Serco Group plc

My name is Mark Irwin. I'm Chief Exec for Serco Group, and joining me this morning for our results presentation is Nigel Crossley, our Group CFO. May I start by thanking everyone who has joined us in the room today for the session, as well as those joining us online. We appreciate your time, interest, and support for Serco. As is required, I ask that you note the disclaimer on the screen. There's also a copy of it in the results booklet which you have with you in the room today. The format for today's session is similar to what you would have seen in previous years. After my introductory comments, Nigel will take us through the numbers and I will come back and speak briefly about the business before moving to Q&A. Now we were actually in this very same building talking to you about our 2021 full year results on the 24th of February last year, the same day that Russia invaded Ukraine. After two years of COVID, any hopes of a return to some version of pre-pandemic normal were subsequently lost to a prolonged conflict, rattled energy markets, inflation at levels not seen in decades, and labor shortages among a long list of challenges faced by citizens, governments, and businesses. And so it is against that difficult backdrop that we believe our full year results for 2022 is demonstrative of the operational and financial resilience of our business. Our revenue, which exceeded 4.5 billion pounds, was up 11%, excluding the impact of COVID-related work going away and currency movements. Our underlying trading profit at 237 million pounds was slightly better than what we indicated at the pre-close in December. but significantly better than the initial guidance of £195 million at the start of the year. Cash generation continues to be strong. We converted 97% of UTP during the year and underlying return on invested capital remains high. Nigel will talk through the detail of our capital allocation model, but generally when you look at the achievement, we are pleased that we are delivering well against all of our stated priorities. Our international portfolio is delivering. with more than 75% of our underlying trading profit being generated outside of the UK. And the agility of our B2G platform allowed us to respond to increased demand for case management services in the US and immigration services in the UK, Australia and Europe as key areas of growth. But we're pleased that in every division, we saw good performance in 2022. We did have some negative impact in energy prices in the UK in the first quarter of last year, but over the course of the year, inflation, tight labor markets, and supply chain challenges were generally all well managed. We had another good year of order intake, and our pipeline at year end remains healthy at 8.4 billion pounds. And our guidance for the coming year is maintained as our medium term growth targets. And you will be aware from the announcement this morning that our board has supported a further £90 million share buyback for 2023. I wanted to spend just a minute on this slide, which I hope will clearly show that the hard work that has been done in the business since 2014 has not only resulted in a turnaround, but provides a platform for sustainable, profitable growth and shareholder value creation. If we use 2019, the last year in which our results had no impact of COVID related work as a baseline, we see that through to the end of 2022, our revenues have grown by 40 percent. Our underlying trading profit has nearly doubled. ROIC is better by more than 500 basis points. Our pipeline has remained robust despite strong conversion rates and continues to offer good visibility to further growth opportunities to meet our medium-term growth goals. As we work toward those medium-term growth goals, we will take a systematic approach to strengthening our international business to government platform by focusing our execution on three value drivers. growing customer impact and market share, growing the value of colleagues' work, and growing margins and efficiency. I'll come back to these a little later in the presentation, but I'll now hand over to Nigel to take a closer look at our financial outcomes for FY22.

Thank you, Mark, and good morning to everybody. But before I run through the numbers, I just want to take a minute to assure everybody that the delay in last week's announcement had nothing to do with the quality or the accuracy of the group's results. And this was purely due to a standard audit procedure, which had not been fully completed by KPMG. And this came up unexpectedly, and we were first made aware of it less than 48 hours before we were due to announce our results. This was frustrating and inconvenient for us, and I'm sure for you, for which we apologize. But just to emphasize that the results you're seeing today are audited, and they're exactly the same numbers and same results that would have presented last Thursday. So there's been no change. So moving on. Sorry. Moving on. I'm going to start with a summary of the group's financial results, which, as Mark said, have turned out considerably better than we expected at the beginning of the year. Revenue grew just over 2% to £4.5 billion in the year. There's been 3% growth from acquisitions, including ORS and Sapienza, which we closed this year in Europe, as well as a full year effect to the 2021 acquisition of WBB in North America Defence. Organic growth was a negative 4%, but this only tells half the story. Within organic growth, there's been a negative 11% impact from the ending of COVID-related work in the UK, partially offset by strong performance in the rest of the business, which has grown organically at about 7%, including a small benefit from inflation. Underlying trading profit was £237 million, an increase of 4% on 2021, with margins stable at 5.2%. And similar to revenue, profit performance from the base business has been strong and up more than 30%, excluding currency and COVID-related work. Of note is that all our international regions deliver both increased profit and margins in the year, and combined they now account for around three quarters of the group's profit before corporate costs. And I'm also pleased with the way that business stood up to inflation in 2022. There's been no significant net profit impact in either direction, and inflation protection mechanisms within our contracts have served the portfolio well. There have been some pockets where the timing of cost pressures have run ahead of revenue uplifts, such as in the UK, HGV drivers and energy costs. But overall, it has been a successful year for managing the financial impacts of inflation. There was a strong underlying EPS performance, which was up 11% to 13.9p per share. This reflects a good trading profit performance, slightly lower finance and tax costs, as well as the benefit of the share buyback program that we completed in the year and reduced the share count. And this also supported another significant increase in the dividend per share, which has increased 19% to 2.86p per share. And then finally on this slide, we continue to report a good return from our invested capital with underlying ROIC over 20% in the year. And while this is a little lower than 2021, it is mainly because of the full year impact of the WBB acquisition in the invested capital base. So moving now and looking at the different regions, we're going to start with the Americas, which now contributes 49% of the group's underlying trading profits before corporate costs. And America's revenue was up 13%, which did benefit from a strong U.S. dollar, as well as 3% from last year's acquisition of WBB. Organic growth was down just 1%. The defense sector grew by 2% on a constant currency basis, with the increased revenue from WBB broadly offset by the reduced volume of task orders in the low-margin Keynes ship modernization program. Underlying trading profit was 137 million pounds, and we grew margin to 10.8%. And this improvement was largely due to some strong contract profit performance and a portfolio mix, particularly in the defense sector. But the North America highlight for 2022 was their order intake of £2 billion, which was a book-to-bill of 160%. The majority of these wins were in the defence sector, and we were particularly pleased with Metz, which we acquired in 2019, who secured $1.2 billion of wins and a book-to-bill of over 400%. With both rebates including the Navy C21 contract and new bids like Nomars and Shapen. These wins will set the business up for a strong 2023. Also the Americas pipeline has been replenished. After the strong order intake in 2022, it currently stands at 2.5 billion pounds up from 2.2 billion pounds. Once again, the pipeline is a strong weighting to defense, but there are some interesting opportunities in Canada and citizen services sector. And we should just say that 2023 has got off to a good start with a successful rebid of CMS, which we announced last week. Moving on to the UK, the UK business delivered a strong result in 2022. While revenue was 1% lower in the period, this did include a 22% impact from £480 million of reductions in COVID-related work. This has largely been offset by strong organic growth coming from DWP restart, defence, and higher volumes in immigration. Similarly, profit was down just £24 million after absorbing £65 million impact in 2022 from the end of AWE and COVID work. Justice and immigration had a very strong year, and in particular, immigration services, where the number of asylum seekers has continued to increase significantly during the period. And we've also expanded our immigration business into Europe, where the acquisition of ORS in September. Citizen services have benefited from the ramp up of DWP restart contract, and as expected, these have been more than offset by the end of the COVID work. Other highs and lows in this area include leisure, which is performing well on its post-COVID recovery path, and environmental services, which did experience increased operational pressures in the year, impacted by tight labour markets, particularly from HGV drivers. Defence has traded well with a successful start-up of DIO contracts under the VIVO joint venture, and our share of profit here largely replenished the lost profit from the end of AWE joint venture. Elsewhere, the conclusion of the future provision of marine services, our FPMS contract, was successfully transitioned to a new interim two-year contract. And transport continued to recover post the pandemic, with volumes and profits higher in the year. Mercer Rail, which was one of those areas significantly impacted by COVID, improved profitability as passenger volumes continued to rise. Order intake of £1.9 billion included the HMP Fosway new prison and also securing the maritime services contract. We were clearly disappointed on some of the losses, including Skynet and HMP Loudon Grange, but our £3.7 billion pipeline of new business remains healthy, particularly in justice and immigration and defence. And moving on to ASPAC, who traded well across the year. Organic revenue growth was flat, as higher volumes in immigration services were offset by reduced volumes within our citizen services portfolio. This was particularly affected by tight labour markets and higher vacancies, as well as a reduction in the scope of work at Fiona Stanley Hospital, where some services were taken back in-house in 2021. The underlying trading profit for the period has increased 31 basis points to 6%, which has principally been due