Serco Group Plc Sp/Adr

Good morning everybody, it's Rupert here and we will just go rattle through our results in the usual fashion. I'll just do the numbers and I will do the operational side. It's been an extraordinarily strong first half. where a lot of the good things that happened in 2019 came to fruition in 2020. Revenue was up 24% with 15% organic growth. I think it's been many a year before one imagined these businesses could produce 15% organic revenue growth. underlying trading profit up 53% and our margin continuing its journey up to 4.3%. But I also want to say that whilst the COVID-19 has had actually relatively little impact on our underlying trading profit, in fact, zero pretty much, it's had quite a big impact on our revenues with 130 million of additional work offset by 50 million of downside where we've lost revenue in contracts. So net about 80 million, but the profit impact has been flat. But underlying that there's been enormous operational performance going on to deliver huge mobilizations. 15,000 people recruited to support governments around the world. 7,500 tracers recruited and mobilized in a period of six weeks. And two days ago, we performed our half millionth test on the drive-through mobile testing stations. And the important thing for us is that our people, our processes, our system, and indeed our strategy and our organizational approach, which we describe as loose-tight, actually responded very well to the challenges. Pleasing was that we, in a time when Fairly customers were concentrating on other things, and there was a lot going on for them. We ended up with order intake slightly above revenue, so yet again 100% book-to-bill, and our order book increased to £14.5 billion. Our balance sheet is very robust. We ended up with lower debt than we were actually expecting. And Angus will explain why to you later. And we are reinstating our 2020 guidance, which you'll remember that we came out in late June in an unscheduled update to tell people that we were reinstating guidance. If you go to the next slide, you'll see something of how this journey has been. And if we hit the middle of our guidance range for UTP, it will represent a 27% compound growth in profits between 2017 and 2020. So consistent progress on profits. I'm now going to hand over to Angus, who will take you through the numbers. Thank you, Rupert.

