Serco Group plc

OK, good morning, everybody, and welcome to both those in the room and online to the 2001 annual results presentation of Serco. My name is Rupert Soames, and I'm the chief executive, and I'm joined on the stage by Nigel Crossley, CFO, Anthony Kirby at the end, the chief operating officer, and Mark Irwin, the CEO of our largest division, UK and Europe. Mark will be talking about UK&E and also about one of our most exciting sectors, being space. Anthony will be talking about labour markets and the people services which support our B2G platform. John Rishton, our chairman, is also here in the room as the responsible adult for me. 2021 has been another very challenging year. And it's been another year in which, dare I say it, Serco has performed out of its socks. In my first slide, I would normally start by talking about the financial performance, but on this occasion, I just wanted to remind people what a heinous year 2021 was, with dislocated labour markets, successive waves of COVID, high absence and attrition rates, constantly changing regulations and volatile demand for COVID and related services. And I have to say that in my 35 years as a manager of international businesses, 2021 ranks as the most difficult, the most difficult for line management who have borne the brunt and stress of successive challenges. And I want to pay tribute not only to the frontline people who've been the tens of thousands, the 90% of Serco people who work on the frontline, but also to their line managers, who it has been an incredibly complex and difficult situation to manage through, very stressful, and they've done a stellar job over the last 12 months. And given the very difficult operational background, it's been all the more creditable that the financial performance of the business has been so strong. Revenue up 16% and 10% of that growth organic. Underlying trading profit was up 45% and our margins increased to 5.2%. Cash flow was very strong. And despite spending £249 million on acquisitions, we ended the year with a leverage of 0.7 times, which is just slightly more than the Nats whisker above the level of last year. Our return on invested capital, which is one of our key measures, increased from 19% to 24%. As remarkable as our strong trading performance, we had record order intake of 5.5 billion pounds, a book-to-bill ratio of 125%. And despite this very high level of order intake, our closing pipeline stood at almost 10 billion pounds, up from 6.4 billion at the start of the year. And I'm delighted to say that as a result of this strong performance, the Board has agreed a share buyback programme of up to £90 million and a proposed increase in the final dividend of 15%. In terms of guidance for 2022, this is materially unchanged from the pre-close update we gave in December, albeit it's been adjusted to take account of the lower levels of opening debt and the share buyback programme. And I'm delighted to say that we've had a strong start to 2022 with over £600 million of order intake in the first six weeks of the year. Hopefully, we're going to see far lower levels of COVID-related revenues in 2022, and we expect this to be a drag of around about 13% on our revenues. Whilst it's extremely difficult to untangle what is and what is not directly COVID related, we estimate that around about £60 million of the profit that we made in 2021 will not recur in 2022. So the strong performance in 21 does give us the opportunity to just cast our eyes back over the last five years. And I lay before you like a soggy but enthusiastic Spaniel, the track record of Serco since 2017. compound growth in revenue of 11%, UTP of 36%, ROIC increased from 9% to 24%, cash flow increased by a factor of 10, and employee engagement dramatically improved. lest anybody say that this is all the result of COVID. I would like to point out that between pre-COVID 2019 and the largely post-COVID 22, revenues are set to increase by 30% and underlying trading profit by 60%. And on that happy note, I hand over to Nigel, who will take you through the numbers. Nigel.

