suppliers confirmations of their adoption of appropriate working practices; and k Continued monitoring of compliance with our anti-bribery and corruption procedures. Further progress planned for 2014 k Current approach to the management of this risk will continue. Change Stable Change Stable Strategic report Governance Financial statements

42 44 Our people Berendsen plc Investing in our people to grow the business. Our ability to look after the well-being and development of all our people has a direct impact on our overall strategic performance. By engaging our people we improve customer satisfaction and retention and ultimately Berendsen s growth prospects. Key points in this section: Employee engagement 69% employee engagement level. 8pts higher than benchmark norm. Leadership 50 Managers invited to attend LEAD programmes in Investment in people 2.24m Training spend. Values 100% Roll out to all sites of vision and values communications. Monitoring a motivated workforce 96% Senior management KPI retention rate. 6 Chris Thrush Group Director, Human Resources Across the group, 2013 was a year of implementation of our previously announced plans to motivate, engage, develop, reward and recognise our employees. Here we provide an update on progress against our commitments in areas which relate directly to our strategy for growth. Understanding our people In September 2013 we conducted our first company-wide One Berendsen employee engagement survey. Out of 15,000 people, a total of 11,500 participated in the online survey, giving a response rate of 76%. Consisting of 25 questions, available in 23 languages, the high response rate gives us confidence in the survey category results of communication, engagement, leadership, organisation, my manager, my team, my role, performance and personal development. An overall engagement score of 69% put Berendsen 8 points higher than the global norm for the 176 other organisations who have conducted similar surveys with our chosen partner, Get Feedback. Conducting the One Berendsen survey online enabled us to easily produce detailed engagement summaries for all 140 Berendsen workplaces. Following receipt of the results, line managers have since been engaged in an open and transparent communication of the results at every location. What s next? We will continue to communicate the results in 2014, working with employee groups to identify three to four improvement actions for each site, aimed at further enhancing levels of engagement before the survey is undertaken again in Employee engagement score % Berendsen Global norm Areas of strength 61% 69% Our people have higher than average levels of engagement and little intention of leaving Berendsen in the next 12 months; Our people understand their role in relation to organisational success, know what is expected of them and feel comfortable sharing their opinions with their manager; Our people believe that the CEO and his team are taking Berendsen in the right direction; and Berendsen scores higher than the global norm scores for all the above. Areas of attention Our people see that leaders could increase the amount of visible presence in their area of the organisation; Our people say they would like to have more regular feedback, particularly when they perform well; and Our people believe more could be done to increase the opportunities for career development within Berendsen.

43 45 Embedding leadership behaviours In 2012 we developed LEAD, our model of 8 key leadership behaviours which combine both our perceived current leadership strengths with those we believe we need to develop further for our future success. LEAD, short for Leadership Effectiveness And Development, identifies the behaviours we consider will be most effective at both plant and senior leader levels. In 2013, in addition to communicating and explaining LEAD to the whole management group, we developed tools and processes to begin embedding Always moving forward Engaging with our people In order to maximise the potential response rate in the online employee survey rolled out in 2013, it was necessary to provide a way for all employees who wanted to take part to be able to do so (including those with no regular access to a computer). Advance publicity material created awareness, but this was not enough. We appointed one or two volunteer survey champions at each Berendsen site. Their role was to provide support and help to anyone wanting to undertake the survey, together with ensuring dedicated and private computer access was available in normal work time. This proved so successful that in the end the response rate from our people without regular access to a computer was higher than our people working with a computer every day! 76% response rate to online employee survey. LEAD behaviours, e.g. including LEAD in our Performance and Development Review (PDR) process to ensure a regular dialogue between a manager and his or her manager about progress against the LEAD framework. In addition, a LEAD 360 feedback tool has been added to further enrich the PDR discussion, together with summary LEAD development suggestions for each LEAD behaviour so that learning and development action plans can be put in place for each manager wanting to accelerate their progress against the model. Leadership Effectiveness And Development model What s next? In 2014 we will continue to embed LEAD through the introduction of LEAD Development Centres. These are intensive and stretching one day events aimed at building competency around LEAD behaviours. They are either one to one, or group based programmes and result in each participating manager being provided with a tailored development report identifying leadership strengths and opportunities for ongoing learning and development. 