Morning, everybody. Let's start with the income statement. Revenue of £1.8 billion is up 24% in both reported and constant currency. This comprises 15% organic and 9% from the acquisition of NSBU in August 2019. Of the 15% organic revenue growth, around 5% or £88 million is COVID-19 related, comprising £130 million of new business offset by around 50 million of COVID-19-related revenue decline on impacted contracts. The net currency impacts during the first half were minimal, and the detail and sensitivities are shown in the slide. UTP grew by 53% to 78 million. Of the 27 million pounds of UTP growth, 10 million came from the NSBU acquisition in North America, in line with our expectations at the time of the deal. COVID-19's impact in UTP was almost net neutral, but as with revenue, there were large swings in different contracts across the business. Consistent with full year 19, UTP of 77.6 million is lower than trading profit of 80.5 million, reflecting the exclusion from underlying of 2.9 million of contract and balance sheet review benefits arising from OCP provision releases. This ensures that we continue to give an accurate picture of true underlying performance. Underlying trading margin improved by 90 basis points to 4.3%, compared to the 3.4% in the first half of 2019. The UTP margin improvement came from keeping a tight control on SG&A costs, which grew 4% in the previous period, as compared to revenue growth of 23%. Contract margins also improved by 30 basis points as the new large contracts transitioned from mobilization to trading profitably. On the negative side, joint venture profits were 6.5 million lower, largely due to the impact of COVID-19 on the operations of Mersey Rail, which equates to a 50 basis point reduction in group margin. Turning to revenue. Organic revenue of 15% was driven by strong performance in our three biggest businesses. The headliner was ASPAC, where organic revenue grew by 25%, coming mainly from recent contract wins, notably the contract to provide health services to the Australian Defence Force, one in 2019, as well as other newly operational contracts, including the Adelaide Romand Centre, a little bit of Clarence Prison, and the Department of Human Services. Organic revenue grew by 19% in UKE, with 100 million of growth arising from the impact of COVID-19-related contracts, notably testing centres, test and trace and call centre work, supporting NHS 111 and universal credit, partially offset by revenue loss, which occurred mainly on our leisure, rail and ferries contracts, Additional UK e-growth was generated in the new AASC Asylum Seeker contract, where volumes also exceeded our expectations and, to a lesser extent, our recently won Gatwick IRC contract. In North America, organic revenue grew by 8%, with strong performance from the FEMA contract, which started in the second half of 2019, and further growth coming from higher CMS volumes offset by lower revenues on our driver examination services contract in Ontario as the driving centres were closed during Q2 due to COVID-19. And finally, lower ship and shore modernisation revenues. Organic revenue in the Middle East fell by 2% due to the impact of COVID-19 on our air traffic control and airport FM businesses. UTP for the group of 78 million represents both headline and constant currency growth of 53%. Underlying trading margin improved by 90 basis points to 4.3%. The strongest growth was recorded in UKE where UTP grew by 11 million or 74% to 27 million. This growth arose from strong performance in our justice and immigration and citizen services businesses. with the biggest contributors being the ASC asylum seeker contract, COVID-19 testing and trace, and COVID-19 mobile testing centres. These latter contracts are at lower than usual margins, reflecting the nature of the COVID-19 related work. This growth was offset by some negative COVID-19 profit impacts across other business units, notably health, transport and leisure, which all experience disruption, whether through the closure of leisure centres, high rates of absenteeism, or reduced passenger and service volumes on our rail and ferries contracts. In addition, financial support has been received from some of our customers to ensure the continuation of underutilised services, which has come in the form of emergency measures agreements reimbursing higher contract costs. The furlough benefit is around 5 million in the first half, most of which relates to our leisure centre workers who were furloughed due to the closure of all our UK leisure centres. Some of our staff were able to be redeployed into other contracts, but in total we have some 2,500 staff currently furloughed. 39 of our 49 leisure centres have recently reopened, and 650 of our furloughed staff have returned to work, with many more expected to return in the next few weeks. subject to any change in government policy. As staff come back into employment, we are not applying for the £1,000 per employee bonus that has been offered for re-employing furloughed staff. Furlough has worked in the way it was intended from our perspective, and has enabled us to keep employees on the payroll that we would otherwise have had to make redundant, as we had no revenue stream with the leisure centres. which means that we have qualified and experienced staff to reopen leisure centres quickly and safely. Overall, our margin in UK and Europe improved by 110 basis points to 3.4%, in large part due to the transition of our asylum seeker contract, moving from mobilisation into operating profit. The Americas also performed very well. growing UTP by around £15 million, or 40% in constant currency terms, to £53 million. Around 10 million of this UTP growth came from the NSBU acquisition, which completed in August last year. We're pleased with the progress we're making with NSBU, and it remains on plan from a profitability perspective, with the Canadian business continuing to perform particularly well. During the first half, our CMS health insurance eligibility contract continued to benefit from unusually high volumes of variable work. This work was recently completed, and we expect activity levels and profitability to be lower going forward. Beyond NSBU and CMS, the broader Americas business generally performed well, with the standout being our recently won FEMA contract, where we continued to experience high activity levels. From a margin perspective, the Americas continue to have an underlying trading margin around 10%, a level not expected to sustain going forward given the non-recurring nature of some of our CMS work. UTP and ASPAC increased by 19% in constant currency terms to $13 million. This increase was largely the result of the first-half contribution from the Australian Defence Force health contract which was incurring mobilization costs in the first half of 19, as well as the continuing strong performance of the services, which was helped to a small extent by some extra COVID-19 work. Reported UTP margin was broadly similar to last year at around 4%. UTP and constant currency in the Middle East declined by 4% to 7 million, reflecting primarily the disruption caused by COVID-19 on air traffic volumes, leading to a 20 basis point margin fall to 4.3%. Turning to the bottom of the income statement, finance costs increased by £2 million to £13 million, largely due to the additional lease interest from bringing on balance sheet the housing leases associated with our AASC asylum seeker contract. The blended average cost of our gross debt in 2020 was lower at 3.91% as compared to 4.51% in 2019, reflecting the higher utilization of the revolving credit and acquisition facilities, which have lower interest rates than US private placement debt. The underlying tax rate was 26%, two percentage points higher than the same period in 19. This is due to the mix of where profits were made primarily a higher proportion of taxable profits being earned overseas, where the blended tax rate is higher than the UK at around 30%. Underlying profit before tax generated from these overseas operations accounted for more than 80% of total underlying profits in 2020, thereby pushing up the effective rate relative to the UK statutory rate. Over the medium term, we expect the underlying effective rate to remain around 25%, with the cash tax rate a little lower due to the benefit of the Goodwill amortisation in the US. Cash tax will also benefit in the longer term from the £760 million of off-balance sheet losses in the UK. Underlying diluted earnings per share grew by 47%, from 2.62 pence to 3.86 pence. The weighted average number of shares increased from 1.15 billion in 2019 to 1.24 billion in 2020, largely as a result of the annualising effect of the May 19 share placing of 111.2 ordinary shares to finance the