Serco Group plc

Good morning, everyone. I'm Mark Irwin, Group Chief Executive. Thank you for taking the time to join us in person, as well as those who have joined us via the live webcast for this morning's presentation of our 2023 full year results. As always, we appreciate your interest in and support for Serco. May I also acknowledge John Rishton, Chairman of the Serco Board, who is with us this morning. As required, I ask you to note the disclaimer on the screen, which also appears in the results notebooks that you have for those in the room. I'm joined this morning by our group CFO, Nigel Crossley, and as we have done in previous years, I will start with the summary of the year. Nigel will take us through the detailed financials and I will come back to close with some brief comments on where we are with executing our strategic plan before moving to Q&A. The execution focus which gave us the positive start we reported on in our mid-year trading update continues and has driven the strong set of results you see headlined in the summary. On a full year basis for 2023, we've delivered growth in revenue and profit, as well as continued strong cash generation with all of these measures ending the year better than our initial guidance. We grew revenue by 7% to 4.9 billion pounds, underpinned by 4% organic growth. Underlying operating profit increased 5% to £249 million. The business has a proven track record of cash generation and the work that Niger leads across the group to continuously improve has delivered more than £200 million of cash in the year. In our work to build a resilient international growth platform, we had order intake of 4.6 billion pounds and our order book remains healthy at 13.6 billion. A more analytical approach to understanding the market and getting left of the deal sees our qualified pipeline of new opportunities at 10.1 billion pounds, over 20% higher than it was at the end of last year, more than double its pre-COVID level, and featuring good distribution across sectors and geographies. and the strength of our balance sheet has allowed us to act on all four of our capital allocation priorities, including the board approving the new shared buyback of 140 million pounds, which we announced today. And as I leave the slide, it is important that I acknowledge and thank my colleagues across the group, without whose hard work and dedication these results would simply not be possible. Looking at some of the highlights across the business, the strong performance in 2023 is supported by a more engaged workforce, enhanced customer relationships, and improved win rates compared to the prior year. The successful integration of ORS and helping it to respond to market demand more effectively has seen revenues double when compared to the last full year prior to acquisition. and we expect the acquisition of European home care to further build scale in the sector. Order intake in 2022 made for a busy period of mobilization over the past year, including the highly effective commissioning of the newly built HMP Fosway prison in England, which has already now ramped up to full operational capacity. And we began instilling good practice to get below the headlines of contract performance to identify opportunity for productivity, which will contribute to the 30 basis point margin improvement in our 2024 business plan. We delivered revenue growth of more than 7% in all of our geographic divisions except Asia Pacific, underlining the value of our international portfolio. included in that was retaining the CMS contract in the US and continued growth in Canada through the employment services contracts we now have in Ontario. This is a fantastic example of growth in ABLE through global collaboration where our expertise in running the DWP's restart scheme in the UK directly led to the ability to bid and win opportunities in Canada. and we entered 2024 with the largest pipeline of potential new work in a decade, validating our focus on the government services market as a source for sustainable and profitable growth. And our capital allocation priorities are clear, and we believe through them we can continue to create value. Now, we're always transparent about what did not go as well as we'd planned, and so on the other side of the ledger, our Asia-Pacific business did not meet expectations, both in terms of the progress made on contract remediation or improving our new business winds. In addition, during the year we saw a reduction of the volume variable work in our immigration contract, which continued from the fourth quarter of 2022 into 2023. We've taken appropriate action, appointed a new leader for the division, and put in place a robust recovery plan, which is now well underway. In North America, we had terrific rebate success, defending more than 90% of our contracts. However, our new business conversion was below our internal targets. Our focus for 2024, therefore, is on improving the new business conversion rates in the division's £3 billion plus pipeline. We also saw during the year that our customers chose to self-deliver our Caledonia Sleeper and Wishaw Health contracts in the UK, despite excellent service delivery during and post-pandemic. While we are very disappointed about that outcome, we respect the decision of governments in relation to public service delivery. And as we always do, we manage the demobilisations professionally and with citizen interest as a priority. In terms of the labour markets, we know that there's been some easing in the global labour markets, but dynamics in certain locations and for certain skill types remain challenging. Having significantly reduced vacancies in the past year, we've now shifted our focus to reducing attrition and will include attrition management as a performance metric for our leadership team in 2024. and our safety outcomes in 2023 have improved. However, we are committed to always do better, and we've now set an ambitious target to reduce lost time injuries by 50% over the next three years. Having now set this operational context for what has been a good year, I will now hand over to Nigel to talk through the details of our financial performance.

