Serco Group plc

Good morning, everybody. Rupert here. I'm starting on slide five, which is the opening slide. I'm joined by Nigel Crossley and also by Angus Coben. By way of introduction, 2020 has obviously been a very strong performance, and pleasingly, we see continued growth in 21. Revenue up 20% of constant currency, 16% organic, and of that 16% organic, obviously quite a lot was related to COVID. So ex-COVID, the organic was about 4%, and it was about 5% from the impact of the NSBU acquisition in the U.S. Online trading profit up 37% in constant currency, and the margin increase from 3.7% to 4.2. Very strong free cash flow. Doubles to $135 million, and that's brought the adjusted net debt down by $157 million to $58 million, and leaves us with 0.5 times leverage. A couple of points to point out would be that this now means that about 75% of our trading profit now comes from outside the UK, and that's a point that we'll be returning to in terms of the geographic balance of our flow of profits. I'd also like to point out that ROIC now, post-tax ROIC, has now hit 15% on an underlying after-tax basis. COVID itself, whilst it had a significant impact on revenues, had an only marginal net impact on profits, less than £2 million. And that was because we've repaid all the furlough. It was because we have had businesses in our portfolios, such as leisure, doing leisure centres for councils, and transport and air traffic control have had, basically, they've had almost to shut. And then we've had other businesses like health that have had significant costs. We've paid out £5 million to 50,000 employees as an ex-gratia payment. And the net impact of that is from about £400 million of revenue, we've actually generated net about £2 million of profits, less than 1% of our total profits. And of the £43 million increase in underlying trading profit year on year, £41 million of it came from sources other than COVID. It's been a very strong operational performance. I'll talk more about it. But the business has responded really, really fast to new opportunities and to the sort of disruption that we've all faced whilst maintaining discipline and control. Solid order intake, 3.1 billion, a lot slower in the second half. It seems to be that the second lockdown has slowed up, had a much bigger impact on slowing up tender adjudications. In the US alone, there's 2.8 billion of outstanding tender adjudications. And we got large ones in the UK as well. And that's had the impact of increasing our pipeline. But our book-to-bill was 80% for the year, which compares to 160% the previous year. So we're still ahead across the two years. The reasons why we might not have proposed a dividend have now all fallen away. And we are proposing a dividend of 1.4p, which is about a 25%. And we are continuing with our 40 million share buyback program, but we are confirming that about 20 million of those shares will actually be canceled. In terms of 2021, we've increased our guidance from up to 175 million, which will give us on a constant currency basis about 10% growth. And the reason for that really is that we've had a very strong start to the year. Moving on to the next slide, that is slide six, just to put this sort of profit growth into context. between FY17 and FY20, we delivered compound annual growth of 33% in UTP, and the margins gone from 2.3 to 4.2. If we extend that to a four-year CAGR to 21, it's still a 26% CAGR. And this is, of course, all without the impact of WBB, an acquisition that we announced just over a week ago. And we will update guidance to reflect that when we have completed. But the fact is, is that the revenue growth and the profit growth indicates that we are outperforming, we think, the market by a meaningful degree. And we are delivering on our promise of taking our margins up towards 5%. I will now hand over to Angus, who will go through the first part of the financial report. Angus.

Thank you, Rupert. Morning, everybody. I'll now take you through a brief review of the 2020 financials before handing over to Nigel, who will talk about debt, capital allocation, dividends, and the outlook. Let's start with the income statement on slide eight. Revenue of 3.9 billion is up 20% in both a reported and constant currency basis, with organic revenue growth of 16% being boosted by the full-year impact of the NSBU acquisition. The net unfavorable currency impacts of 24 million in revenue and 1.4 million in underlying trading profit arose primarily from the weakening of sterling against the US dollar. All the rates are in the appendix. UTP was up 36% to 163 million. Like last year, UTP is lower than the trading profit of 176 million as it excludes non-recurring and contract and balance sheet review items, namely the benefit of commercial settlements and the Caledonian sleeper contract and a couple of OCP provision releases on our legacy PEX and Compass contracts, which together amounted to 12.6 million. Underlying trading margin improved by 50 basis points to 4.2%. This ongoing improvement, assisted to some extent in 2020 by reduced travel costs, has been generated by keeping a tight lid on SG&E costs as the revenue line has grown. The overhead leverage that our business model now delivers is illustrated by the fact that in a year when revenue grew by 20%, our administration expenses grew by less than 3%. The 