Thank you, Rupert, and good morning to everybody. I'm going to start with an overview of the group's strong financial performance, which has continued through 2021. Revenue grew 14% to £4.4 billion, including 10% organic growth driven principally by a full year of COVID-related work and higher volumes in both the UK and Australian immigration contracts. Six percentage points of revenue growth was generated by two bulk acquisitions, Facilities First in Australia, which closed at the start of the year, and WBB in North America, which completed at the end of April. Underlying trading profit for the period was £229 million, an increase of 40% on 2020, and acquisitions have contributed about 11 percentage points to the group's profit growth, and foreign exchange had a negative impact of about 4 percentage points. Underlying trading margin was 5.2%, up from 4.2%. And underlying EPS was 12.56 pence. And this is almost 50% up on 2020, due to the strong trading profit performance, slightly lower finance costs, and a small benefit from the 2021 share buyback programme. And free cash flow of £190 million is the highest in any year in Serco's history. Cash conversion was 112% and leveraged 0.7 times, which is now below our target leverage range. So I'm going to start with the Americas, whose results have been impacted by the dollar when you translate it into sterling. But on a constant currency basis, revenue has grown 12%, of which 2% has been organic growth, and while underlying trading profit is up 25%. Citizen services saw the strongest growth in the region, benefiting from higher CMS volumes as the enrollment period extended during the year, as well as growth in other parts of the sector. Defence includes around £100 million of revenue from the WBB acquisition, which was partially offset by a small organic decline in the base business. And this reduction was due to the joint support ship work in Canada Marine going back in-house during the year, as well as delays in customers awarding new work. Although we saw a strong performance in the ship modernisation part of the business. Underlying trading profit for the Americas was £118 million, which increased the profit margin by 100 basis points in the year to 10.5%. This is due to higher margin business from the WBB acquisition, the higher volumes and operational efficiencies we've seen on the CMS contract, and stronger operational performance in a number of other areas. There was also a £3 million profit from the sale of the US parking contracts. The profit contribution from WBB was about $5 million less than we expected. And we're not worried about this because at the time of the transaction, we thought the impact of COVID on the defence business, which had resulted in slow order placement and difficulties hiring people, would ease during 2021, but it did not. And all across our defence business, we saw gummed up procurement and difficulties hiring new staff. We are now back on a more even keel, and delighted to say in the last two months, WBB secured over $100 million of new business. Order intake in the year was strong, with two large important defense recompete secured for Goose Bay Air Base in Canada and the anti-terrorist force protection contract for the U.S. Army. Also, the US Navy has announced the award to Circa of the Ship Acquisition Program and Project Management Contract, which has an expected value of over 250 million pounds. But since the award was made, there has been a protest. And at the moment, we're not including that in our order intake. In addition, and gratifyingly, the US Government Accountability Office held up our protest against the award of the C21 contract to a competitor, and we've subsequently been awarded an extension to this existing contract. And the Americas pipeline remains strong at 2.2 billion pounds, with defence making up the bulk of the opportunities, and with a significant value of bids already submitted and awaiting decision by the customer. So moving on to Asia-Pacific, where revenue has grown 26% to over £900 million. Eight percentage points of this growth has been organic, while 15 percentage points came from the acquisition of Facilities First Australia. And foreign exchange has added a further two percentage points. The acquisition, which is included within the health and FM sector, has performed well. But the impact of COVID has been mixed. There have been higher volumes of cleaning offset by the customer deprioritising some of the asset management and hard FM work. But overall, profit was in line with our expectations for the year. Justice and immigration has generated strong growth from the newly built Clarence Prison in New South Wales, where the prison is currently operating at around two-thirds of full capacity. There's been further growth in immigration revenue due to higher variable work. And citizen services also perform well, particularly in ramping up COVID support contact centre activities. Underlying trading profit margin for the period has increased by 1.1 percentage points to 5.6% due to increased volumes on the immigration contract, good margins on short-term work in citizen services, and the operational leverage of stable fixed costs combined with higher revenues. Order intake in the period was relatively light as the pipeline is being rebuilt, but did include, importantly, a successful two-year