NSBU acquisition. Statutory earnings per share now diluted basis, which reflects non-underlying items and exceptionals with 5.66 pence, as compared to a loss per share of 0.15 pence in the prior period, which reflects the fact that we've pretty much completed not just the SFO settlement, but also the large historic exceptional restructuring costs. I'll come back to dividends later. For the first time in my tenure, turning to exceptional items, not only are OCPs conspicuous by their absence from the slide deck, Exceptional items barely merit a mention. In fact, during the first half, these were a net £13 million credit in 2020 as compared to a £31 million cost in the prior period, largely arising from our £23 million deferred prosecution agreement with the Serious Fraud Office. The exceptional credit arose from the disposal of our share in the Biopath Pathology joint venture following the loss of a rebid. We have now completed the transformation stage of the strategy implementation, and as promised, there are no exceptional restructuring costs to highlight. Process improvement, however, continues apace, notably in improving our HR platform and capturing the benefits of our own speedy boarding process for new employees, which we benefited from during the rapid sourcing and onboarding of 15,000 people in a matter of a few weeks for testing and tracing. We will continue to improve our systems, processes and structures, but we expect the costs associated with this to be charged to underlying trading profit. Our focus continues to be on operational improvement, reaping the benefits of our procurement transformation and completing the rollout of workforce management. The benefit of our extensive restructuring and transformation and the new shared service platform was illustrated clearly during the first half. not only from our ability to grow with minimal incremental overhead costs, but also from an operational perspective, which allowed us to respond in an agile way to both the opportunities and risks arising from COVID-19. Having said in February that for the first time in five years the Board was recommending the payment of a dividend, who would have imagined that in a matter of a few weeks, we would be withdrawing the dividend resolution to pay a one pence per share final dividend for 2019. This decision reflected our caution vis-à-vis the impact of COVID-19 as we withdrew guidance for the year and the fact that it would, in our view, have been inappropriate to pay a dividend to shareholders having utilised government liquidity support in the form of £38 million of VAT deferment. Since then, the business has continued to perform well. We've reinstated guidance for the year, and our leverage ratio is below one, even taking out the benefit of government liquidity support. However, significant uncertainty remains, and there is still a wide range of potential outcomes, and therefore prudence dictates that we continue to utilize the government tax deferment support, probably into the fourth quarter. when we hope to repay taxes earlier than required. If circumstances allow, and we can sensibly pay back this liquidity support before the end of the year, the Board believes it will then be in a position to consider whether it should distribute all or part of what would have been paid as the final dividend in respect of 2019. Under the same logic, the Board has also decided to defer a decision on whether to pay any interim dividend in respect to the first half of 2020 until the fourth quarter as well. As the Board considers its position on dividend timing and quantum, it will continue to be mindful of the longer-term requirement to maintain a prudent level of dividend cover, the potential to enhance value through bolt-on acquisitions, and the need to maintain a strong balance sheet, which is key for Serco in the long term. I will now pick out some of the key moving parts cash flow-wise. Free cash flow benefited from £49 million of government liquidity support in the form of tax deferment, most notably £38 million of UK VAT. Of this £49 million, £45 million is in working capital, with £4 million coming through tax paid. If we exclude this £45 million, we had a net working capital outflow of £25 million on a revenue increase of £346 million. Free cash flow for the period is $32 million, excluding the tax deferment benefits of $49 million, which compares to free cash flow of $0.4 million in the first half of 2019. Underlying trading cash flow conversion after excluding the tax deferral benefit is 78%, higher than the 56% of the previous period. In terms of the rest of the cash flow, many elements are self-evident. However, a number require little commentary. The increases in depreciation impairment of leased assets and the capital repayment of lease assets are a result of the new AAC contract being accounted for under IFRS 16, whereas last year at the same time, the predecessor Compass contract was accounted for as an operating lease, as it only had a few months to run at 1 January 19, the adoption date of IFRS 16. CapEx in the first half was 21 million, an increase of 9 million in 2019. Almost all of this increase relates to the timing of the purchase of new vehicles as part of the mobilisation of the new prisoner escorting contract in the UK, which are still under construction and once completed, they will be sold and leased back in the second half. Looking now at net debt and leverage. Adjusted net debt was £143 million, as compared to the pro forma June 2019 number of £201 million, which excluded the £139 million of equity proceeds subsequently paid out to complete the NSBU acquisition. However, it should be borne in mind that this net debt number benefited from the £49 million of tax deferment as previously discussed. Excluding this, adjusted net debt would have been £192 million, which is £23 million lower than the £215 million at the end of 2019. Daily average net debt was £283 million, with a peak of £356 million. The bigger than usual difference in terms of average to period end net debt was caused by three main items. Towards the end of the half year, as I previously referred to, tax payments of $49 million were deferred. Secondly, there was a material catch-up in May and June in US receivables, primarily relating to delays in payment in the FEMA contract caused by high activity levels and new billing processes. Thirdly, there were significant receipts towards right at the end of the period, relating to our testing and our test and trace contracts, which had been delayed given both the customer and our focus on mobilisation and early operation. Adjusted net debt excludes all lease liabilities, which were £360 million at the end of June. With these lease liabilities included, reported net debt was £503 million. Covenant net debt excludes these IFRS 16 lease liabilities, and at June 20, the leverage ratio was 0.7 times as compared to 1.4 times on a pro forma basis in June 19. Excluding the tax deferment benefit of £49 million, the underlying ratio was still below 1 at 0.9 times. In terms of our liquidity, we remain in good shape. We have no off-balance sheet debt in the form of receivables or payables financing. Our pension is an accounting surplus and a very small actuarial deficit. The onerous contracts are close to ending. We continue to pay our creditors to government guidelines. Our deferred revenue is trading in nature, and our JVs are purely operational. On top of that, our available liquidity at the half year was in excess of £360 million. Finally, let's look at the outlook and modelling assumptions. There are no changes to the guidance that we gave in June at the pre-close update. We expect revenue for 2020 to be around 3.7 billion, which represents organic growth of circa 9%. In terms of underlying trading profit, we continue to guide to a broader range than normal of 135 to 150 million. Because of the uncertainty associated with COVID-19, Our COVID-19-related contracts are short-term in nature, with variable volumes, which are difficult to forecast. Similarly, it is difficult to predict how the parts of our business that have been negatively impacted by COVID-19 will continue to be affected by the virus. In addition, during the second half, we will transition the new PECS contract and ramp-up activities in the Clarence Correctional Centre in ASPAC and the Gatwick IRC in the UK. We expect net finance costs to be around £27 million, reflecting the full impact of AESC on IFRS 16 lease interest. We expect closing adjusted net debt, which excludes leases, to be around £200 million, with covenant leverage at the lower end of our target range at around one times. The rest of the guidance is there for your reference. And thank you for your attention, and I'll hand you back to Rupert.