20% constant currency revenue growth on slide 9 consists of organic growth of 16%, with the NSBU acquisition contributing 5%. Forex reduced revenue growth by 1%. Approximately 12% of that organic growth was COVID-related. UKE and ASPAC were the key drivers, with organic growth growing by 31% and 18% respectively. In UKE, the net estimated impact in revenue from COVID was around 400 million and supplemented by the full year impact of the AASC contract, as well as the PEX and Gatwick Immigration Removal Centre mobilisations. These increases were offset partially by sharp COVID-related falls in demand on Northern Isles ferries and directly managed leisure trusts. Growth in ASPAC was largely due to recent contract wins, including our AHSC Garrison Healthcare contract, which commenced in 2019, and the Adelaide Remand and Clarence Correctional Centres, which came online during the year. Revenue in ASPAC was also boosted by additional demand in immigration services, as well as COVID-related work for Services Australia. Organic revenue growth in the Americas was muted at 1%, with strong first-half growth in our FEMA and U.S. pension benefit guaranteed cooperation contracts being offset later in the year by the loss of the Georgia Department of Transport contract, as well as a significant reduction in the ship and shore modernization business during the second half, where activity levels had previously been very high. Organic revenue in the Middle East fell by 7%, mainly reflecting the impact of COVID on our airport services work in Dubai and air traffic control contracts in UAE and Iraq. These transport losses were compounded by a COVID-related reduction in revenue on our Saudi rail contract, as well as the loss of a hospital FM contract in UAE. As slide 10 shows, UTP, for example, of 163 million represents headline growth of 37% in constant currency. Underlying trading margin improved by 50 basis points to 4.2%. This means that over the last three years, Serco has grown its underlying trading profit at a compound rate of 33% and added 90 basis points of underlying trading margin. The net positive impact from COVID-19 was around 2 million pounds or 1% with some large operating impacts. All four divisions increased their underlying trading profits in 2020. The outstanding performers were UKE and the Americas, where constant currency UTP grew by 48% and 24% respectively. Despite the strong growth in UKE, this division still contributes only around a quarter of Serco's profits, reflecting the higher margins earned overseas and illustrating the growing importance of Serco's international business. The early January acquisition of Facilities First in Australia, and once regulatory approval has been obtained, the recently announced acquisition of WBB Inc in the US, further underline the growing importance to the group of Serco's international footprint. UKE had some big profit swings. Most notably, the contrasting impact of COVID on different businesses. Our immigration contract AASC benefited from no longer having the transition costs of 2019. Citizen services delivered a very strong performance, in large part due to additional COVID call centre and testing and tracing work. In transport, low ridership took a previously profitable Mersey Rail contract into loss, whilst our health business was impacted by COVID-related absence and additional costs. In addition, our leisure business sustained a significant loss due to the closure of leisure facilities. Overall, however, UKE performed very well, growing its UTP by 48% to 57 million and its margin by 40 basis points to 3.2%. UTP in North America grew by 24% in constant currency to 101 million pounds, with margin improvement by 50 basis points to 9.5%. Around half of this growth came from the MSBU acquisition. The rest of this growth came from across the contract base, with notable contributions from the pension guarantee corporation, FEMA, and our garrison support contract in Goose Bay, Canada. This growth was offset by the reduced volume of ship modernization work, the loss of the transport contract in Georgia, and the anticipated second half impact of the completion of the additional CMS volume in early summer. Going forward, the completion of the higher margin WBB acquisition will help offset the full year margin impact from the end of the temporary uplift in CMS margins and the lower margin in the recently secured ATFP bid. Also impacting margin are higher insurance costs, which have been felt across the group but most notably in our US air traffic control business. UTP and ASPAC increased by 5% in constant currency terms to 33 million. This increase reflects continuing strong performance in the citizen services business, in part due to COVID-related work for Services Australia, as well as the full year impact of the AHSC garrison healthcare contract. Our justice and immigration business also performed well, with higher volumes in immigration caused in part by COVID and the end of the mobilization of the Adelaide romance center contract. Reported UTP margin reduced by 50 basis points to 4.5% due to the startup of Clarence Correctional Center and delays on the icebreaker given schedule slippage in part caused by COVID. Despite the fall in revenue, UTP currency in the Middle East increased by 2% to 14 million, reflecting strong growth in our citizen services