extension on the immigration contract through to the end of 2023. And the pipeline in ASPAC now includes the largest opportunity in the group, being the vehicle licensing contract in Victoria. The Middle East Division's results have started to reflect the impact of Dubai Metro that came to an end in September, which has had a more significant impact on revenue than it has on profit. In a full year, the loss of the Metro contract will have an impact of around about £100 million on revenue, but only £3 million on profit. And overall, revenue was down 13% in the region on a constant currency basis, while underlying trading profit was held flat year on year. The transport sector was down on the year from both Dubai Metro ending, but also air traffic control and other airport-related contracts experienced a reduction in the volume of flights and passengers during the pandemic. But encouragingly, we are starting to see some early signs of recovery in this part of the business. Facilities management work within health and FM experienced lower levels of project work, principally as a result of customers deferring work during the pandemic. And despite the lower revenues, profit was flat in the period. And this is largely because of higher volumes on scope changes on some of the more profitable contracts that we have, and through good cost control on contracts where revenues have been negatively impacted by COVID. There's also been some wins in the period, including the Ras Al Khaimah air traffic control, Dubai Airport technical manpower, as well as the mobilization of the Dubai Metro customer services contract. There's also been good progress on rebuilding the pipeline in the region, both on a sector and a geographical basis, with the largest opportunities in air traffic control, fire and rescue services, and asset management. I'm going to leave the UK&E slide for Mark to talk us through when he gets up shortly, so I'm going to move on to cash flow. Free cash flow was exceptional in the year, continuing our recent trend of strong cash generation. Trading cash conversion was 112%, as working capital investment was a positive inflow, despite the significant organic revenue growth. And this is due to the collection of older debts, customers paying early to support their suppliers during the pandemic, the successful closed-out and debtor collection of Dubai Metro, and some favourable timing effects. We've not used any financing facilities or efforts out of the ordinary to reduce our period-end net debt. And we continue to comply with the UK government's prompt payment code, and 89% of UK suppliers were paid within 30 days of receiving an invoice. Working capital performance was better than we expected due to the continued prompt customer payments, which will now return to normal in 2022 as those contracts come to an end. And as we've previously set out, over the medium term, we expect cash conversion to be around about 80%. The better than expected cash flow in the year is also reflected in net debt, with adjusted net debt of £178 million and covenant leverage of 0.7 times EBITDA. Adjusted net debt has increased by £120 million in the period, after investing almost £250 million in acquisitions, £20 million in the shared buyback programme, and paying our first dividend for seven years. So turning to capital allocation. And in 2021, once again, delivered strong cash generation and maintained a strong balance sheet, which has enabled cash to be used in all four of our capital priorities. First, we've continued to invest in the business to generate organic growth, which has delivered revenue and profit growth in the year above our financial targets, as well as order intake of £5.5 billion and book-to-bill of 125%. In addition, we invested an incremental £10 million in systems, processes and efficiency programmes to provide improved tools to support the business, which included workforce management, Serco Workforce Solutions, SAP Europe and People First. And second priority, we've announced today a final dividend for 2021, which is a 15% year-on-year increase and puts the group on a path to sustainable increase in dividends, which over time will take our cover down towards three times. Our third capital allocation priority is to fund Bolton acquisitions. And in 2021, we've completed three acquisitions, WB in North America Defence, Facilities First Australia, and Clemeco in Defence in Europe. The total cost of the acquisitions was around 250 million pounds, and these have all been funded using the balance sheet. Our final capital priority is to return surplus cash to shareholders. And we've ended 2021 with leverage of around £90 million below the bottom of our target range. So today we've announced a share buyback programme of £90 million, which will take leverage back to the bottom of the target range whilst retaining flexibility to fund acquisitions when they arise. And I just want to touch on inflation and the protection we have in our long-term contracts, and which is particularly important in the current economic climate. And this comes in many different forms with different customers across different regions. But 86% of our revenue is covered by one of indexation, cost-plus contracts, or short-term contracts of less than one year. Cost-plus contracts enable us to pass all cost increases to the customer. Indexation