50 managers, selected from the talent lists in our succession planning process, will be invited to take part in LEAD Development Centre programmes in values 8leadership behaviours 3strategic goals... 1vision. LEAD Caring sensing (radar) External internal operational focus Strategic Determination Drives customer commercial improvements Customer focus Business acumen Our vision We take pride in doing what we re best at, delivering unsurpassed levels of service, so our customers can do what they re best at. Motivates for results Empowerment Leads the push for growth Building for growth Operational effectiveness Stretching people & terms Builds self development Teamwork Strategic report Governance Financial statements

44 46 Berendsen plc Our people Developing our people Having a clear strategic approach to developing our management capabilities will shape us for continuous growth. Berendsen Academy In 2013 we continued to add to the learning and development opportunities provided through the Berendsen Academy. The Academy, first launched in 2012, is Berendsen s in-house corporate university for furthering company knowledge, expertise and leadership development. In January 2013 the Academy trained over 200 managers in pricing and commercial terms to improve the profitability of our contracts and support our strategy for higher growth. In 2014 we will introduce new courses aimed at building further understanding, involvement and empowerment. The Academy also introduced new online tools for 360 feedback, recruitment skills and diversity awareness. Integrated model for leadership development Reward strategy Bonus programme Long-term incentives Recognition programme Reward and retain Succession Planning Process LEAD model Berendsen Academy LEAD 360 Feedback LEAD Development Centres Pricing and Commercial Terms Coaching and Performance E-Learning tools: Recruitment skills Unconscious bias Attract management talent Develop Management development programmes In addition to the group level leadership development programmes of the Berendsen Academy, at the country level, management development programmes, which put in place the building blocks of management skills and competency, have been implemented. A number of these took place in 2013, with over 300 managers participating in Leading through Change and Cycle of Service workshops in the UK, and managers in Denmark participating in a simulation game, Wallbreakers, a tool used to train implementation of organisational change. In Sweden the fifth in a series of leadership programmes with selected managers was completed, and in 2014 a management development programme for managers in Germany will be launched. Group recruitment guide Gender diversity policy Management trainee scheme Motivate, engage, performance manage PDR process LEAD model k k One Berendsen staff survey Group induction programme Management trainee scheme The Berendsen Management Trainee scheme was enhanced and expanded further in A total of 24 trainees, 14 men and 10 women, an increase of 50% on the numbers in 2012 began or continued a two year traineeship which requires the completion of four six-month projects aimed at addressing complex organisational issues. Trainees get experience in many functional areas, are provided with a thorough grounding in the company and are expected to work internationally for at least one of their six month projects. The scheme provides a pipeline of future management talent and at the end of their two year programme trainees are typically appointed to middle management roles throughout the organisation. An example is Christoffer Johansson who graduated from the Management Trainee Scheme in Following projects undertaken in Sweden, the UK and Germany, Christoffer has been appointed Deputy Plant Manager for a Flat Linen plant in the south of Sweden reporting to the Danish Plant Manager who is based there on a part-time basis. The role will provide Christoffer with the opportunity to develop operations and people management skills and grow toward taking full responsibility for the Plant. Increasing our talent pool Succession planning measures Two identified successors for each position in Top 50 list; Promote from within = 70% of management appointments; and Senior Leader retention >90%. Training spend 2.24m (2012: 1.77m) In addition to the management and leadership development programmes described in this section, we invested in the skills development of our people in the areas of safety awareness, driving, customer service, engineering, selling, and our CL2000 methodology.

