Serco Group plc

Well, good morning everyone. I'm Mark Owen, Group Chief Executive, and I'm joined this morning by Nigel Crossley, our Group Chief Financial Officer. Thank you to everybody here 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 first half results for 2024. I also acknowledge John Ristian, Chairman of the Serco Board, who is with us today. As required, I ask that you note the disclaimer on the screen, which as usual appears in the booklets that you have with you in the room. Our plan this morning is for me to provide a brief introduction of where we are before handing to Nigel to take you through the detail of the first half financials. I will then come back and speak briefly on the defence sector before wrapping up and moving on to Q&A. We provided a pre-closed trading statement on the 27th of June and the detail you will see in the stock exchange announcement released this morning and in this presentation is in line with that pre-closed information. Coming into 2024, we've focused our business agenda on the execution of initiatives which prioritised service excellence to our customers, the safety and productivity of our colleagues, actively managing our portfolio for performance and delivering profitable growth over the medium term. The work in all of these areas is ongoing, but we are pleased with the progress we've made so far, and encouraged by the fact that as we execute, we're finding more opportunities to improve efficiency and effectiveness across our business. I wanted to touch on just a few examples of this progress to show you why we entered the second half with momentum, and why we have the confidence to have upgraded our profit guidance for the full year to £270 million, delivering a year-over-year improvement of 9%. The full-year profit outlook includes a second half that is 25% higher than the same period last year. We flowed that profit improvement through to our cash outlook, And as you will hear shortly from Nigel, overall our financial position is strong and we are clear about the application of our capital allocation framework to create shareholder value. And in that regard, you will note the continuation of our share buyback program as well as the approval by our board of an interim dividend of 1.34p representing an increase of 18% year on year. In terms of our progress, when it comes to serving our customers well, we're never complacent, but our operational track record has been good across our international portfolio during the period. Our discipline on M&A extends to managing post-acquisition outcomes and during the period we closed and are integrating European home care as it continues to grow through the first four months as a SoCo business. We've also fully integrated Climatise in the Middle East. In the UK and Europe, the division managed previously announced contract exits extremely well while also responding to ongoing demand for immigration services and successfully ramping up significant new work for the UK Ministry of Justice as well as for the Department for Work and Pensions. I wanted to highlight the mobilisation of HMP Fosway, a new-built prison in England which, against an accelerated schedule, is already operating at maximum safe capacity in order to help the MOJ with the capacity challenge you are familiar with from recent media coverage. I also wanted to note the transition to the new phase of our work in CMS. where our team was day one ready, not only to ensure the continued delivery of critical eligibility services for US citizen healthcare, but also to continue the innovation, which still sees CMS as a benchmark contract across the group for technology enabled productivity. Similarly, we've seen effective mobilizations for a number of other contracts across the divisions. As you will be aware if you've attended any of these sessions before, the safety and wellbeing of my colleagues is a key priority. I'm pleased to say that compared to the first half of last year, we've seen a drop in serious safety incidents by 18% as we continually analyse and act to make Think Safe, Work Safe and Home Safe a reality for every colleague, every day, everywhere across Serco. We've also seen our vacancy levels reduced by more than 50% since its peak, and we are selectively deploying AI platforms like Autogen and Synthesia to increase the value of colleague work. And this takes me neatly to the third area I wanted to highlight, the work we've done on margin improvement. While we always understood the organisational and service impacts of high attrition, we cast an economic lens over that in the second half of last year. A data-driven approach to understanding and addressing the drivers of attrition has helped us to reduce voluntary attrition in our business by 30% from its peak, and the work continues to improve that further. We've implemented plans to remediate the underperforming contracts in our portfolio, and we have going on at contract level across the group to target marginal gains, all of which has enabled the delivery of the 6% margins reported in the first half. And finally, we've had order intake of 1.9 billion with some key awards still pending. In the few weeks since period closed, we've had some further awards, including a new 320 million US dollar contract for the US Army Corps of Engineers to upgrade defence infrastructure in Greenland. You can see we've got a strong pipeline of opportunities that remains above 10 billion pounds. And of course, we remain mindful of the potential timing impact of elections in 2024. While the sheer number of elections in this single year is notable, we're confident that the fundamental drivers for demand for Serco capability remain strong. Our customers face challenges with fiscal constraints, demographic and social challenges, global migration patterns, aging infrastructure, and geopolitical risk, amongst others. Serco's geographic and sector diversity means that we are well placed to respond to these demands by bringing together the right people, the right technology, and the right partners. And just before I hand over to Nigel, I would like to extend my thanks to all Serco colleagues for the hard work, dedication, and shared values that makes all of this possible.