Thank you, Mark, and good morning to everybody. I'm going to start off with an overview of the group's financial results, and 2023 was another very strong performance. Revenue grew by 7% to just shy of £4.9 billion, including organic growth of 4%. Demand in immigration and defense sectors were major drivers, and this more than offset the remaining impact to the end of COVID from 2022 and some contract exits. And while the group's reported revenue excludes joint ventures, if Serco's share of JVs was to be included, this would have added a further 5% of the group's organic growth following the mobilization and increased volumes in Avivo JV. In addition, the first full year of the European Immigration Acquisition, ORS, contributed a further 4%. Underlying operating profit was £249 million, an increase of 5% on 2022, with higher UK margins and revenue offset by tougher trading conditions in our Asia-Pacific division. Underlining earnings per share were up 10% driven by the strong operating profit performance and the share count benefit from the share buybacks that we've completed. And strong cash performance remains one of the important characteristics of our business with free cash flow generation of 209 million pounds in the year. This means on average the group has converted over 100% of its profit into cash over the last five years due to strong discipline around collecting receivables from our customers. And our balance sheet strength and cash conversion underpins both increasing dividend per share, which is up 19% on 2022, and a new £140 million share buyback, both of which have been announced today. So I'm now going to turn to our divisional performance and starting with North America, which contributed strong organic growth for the group and continues to be the most profitable of all our regions. Revenue is up 7%, with 8% organic growth and a 1% adverse impact from currency. And the defense sector reported the strongest organic growth, increasing by 8%, which was driven by the mobilizations of strong winds in 2022, including the maritime, SHAPEM, and NOMARS contracts. And citizen services grew 77% from the start-up of new employment contracts for the Government of Ontario as our Canadian business experienced growth for the first time in many years. And stronger-than-expected volumes on CMS through the year offset some of the impacts of its new contract terms. Underlying operating profit of £138 million was slightly higher than 2022, with margins declining by around 60 basis points to 10.1%. This reduction was expected following the investment to mobilize new contracts, some defense IT management contracts transitioning from installation to operational phase, and a higher mix of lower margin, lower risk cost plus work within our portfolio. An order intake of 2.1 billion pounds continues to be strong with a book to bill of 150% following the 160% reported last year. The retention of existing business was particularly strong, accounting for 75% of the order intake, with a rebid win rate of 95% in the year. And the largest new business win was the employment services in Ontario, building on our first win in 2022. Importantly, we also retained CMS, the division's largest contract. This started on the 1st of July and will operate at a lower margin than the old contract, albeit still at a high margin relative to the North America portfolio. In addition, since the end of the year, we've retained another key rebid by securing our contract with FEMA. The Americas pipeline remains very strong and increased to £3.2 billion, up from £2.9 billion at the half year, with around 80% of the pipeline weighted to the defence market. So moving on to UK&E, which was a standout performer in the group. Revenue increased 16%, with organic growth of 7%, driven by demand for immigration services in both the UK and continental Europe. and also supported by our justice and defence sectors. This was despite an impact from the end of a number of contracts such as DWP Universal Credit, Caledonian Sleeper and Barts Hospital Trust. ORS, the European immigration business acquired in 2022, contributed 8% to the UK's growth and has doubled in size since the acquisition due to strong volumes and ability to scale the capacity of the business. Justice and immigration continued its significant growth, particularly immigration where demand for services remained high due to global migration patterns with service user levels remaining elevated. Additionally, the successful mobilisation of the new prison HMP Fosway contributed revenues in the justice sector. Citizen services revenue declined as expected with fewer wins in the year and the impact from the end of COVID work in 2022. as well as a DWP universal credit contract. There was some growth from the restart program. And while the new DWP functional assessment does not mobilize until 2024. And the defense business traded higher after re securing our maritime services contract, as well as growth in the defense radar operations. And underlying profit increased significantly, up 68% to £121 million, and profit margin was increased by 150 basis points to 5%. This improvement has been delivered through the revenue growth in the division, as well as strong performances in the Mersey Rail and Vivo joint ventures, albeit some of the Mersey Rail contribution was one-off in the year. And order intake was robust at 1.9 billion pounds. This includes the 350 million pounds five-year contract to deliver functional health assessment for the DWP in the Southwest of England. And a 200 million six-year contract to deliver electronic monitoring in England and Wales. Importantly, the new business and rebid ring rates were strong at 60% and more than 95% respectively, bouncing back after lower rates in 2022. And the pipeline of new business remains attractive at around £4.8 billion, with a number of decisions moving from 2023 to 2024, and a good range of growth opportunities across justice and immigration, defence and citizen services. So moving on to