to higher volumes and mix of services in the immigration contract. Order intake in the period was relatively subdued, following the unsuccessful bids of two large new business contracts, Frankston Hospital and Vehicle Licensing in Victoria. The business is now focused on rebuilding their pipeline, which includes defence-based support, one of the largest business opportunities in the group. But the priority for the division in 2023 is the retender of the immigration services contract, which is due to end in December this year. And finally, the Middle East. The Middle East results continue to reflect the impact of Dubai Metro contract that we exited in September 2021. This had a £90 million impact on revenue, but minimal impact on profit due to its lower than average margins. The transport business has seen an improvement in their airport-based contracts during the year as travellers started to return and is now approaching pre-COVID levels. Despite the lower revenues, profit increased 17%, and the profit margin improved almost 2.5 percentage points. The successful exit of Dubai Metro has been accretive to margin, supported by good performance elsewhere in the sector. In the year, we successfully rebid our Dubai Navigation Services contract, as well as a new win to provide facilities management services to Riyadh International Airport. We've also seen wins on smaller but higher margin contracts for asset management consulting services in Saudi Arabia, where there continues to be a strong pipeline. So moving on to free cash flow. And free cash flow at 159 million pounds delivered trading cash conversion of just under 100%. And since the significant cash drain of OCPs in 2018, the cash conversion has averaged over 100% for the last four years. Adjusted net debt was slightly better than we expected at £204 million, which was flat in the year, excluding the impact of foreign exchange movements. And this reflected strong free cash flow being offset by £90 million of share buyback, £30 million of dividends and £26 million of acquisitions. And we've not used any financing facility or efforts out of the ordinary to reduce our net debt at the period end. And our average daily net debt in the full year was just £27 million higher than the closing net debt. And leverage at 0.8 times EBITDA remains below our 1 to 2 times medium term target and underlines the strength of our balance sheet. So now turning on to capital allocation. And 2022 has been another year where we've invested capital in all of our four priority areas, including funding organic growth, increasing dividends, completing acquisitions, and returning surplus cash to shareholders. Generating organic growth continues to be our first priority for capital. But as we've said in the past, our operating model is capital light. But in 2022, we have invested in our people. Recognising the cost of living crisis and tight labour markets globally, we've increased pay faster than we expected to. We've distributed £9 million of WeCare payments to our frontline workers. And we've funded other support programmes for our people. In addition, we have recommenced our residential Oxford University leadership and contract manager courses, and this has contributed towards ending 2022 with fewer vacant roles than we had at the start of the year. Also during the year, we've increased our investment in business development, and particularly in North America. Our second priority is dividends, and we've announced today a final dividend for 2022 of 1.92p per share. This is a 15% increase on total dividend cash payout for 2022, but combining with a share buyback results in a 19% increase on a pence per share basis. And we remain on track to reduce dividend cover towards three times in the medium term. And our third priority is to fund acquisitions, and we completed two acquisitions in Europe during the year, which starts to build our scale and presence in a strategic priority region. Sapienza closed in July, which supports our European space business, and more significantly, ORS closed in September to extend our immigration capability into mainland Europe. And our final priority is to return surplus cash to shareholders. In 2022, a £90 million share back was completed, and today we have announced our intention to undertake an additional £90 million share buyback in 2023, based on our strong balance sheet position. Finally, on guidance, which is laid out clearly on the screen for 2023 and is essentially unchanged from the December pre-close announcement. The only one update is net debt, which reflects the stronger closing position in 2022 and the impact of the 2023 planned share buyback. Revenue is expected to be at least 4.6 million pounds, which is a 2-3% increase in the year. This will be driven by the Americas, following the strong order intake, combined with modest growth from other regions, after absorbing the impact of contracts ending in the UK. Underlying trading profit guidance of around £2.35 million is similar to the 2022 outturn, and our free cash flow is expected to be approximately £120 million. Net debt should end the year around £200 million after factoring in the 2023 share buyback. Both net finance costs and the effective tax rate are expected to increase slightly in 2023. The net finance costs will include higher prevailing interest rates on borrowings, and we expect lease interest costs to increase as more properties are leased in response to the volume growth in our UK immigration contract. The effective tax rate will increase as higher corporation tax in the UK take effect, and in later years we will have the introduction of corporation tax in UAE and global minimum tax. So that finishes the finance review, and I'm going to hand back to Mark now.