clauses in our contracts allow pricing to be increased annually, which are often linked to CPI or RPI. Our other indices, for example, building materials or medical staff wage indices, if there is a large concentration of these costs in the contract. And short-term contracts, often task orders or short-term consulting type contracts, which we see most commonly in North America and the Middle East, allows to price contracts using current costs and avoid inflation risk. The other 15% of our revenues has some kind of inflation protection, whether it be an agreed fixed annual escalation increase, typically of 2% to 3%, where we take the risk or benefit if inflation is higher or lower, We have long-term agreements with our suppliers that have the same pricing terms that we have with our customers. Or there may be an agreed customer practice to go back to the customer for price increases to cover inflation, and we have seen that recently in North America. So we estimate that there's only a very small part of our revenue that has no inflation protection. Overall, we have good protection against inflation in our contracts. There will be some timing differences where indexation uplifts are after price increases have been incurred. Or there'll be some cost spikes like utilities or driver salaries that are higher than the indexation received. But conversely, there'll also be some fixed costs where there's no inflation. So we're going to 2022 wary of the impacts of inflation, but satisfied we have strong contractual protection. And at our investment committee, we continue to scrutinize the inflation protection built into our contracts that we're bidding for. And just to finish off on this point, previous history tends to suggest that overall, moderate inflation is a slight help to our business over the medium term. So finally, giving off guidance, which is broadly unchanged from what was communicated ahead of the Capital Markets Day and now includes the assumed share buyback of £90 million. Revenue for the full year is expected between £4.1 and £4.2 billion, which equals 8% organic revenue decline. Within that, COVID work ending accounts for about 13% of decline, which is partially offset by about 5% growth on our base business. And within our full year trading profit guidance of 195 million pounds, which is 34 million pounds lower year on year, there are some major moving items. Clearly, the majority of COVID work will drop away, which we expect to have a non-recurring element of around 60 million pounds of UTP in 2022, along with the annualization of the loss of AWE and Dubai Metro. However, DWP restart will move from mobilization to operation, The DIO contracts through the VIVO joint venture will commence, as well as mobilising other order intake we won in 2021. In addition, we are not expecting to repeat some of the accelerated investments that we made in 2021. Our free cash flow is expected to be approximately £100 million for the year, and the trading cash conversion around 80%, as some of the benefits in 2021 will not repeat. After factoring in the share buyback, adjusted net debt will be around £220 million at the end of the year, and leverage around the bottom end of our target range of one to two times EBITDA. So I'm now going to hand over to Mark, who will talk us through the UK and E-business.

Nigel, thank you, and good morning to everyone. My name is Mark Irwin. I've had the privilege of leading our UK and Europe business over the past 18 months, and prior to that, led our business in Asia Pacific for six years. In the next few minutes, we will take a closer look at the FY21 results for the UK and Europe, and I will conclude, as Rupert indicated, by looking very briefly at our international space business. Rupert's opening comments regarding another year of strong operational and financial delivery for Serco Group applies very much in the context of FY21 for the UK and Europe division as well. Over the reporting period, we've seen the continued courage and commitment of our frontline teams, strengthened relationships with our customers, effective utilisation of our operating platform and disciplined management of our business underpin growth in the division, leading to revenues of £2.1 billion. Revenue from our Climaco acquisition was less than 1% in the year, so that growth actually represents 20% of organic growth during the period. We've grown in every part of our business. particularly in our citizen services business, through which we deliver our services to the Health Security Agency in the UK, the Department for Work and Pensions, and the Office for National Statistics. As you can see, we've also had strong performance in our justice and immigration business with the mobilisation of the next generation of prisoner escort and court security contract, higher volumes in the asylum accommodation contract and continued good results in our core custodial operations. We're pleased that even in parts of our portfolio, like transport and health, which experienced lingering impacts negatively of the pandemic, we've delivered year on year growth and made a positive contribution to the division and the group. Our environmental services business was particularly challenged as it was directly impacted by the driver shortages seen more broadly in the market, compounded by COVID absences and significant increases