Asia-Pacific, which as we set out at the half-year results, had a tough year. We're pleased to have appointed a new chief executive in October, who is starting to execute a growth and profit improvement plan. We expect to see some benefits to the profit improvement work in 2024, but the growth recovery will likely take longer to impact the financial performance and will likely benefit 2025. Organic revenue declined 7% in the year, and this reflected lower volume variable work, particularly on the immigration contract, where volumes declined quicker than expected due to changes in demand. and this was combined with reduced volumes and some contracts ending in both citizen services and facilities management. Underlying operating profit reduced 58% to £24 million, with the margin decreasing by around 320 basis points to 2.8%. This was impacted by the immigration volumes and mix, lower levels of facilities management work, and tight labour markets, making it difficult to recruit and retain staff to achieve customer headcount targets. and order intake was low at 0.3 billion pounds. The pipeline for new work stands at 1.3 billion pounds and includes the defense-based services opportunity, which is a large integrated FM contract for the Australian Defense Force. And in quarter four, we submitted the rebid for the immigration contract, which ends in December of this year. And the Middle East made some good strategic progress over the year with some strong wins, as well as developing a healthy pipeline of new business opportunities. Revenue increased 8% and 9% on an organic basis with some early success in our advisory business, which largely sits within citizen services, as well as good organic growth on some existing contracts in the UAE. Profitability and margin both experienced a small decline in the year following the demobilization of a higher margin traffic control contract. An order intake of 0.3 billion pounds was strong with a book to bill over 150%. And this included new contracts provided fire rescue services in the Neom economic zone in Saudi Arabia, as well as airport custom experience services in Abu Dhabi. We also retained the contract to provide logistics and base services support in the region for the Australian Defence Force. The pipeline of new work is healthy at around 0.8 billion pounds, including a number of larger opportunities in UAE across defence, citizen services and transport, and further opportunities in our advisory business across the region. So now moving on to cash, and as we've already said, we delivered an exceptionally strong cash performance over the year with free cash flow of 209 million pounds and a trading cash conversion of 111%. And over the last five years, cash conversion has averaged above 100%. And over that same period, we've reduced the number of day sales outstanding by 20 days. which is the equivalent of more than 250 million pounds of working capital. We've achieved this through continuously improving the accuracy and timeliness of our sales invoicing processes and working with customers to pay to terms. We also continue to play our suppliers on time and in line with the UK prompt payment code. The net effect of these items is that working capital was a 30 million pound inflow in the year. Adjusted net debt finished the year better than we expected at £109 million following the strong cash performance. And this has resulted in leverage of 0.5 times EBITDA, which is the equivalent of being £140 million of debt below the bottom of our one to two times target leverage range, and once again underlines the strength of our balance sheet. And since the end of the year, we have successfully raised $150 million of U.S. private placement loan notes to provide liquidity for the group after repaying debt maturity in 2023 and to fund the share buyback. The loan notes have been secured at a blended rate of 6.6% with 5- and 10-year maturities. So on that note, let's move forward to capital allocation. And there are no changes to our capital allocation framework that we've shared previously. And in 2023, we delivered on all of our priorities. Generating organic growth will always be our first priority. And we've continued to invest in our pipeline and building capability and bidding capability. And that's been demonstrated today by the size of the pipeline that we've announced. We've also started a number of small pilot programs to partner with technology businesses to further improve capability that can both support organization efficiency and organic growth. Our second priority is to increase dividends. And we've announced today a final dividend of 2.27 pence per share, taking the total to the year for 3.41 pence per share. And this is a 19% year on year increase and comes on top of last year's 19% increase. And our third priority is to fund acquisitions that will drive future organic growth for the group. In December 2023, we announced two acquisitions, European Home Care in the German immigration market, which strengthens our position in the largest immigration market in Europe, and Climatize in the Middle East, which adds sustainability capability to our growing advisory business. And our final priority is to return surplus cash capital to shareholders, which we define as the value of debt below one times leverage. So today we've announced a £140 million buyback to be completed in 2024. And this is on top of the £200 million of share buybacks completed since 2021. So finally, on to guidance, which is laid out clearly on the screen and has been updated from our initial guidance issued at the pre-close in December. Revenue, profit and cash expectations today are unchanged, but debt guidance is updated for both the better outturn in 2023 and the £140 million share buyback announced today. Revenue is expected to be around £4.8 billion, with an organic decline of 3%. a 2% contribution from acquisitions and a 1% adverse currency impact. The organic decline includes the new agreement for the CMS contract previously announced, contract