45 47 Communicating our values Employee communications Reward and recognition In 2013 we continued the embedding of our One Berendsen Vision and Values programme. We strengthened employee understanding with the help of three DVD film presentations containing success stories showing how our values are being demonstrated every day through the work our people do. A one year on competition held in March 2013 was aimed at finding out how well the Vision and Values programme had been communicated to date. The competition proved to be a popular event and our people in Hofors Sweden, Aalborg Denmark, Uden Netherlands, Szamtuly Poland, Glinde Germany, and Wakefield UK, provided the winning entries. In September 2013 the One Berendsen Employee Survey question Berendsen s Vision and Values has been communicated in a way that I understand them was answered agree or strongly agree by 67% of respondents. Always moving forward Living our values We are driven by a strong sense of passion and belief. We push for engagement through communication of our values which actively stimulates discussion within the business, using clear explanations and concrete examples. An illustration of this is the story of Jaz Dhami, a demonstration of our caring and teamwork values. Nineteen years with the company, Jaz has worked for the last 6 years as a Transport We place a high priority on employee communications. Berendsen Universe is our group intranet accessible to all employees. First installed in 2012, Universe provides a wide range of company information, news, knowledge sharing and best practice guides. There were eight editions of Berendsen s online Newsletter in 2013 highlighting company successes in sales, product news and other developments across the whole company with each issue introduced by the CEO giving regular updates on company performance. In addition, local operating companies have installed large flat screen TV s and internet capability in canteens to communicate messages and provide access to Berendsen Universe. Use is also made of management and team briefings, letters to staff and annual kick off, or ad hoc meetings to ensure our people are well informed. Supervisor in our Wednesbury Hotels plant in the UK. Having being informed by the customer service office, who had taken a call from distraught parents, Jaz and his colleagues set about rifling through 18 cages of linen recently returned from local hotels until they found a lost teddy bear. He then set off to return the much loved bear to his owner and the little girl s astonished parents. We reward our managers based on their performance, potential and contribution to the success of the business. We aim to provide competitive fair rates of employee pay and benefits in every country where we operate. In 2013 we continued to focus on clear and transparent links between performance and reward. We incentivise managers through annual bonus programmes aligned to the key performance objectives of each business line which in turn are in support of our strategy for growth. The new Berendsen Long Term Incentive plan, first introduced in 2012, rewards approximately 100 managers for the achievement of strategic goals and encourages share ownership. At Berendsen s 2013 annual management conference 60 managers spent two busy days putting growth at the centre of the agenda and explored the ways to increase organic growth through best practice sharing, market insights and other initiatives. At the end of the Conference, Excellence Awards were given to recognise managers for their outstanding achievements in support of the overall goal of higher growth. Awards were given for Growth Excellence, Service Excellence, Cash Excellence plus further awards for Management Team of the year and Colleague of the year. Strategic report Governance Financial statements

46 48 Our people Berendsen plc Focusing on diversity Our goal is a working culture that is inclusive for all. We are committed to eliminating discrimination and encouraging diversity amongst our workforce. We aim for our employees to be representative of the communities in which we operate and for each of our people to feel respected and able to give their best. In 2012 we outlined our commitment to improving gender diversity with particular emphasis on the numbers of women in management roles. In 2013 we have continued to focus on this area through a number of initiatives. Each member of the Women in Berendsen network, first established in 2012, took on the responsibility of mentoring another more junior woman manager to strengthen the network deeper into the company and to encourage and build confidence. A partnership has been established externally with the EveryWoman network which provides access to excellent online learning materials and leadership development training days. In addition, an in-house Berendsen Academy training video has been produced on the subject of Unconscious Bias to increase awareness and is available online to all managers and supervisors. Our succession planning process, which includes two reviews per annum at the Executive Board and business line levels, now identifies and reviews development plans for the numbers of both men and women who make up the talent pool of future or emerging leaders. The establishment of our new Supply Chain and Procurement function in 2013 provided the opportunity to make several new appointments, including the recruitment of a senior woman manager as Director of Procurement. What s next? In 2014 we will undertake a more detailed analysis of women in management positions across the company with a view to achieving a better understanding of their aspirations and career development needs. Women in management 0% Women executives, we are building a pipeline 9% Women senior leaders 24% Women middle managers 43% Women employees at Berendsen Always moving forward Celebrating diversity Our second annual meeting and dinner with senior women in Berendsen was held. A total of 25 senior women leaders and their mentees met with Peter Ventress, CEO, and Chris Thrush, Group Director, Human Resources, to discuss progress made in 2013, and in particular, the success of the new mentoring programme designed to encourage confidence and ambition and strengthen the network. Several mentees described the increased confidence and selfbelief that they had derived from participating in the programme with five women informing the group of their promotions in the last year! One of these is Janni Nielsen who first joined Berendsen as a trainee in her mid 20 s in Denmark. Seven years on Janni has been appointed Plant Manager in our Workwear plant in Svendborg following earlier appointments as Production Manager, Project Leader and Product Manager in our Healthcare and Washroom businesses. Janni s mentor in 2013 has been Lene Fredeloe, Workwear Sales Director in Denmark and a former Svendborg Plant Manager. 43% Women employees at Berendsen.