Nigel, thank you. In the remaining part of this morning's presentation, I'd like to reflect on some of the highlights and lowlights from the prior year and then touch briefly on what we will focus on going forward. The right place for me to start is to say that we are immensely proud of the achievements of our more than 50,000 colleagues around the world whose dedication and tireless efforts have led to another successful year for the group. As you saw in the detail presented by Nigel, our performance was much better than we expected at the start of the year, showing our platform enables the business to respond to both risk and opportunity to consistently deliver positive results. And while we had good results across the group, I think worthy of highlighting again, following on what Nigel shared previously, that we had a particularly strong finish in our North American business with 160% book-to-bill, driven out of strong win and rebid rates in our METS business unit. You will recall that we made the strategic acquisition in 2019 to add a platform for growth in maritime engineering, design, technology, and sustainment. We also see across the group more and more examples of leveraging capability cross-divisionally and across sectors where that collaboration is resulting in better solutions for our customers. Through one of those collaborations, we entered the employment services market in Canada in the second half of 2022, winning a five-year, £110 million contract as a result of work done between our citizen services teams in Canada and the UK. In the UK, we've been doing this work for the UK Department of Work and Pensions for a long period of time, and so we were able to share that knowledge and experience and help our Canadian colleagues enter that new sector. Also, as you heard from Nigel, our results for 22 continues a track record of strong performance, which has enabled us, again, to deliver on all of the pillars of our capital allocation strategy with consistency. We've spoken previously about contractual protections in our portfolio mix affording protections and mitigation against inflation risk, and we were able to manage well again through last year despite that significant surge in inflation seen globally. We did so while being mindful of the hardship brought to colleagues by cost of living pressures in the broader economy. We increased wages more than we budgeted for during the year, and we also distributed an additional £9 million in We Care payments to colleagues outside of management ranks in September. This follows a £6 million payment announced at the end of 2021, which was paid in February 2022. and a broader portfolio of support through our Employee Assistance Program, our Financial Wellbeing Hub, hardship grants, which are provided to employees through the Serco People Fund, and our Serco My Benefits Program, which offers employees savings at more than 1,000 retailers. And finally, when we look at our highlights, our order book remains robust at 14.8 billion pounds, and that excludes the one and a half billion pounds of order book in vivo, our joint venture with Equans. And our qualified pipeline of new business, which stands at 8.4 billion pounds, has been replenished during the year, and we believe remains at a healthy level. Some lowlights on the other side of the ledger. As Nigel said, in relation to the VicRoads deal and a PFI hospital opportunity in Australia, we took some big swings at adjacent new growth opportunities where we were unsuccessful in our first runs. So while the outcomes were disappointing, we take lots of learnings from those bids to similar opportunities in the future. And we were also unsuccessful at a few but large rebids in the UK towards the end of 2022, which took our rebid rates below what we have seen in recent years. In relation to our workforce, we have reduced the number of vacancies across the group, but it remains really hard work. While we are able to attract new colleagues into the business, retention continues to be a significant challenge for us. Another disappointment was the announcement by the Scottish government to end the Caledonia sleeper franchise despite recognition from the public and the government itself that we have totally transformed that service. And I'd like to acknowledge that the positive impacts of immigration volumes is evident in our financial results, but our AASC contract in the UK made those outcomes possible because of the fantastic response of our teams on the ground. we're very conscious of the fact that they continue to face a challenging and dynamic operating environment, as do our colleagues in the civil service in addressing the complex issues related to asylum accommodation. And I note the last but critically important point on the slide. As restrictions largely came to an end related to COVID during the year, we saw service users and our staff return to circumstances they had not faced in more than two years. For some of our staff, not faced at all since they joined us during the pandemic. And what we saw during the year was custodial regimes normalizing traveler numbers swelling and backlogs for driver testing and other public-facing services seeing rapid demand during the year. And that resulted in more of our colleagues being injured. The safety and well-being of my team is personal to me and a responsibility that I care deeply about. So doing everything that I can to make think safe, work safe, home safe a reality for every colleague in our business every day is my first priority and we are committed to do better in 2023. I've been a member of the Serco Executive Committee since 2014 and part of the team that developed our strategy. Looking forward, I remain confident that the strategy provides the best pathway to value creation for our customers, our colleagues, and our shareholders, and our performance framework to grow revenue faster than market, profit faster than revenue, and to convert that profit to cash serves as a good measure for that. Our focus, therefore, in coming years is the execution of our strategy to achieve our goals of 4% to 6% growth at increased margins over the medium term, while impacting a better future for people, place, and planet. Our strategic framework therefore remains unchanged, but with the clear focus on executing against three value drivers, our three Cs, customers, colleagues, and capabilities, which I will elaborate on in just a moment. When we look more broadly at the market, our view remains that the market for private sector delivery of government services