Thank you, Angus. So starting the operational review with the usual highlights and lowlights slide, I'm going to start with the lowlights and start with the news that from our workforce we've had seven colleagues die. related to COVID-19 out of a workforce of about 55,000. And not only is that a tragedy for their families and for them, but I think that it also serves to remind ourselves of the bravery of the people who turned up to work knowing that some of their colleagues who worked in prisons or hospitals had actually died of this scarcity disease. Moving on, bid losses. We lost a big pathology bid in our joint venture at Viapath, but then managed to exit from that joint venture with a gain where we sold our interest to the other shareholders. We lost a big contract to do air traffic controller training in the US for the Federal Aviation Authority, which was obviously a disappointment. More generally, some of the very largest tenders have been pushed back. And we'd have to say that a lot of our customers are somewhat distracted at the moment. But that's not necessarily, you know, it pays us, if we're the incumbent, it tends to mean that the contracts will get extended. The pipeline has got a bit weaker. We're not worried about that. That's the city pipeline. The gross pipeline, the wider one, is actually still pretty robust. It's been, you know, we want to continuously improve all the processes in our businesses and particularly out in the contracts. It's been difficult to maintain that continuous improvement at the time of lockdown and minimum travel. And the delivery of the icebreaker has been further delayed by there was an outbreak of COVID-19 at the shipyard, which has led to further delay, and we have actually decided to tow her out of the shipyard, and she's now... on her way down the Danube and out to the Black Sea to bring her to Europe to be finished off. But I think the customer is very understanding of what's been going on there. We've been subject, as is the case, you know we're pretty robust about this, to a lot of negative trends. press on particularly Test and Trace. I think that we are actually doing really well there. Of the people who we get to speak to, we are persuading 96% of them to isolate themselves, which is very good. and I think that the customer is in no way displeased with what we are doing, but we have a job of work to do on the PR front there. Health continues to be difficult, not only because we've had to put in a lot of additional resources to backfill people who were absent, but so there's been quite a lot of additional cost in the business, and the government is, quite rightly, winding up the efforts on its PFI auditing, which always results in a lot of work for us. So those are the main lowlights. Let's move on to the highlights. I'm going to do three or four slides on COVID-19, because it might be of interest to you seeing a little bit of really how it does affect a business like ours. But I think for me the highlight has been that our people, our systems, our processes have proved themselves to be incredibly scalable and agile. As I say, we stood up 15,000 people during the period. And this idea of a highly flexible business model where we can move people from sector to sector, and in particular maintaining presence in such as the onshore call centres that we had used to be regarded as something of the ugly duckling, and there are endless strategy review cases about saying how we should exit this if we can. It turns out she's the belle of the ball. and has enabled us to step up the level of service that we provide to government. Had we not kept that capacity and that presence in the onshore government-related call centre market, we might not have been able to do that. We've talked about the very strong financial performance. One wonders whether it could ever get better than that. Probably not, but it's a very chuffing scene, both organic and inal, and it's really coming together. And 100% book to bill on the order intake in a difficult environment, key wins being the extension against fierce competition and indeed a procurement challenge. for Northern Isles Ferries. We not only won the Gatwick Immigration Removal Centre, we actually went and took it live during a period of lockdown We've won a very long extension to the Fiona Stanley Hospital and the GODSS and Fidingdale's, two important deep space contracts, one doing electro-optical deep space exploration for the US government maintaining equipment for that, and the other is the RAF Fidingdale's. I mentioned Gatwick IRC mobilising that during lockdown, but of course we also had Clarence, which went live in July, started taking prisoners in July. That's been very successful. And in August we take live the new PECS contract, so we've been busy on that front. In terms of the U.S., in NSBU and METS are performing in accordance with a plan. And interestingly enough, 40% of the pipeline for the U.S. business now comes from work for that unit. As Angus mentioned, FEMA's running better. We've contributed. done very well from additional volumes in the CMS contract, which carried over unexpectedly into the first few months of this year. On asylum seeker accommodation, we've had to find 2,700 additional places for people since March, which has been quite a test. And we've also been doing, on the management side, we've had a series of new appointments to our exec, which is Kevin Craven, retiring from the full-time role in the UK business, Mark Irwin coming from Australia, Peter Wedding stepping up to run the Australian business. And at the other end of the scale, for our 40 graduate positions, we've had 7,500 applicants, which I think tells you something. about Serco being an employer that has a good reputation. The other highlight has been the way that necessity being the mother of invention, we've had to go and re-look at a lot of our processes, including the interminable process of hiring somebody into Serco that used to take weeks or months. We've now got a new process called speedy boarding, where literally within weeks we are able to recruit people. So we're pleased that despite all the issues to do with COVID-19, we have still continued to improve our processes, our central processes, and make them run better. To the next slide now, just talk a little bit about COVID-19. And I want to start it by saying that from the get-go, and I think that this was a very important thing to say to the outside world, to our customers, but also to our colleagues within the business, is that it was our priority, our top priority, was to support the delivery of essential public services. These are not things that we can walk away from. And within that context, of course, we would do all we could to protect our employees and the interests of our shareholders. But throughout this, we have put front and center the need to support and sustain the delivery of public services. And this raised a series of questions, which you might call generic or group level, is how the hell do we manage ourselves in this environment? Would it be the same or different impact by different country? How many people are going to turn up for work? At what level of attendance do we find that we simply can't operate? How can we scale up the ability to provide secure IT in people's homes? How long is the situation going to last? Will our customer and government be able to function at all? What would happen to our liquidity? And what PPE do we need and how fast do we need it? Now, we had been fortunate to have actually done quite a lot of work on business continuity planning. And we have regular sort of emergency exercises where people turn up to work and suddenly find that all the networks have been disconnected or some terrible crisis has happened. So we did quite a lot of that. And the plans, the business continuity plans actually worked. well, slightly to everybody's amazement, the loose tight devolved structure worked really well. This is my favourite thing about managing. You devolve management responsibility as close to the customer as you can, but it is within tramlines of quite tight devolved authorities. that has worked well because it's given people, contract managers, the ability to go and respond to customer requirements in the particular way that they need to, but in a way that we can have confidence is not going to cause us problems. 90% of our, everybody worries about home working, but actually 90% of Serco employees work on the front line. They work in prisons and hospitals and in call centres, so we had to bear that in mind, that the earthquake that was working from home actually only applied to about 10% of our people. Government is actually continuing to function well. They've been paying their bills. Liquidity has been strong. And one day we will write a story of all different war stories about PPE, including a container load of sanitizer and PPE that have been painfully bought from China at vast expense that then got stolen at the port of Calais, setting our plans to null. So we've had the same sort of issues there. Moving over to just give you an idea of what happened on absence, I said that around about 30% of these people's businesses become really difficult to run. And in March, when it first broke and people were being told to isolate and to shield and everybody was nervous, we were running at about 28% absence rate. which was very hard to manage, particularly in our healthcare business. But that fell very rapidly, and we're now down where we are, down to about 7.2%, of which 2.3% is COVID-related. So you say underlying 5%, which in the summer period is about normal. But it's been very interesting, that journey, how dire it was back in March. Moving on to each different sector, this was where the loose tight comes into, there were very few, in very few sectors were the questions exactly the