47 49 Maintaining health and safety as a priority Definition: (Number of deaths and major injuries/total hours worked) x 1,000,000. Major injury rate (by Business Line) 5 KPI Managing our health and safety Target The health and safety of our people is paramount. Tragically last year we saw the death of a driver from our Fürstenwalde plant in Germany. The road accident is still being investigated. His colleagues, and all Berendsen employees, were deeply saddened by this tragic event. As we operate in many countries, local standards, both in terms of regulation and accepted best practice, do vary. Group-wide we want to achieve a much higher standard than mere compliance as the common standard. We received and updated our Group Health and Safety Policy in The new policy builds on the standards previously set. Major Injury Rate As part of the process of rolling-out this new policy, we asked all businesses in the Group to complete a self assessment questionnaire to identify any gaps in compliance. To get an external perspective on how we mange health and safety we commissioned a specialist health and safety consultant to visit seven plants in six different countries. This review will be completed in Q and the findings will be presented to the Operational Risk Management Group in April Any health and safety related incidents, across the Group, are reported through our internal reporting system. This ensures that incidents are promptly reported to senior management and that actions are taken to try and prevent incidents of a similar nature occurring again. Group incident statistics continue to be regularly collected and reviewed by the board twice each year. The table above shows the major injury rate and number of major injuries for Berendsen employees in 2013 and 2012 by business line. Number of major injuries Major Injury Rate Number of major injuries Business line Facility Workwear UK Flat Linen Flat Linen outside UK Clinical Solutions and Decontamination Total group Due to more manual handling in our Flat Linen businesses compared to other business lines, we have historically seen a higher major injury rate there. Our Facility business line had no injuries in 2012 and three in 2013, however this is not an obvious trend development. Our Operational Risk Management Group has placed increased focus on health and safety including more accurate reporting and categorisation of incidents as they occur. If there were to be any instance of an employee becoming disabled during their employment with us, every effort would be made to make sure that their employment with us continues and that, where needed, appropriate retraining is arranged. Strategic report Governance Financial statements

48 50 Berendsen plc Corporate responsibility The heart of a sustainable business. A sustainable business requires a proactive and practical approach to corporate responsibility (CR). We recognise that this will continue to be a key driver of our success. Sustainability is not just important to us, but to our customers too. Our focus is on meeting the changing demands of our customers. Many of them acknowledge that we are on a journey. I think it would be fair to say that they are not looking for us to achieve everything tomorrow, but are keen that we demonstrate continuous improvement, both in terms of the sustainability initiatives that we undertake, and in the results that we achieve. In my view, corporate responsibility has become much more than just CO 2 emissions it embraces everything from addressing changing customer demands and human rights, to how we work with our employees; that s why it s absolutely central to our business performance. Opportunities Commercial opportunities Our customers have important sustainability commitments of their own and we work hard to help them meet those commitments. Our drive towards sustainability helps support their drive towards sustainability. Operational efficiencies Improved sustainability performance can translate directly into operational efficiencies. We constantly evaluate how new ideas and technologies can improve how we work, reducing both our environmental impact and our operating costs. Risks Environmental risks Failure to manage how we use water, electricity, chemicals, oil and gas would damage our reputation, increase costs and mean that customers could fail to meet their own environmental commitments. Exposure to price changes Utilities and textiles are essential to our business. If prices change significantly, it could have a detrimental impact on our overall costs and competitiveness. Engage and retain employees Being a good employer and supporting our people to do their best work helps us attract and retain the high performing individuals we need to improve business performance, year on year. Competitive advantage We operate in a crowded and competitive marketplace. Seizing the opportunity to be a more responsible business helps to differentiate ourselves from our peers. Regulatory environment The regulatory landscape in Europe is subject to change. New regulations, such as legislation targeted specifically at our sector or at the key resources and utilities we use, could affect our business model. Changing customer demands Customers are increasingly concerned with the sustainability performance of their suppliers such as Berendsen. As their demands evolve, we must ensure that our commercial approach adapts to meet their needs. Peter Ventress Chief Executive Officer Our priorities Managing our environmental impact We will strive to minimise our business environmental impacts with particular focus on CO2 emissions, water, chemicals and transport. Operational efficiency We are committed to ensuring that smarter working practices go hand-in-hand with being a more sustainable, responsible and competitive business. Engaging with our stakeholders We work with all our stakeholders including customers, employees, investors and local communities to understand and action on their expectations.