is both large and growing. Partnering with the private sector to deliver impact allows governments flexibility in the design of solutions, in the efficiency of service delivery, and in the measurement of impact for citizen, community, and country. In 2021, we conducted a market review which included using two independent research firms. The conclusion of that work indicated that the total outsourcing spent by governments on services in the markets that we operate in was estimated to be 715 billion pounds, and that the market was expected to grow over the medium term at a rate of 2% to 3%. while noting that the market remains fragmented, and despite Serco being a leading international provider of services to government, we think our market share is still quite small, somewhere between one and three percent. So based on that data, we should have significant opportunities to grow our share of existing market, and we think that the manifestation of the four forces which we've discussed previously may see potential acceleration from structural labor market challenges and the development and conversion of technology, all of that providing fertile ground for us to achieve our growth objectives. Our BTG platform was introduced at our Capital Markets Day in December 2021, and in the context of the current challenges that we see governments facing, we believe that it continues to offer differentiated Serco capability, capacity, and agility that enhances rather than replaces public sector effort. So going forward, we aim to participate more broadly across our customers' value chain, from advisory to operations, from designing services to enabling better outcomes in flexible partnerships focused on delivering impact. And the three Cs I mentioned earlier is all about delivering our medium-term growth targets. growth in revenues, growth in colleague enablement, and growth in margins. Let me take a look at each of these in turn. In terms of our focus on customers, we've worked hard in recent years to earn credibility, and our customer relationships are now strong. We will work even harder in the period ahead to elevate those relationships and will be forensic in our understanding and targeting of the existing market while remaining agile and responsive to new and emerging opportunities. In our chosen markets, we believe we have the broadest touchpoints with government amongst their strategic suppliers. We will build those partnerships stronger by giving our customers long-term, cross-department, non-institutionalized and pragmatic perspectives so that they can address their challenges drawn from Serco's experience and capability around the world. we will grow revenues by increasing share of customer and share of market and support our mission to impact a better future by evolving from outsourcer to impact partner to the world's leading governments. In terms of colleagues, our commitment to the safety and well-being of our colleagues remains foremost in our efforts to protect and deepen the relationship between Serco and the people whose dedication and commitment stands behind our success. To support retention, we will continue to develop our employee value proposition to build on the purpose-driven foundations we already have and to grow the value of work we ask people to do. We will have renewed emphasis on work process re-engineering with the technology first approach to support productivity. We'll extend the high levels of engagement we have to high levels of enablement through workforce augmentation, which will allow colleagues to focus their efforts on areas of highest social and economic value. And so our targeted progression in coming years is therefore growing the value of work deepening the relationship between the company and our colleagues, and then turning our colleagues into advocates for Serco. And the third C is capabilities. We're going to put significantly more effort on technology enablement and continuous learning across the group. In past years, we've invested in building a robust IT infrastructure and cyber capability. We will continue to protect those core elements of our technology platform while accelerating our capability to fully exploit the functionality of platforms we've already invested in, and we will pivot our ambition to harness new and emerging technologies to help everyone in our business work safer, be more productive, and grow value. We will explore scaling artificial intelligence, AI, but in a very practical sense to extract value by applying it to decision-making and operations, and then to evolve our structure and culture around the optimization that it may offer. In other words, we will look for answers to put robotics and automation in, in order to take unproductive costs out. In the coming years, we will access those enabling technologies from a broader capability ecosystem by proactively partnering with both startup and established tech companies. And so to wrap up, Our FY22 results further builds on Serco's track record of delivering better outcomes for citizens, for customers, for colleagues, and for our shareholders. We hope that it gives confidence that our strategy of being a focused supplier of services to government, operating through our Serco management framework, and using our B2G platform to win and deliver business continues to create value. As Nigel said, our guidance for 2023 remains unchanged in terms of revenue and profit, noting the 90 million share buyback. We exited the prior year with good momentum in our win rate, and 2023 is off to a good start with the success of rebidding the CMS contract in North America. In the period ahead, we will place systematic and rigorous execution focus on growing market share through deeper relationships with our customers and a more ambitious and rigorous targeting of the post-pandemic government services market. by growing value in the work our colleagues do to increase enablement, retention, and the advocacy of colleagues, and growing our margins by leaning into technology to deliver productivity through process automation and workforce augmentation. And all of this is consistent with our broader goals of growing revenue faster than the market, growing profit faster than revenues, and shareholder returns growing faster than profits over the medium term. And importantly, we will do this by embedding our ESG commitments to protect people and planet, to deliver meaningful social value, and assuring robust governance in everything we do in our mission to impact a better future. Thank you. We will now go to Q&A.