exits such as Caledonia Sleep in the UK, and a contract mix change in the UK immigration as we support the government's efforts to reduce the number of asylum seekers being accommodated in the hotels. The guidance also includes around £100 million from the acquisition of the European home curb, which we expect to complete soon. Underlying operating profit guidance for around £260 million is unchanged, which is a 5% growth on 2023, after absorbing a 2% adverse currency impact. Profit margins are expected to increase by 30 basis points to around 5.4%. And drivers of margin improvement include the benefit of new contracts moving from mobilisation to operations. But most significantly, the renewed focus on operational efficiency improvements across our portfolio, both the efficiency of our overhead structures and shared service functions, as well as the productivity within our contracts. And in addition, there will be a contribution from the acquisitions already announced. We expect cash flow to remain strong with guidance of around £140 million, which is the equivalent to around 80% trading cash conversion, in line with our medium-term goals. And guidance for net finance costs is increased, but only slightly. This is driven by higher debt, principally from the share buyback, tempered by more favourable interest rates and better outturn for 2023 debt. And the effective tax rate of 25% is in line with our medium-term guidance, albeit higher than 2023, which included a one-off benefit from a reduction in tax provisions. And on that, I'm going to hand back to Mark.

Nigel, thank you. During 2023, we worked with colleagues across the group to bring clarity to our purpose, to impact a better future, our vision to be the partner of choice to governments globally, our mission to bring together the right people, the right technology, and the right partners to help our government customers solving some of the most complex problems they face, and re-energising the shared values of our Serco community, which remain the guardrails for everything we do. I remain confident our strategy provides the best pathway to value creation for our customers, our colleagues, our shareholders, and our performance framework to grow revenue faster than the market, profit faster than revenue, and convert that profit to cash serves as a good measure for that. If we reflect on the last year, from technology transformation to continuing conflicts, we saw another year of significant global change. However, the fundamental features of our business to government markets remain the same, large and growing, with high barriers to entry. We've previously described the long-term drivers of demand for our services through the four forces, which continue to be relevant and indeed is amplified by recent market forces and world events. There are growing costs for government due to, amongst other things, service backlogs, ageing populations, and the need to modernise infrastructure. We know that governments continue to balance public income and expenditure, as well as the need to reduce debt, which is at unprecedented levels post-pandemic. And we certainly know the tension between popular governments and higher taxation. We've seen citizen activism in relation to higher expectations for public service quality and reliability. And there are new challenges which continue to add further pressure on governments. De-globalization and geopolitical risk, demographic and skill impacts on labor markets, and the technical debt that most governments enter the next wave of AI-enabled technology changes that we are already seeing in the world today. These forces continue to drive requirement on governments globally to deliver more and better for less, irrespective of their ideologies. I wanted to touch briefly on two sectors where we see macro drivers driving longer-term demand. The first is the opportunity to support governments with the challenges that flow from global migration trends. In 2023, the World Bank estimated that 184 million people lived outside their country of citizenship, including 37 million refugees. This is only set to increase, driven by factors like climate change, conflict, demographic trends, and income inequality. These forces are not only pushing more people to relocate for better opportunities, but are also presenting growing challenges for migration policy in the decades to come. It is estimated that by 2050, there will be over 330 million international migrants and potentially 143 million people displaced by climate change. For Serco, this is a sector where purpose, vision, mission, and values align perfectly to our growth strategy. We are differentiated in the breadth of our capability, the flexibility of the capacity we provide, the values-based approach we take to service delivery, and the international footprint we have in offering these services. We therefore see significant opportunity for further growth in this market by offering more services in the geographies where we already operate and through building scale internationally. The secondary is defence. Defence services is our largest sector globally and the key, one of the keys to our growth strategy. I don't think anyone needs a reminder that geopolitically, the time of clear lines and conventional alliances is now less certain. And that in the multipolar world we now live in, it simply means that everything is just more complex and therefore less predictable. Serco, different from original equipment manufacturers, offers a full lifecycle approach from concept and design all the way through to modernisation, sustainment and operational support. And we are supporting defence and national security agencies with forward deployment and digital skills to build the military capabilities that governments will need in the future. The examples shown on this slide are just a small sample of the types of contracts we've won over the past year and intended to show the diversification of our Defence Services portfolio. In particular, I