INVESTOR - spotless.com€¦ · 25 May 2017 Dear fellow Spotless Shareholder, You will have...

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SPOTLESS GROUP HOLDINGS LIMITED ACN 154 229 562

INVESTORUPDATE

MAY 2017

IMPORTANT NOTICESImportant notice and disclaimer

This document is a presentation of general information about Spotless Group Holdings Limited (Spotless) current

at the date of the presentation (25 May 2017). The information contained in this presentation does not purport

to be complete. It does not constitute personal advice and does not take into account the investment objectives,

financial situation or needs of any particular investor. It is important that you consider the information in the

Bidder’s Statement (together with supplementary Bidder’s Statements) issued by Downer Services and the Target’s

Statement (together with the supplementary Target’s Statement) issued by Spotless in light of your particular

circumstances. You should seek advice from your financial, legal or other professional adviser before deciding

whether to accept or reject the Offer.

Forward looking statements

This document contains certain forward looking statements and comments about future events, including Spotless’

expectations about the performance of its businesses and statements of current intention or expectation.

Forward looking statements can generally be identified by the use of forward looking words such as, ‘outlook’,

‘expect’, ‘anticipate’, ‘likely’, ‘intend’, ‘should’, ‘could’, ‘may’, ‘predict’, ‘plan’, ‘propose’, ‘will’, ‘believe’, ‘forecast’,

‘estimate’, ‘target’, ‘guidance’ and other similar expressions within the meaning of securities laws of applicable

jurisdictions. Indications of, and guidance on, future earnings or financial position or performance are also forward

looking statements.

Forward-looking statements are subject to inherent risks and uncertainties. Although Spotless believes that the

expectations reflected in any forward-looking statement included in this document are reasonable, no assurance

can be given that such expectations will prove to be correct. Actual events, results or outcomes may differ

materially from the events, results or outcomes expressed or implied in any forward-looking statement.

None of Spotless or its Directors, officers and advisers gives any representation, assurance or guarantee to

Spotless Shareholders or any other person as to the accuracy or likelihood of fulfilment of any forward-looking

statement, or any events or results expressed or implied in any forward-looking statement, except to the extent

required by law. You are cautioned not to place undue reliance on any forward-looking statement. The forward-

looking statements in this document reflect views held only as at the date of this document. Except as required

by applicable law or the ASX Listing Rules, Spotless does not undertake to update or revise these forward-looking

statements nor any other statements (written or oral) that may be made from time by or on behalf of Spotless,

whether as a result of new information, future events or otherwise.

Risk factors

Spotless Shareholders should note that there are a number of risk factors attached to their investment in Spotless

and other risks which apply in the event the Offer is accepted. You should refer to section 7.2 of the Target’s

Statement (as supplemented by the Supplementary Target’s Statement) which sets out further information

regarding those risks.

25 May 2017

Dear fellow Spotless Shareholder,

You will have recently received the Bidder’s Statement from Downer in respect of its takeover offer to acquire your Spotless Shares for $1.15 per share (the Offer), which Downer has declared as its final price, in the absence of a superior proposal. You will have also received our Target’s Statement containing the unanimous recommendation of your Spotless Directors to REJECT the Offer.

Spotless is currently at an inflection point and, for the reasons outlined in the Target’s Statement dated 27 April 2017 (and as supplemented by the Supplementary Target’s Statement dated 23 May 2017), your Board continues to believe that the Offer does not represent adequate value for your Spotless Shares and, unanimously recommend

you REJECT the Offer.

The management team has a clear strategy to deliver earnings growth and is executing on this strategy. Early signs are promising with an uplift in contract win and renewal rates, a growing pipeline of business development opportunities, the mobilisation of new PPPs and progress on the turnaround of Laundries.

For the reasons set out in the Target’s Statement dated 27 April 2017 (and as supplemented by the Supplementary Target’s Statement date 23 May 2017), the Board believes that Spotless can create more value for shareholders over the medium term as an independent company through continued execution of management’s strategy.