same. In the hospitals it revolved around PPE, how we were going to be able to backfill a lot of the people, the absences, how much of the hospitals they actually wanted to continue services, would be able to get food. In prisons it was all about, do we go for lockdown? How are you going to stop it spreading within a prison because there was experience in places like Italy where it spread through prisons incredibly fast. Would we be able to do driving tests? What about the leisure centres? And it had some really strikingly different impacts. So in our environmental services business, which is basically clearing your rubbish bins, we've had a 25% increase in rubbish volume. because people have been at home and they're consuming a lot more stuff, they're getting a lot more cardboard boxes through those. Driver and test examination in Canada, we had to completely close as we did our leisure centres. On the other hand, the asylum seekers, because the Home Office stopped ending people's support, we've ended up in a situation where we have a one-way valve, just people arriving but nobody leaving. Call centres, we have customers who insist that their work is done on a physical site connected to their networks and not from home, but those call centres now find themselves with capacity reduced by about 70%, and now mercifully more and more customers are agreeing to home working. When you have to shift a nuclear submarine out of Farns Lane, how can you be sure that you're going to have a tug available? The answer is you have to take two whole tug crews and isolate them for 14 days beforehand. The logistics of it become immense. Our transport business, we've been running at much lower volumes on, obviously, Mersey Rail, Caledonian Sleepers and Lockwood Ferries, going to be by Metro. but also all the airport services businesses and mayor traffic control have also been hit. So moving to the next slide, it's been a huge operational test, not only for Serco but also for governments and our reaction when governments have said, can you help? The answer has always been, yes, of course we can. And we've helped in really diverse ways from setting up a field hospital in the World Dubai Trade Centre, to looking after about 1,300 Australian nationals returning from abroad in quarantine. And let me tell you, we're trying to keep 1,400 Aussies just back from holiday in a hotel where they can't drink. was quite a challenge, and the drain pipes were getting quite a lot of usage as people tried to climb up and down them. So we did that for the government of Western Australia. We've had increasing numbers of extradition cases where people coming out of prison, foreign national offenders can't be extradited, so we've got extra capacity being put in in Australia to handle And in the UK, as I mentioned, half a million tests that we've done on the drive-through mobile test centres. We're doing 25 drive-through test centres, 64 mobile test centres and 19 prisons. It's huge, the extent of the mobilisation that we have done. Overall, we think that moving to the next slide, that COVID-19 will be a net positive for our relationships with government. We have formed really close working relationships with people throughout government on this and I hope it's been a positive experience for a lot of them. I have utmost respect for governments here and elsewhere, how they've had to react to situations where the science was moving incredibly rapidly Today's answer was not yesterday's answer, and the consequences of taking wrong decisions were manifold. But I think what we've put in our statement is quite a lengthy thoughts about the long-term impact of this. And our view on this is that the four forces that we first introduced as a concept back in 20, our strategy review in 2014 and 15, is what drives government to want to use private companies. Fundamentally, the voices of this choir are going to be even louder. The choir that says that we need better health care, we've got demographic issues, public services are a really important part of our life, and we expect them to be of high quality, governments being massively in debt with large deficits, but also citizens not wanting to pay more tax. And all this is going to go and drive with even fiercer need, the need to deliver more public services of higher quality for less money. And I think that also the response of the private sector has been really strong in ventilators, Dyson, Babcock, McLaren and Panlon. We've got the Nightingale Hospitals being built by mighty InterServe, Balfour Beatty, Kier, the British Army, and with us with Louisa Jordan in Serco. I mean, fantastically good cooperations. and a greater expansion in hospital capacity in the UK than I think has been seen almost anywhere in the world. As a whole, the public and private sectors have worked really well together. Moving now briefly to the regional summaries, the UK and Europe are 19% organic grey, fantastic performance. Now part of that is about 100 million of that is COVID related but we have the new AASC contracts flipping from the loss making compass contracts and the mobilisation of AASC in the first half of last year flipping to what is now a profitable contract. The Northern Isles Ferry we won the extension but promptly went into lockdown so that was a but they've got over a billion pounds of awards in the first six months. In terms of pipelines, rebids and extensions, well, the test and trace contracts are being renewed on a kind of monthly basis, so that's a permanent job. We've got Harts County Council, the TUD contract, the Future Maritime Systems contract coming up for rebid, and we've also got the Skynet contract, bid satellite communications for which we lead the consortium called Athena with Lockheed Martin and others. We got a big bid that we're working on as a joint venture with Angie for the DIO defence infrastructure. We're bidding for new built prisons and also in Europe. America's summary, they had a huge year. Revenue up 46%, but 36% of that has come from NSBU. This is now our most profitable business. UTP growing by 42%. Quieter on the contract awards front in the first six months. But they've got a strong pipeline, and as I said, 40% of that pipeline comes from METS-related work. Moving on to ASPAC, 19% revenue growth, 25% organic, with 6% of FX headwinds, and the largest contributor to that was the defence garrison healthcare services, what we now call AHSC, which started in the second half of 2019, getting a full half effect of that. And the business has been doing well, and in particular mobilizing Clarence, They've got a lot of extensions coming up, including the DRPP immigration contract. That comes to an end, and that's extended at the end of next year. So we'll have to see whether they want to extend. They've got the right to another extension. A lot of work in call centres, the Department of Human Services. Acacia Prison is up for rebid, so they are busy on that. Middle East has had a difficult time. where a lot of their work is related to transport and clearly the volumes they had won just before COVID came along, a large contract to go do work for Dubai Airport FM, which probably closed, all but closed. And the volumes on air traffic control are clearly much reduced. And there's not been a lot to replace it. So they're doing really, really well. They're beating every bush to try and create new business. But it's been quite tough for them. Moving on to the summary and outlook. Frankly, this has been a very strong operational and financial performance. The people, the processes, the strategic positioning, the loose tight has all served us well during COVID-19. We're going to revisit the decisions around dividend in Q4, both for the withdrawn final and for the interim. and that will also partly be informed by whether we are in a position to repay the deferred taxes in Q4, which we hope to be. Short timeline look, there's a wide range of UTP guidance for 2020 due to there being frankly significant uncertainties, you can imagine, and that we think will persist into 2021. the government contracts that we've got that are generating extra revenue and some extra profit. are very short term and quite volatile and could well disappear. And we need to get a balancing act. We hope that when they do, as they will inevitably disappear, that at the same time the negative drags on our revenue, such as the closure of leisure and others, will correct themselves at the same time. But it's quite a balancing act to get. And we've seen these recurring outbreaks, how serious they can be in Australia and the US and now in the UK. This is a highly infectious disease. Long term, we believe that the four forces will be stronger than ever. But on the whole, within our business, we've said that one of the good things about it, we get This is not a business that's going to be disintermediated. I am confident that in 20 and 30 years' time, there will still be two people at night on G wing, that we will still have to have people cleaning up underneath people's beds and feeding people in hospital. And I think that while a lot will change, our processes will improve further. We'll have more home working and the like. But more will stay the same than will change. And I remember the saying of Jean-Baptiste Carr, who said a year after the French Revolution in 1848, « Plus ça change, plus ça ne le même chose. » And to end, just say, « Cirque. » I used to sign my email saying, « Cirque. » in private, and I stopped doing it for some reason. Not that I wasn't proud, but it just seemed a little dry. But after this half, we are really rather proud of what Serco has done. Thank you, and let's move on to Q&A. The questions will be taken on the phone line so that we can hear your voices. I have been told quite what that means in English. I don't know. But anyway, let's have your questions, please.