49 51 The business case for corporate responsibility Our Vision is that We take pride in doing what we re best at, delivering unsurpassed levels of service, so our customers can do what they re best at. To achieve that, we only make investments that have commercial payback and that includes investments in corporate responsibility (CR). Most companies recognise the many soft reasons why CR matters. But in our experience, there are also compelling and indisputable hard reasons why CR is not just desirable, but fundamental to long-term success of our business. High among these is that CR issues inform almost every business conversation we have with customers or potential customers. Customer needs are changing and they are changing fast. They want to know how we are performing from a CR perspective and what we are doing to improve, because their customers are raising the same issues. When we use water more wisely, reduce the amount of fuel our trucks use or support our people in new and better ways, the more we can have a positive impact on those customers own CR performances. And that means increased business for us. Secondly, we operate in an increasingly regulated business sector. Our stakeholders need the reassurance of knowing that we meet all regulations and surpass and anticipate them when possible. Tenders and other procurement processes ask tough questions about efficiency and compliance and when we are able to answer affirmatively, customers have the confidence to work with us. Always moving forward Working with our suppliers responsibly We use the services of an external specialist organisation to provide us with assurance that our overseas textile suppliers are adopting appropriate ethical and working practices. During 2013 they completed eight audits at supplier locations in Cambodia, China, Pakistan and Vietnam. They made a number of recommendations to further improve the high standards that our suppliers adopt. We have been working with our external specialist and our suppliers to ensure that actions are complete, or are in progress, to address all of the recommendations made. In addition, our business success is inextricably linked to the quality of our people. We depend on their skills, dedication and can-do attitude to provide the best possible service to our customers and they deserve our unqualified support. So we continue to invest in and develop our people, creating an environment where they can do their best work. Again, this is an investment that is not just the right thing to do but one that is also commercially rewarding. Managing our environmental impact Water, energy, chemicals, and oil and gas (WECO) are everyday resources to our business. All our business lines depend on wash regimes to varying degrees, which is why WECO forms the core of our commitment to environmental management. We work hard to reduce the quantities of WECO we use across our operations. At the same time, we also aim to be more efficient in effect, using fewer resources more wisely in order to drive down our environmental impact. Such an outcome is good for our business and our customers because it reduces risks and costs and also good for the environment and the communities where we operate. Ultimately, improved WECO management will help us fulfil our environmental commitments and those of our customers and that means we will win and retain more contracts. Strategic report Governance Financial statements

50 52 Berendsen plc Corporate responsibility CO 2 emissions Last year, for the first time, we reported CO 2 emissions for each of our business lines using the Greenhouse Gas (GHG) Protocol methodology. This year, by being able to compare two consecutive 12-month periods, we can demonstrate that we continue to move in the right direction. As the table on the right shows, Kg of CO 2 per tonne of laundry shipped has fallen from 411Kg in 2012 to 402Kg in 2013, a reduction of 2.2%, although our tonnes shipped in 2013 has risen by 3.1% compared to We are compliant with all relevant national legislations and in the UK that includes the requirements that from October 2013, we should report the annual tonnage of CO 2 from: Combustion of fuel and operation of any facility (Scope 1); and k Purchase of electricity, heat, steam or cooling by us for our own use (Scope 2). Scope 3 emissions are not included in this year s report. This is partly due to the complexity of assessing those, notably in terms of emissions linked to our procurement activities. Scopes 1 and 2 emissions are shown in the table on the right: Methodologies used As stated above, we use the Greenhouse Gas Protocol methodology and conversion factors to assess our carbon footprint. However, we only update these once each year (from 1 January). The Greenhouse Gas Protocol has recently updated its conversion factors, but we will only implement those from 1 January 2014 to ensure we have consistent and comparable data till then. Certification in the UK We value the role of the Carbon Trust Standard in helping companies reduce emissions and our UK business is proud of its existing certification which we will actively be looking to renew after the end of The standard is only awarded to those organisations that measure, manage and reduce their carbon footprint, which is