The enclosed business update demonstrates the positive momentum of the business and highlights the reasons for the Directors’ recommendation to REJECT the Downer offer:

1. Spotless has a clear strategy to deliver earnings growth and value to shareholders as an independent company.

2. The Spotless management team has driven a strong agenda of change over the last 18 months to drive earnings growth.

3. Spotless’ contract portfolio is being optimised for growth. It already comprises 47% high margin, multi-service and facilities management contracts(1) and 57% of contracted revenue is in identified growth markets(2). Spotless is set to increase the proportion of earnings from priority growth services and end markets from here.

4. Investment in business development is demonstrating early signs of success, including improved win and renewal rates of high quality contracts — with $330m of revenue signed during March 2017(3)…

5. …and a continued strong pipeline of high quality opportunities — with annual revenue prospects of over $500m from the top 15 opportunities.

6. Spotless has a proven track record in the social infrastructure PPP market with 18 PPPs with a total life time revenue of $10.8 billion. New PPP mobilisations are progressing well and we continue to win new PPP contracts.

7. The Laundries turnaround is underway and the recent Cabrini laundry acquisition strengthens Spotless’ market-leading position in Health.

8. Spotless has guided to growth in NPAT for FY18, with an outlook for continued growth in FY19 and the longer term.

9. Downer has acknowledged Spotless’ strong fundamentals including earnings from stable businesses with resilient earnings and long term contracts that provide high certainty over revenues.

10. Downer has adopted a conservative approach to estimating potential synergies.

Your Directors continue to unanimously recommend that shareholders REJECT the Downer Offer and each Director who holds or controls Spotless Shares continues to intend to REJECT the Offer in relation to those Spotless Shares.

If you have any questions in relation to the enclosed materials or your shareholding in Spotless, please call the Spotless Shareholder Information Line on 1300 963 991 (for calls made from within Australia) or +61 1300 963 991 (for calls made from outside Australia) Monday to Friday between 8.30am and 5.30pm (AEST).

Thank you for being a Spotless Shareholder.

Yours sincerely,

Garry Hounsell Chairman

(1) Based on estimated FY17 revenue.(2) Based on estimated FY17 revenue. Growth end markets include Health, Government, Education, Defence and Leisure and Hospitality.(3) Total value of key strategic contracts awarded (including new wins) during March 2017.

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SPOTLESS INVESTOR UPDATE | MAY 2017

Spotless’ Directors unanimously recommend

shareholders REJECT Downer’s offer.

KEY MESSAGES

• Our strategy is clear

• We are executing the plan

• The portfolio is being optimised

• Win and renewal rates are up

• The pipeline is growing

• New PPP mobilisations are progressing well

• Laundries turnaround is underway

• We have guided to growth

• Spotless’ strategic value has been made clear by Downer

• Downer will benefit from material synergies

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OUR STRATEGY IS CLEAR

Enhanced BD capabilities and refreshed

branding

Sector-leading proposals and

higher win rates

Innovation and technology

partnerships

High performance culture and

capability build

DRIVE NEW BUSINESS WINS

Large

contracts

Integrated

facility

services

Long-dated

PPPs

Scalable

defence and

laundries

FOCUS ON HIGH-MARGIN, HIGH-RETURN SECTORS

Spotless has a clear strategy to deliver earnings growth and value to shareholders as an independent company.

Health Government Education Defence

FOCUS ON GROWTH END MARKETS Leisure and

Hospitality

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WE ARE EXECUTING THE PLAN

The Spotless management team has driven a strong agenda of change over the last 18 months.

KEY INITIATIVES IMPLEMENTATION PROGRESS(1)

LE

AD

ER

SH

IP

New management team

and performance culture

• Majority of senior management roles replaced in last 18 months

• Improved performance targets and accountability

GR

OW

TH

Investment in business

development and

marketing capabilities

• Increased business development headcount

• Refreshed brand and marketing collateral

• Target ROIC >20% on new business wins and renewals

Momentum in pipeline

growth and win-rates

• Early signs of success through improved win and renewal rates of higher quality contracts

Exit of unprofitable

contracts

• Identification of unprofitable contracts complete and exit underway

• Process for potential sale of exited contract bundles has commenced

• Will drive simplification of business, group margin improvement and reduced overhead

INIT

IAT

IVE

S

Improve Laundries

• Laundries identified as potential source of value creation

• Performance improvement initiatives underway

• Cabrini laundry acquisition strengthens market-leading position in Health

Strengthen balance sheet

• Target reduction in net debt of $50m in 2H17 driven by recently revised dividend payout ratio to 40 – 60% to align Spotless with peers, improved capex controls and potential asset sales

• Realisation of $80m of working capital savings in progress

Initiated Completed

(1) Estimated.