Thank you. So your first question today comes from the line of Sylvia Barker from JP Morgan.

Hi, good morning. Thanks for taking the questions. Firstly on the short-term guidance and just your thoughts into 2021. So obviously tenders are probably pushed to the right a little bit and we do understand the mix of short-term UK government work versus kind of potentially the longer lasting impact of travel and leisure. But maybe can you give some thoughts around the relative importance of these elements within kind of the whole picture of uncertainty? And again, on 2021, could you maybe remind us what profit uplift we should be expecting from things like PEX, Gatwick and Clarence in 2021 over 2020? And then net debt was a little bit better. Some of that seems to be timing, but could we maybe hope that the full year is a little bit better as well? Are you in a better position now than perhaps when you set the guidance in June? And then finally, just in terms of the long term and where you are seeing the potential for kind of COVID-19 related, maybe further outsourcing, Is that the UK mainly, or would you say that there are other parts of the world where you're seeing a bit of a shift as well? Thank you.

Well, let me start, first of all, in terms of, you know, we don't want to give out clearly individual profit numbers by contract. But, yes, you've identified three of the things that will get better next year. So, for example, during transition with IFRS 15, you know, we will incur a small loss in PECs during the second half. We've incurred a bit of a loss in the first half as we've gone through transition. And that contract will move from being loss-making in 2020 profit in 21, but just remember, Sylvia, we've not done the budgets yet. The budgets happen in quarter four, so I can give you conceptual, but we're not going to go into the individual contract details. Gatwick will be similar. As Rupert said, they've done an amazing job of getting this contract up and going, but in the early days, we've got transition costs again. We should get a very good run at that in 21. And Clarence, You know, we've been doing transition. We've had some payment, very low level of profit to date. We'll begin, as the prisoner numbers increase, we'll begin to make a little bit more in the second half. But again, you know, there'll be a kick-up next year in that. But these are the three main new contracts. As you rightly point out, AHSC, AASC will be lapping at full years as normal. They've been the big drivers in H1. In terms of net debt, I'm just trying to get exactly the question. Our track record is not perfect on net debt, I own up to. But it is extremely difficult to pinpoint a number when you've got 350 odd million every month, both in sales and in purchases almost. And government will pay at a point in time. you know, we'll always have a bit of volatility around the year end. And you just have to look back at our pre-closed guidance versus where it came out to be able to see that over the last few years. You know, I think the consensus is somewhere sort of, you know, 180-ish. You know, we've said 200. You know, give us plus or minus on that. And, you know, let's see how the second half plays out. But you know, the cash performance in the first half, that last couple of weeks was great because we, you know, the cash had been disappointing until then, but, you know, we finished a half really strong, great credit to our North American business and also to the UKE business for, and, you know, the customer for supporting us and, you know, getting that paid just before the year, you know, the half year end. In terms of the guidance, you know, the ball is the crystal ball. The ball is not quite as transparent as it usually is. You know, we're looking at the macros each day. And Rupert was, you know, Rupert, I think, during the outlook summed it up well. You know, the extra revenue, we've got big moving parts, 130 of extra COVID revenue, and then 50 million of revenue decline. How are these two elements going to play? And remember, the decline tends to be at a higher margin than the new revenue. The new revenue that we've got, we've consciously priced it to be supportive of customer and given the circumstances. So it's how these two interact and play out that gives us uncertainty as we look into 2021. And one thing, sure, it's not going to be a COVID-free year. Rupert, do you want to have a think about the longer term around the world, the same dynamics?