And with that, I'll hand over to our CFO. Thank you, Mark, and good morning to everybody.

So I'm going to start off with a financial overview of our results for the first half, which were stronger than we anticipated at the start of the year. Revenue was 2.4 billion pounds with an organic decline of 5%, reflecting the exit of a number of lower margin contracts as we have set out previously. And as these impacts drop away, we expect to see the improving trajectory in the second half and therefore ending the year down around 3% on an organic basis. And our acquisition of the German immigration business, European Home Care, accounts for most of the 2% acquisition revenue growth in the period. Margins in the first half of the year at 6% is at the top end of our medium term guidance of 5% to 6%. Despite the impact of new terms on the rebid of the CMS contract in North America and lower volumes on our Australia immigration contract. And this margin has been achieved through actions to improve efficiency and productivity across our portfolio, which I'll cover in more detail in a few slides. Underlying earnings per share was down 9% compared to last year on higher interest costs and additional tax taken in the first half. For the full year, we expect the tax rate to return to 25% and EPS to report around a 6% year-on-year increase. And finally, our return on invested capital remains strong at over 20%. And this is after completing two acquisitions in the first half of the year. So let's have a look at the performance by division. And I'm going to start off with North America, which delivered a very strong margin in the first half. Organic revenue did decline 3%, as we had expected, reflected the new CMS terms in citizen services, and the exit from some low margin work on Colorado Springs contract in transport. The division will return to growth in the second half as this impact passes through. The defense sector grew modestly with a strong comparator from 2023, and there's also good growth from our employment services business in Canada. Underlying operating profit margin was 10.5%, and we expect this to remain at around 10% for the full year. And this is particularly pleasing in the first full year, the CMS rebate contract with its new scope and terms. And this has been achieved through productivity gains across the portfolio, with CMS and the Ontario driver examination contract being the standout performers. Order intake of 0.8 billion pounds delivered a healthy book to bill of 130%, which will fuel the second half growth. In the period, we secured a further employment services contract in Canada and retained our next gen IT support for the US Air Force. We successfully rebid our work providing customer support to the Pension Benefit Guarantee Corporation. And in July, as Marcus Peter said, we won a $320 million four year contract to upgrade defense infrastructure in Greenland. And also importantly, the Americas pipeline remains strong at £3.4 billion, with defence accounting for most of those opportunities. So moving on to the UK and Europe, which has also delivered an excellent margin performance in the period. And as expected, there was a very modest decline in revenue as the business managed the exit of low margin work such as Caledonian Sleeper and Barts Health Trust. And this was largely offset by the acquisition of EHC, which has traded well in the first few months of our ownership, alongside strong performance in our existing European immigration business. Demand for UK immigration services was modestly reduced in the first half, and this is expected to decline further in the balance of the year. And this will be partially offset in the second half by the ramp-up and mobilisation of new contracts. Underlying operating profit increased 19% to £83 million. Of particular note was the progress made on margin, which improved 110 basis points to 6.8% in the period. And this was achieved through improved efficiencies in our back office and overheads, the exit of lower margin contracts, better productivity in justice and immigration, and profit improvement plans across our health portfolio. Order intake was £0.8 billion with some good retentions and extensions including HMP Ashfield and the DWP restart contract. It was a quieter period for new wins but importantly the pipeline remains healthy at £4.5 billion with a good range of growth opportunities across justice and immigration, defence and citizen services. So moving on to Asia Pacific, where the new management team has started to execute the plan to stabilize the business and to position it for future growth after a difficult 2023. The turnaround plan is on track with a number of successful activities delivered in the first half, which will contribute to improve financial performance in the second half of the year. Organic revenue declined 10% in the period which reflected lower volume variable work, particularly in our immigration contract, as well as contract ending in citizen services and facilities management, as we had set out at the full year results. Underlying operating profit and margin both reduced, reflecting the lower revenue, as well as the mixed impact from immigration, which has continued from the second half of last year. There's also been investment in the first half to transform the cost base of the division and to improve the performance of some of the division's largest contracts. Good progress has been made and we're starting to see some benefits come through in the monthly results. While there is more to do, we encourage that this will deliver more benefits in the second half and going into 2025. And the pipeline for new work at £1.4 billion includes the Defence Base Services, which is a large integrated facilities management contract for the Australian Defence Force. And finally, the Middle East has delivered good growth, an excellent book to build, and further developed its strong pipeline of new opportunities in the first half. Organic growth was 5%, and this was delivered through new business, on-contract organic growth, and