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THE PORTFOLIO IS BEING OPTIMISED

Spotless’ contract portfolio is being optimised for growth. It already comprises 47% high margin, multi-service and facilities management contracts and 57% of contracted revenue is in identified growth markets. Spotless is set to increase the proportion of earnings from priority growth services and end markets from here.

38%

9%

17%

9%

20%

7%

Multiple

Cleaning

Food

Laundry

Facilities Management

Tech Services (1)

Integrated and facilities

management 47%

Laundry and technology

26%

Cleaning and food

27%

Priority growth services

20%

12%

7%

7%

6% 4%

17%

9%

11%

6%

Government

Resources

Business and Industry

Laundry

Defence

Health

PPP

Leisure and Hospitality

Education

Tech Services (1)

Restructureand invest

26%

Priority growth markets

Restructureand maintain

17%

Invest /optimise

and grow57%

Portfolio Mix by Service Line

By estimated FY17 revenue

Portfolio Mix by End Market

By estimated FY17 revenue(2)

(1) Includes AE Smith, UASG, Nuvo and TGS.

(2) Amounts shown do not sum due to rounding.

Commentary

Targeting high return long-dated,

expandable multi-service

contracts that leverage Spotless’

scale, geographical footprint

and breadth of capabilities

Commentary

Focused on high-growth end

markets including Health,

Government, Education,

Defence and Leisure and

Hospitality, most of which

are expected to experience

robust growth

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WIN AND RENEWAL RATES ARE UP

Investment in business development is demonstrating early signs of success. Spotless has achieved improved win and renewal rates of high quality contracts.

50%

21%

12%

71%

41%

21%

By number By lifetime revenue By annual revenue

1H16 1H17

21%

20%

9%

Key wins in FY17: Key renewals in FY17:

(1) 1H17 renewal rates have not been adjusted for the contract portfolio rationalisation (which would have a positive impact on rates shown).

(2) Excluding Rio Tinto renewal loss in 1H16, renewal rate was 79%.

(3) Total value of key strategic contracts awarded (including new wins) during March 2017.

Win Rates Renewal Rates(1)

84%

63%66%

95%

69%72%

By number By lifetime revenue By annual revenue

(2)

11%

6% 6%

1H16 1H17

Total value signed during March 2017 ~$330m(3)

NZ Schools

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THE PIPELINE IS GROWING

Investment in business development is demonstrating early signs of success. Spotless continues to have a strong pipeline of high quality opportunities, with annual revenue prospects of over $500m from the top 15 opportunities.

Top 15 Pipeline Opportunities(1)

ACCOUNT NAMEPRIORITY

SECTORMULTI-SERVICE LONG-DATED(2)

POTENTIAL

ANNUALISED

REVENUE (A$M)

POTENTIAL

CONTRACT

VALUE (A$M)

INDICATIVE

TIMING

Health services provider 65 655 1H18

Property developer 55 115 1H18

Retailer 50 240 1H18

Accommodation provider 40 200 1H18

Government department 35 105 2H18



General industry 30 170 2H18


Resources 25 75 2H18



Health services provider 25 235 2H18



TOTAL 515 2,245

% OF TOTAL PIPELINE 31% 35%

(1) Contract revenue and values rounded to nearest $5m.

(2) Long-dated contracts are those with potential contract values exceeding 3.0x annualised revenue.

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NEW PPP MOBILISATIONS ARE PROGRESSING WELL

Spotless has a proven track record in the social infrastructure PPP market with 18 PPPs with a total life time revenue of $10.8 billion. New PPP mobilisations are progressing well and we continue to win new PPP contracts.