wanted to highlight the Shipbuilding Acquisition Programme Management Services contract, which Nigel referred to as SHAPEM, which has been awarded to Serco by the US Naval Sea Systems Command. As the prime contractor, we will provide program management, business and financial management, technical and engineering services, logistics, and foreign military support. The contract could extend over five years and is valued at more than $330 million. What this means in practice is that we are now supporting NAVSEA Team Submarine, working with the program executive offices for strategic submarines, attack submarines, and undersea warfare systems with the goal of helping them to eliminate the traditional siloed structures and processes which created impediments and inefficiencies in the submarine research, development, acquisition, and maintenance communities. While the program content of SHAPEM is protected within the US, the broader capability we bring to support the interests of the US and its partners in the AUKUS Alliance offers Serco opportunity to grow in what are our three largest geographic markets in our largest global sector. And I wanted to turn just very briefly to update on our strategic enablers of customers, colleagues, and capabilities. As highlighted in the ShapeM example I just gave, we've worked hard in recent years to earn credibility and enhance our customer relationships, which we now believe are stronger. We'll continue to work hard in the period ahead to elevate those relationships and to be forensic in our understanding of the existing market while remaining agile and flexible to respond to new and emerging opportunities. Our strategy focuses on profitable, sustainable growth. Our process to drive innovation and support customers from service discovery to service delivery is underpinned by three components. our impact pathway, our approach to partnership, and our use of global data and insights. Bringing these together allows us to support governments with solving some of the most complex challenges that they face. In a further example, we will continue to invest in our advisory to operate business in Saudi Arabia, which has already shown early signs of success and is focused on supporting the country in its development of sustainable future cities. With more than 100 advisory colleagues already active on the Giga projects during the planning and construction phases, we are working to build the trust and confidence with our customers to have long-term presence in the delivery of the Kingdom's Vision 2030. With this new approach to how we can partner with our customers, we've been able to build our pipeline to £10.1 billion so far, the largest we've seen in a decade. In relation to colleagues, during 2023, our people and culture function reorganised to ensure that it is structured to confront the current and emerging workforce challenges that impact government service providers while continuing our work to progress inclusivity, equity and diversity. Quite simply, colleagues are and have always been at the heart of Serco. our engagement continues to be a marker of our success in retaining and growing our colleague network. And in 2023, our engagement improved to 71. Our commitment to the safety and wellbeing of colleagues remains foremost in our efforts to protect and deepen the relationship between Serco and the people whose dedication and commitment stands behind its success. Although our LTIs last time injuries reduced in 2023, as I've said, we now have an ambitious target to reduce them further by 50% over the next three years, consistent with our longer term commitment to make zero harm a reality in our business. And finally, we're seeing external recognition of our commitment to colleagues, such as being named on the 2024 Forbes Best Large Employers list. In terms of capabilities, Nigel's referenced before the margin improvement. We have a business plan to deliver 30 basis point margin improvement through a rigorous approach to operational efficiency over the next year. Our mantra is now mobilize, stabilize, and then get below the headlines of every contract to drive operational improvement. we've begun also to optimise our existing IT platforms and align investments to business and growth needs, such as selectively piloting AI systems. In December 23, we signed a strategic MOU with Microsoft UK to drive Serco's digital transformation, to leverage opportunities for co-innovation and joint business development, And this includes a pilot project to use Microsoft's Vision AI platform to automatically identify, classify, and retrieve prisoner property, which is aimed at improving significantly the processing time, as well as enabling the identification of the indicators of bullying and gang activity in custodial environments. Once this platform has been fully tested, it is our intention to deploy it across our entire prison and immigration network globally. And our first technology pilot in 2023 with Autogen AI, a UK-based startup, has already resulted in a global partnership agreement. Initial tests during the pilot have shown a very significant time saving when managing and collating knowledge about Serco's capabilities worldwide. We've already used Autogen's AI technology over 6,000 times in the pilot phase just in the UK and Europe, and it will now be deployed globally to support better knowledge management across the group. And so to conclude, we're building a resilient international platform for growth in the government services sector as evidenced by the largest pipeline in a decade. We've aligned our business to a renewed purpose, vision, and mission, which has resonated with our colleagues, our customers, and broader stakeholders. And our execution focus on our strategic enablers of customers, colleagues, and capabilities has already delivered results and will continue to improve profitability as evidenced by our guidance for 2024. All of this is aligned to our medium-term goals to continue to create shareholder value. Thank you.