Yeah, I think the same dynamics do play. I think one of the interesting things you've got, though, is a difference between federal structures and non-federal structures. In Australia, we're actually multiplying the number of customers we have to deal with because each state has its own government and then there's the federal on top so there are multiple consumers. The same thing of having to rely on and call on private sector quickly to come to the site, that has worked well. I would say in the Middle East the impression we're getting is that customers are coming to remember that it's quite valuable to have instead of having very low-cost operations there, that actually there is a value to having more resilient operations supporting you. So I think that that is, and in North America, I mean, we are, you know, although it's a large part of our business, we're quite a small player there, but the Navy has just been, in particular, has just been completely robust in saying you get down in that battleship and you go and fix it. and there's a step to the mission so that's what everybody is doing but I think more generally this issue of large deficits and the need to have high quality and resilient public services and the state can't do all that I think that's a pretty worldwide thing Okay, thank you both No, that's great, thank you

Thank you very much. Our next question is from James Rose from Barclays. Please go ahead.

Hi there, good morning. I guess the first question is on FY21 again. I know it's very hard to pinpoint a number for what it might be versus the FY20 range, but if you could just give a bit more detail on what you think the most significant moving parts could be, I mean obviously there's elements within COVID We've talked about those three contracts so far. I mean, is there anything else you'd call out as being particularly variable? And then secondly, on the pipeline, could you give us a bit more colour on how the pipelines are evolving, perhaps by geography and by sector as well? And is there a reason for us to be more cautious on organic growth opportunities in FY21, 22, or should we expect no change as to what we talked about earlier in the year?

Well, I'll let Angus talk about pipeline, but I will just say we are coming off absolutely extraordinary organic growth rates. I mean, just to remind everybody, we think that this is a market where the long-term growth rate is around about 5%. So clearly the organic growth rate is going to come down quite significantly. Look, I think that this issue, there are a few enough companies that are giving guidance for 2020 And it is difficult. I mean, we are not giving guidance yet for 21, because we haven't done our budgets. But in a normal year, we would be, as it were, beginning to give some greater clarity about 21. But it's really, really hard, because nobody can tell when the disruption to our business is going to end, when we are going to get back into offices, the extent to which we get a second wave in winter and have to go back into lockdown. So I think that whilst I know that you love to have some hard numbers, on this, all we can say is that it's clearly not going to be, you know, it's not going to be much better than, it's highly unlikely to be any better than 2020. It might be a bit up, but even a bit up would be pretty good. But in particular, I want to draw your attention, to everybody's attention, to a bit of a night edge, which is that in the first half, we, and for the full year. We are, broadly speaking, able to say that we're going to make what we thought we would make way back in February when we did that. But the basis on which we get there has at the top of it a trapeze artist shaped like me, or rather walking a tightrope, consisting of the balance between the extra margin that we're making on the government extra work from COVID against the profit impact of those parts of our business that have been hit. In some fantastically pleasant world, those two will run off at the same time, and we will continue at net zero through into 2021. However, life being what it is, it is quite possible that the government contracts could roll off earlier, or produce less margin. And we'd still be stuck with the negative impacts of the $50 million of revenue that we've lost. And that's falling through to our bottom line at a higher rate. So I'm not saying it's going to happen. But clearly, it doesn't take a lot of imagination to say that that could move easily by $10 million either way. And within what you guys think of in guidance, you want to have granularity down to a very tight range. So we're not giving guidance for 21. We're just saying it's clearly not going to be a lot better than 20. And there is this risk. that you get a mismatch of timing between the additional revenue coming from government contracts and the hit that we've got. And that is as clear as I can make it. Angus?

In terms of the investor pipeline, James, it was sitting at $4.9 billion at the end of the year. At the end of 2019, we're now at $4.1 billion. And if you look at the total pipeline, the investor pipeline only includes bids with an annual contract value of over 10 million. If we include the less than 10 million, then the pipeline is 5.9 billion, so 4.1 of the investor pipeline and then 1.8 of smaller contracts, so 5.9 versus 6.5 at the end of 2019 and 6.6 at the end of 2018. But let's go back to the investor pipeline. So the split of it geographically, UK is just a touch over half of it, and that is stronger as a percentage than it was, albeit around about the same amount, than it was at the end of the year. The ASPAC pipeline is down a bit. It's about 10% of the total. We've had very good success in ASPAC of late, and that just reflects the emptying out of it. The Middle East, a lot of their contracts are smaller, so it's only about 5% of the pipeline. And then the balance, just over a third North America. And there again, we had a very strong year last year, not quite as much converting, a couple of losses in the first half. But still, we're positive in terms of the outlook in the USA. The other way of looking at it is in terms of sector. So health, again, most of these contracts are smaller, and so a lot of them will be in the total pipeline number as part of the smaller ACV annual contract values. Citizen services, enormous success with Andrew and Peter in the UK and Australia, and that's reflected in the fact that pipeline is down You know, a couple hundred million health, about 100 million transport, about 100 million. And that's down again, the difference being Northlink Ferries, which we won in the first half, if you compare it back to the investor pipeline at the end of December. And then the biggest element of it, defence. You know, almost three quarters of the pipeline Yeah, we've got a good pipeline down in Australia, in the US, and as Rupert talked about with METS, NSBU, and also in the UK with the Vivo work. And then the balance being JNI, clearly we weren't successful on Wellingborough. And that pipeline, we won Gatwick. So these are the two main moving parts there. You know, about just 15% to 20% of the pipeline being in JNI. So pipeline is down a bit. Things have moved a little bit to the right. That's helped us in terms of our rebids, clearly, but a little bit tougher on the newer front. But, you know, we're still positive in terms of where the pipeline is in shape.