NAMEMOBILISATION

COMPLETED

CONTRACT TERM TOTAL LIFE (YRS)

ANNUAL REVENUE

LIFE OF CONTRACT REVENUE

OPERATIONAL

NSW Schools 1 28 $

Headquarters Joint Operations Command 30 $$

South Bank TAFE 34 $$

NSW Schools 2 28 $

Orange Hospital 28 $$$

South Australia Schools 30 $

Royal Children's Hospital 25 $$$

Queen Elizabeth II Carpark 25 $

Wiri Prison (NZ) 25 $

Australia National University 30 $

Western Australia Schools 30 $$

Sydney Convention Centre Australia’s Best Infrastructure Project for 2016(1) 25 $$$

Sunshine Coast University Hospital 25 $$$

Victoria Schools 26 $

Bendigo Hospital 25 $$$

MOBILISING

New Royal Adelaide Hospital 30 $$$

NZ Schools (new win) 25 $

Tertiary education contract(2) (preferred) 30+ $

0% 100%

Key for annual revenue: = A$0–10m = A$10–30m = A$30m+Key for life of contract revenue: $ = A$0–250m $$ = A$250–750m $$$ = A$750m+

(1) Infrastructure Partnerships Australia, 2016 National Infrastructure Awards.

(2) Details yet to be announced.


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LAUNDRIES TURNAROUND IS UNDERWAY

Cabrini Laundry Acquisition

• Acquisition of state-of-the-art health laundry facility in Melbourne

• Delivers a number of new multi-year healthcare laundry contracts, including an initial 10 year contract with

Cabrini Hospital

• Strengthens market-leading position and capabilities in Spotless’ priority growth market of Health

• Triples capacity in Australia’s strongest growing market, providing significant opportunities for expansion

• Will deliver efficiency synergies

Other Initiatives

• New leadership

• Technology renewal in priority (Health) laundry sector

• Operating footprint optimisation — Wellington rationalisation

• Investment in new equipment to drive productivity

• Implementation of tighter controls over laundry stock

• Energy efficiency initiatives

The Laundries turnaround is underway and the recent Cabrini laundry acquisition strengthens Spotless’ market-leading position in Health.

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WE HAVE GUIDED TO GROWTH

Spotless has guided to growth in NPAT for FY18, with an outlook for continued growth in FY19 and the longer term.

FY17 FY18

$90m

$100m

$80m

$85m

FY17 and FY18 NPAT guidance Medium to long-term outlook

Key assumptions for FY18 NPAT guidance

• New business wins in FY18 of 17–25% of current

pipeline

— Compares with actual win rate of 21% in 1H17

— Potential upside if current pipeline

opportunities increase

• Renewals of 60–70%

— Compares with actual renewal rate of 72%

in 1H17

• Exit of unprofitable contracts and associated

overhead reduction in line with original contract

end dates

— Majority of contracts have terms ending in next

12–24 months

— Potential upside if contracts are exited early

or sold

• Working capital improvement of $40m in FY18 and

$40m in FY19

Directors are confident that the strength of

Spotless’ core business and contract portfolio,

together with the forecast business trends

and performance in FY18 will drive continued

growth into FY19 and the longer term.

This is expected to be driven by increasing

benefits associated with the strategy reset

including:

• focus on priority growth sectors and higher

margin contracts

• further implementation of the contract

book rationalisation and associated

overhead reduction

• continued improvement in Spotless’

leverage position

Source: Spotless’ Target’s Statement released on 27 April 2017.

Spotless Shareholders should refer to section 5.4 of its Target’s Statement which sets out the basis of the

preparation of FY17 and FY18 Guidance and medium to long-term outlook statement (including key assumptions

and sensitivity analysis).


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SPOTLESS’ STRATEGIC VALUE HAS BEEN MADE CLEAR BY DOWNER

Downer has acknowledged Spotless’ strong fundamentals including earnings from stable businesses with resilient earnings and long term contracts that provide high certainty over revenues.

Source: Financial media, company filings.

(1) Downer disclosure, Offer for Spotless and Equity Raising, ASX and NZX release dated 21 March 2017. Emphasis added.

(2) Media article, “Downer launches $1.3bn bid for ‘solid’ Spotless”, The Australian, dated 22 March 2017. Emphasis added.

(Spotless has) “long-term government and private sector contracts and recurring revenue.”