a key priority for Berendsen. Our UK business also achieved the Carbon Trust Water Standard certification in 2012 and is currently going through the application process to be awarded this again. To be re-awarded this unique accreditation our UK business must demonstrate a 2.6% reduction in water usage from 2011 to What s next? Article 8 of the EU Energy Efficiency Directive came into force towards the end of 2012 and requires that Member States introduce a programme of regular energy audits for large enterprises. The first audit must be completed by the end of 2015, with further audits on a four-yearly basis. In the UK, the Government is now consulting on the implementation of Article 8, with early suggestions indicating that the audits will include: A review of the total energy use and energy efficiency of the organisation; and Clear information on potential savings, which identify and quantify costeffective energy saving opportunities. We are considering how we can best facilitate the audit process and are identifying an approved assessor to support us. In addition, we believe that our involvement with the Carbon Trust will be of help in the UK. During 2014, we will work to identify what the audit process will require in our other operating countries. Our total CO 2 emissions Kg of CO2 per tonne of laundry shipped Workwear Facility UK Flat Linen Flat Linen outside UK Clinical Solutions and Decontamination 1,146 1,230 Group reduction in 2013 of 2.2% Group (total tonnes of CO2 emissions) 247, ,228 Breakdown of our scope 1 and 2 emissions Scope 1 Scope % 20.5% 80.1% 79.5%

51 53 Operational efficiency Water use and recovery Water plays an inevitably significant role in our washing processes and its effective use and recovery has an important impact on our overall environmental and operational performance. Across the group, most operations now have water recovery systems in place. Typically, these lead to a reduction in water consumption of 20%-25% and also have a positive knock-on effect on energy usage when we use less water, it requires less energy to heat it. Recent initiatives include the trialling of membrane water filtration technology that recovers our waste water for re-use. This technology also recovers the heat energy in the waste water which leads to further reductions in our energy consumption. Because the recovered water is already at a high temperature, we need less energy to bring it up to the correct temperature for washing. This means we use less water and less energy. Water-related concerns also drive product innovation. For example, in the UK, we moved from 100% cotton to 100% poly cotton products, as we realised this was driving significant energy and water use reductions, and that it extended our products lifespan. What s next? We will continue to focus on initiatives that will reduce our use of water and increase our recovery rate, as long as they also make commercial sense in reducing our cost base to the benefit of us and our customers. Always moving forward Managing our environmental impacts In the UK we have introduced new systems to reduce rinse water volumes and recover the effluent to a quality that is suitable for washing and rinsing our products. The award in water management efficiency at the Sustainability Leaders Awards held in London was given to us due to the savings and efficiencies achieved of up to 75%. The Sustainability Leaders Awards remain one of the few environmental awards schemes recognised by the European Commission. Chemical suppliers We also work alongside our suppliers to validate our water use and recovery processes. Chemical suppliers analyse our performance and identify areas for improvement, while our boiler water treatment suppliers check boiler operation and provide reports on efficiency. An efficient boiler is the mark of good energy management, and we check performance by monitoring the quality of the water. We also use flue gas thermometers, steam trap surveys and check on hot well temperatures to help us identify efficiency issues. Transport and logistics Our customers depend on regular and reliable deliveries, so transport accounts for a significant amount of our environmental impact. In order to maintain tight control on our operations, we own and operate most of our fleets ourselves. All vehicles conform to the requirements of low emission zones and we always specify the latest and most efficient engines for new vehicles. We also constantly review fuel costs and usage. up to 75% of the effluent is recovered for re-use. We have a range of initiatives and programmes in place to help us reduce this impact. For example, our Flat Linen fleet in the UK uses a vehicle management system to monitor fuel usage and driver behaviour. The aim is to reduce fuel consumption by minimising harsh acceleration, braking, and excessive idling. Across the business, we monitor and regularly review vehicle routes to improve fuel efficiency and, wherever possible, use fewer large vehicles instead of more of the smaller ones. Large vehicles have the advantage of being able to carry greater volumes per mile driven, which enables us to reduce the overall number of vehicles on the roads at any one time. Strategic report Governance Financial statements