business, notably our MASH contract in Saudi, offset by profit falls in health, compounded by the COVID impact and transport profits in Iraq and UAE. Turning to the bottom of the income statement on slide 11, The increase in finance costs of $4 million to $26 million was largely due to a $3 million increase in IFRS 16 lease interest caused by the growth in properties rented for the AASC contract, together with increased utilization of the RCS in the early part of the year and a reduction in pension interest. The blended average cost of our debt in 2020 was 50 basis points lower at 4.01% as compared to 4.51% in 2019. The underlying tax rate in 2013 was two percentage points lower than in 2019. Underlying profit before tax generated from our overseas operations accounted for more than 80% of the total underlying profits in 2020. thereby pushing up the effective rate relative to the UK statutory rate. Offsetting this, we have been able to use some of our historic UK losses and deductions against UK profits in 2020, which reduces our underlying tax rate. Over the medium term, we expect the underlying effective rate to be around 25%, with the cash tax rate a little lower due to the benefit of goodwill amortization in the US. Cash tax will also benefit in the longer term, from the 560 million of UK unrecognised deferred tax assets with a current tax value of 105 million that we expect to bring onto our balance sheet as UK profitability continues to improve. Underlying diluted earnings per share grew by 37%, from 6.16 pence to 8.43 pence. The weighted average number of shares increased from 1.199 billion in 2019 to 1.254 billion in 2020, largely as a result of the full-year effect of the May 2019 share placing relating to the NSBU acquisition. Statutory reported earnings per share on a diluted basis, which reflects non-underlying items and exceptionals, was 10.67 pence, as compared to 4.21 pence in the prior year, which mainly reflects the strong growth in underlying profitability, together with the credit arising from non-underlying items and the exceptional profit in respect to the disposal of our Viapass joint venture. Nigel will talk about the dividend later. Turning to slide 12, exceptional items were a net 12 billion pound profit in 2020, as compared to a £26 million loss in the prior year. The biggest example of cost in the prior year related to the third project agreement with the Serious Fraud Office. We said this time last year there would be no exceptional restructuring costs in 2020, and we were true to our word with the costs relating to improving our HR processes running through UTP in 2020. The exceptional cash inflow was £12 million. as compared to the exceptional cash outflow of 49 million in 2019, which reflects in both the SFO settlement and the significant restructuring cash costs. With both OCPs and restructuring behind us, the naturally strong free cash flow generation of Serco's business model will be fully reflected in net debt as the historic leakage from loss-making contracts and restructuring is now well behind us. Slide 13. has the usual detailed cash flow and net debt and cash flow. Now, you can pick up more detail in the appendices on both net debt and cash flow. Here, I'll just pick out a few headlines. 2020 has delivered excellent free cash flow performance, which was significantly better than expected. Free cash flow generation improved from 62 million in 2019 to 135 million this year, which represents 127% conversion of underlying profit after tax compared to 84% last year with around 21 percentage points or £12 million of benefit coming from COVID related tax deferrals in the US for which there is no early repayment mechanism in place and which will consequently be repaid in 2021 and 22. All other COVID related tax deferrals were fully repaid during 2020. The increase in free cash flow was largely driven by higher UTP and strong cash collections in North America, notably the catch-up with FEMA. In addition, the end of the cash costs associated with our loss-making contract portfolio had a big positive impact on cash generation. We continue to have zero receivables or payables financing in place. Our billed receivable days were 23 six-day improvement compared to the 29 days of 2019, reflecting strong cash collection efforts, particularly in North America and the Middle East, and the continuing support provided by our government customers during COVID in terms of paying their bills in a timely fashion, despite all the disruption. Our trade payable days decreased by five to 20 days, reflecting our focus on paying suppliers promptly and passing on the benefit of the prompt payment of our customers during COVID. Just before I hand over to Nigel, let me say a huge personal thanks to both the analysts, some of whom have had to suffer my chat for more than 20 years, and our shareholders for your support over the last six and a half years. I will miss Circle and my colleagues enormously when the time comes. particularly Rupert, who it has been one of life's great privileges to work with. But I'm delighted to hand you over to my successor, Nigel Crossley, whose appointment ensures that Circle finally has a proper CFO in place. Having worked closely with Nigel during my time at Circle, I know that the company is in a very capable and safe pair of hands. Nigel. Thank you, Anderson.