in household refuse and recycling materials as significant parts of the population continued to work from home and shop online. We are working with our teams and our customers to address these impacts as part of an ongoing performance improvement program going into 2022. In 2021, we also saw the conclusion of our services at AWE at the end of June in line with the government's announcement. Underlying trading profit for the division increased to £96 million in FY21, up from £57 million in the prior year and £38 million in 2019. You'll see that margins also improved in the year to 4.5% compared to 3.2% in the prior year and 2.8% in 2019. Order intake was particularly strong at around £3.4 billion, representing around 60% of the group's total order intake. Significant wins for us included the Defence Infrastructure Organisation, or DIO, award to our VIVO joint venture with Equans, which we estimate will have a value in aggregate to circa of 1.9 billion pounds over the initial seven year term. This contract includes responsibility for the maintenance of some 200 military sites, 19,000 buildings, and in excess of 20,000 homes for defense personnel. The order intake also includes our Department for Work and Pensions restart contract, which we had valued estimated at 350 million pounds, and the COVID-19 testing centre contract, which we valued at up to 190 million pounds at the time of award. In Europe, Clemaco has integrated us into the Belgian Navy's support system and has allowed us to leverage our global maritime capability to now provide maintenance and support for the Navy's Mine Hunter class of ships, which it shares in a cross-border program with the Dutch Navy. In addition, we've had a positive start to 2022 with the award to operate Her Majesty's Prison Glen Parva, valued at over £300 million, and a new two-year contract for the post-COVID single service centre for the UK Health Security Agency, providing us the opportunity for service continuity as the government leads the country through the living with COVID phase, as well as other UK HSA services like the flu hotline. Looking ahead, we have a positive and healthy pipeline for our business across all of our chosen market segments. The current pipeline also reflects our active portfolio management to shape the type of business we want to have by the end of our current strategic period in 2026. Key bids include various opportunities related to Skynet, the armed forces recruitment and inland border facilities opportunities, and a robust pipeline of existing and new prison operation opportunities, as well as CPMS, which is the continued provision of marine services which provide operation and maintenance services to the Royal Navy's support fleet. So in summary, when we look across the division and our performance in 2021, we've delivered strong operational, financial and growth performance in our business for the year. I'd now like to conclude by just taking a minute or so to highlight our work in the space sector as one of the key areas of opportunity for the division and for the group. From a UK and Europe perspective, we're excited about the opportunity we have to grow geographically in Europe as governments increasingly look to the private sector to help them with both skills and budget deficits. And within that space, which currently represents 60% of our European portfolio, is a strategic sector that allows us to leverage deep sector expertise and international breadth through our B2G platform to deliver future growth. Today, we have more than 1,000 specialists across our business supporting end-to-end operations and the entire lifecycle of the satellite from concept to launch and into operations. We manage over 500,000 registered users globally for the Earth observation Copernicus services and process 47 million Earth observation images on our data platforms. In 2021, notable contract wins in the sector for us included a new contract with the European Space Agency to support satellite operations in Germany and a new contract with the same agency to provide operations and evolution of data access and user support services. But beyond the work we do with the UK MOD and the space agencies in Europe, we have long-term and valued relationships with the US Space Force through the acquisition of WBB. So I hope you'll see that we already have a credible and growing presence in the sector, and we know that governments in all of our operating geographies have space ambitions, have existing or evolving space strategies, and space agencies that have varying degrees of maturity. as a services provider rather than an OEM. Serco is technology agnostic, and so we offer a differentiated value proposition as a managed service integrator, bringing together alliances and partnerships to offer governments highly effective end-to-end solutions. Recent examples of this include the alliance we have in the UK, where Serco has partnered with Lockheed Martin, CGI and Inmarsat, and the Onda Dias collaboration we have in Europe, where we partner with cloud technology providers like OVHcloud and geospatial service providers like Airbus. So I hope this has given you just a glimpse into the current space business and how the market differentiation that has been enabled by our B2G platform is supporting our plans for future growth. Thank you. I'd like to welcome Anthony Kirby.