52 54 Berendsen plc Corporate responsibility Engaging with our stakeholders Our approach is to engage with all stakeholders on a regular basis in order to build solid relationships that will stand the test of time. Our key stakeholders are: Employees; Customers; Suppliers; Local communities; and Investors. While each group has different interests and issues, we recognise the importance of all in helping us build a sustainable business. We listen carefully to their concerns and needs, and work with them to make sure that the way we run Berendsen delivers the optimum outcomes for all stakeholders. Engaging with our employees Berendsen is a people business. We engage with our employees through a number of internal communications initiatives and platforms, promoting our Vision and Values and helping to build a sense of real teamwork and belonging across the group. You will find more details on how we support employees and on our Vision and Values in the Our People section of this report, on page 44. Engaging with customers As we explained earlier, we work hard to meet the many and diverse needs of our customers, engaging with them via both informal and formal channels. Always moving forward Supporting our customers During 2013 our Polish business won the contract to provide garments to one of the country s largest pharmacy networks, with over 600 locations and nearly 2,800 users. Pharmacists work in pristine white coats, so the customer initially requested that we deliver each clean garment wrapped in plastic. We proposed using re-usable textile covers which do the same job this initiative removed the need for the customer to dispose of over 200,000 plastic bags each year and reduced their impact on the environment. At Berendsen, our purpose and so one of our core drivers is to help our customers perform better, and we do that by providing a range of high quality, innovative and cost-effective services. However, CR issues are also increasingly important factors in winning new customers and retaining existing contracts. We are proud to be the trusted suppliers of the NHS (covering about 60% of their daily needs in the UK), and of the hospitality industry (covering about 30% of the industry s needs in the UK). Those customers drive us to increase our own standards and to be innovative, and to deliver safe and efficient products and services. Our sustainability management and performance are frequently of real interest to customers, not only in formal procurement requests for information and questionnaires, but also during meetings and conversations between our customer relationship managers and their customers. How are we doing? Where have we improved recently? Can we help customers meet some specific environmental target that will support their business or CR objectives? We share knowledge and information with customers wherever possible, both on an ad hoc basis and also through formal communications such as this Annual Report. At all times, we stress the fact that sustainability is integral to the way we run our business. It improves our efficiency and reduces our costs both of which translate into improved value for our customers. In short, our focus on CR helps customers run better and more efficient businesses. Engaging with partners and the wider industry As Europe s leading textile services business, we are keen to play a significant role in how our industry develops. We are members of the European Textile Services Association (ETSA), and invest time and resources to help it fulfil its mission of promoting greater understanding of the key issues that the industry faces. We are being recognised for our work in this area by outside bodies. We have been shortlisted for the 2013 PLC Awards Achievement in Sustainability Award, the winner of which will be announced in March Engaging with suppliers The main suppliers we use are in Europe and also in Pakistan, Cambodia, Vietnam and China. We work hard to make sure that not only do our supplier arrangements ensure high quality products, but also the high environmental and social standards that we expect all suppliers to achieve. Our policy is to award relatively large contracts to a small number of preferred suppliers. We do this: to access economies of scale; to ensure standardisation; and also because a larger contract gives us greater status and influence notably on CR issues as a key customer. We regularly visit suppliers and have appointed a single assurance provider to carry out independent audits of these suppliers to ensure that our ethical standards are being correctly observed, including those relating to human rights and working conditions. This approach provides us with a standard audit process and reporting mechanism, highlighting each supplier s level of compliance, flagging any actions required for improvement. For added assurance, we have a supplier whistleblowing scheme which enables suppliers to flag up any issues or areas of concern. We also continue to be committed to the UK government s request that all businesses in the FTSE 350 sign up to the Prompt Payment Code. Under the code, we undertake to pay suppliers on time, give clear guidance to suppliers on issues such as payment procedures and complaints, and encourage them to implement best practice in their own supply chains.