Downer (1), 21 March 2017

The Australian(2), 22 March 2017

“[Spotless has a] higher proportion of earnings from stable services businesses with resilient earnings”

“Spotless’ portfolio includes long term contracts providing high certainty over revenues”

“Spotless has a diversified contract portfolio across a high quality customer base”

“This is a very solid business”

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DOWNER WILL BENEFIT FROM MATERIAL SYNERGIES

Downer has adopted a conservative approach to estimating potential synergies.

• Downer has conducted its synergies analysis on the basis of external information

• On this basis, Downer conservatively estimates that approximately $20-40 million

per annum of cost synergies will be realised through the combination of Downer

and Spotless over time

— Synergies expected to be realised predominantly through reduction in head

office and corporate costs

• A review will be undertaken on completion of the Transaction to validate Downer’s

synergy expectations and ensure that Spotless’ business and assets are operating

efficiently and competitively

Downer(1), 21 March 2017

Synergies

(1) Downer disclosure, Offer for Spotless and Equity Raising, ASX and NZX release dated 21 March 2017. Emphasis added.

(2) Downer disclosure, Bidder’s Statement section 2.2(b), dated 21 March 2017.

(3) In early stage merger discussions that took place between Spotless and Downer in June 2016 (and which progressed no further), the companies discussed

the potential for the combination of their respective businesses to generate up to $60 million in potential synergies in a preliminary base case analysis.

(4) Values presented in this chart are prepared on the basis of, and subject to, the matters set out in the relevant footnotes referenced in the chart.

(5) Calculated by Spotless based on Gordon Growth Model, assuming synergies are fully achieved within 12 months, tax rate of 30%, terminal growth rate of zero,

illustrative Downer EDI WACC of 10.4% (average based on most recently reported WACC for six available brokers) and 1,106.0m Spotless shares on issue.

$20m

Low end ofDowner's

conservativeestimate(2)

June 2016merger

discussionsestimate(3)

$60m

High end ofDowner's


$40m

$0.11(5)

Low end ofDowner's


$0.33(5)

June 2016merger

discussionsestimate(3)

$0.22(5)

High end ofDowner's


Estimate of potential annual synergies to Downer

Approximate value per share of estimated annual synergies to Downer(4)

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SPOTLESS’ DIRECTORS UNANIMOUSLY RECOMMEND SHAREHOLDERS REJECT

DOWNER’S OFFER

Spotless’ Target’s Statement dated 27 April 2017 (as supplemented by the Supplementary Target’s Statement dated 23 May 2017) outlines the key reasons Spotless Directors unanimously recommend shareholders REJECT Downer’s offer.

Downer’s Offer is opportunistic and timed to take

advantage of historical Spotless share price low

Management and the Board have a clear plan to

deliver earnings growth and long term value to

shareholders under the strategy reset

Despite Spotless only recently implementing its

strategy reset, early signs of success are evident

and demonstrate its growth potential

The Offer does not reflect Spotless’ strong core

business

Spotless has issued earnings guidance for growth in

FY18 and provided an outlook for continued growth

into FY19 and the longer term

The Offer does not recognise the strategic and

financial value of Spotless to Downer

The Offer is hostile, highly conditional and not

certain to proceed

Coltrane Asset Management has accumulated a

relevant interest in up to 10.64% and a total interest

(including economic interests under cash-settled

equity swaps) in 10.64% of Spotless Shares on

issue(1) and IF it was to request delivery and be

delivered the shares that are the subject of those

swaps, it currently intends to REJECT the Offer at the

current Offer Price (although it has not made any final

decision and reserves any right to take any action it

considers appropriate in response to the Offer)

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(1) Comprised of a relevant interest of up to 10.64%, and, as at 11 May 2017, a relevant interest of between 8.07% and 10.64%, with the difference between

the actual relevant interest and 10.64% representing an economic interest (pursuant to cash-settled equity swaps).

Reasons for Director’s recommendation to REJECT:

www.spotless.com

SHAREHOLDER INFO LINE

1300 963 991 available between 8.30 am and 5.30 pm

INVESTOR - spotless.com€¦ · 25 May 2017 Dear fellow Spotless Shareholder, You will have...

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