Thank you for those kind words. And good morning to everybody. First, I want to turn to net debt and leverage, which is slide 14. In 2020, adjusted net debt closed at £58 million, which represents a reduction of more than £150 from the start of the year. This is largely driven by strong cash flow performance that Angus has already explained, and to a lesser extent, the proceeds from the sale of our Viapath joint venture, along with some positive foreign exchange movements on our US dollar debt. The average adjusted net debt during the year was £209 million, which, compared to the closing net debt, is higher than we would normally expect. This is due to stronger cash collection performance across all divisions, which helped reduce our average net debt in the second half to only £137 million. Our adjusted net debt excludes all IFRS 16 liabilities, which were £403 million at the end of December. And as we've explained previously, a significant proportion of these lease liabilities directly relate to delivery of our contracts, the costs of which are covered by our contract revenue, and the leases have been structured to anchor terminally with our contracts. Net debt at the end of the year, including all the lease liabilities, was £460 million. As a result of the strong cash performance during the year, the December covenant leverage ratio was just under 0.5 times net debt to EBITDAR. So now turning to funding and capital allocation, slide 15. We ended 2020 with a very strong balance sheet and available liquidity of £582 million, which has enabled the two acquisitions we have recently announced to be funded from existing facilities. In October, we successfully raised $200 million from the US placement market to refinance upcoming debt maturities. The new loan notes are spread over 5, 7, 10 and 12-year terms, with the cost of the new debt lower than our existing debt. This will be the first time that Serco has been able to access investment-grade financing since 2013 and reflects the progress made in terms of financial performance and the strength of our balance sheet. In addition, we have recently secured £75 million three-year loan term with our relationship banks. We will draw this at the time of the WBB acquisition closure, and we expect to be in course two, and this will ensure that we maintain strong liquidity. The Group Revolving Credit Facility, which is currently undrawn, is also forecast to be materially undrawn. Overall, our debt facilities have a broad maturity profile, and we have come to a level of liquidity and financial flexibility that they provide to the business. As we consider the reinstatement of the dividend, we thought it would be helpful to remind everybody about Serco's priorities for capital allocation. Serco's performance over the last two years has proven that it is now a cash-generative business. The cash drag of onerous contracts is behind us, and low levels of capital investment are required by the business, with the most significant internal investment likely to be working capital support revenue growth. Therefore, I expect the group's trading cash conversion to be in the region of 80% to 90% over time. As we have previously set out, the group's target leverage is to be between 1 to 2 times debt to EBITDA. While in December 2020, leverage is less than 0.5 times, We expect this to increase to around 1.6 times by June after the acquisition of Facilities First Australia and WBB in North America, which will still be well within our range and also as we have completed the share buyback programme. However, we expect profits generated by these acquisitions and the business as a whole will result in leverage being towards the bottom end of the target range by the close of 2022. The group's capital allocation priorities are laid out on the slide, and the first priority is to ensure that the liquidity exists to fund all costs associated with operating the business and the investment required for organic, profitable growth. We also plan to be able to fund full-time acquisitions to strengthen Borden's Circo's position in the markets it competes, at the same time as paying an annual dividend to shareholders. If surplus cash builds up and leverage stays below one times for an extended period of time, with no immediate investments or acquisitions opportunities available, we will consider returning surplus cash to shareholders. So turning to dividends, slide 16. In April 2020, when the scale of the COVID pandemic was becoming apparent, Serco, like many other companies, withdrew their recommended dividends. And this was for two reasons. First, we thought it was inappropriate to pay dividends whilst in receipt of government support. And second, we were understanding the cultures at the start of COVID-19 about the potential impact it might have on the financial performance and the liquidity of the group. During 2020, as we've heard, Circus performed well, and our balance sheet and liquidity remained strong. In addition, all government support has been repaid, including £38 million of UK VAT, which was repaid early. The one exception is the US payroll taxes of £12 million, for which there is no facility to repay early. SERP was also paid a £100 excretion bonus payment to each of its 50,000 frontline workers in recognition of their commitment to performance while working in challenging environments. On this basis, the Serco Board has recommended a final dividend should be paid for 2020 of 1.4p per share. This represents a 25% payout ratio, assuming a one-third, two-thirds split between the interim and final dividend. We're also planning to cancel around £20 million worth of Treasury shares purchased through the share buyback programme announced in December, which is a similar value to a final dividend for 2019, and an interim dividend for 2020. The Board will keep the dividend policy, including the payout ratio, under review as we continue to implement the growth phase of our strategy. It would be mindful of the requirement to maintain a prudent level of dividend cover and the need to maintain a strong balance sheet, which is critical for Serco's long term. So finally, I'll turn to the guidance for 2021 on slide 17. And you'll see that we've increased guidance compared to the initial view we gave in December with UTP anticipated to be 175 million pounds and revenue around 4.2 billion pounds. This reflects a strong start to the year with performance on or above expectation in all divisions and particularly in the UK, which has benefited from higher levels of activity on COVID-19 related services. The new guidance accounts for recent foreign exchange movements, which has an approximate negative £40 million impact on revenue and a £3 to £4 million impact on underlying trading profits compared to 2020. On a constant currency basis, organic revenue growth is expected to be 4% and underlying trading profit is expected to increase by 10%. The guidance includes the acquisition of Facilities First Australia, which is expected to add around £6 million of underlying trading profit, but does not include the acquisition of WBB, which is still subject to regulator clearance. We'll update guidance in quarter two to include WBB once we have clarity on the completion date. We expect performance in the first half of 2021 to be stronger than the second half. with volumes on COVID-19-related contracts forecast to drop off as the year progresses. The second half will also see the end of the AWE contract, but we do anticipate seeing improved demand returning on our leisure and transport businesses. The guidance for finance costs, tax rates, free cash flow and net debt remain unchanged from the guidance we provided in December. But on that point, I'm going to hand back to Rupert.