advisory work, more than offsetting the impact of the successful retention of the MeLabs contract with new scope and terms. And MeLabs also contributed to the reduced overall levels of profitability and margin in the period. We anticipate progress and margin in the second half as we continue to position the business for higher margin growth in the most dynamic markets in the region. Order intake of 125% book-to-bill was strong, particularly following last year's excellent performance, and this included a further fire and rescue contract in Saudi Arabia. And the pipeline of new work remains healthy across all sectors, both in UAE and in Saudi Arabia. And I want to spend a couple of minutes talking about our margin progress in 2024 and over the last few years. And as you can see on the screen, since a low point in 2017, margins have more than doubled through to 2024, when for the first time we expect to close the year with margins in the top half of our target range of 5% to 6%. We've increased margins through various means, including turning loss-making contracts profitable, leveraging overhead and shared service costs as revenues have increased from a low of 2.8 billion to 4.8 billion today, as well as our higher margin North America region growing as a proportion of the group. And as we have set out at the full year, and Mark mentioned earlier today, we are focused on driving the productivity and efficiency culture across the organisation. which underpins both the sustainability of future margins, as well as supporting the growth of the business with competitive cost structures. This includes a broad range of plans and activities specific to each region. In North America, our CMS contract is our global benchmark for efficiency and work continues under the new contract structure, alongside retaining contracts at appropriate margins and controlling our indirect costs. In the UK, work began in 2023 to improve the productivity and remove inefficiencies in our back office and shared service environments. This has delivered some benefits in 2024 and there is more to do. We've also established a focus on continuous profit improvement plans across the portfolio and these have already delivered some benefits in the first half. In Asia Pacific, the new management team are optimising the central costs and addressing underperforming contracts, both commercially and through self-help measures. We see further opportunities to reduce the wider costs of the business, including operational measures such as reducing employee attrition. And the Middle East is actively changing the shape of its portfolio with greater opportunities to deliver services to customers' higher value, higher growth areas, as well as finding opportunities to deliver on-contract organic growth. So overall, we have made good progress on margin, and we continue to focus on a broad programme of initiatives helping us to underpin our medium-term margin target of 5% to 6%. Moving to cash, our cash generation continues to be strong in the first half at £75 million of free cash flow, with minimum working capital outflow. We're on track to deliver £150 million of free cash flow in the full year, with a cash conversion in line with our medium-term objective of 80%. An adjusted net debt of £131 million results in a leverage of 0.6 times EBITDA at the end of June. This comes after nearly £60 million of the £140 million share buyback being completed in the first half, £90 million in net acquisition spend, as well as the final dividend for 2023. Subject to any further M&A in the second half, we expect the full year net debt to be around £165 million or around 0.6 times leverage. And in the context of low debt and good cash conversion, there are no changes to our capital allocation framework. Our first priority is to invest in organic growth. And in the first half, there have been investments in growing our pipeline and in opportunities to improve efficiency and productivity across our portfolio. Second, we have announced today an interim dividend for 2024, which is an 18% increase compared to last year. Our third priority is acquisitions, and we have the balance sheet capacity to execute further M&A if the right opportunities are available. In the first half year, we closed two acquisitions, and we continue to look for other targets and opportunities that can support future organic growth, while always maintaining our discipline on business models and valuations, as Mark has already spoken about this morning. And our fourth priority is return surplus capital to shareholders. And there's still around £80 million of the current share buyback to be executed in the second half of the year. So finally, on 2024 guidance, which is unchanged from the June pre-close statement, where we upgraded our expectations on profit, cash and net debt by £10 million for the full year. For revenue, we're expecting a stronger organic revenue performance in the second half, as some of the contract exits fall away and material new contracts such as electronic monitoring in the UK and the defence opportunity in North America begin. We forecast revenue of around £4.8 billion and an organic revenue contraction of approximately 3% for the full year. Underlying operating profit guidance of 270 million pounds equates to a 5.6% margin, which is 50 basis points higher than 2023. Margin in the second half will be materially stronger and up around 100 basis points on the second half of last year. This is driven by multiple factors including the ramp up of new contracts such as HMP Fosway and the Canadian Employment Services contracts, the acquisition of European Home Care and productivity and efficiency initiatives across the portfolio. And these will be partially offset by the reduced volumes within UK immigration. We expect cash flow to remain strong with guidance of around £150 million, and this is equivalent to 80% trading cash conversion in line with our medium-term ambitions. And finally, both net finance costs and tax guidance remain unchanged. So on that, I will pass back to Mark.