Very clear.

Thanks very much.

Thank you, sir. As a reminder, it's star one if you wish to ask a question. Our next is from Joe Brent from Liberum. Please go ahead.

Good morning, gentlemen. Good morning, Joe. I've got three questions, if I may. Firstly, Rupert played journalist and wrote an interesting article in The Times about reputation and relationship with government Can you talk about the contract tracing contract specifically, how that affects your relationship, what the prospects are for that going forward? And then secondly, you haven't talked a lot about NSBU and the opportunities in U.S. defense, which I'd see as quite an exciting area. Could you elaborate on that? And finally, could you talk about whether there are some interesting acquisition opportunities that are emerging given the economic carnage out in the real world?

In terms of our rep on the tracing contract, we've actually got a good story there. We are shoulder to shoulder with the government on this. The reaction I've had from government to that interview I gave on today's programme this morning has been really excellent. And the issue is this. I will try to put it into a... 96% of the people that we talk to agree to self-isolate. The problem is that about 20% of the people that have taken tests and tested positive have deficient contact details. And when you get to talk to them, they say, I've met 10 people in the last 48 hours, but one was somebody sitting on a bus, I don't know who they were, and one of them was somebody my brother-in-law brought round to the house, I don't know who they are. So there's about 20% of contacts where the index contacts has no contact details to give us. So that is what is causing a deficiency in the number of people we are subsequently being asked to contact. But I can assure you that the system is working well. It is getting better every time. One of the things you're hearing on Stories is large numbers of contract tracers with no work to do. Well, that is on the same genre of why we've got 10 Nightingale hospitals lying empty and 30,000 more ventilators than we need. We've got to start somewhere. The government has probably over-provided in terms of the initial pool of contract tracers. and will want to cut the number back, that is something easily cured. But equally, they have an eye on rising levels of infection rate. We're getting better at getting the contact details of those people that are wrong or not available, so volumes into the call centres are increasing. And I suspect that what they will do is they will start cutting back the volume, but they want to err on the side of caution. So we are very robust. We're going to be going around, I think, being more public about our defence of this. There are 218,000 people. who have been told to self-isolate in a period of eight weeks. And that's a non-trivial number. When people say that the mathematical models say you've got to get to 80% for it to be effective, that is not a binary number. It's that 75% isn't as good as 80%, but it's better than 70%, and 70% is better than 0%. It's for every person that you get to self-isolate, that is a reduced level of exposure. And if anybody wants a real teaching on all the numbers and the percentages and the numbers we refer up to Tier 1, I'm happy to give it, because I am now a world expert on this. But if you think that this is causing a problem with our relationships with government, please don't. They are absolutely... We are linked at the hip. Sorry, Rupert, can I just follow up on that?

Do you expect that work to therefore continue, maybe at a lower rate for the rest of the year and onwards?

The current contract runs out in August. The government, I think, is going to be minded to extend it month on month. and they will be varying the numbers, so my expectation is that that contract will be at a lower run rate post-August than it was in the first half. Whether it runs through to October and November, I have no idea. but they will be wanting to flex the numbers up and down. Their priority in the first contract was to get a whole lot of people up and trained. Their priority in the subsequent one is going to have a more flexible model, whether they can flex it up or down. I would be amazed if we did not get any extensions beyond August. I don't think there will be a... I suspect it will be at a lower rate post-August. And how it goes on with that, who knows. So as far as NSBU is concerned, as I said to you, it's 40% of the US pipeline. It is very exciting. We've got a particular, the trouble is all the opportunities come in with incomprehensible initials. There's a thing called FMS FOTS, which is a large contract. to go and support second-hand military vessels that have been sold overseas. There's a contract called GATCS2, which is, again, a design and maintenance contract. We've got the Goose Bay extension coming up. That's not for METS. And we've got the FAA towers. rebid coming up. But we are, as I say, we're very happy with the way that METS is performing. It's performing in line with our original expectations. And there is a lot of that, remember that a lot of the METS pipeline is task order work, where you've got an existing contract on the platform and you get given task orders, so it doesn't really come in the pipeline or either goes in the pipeline and exits straight out.

Does that do for you, Joe? Thank you.

It does. There was a third question, wasn't there, about acquisition opportunities?

Oh, sorry, third question. M&A. M&A. Well... you know, beaten to the draw by Phil Bentley and Mighty and Intercept, not, but it was, no, it was good, you know, I think that was really good what Phil and Intercept did there. You know, there is a degree of distress around, but everybody knows that we are in the market to do acquisitions, I would say that the situation remains as absolutely normal, which is that we are on the look. There is a flow of opportunities inbound. But who knows what's going to come of it. Our balance sheet is in very good form to be able to do something if we did want, but it's an opportunistic part of our strategy rather than our strategy being dependent on it. And if you have any suggestions, Joe, we're always happy to take your call.

Will do. Thank you.

We have another question. It comes from the line of David Brockton from Numis. Please go ahead.

Morning all. Most of my questions have been answered, but I do have a few sort of contract questions. Firstly, in respect to the Viapass JV, I just wanted to understand, did the JV not stack up without Bedford being involved? One would have thought that that would be a growth market going forwards. Secondly, in terms of Wellingborough, I think, Angus, you mentioned that you weren't successful there. Any sort of thoughts on where you may have fallen short and what that means for your future prison work? And then finally, just on CMS volumes, are those already coming back and declining, which sort of underpins your more cautious outlook for the second half? Thanks.

So, Shynu Weddingborough, I'd just say that no result has been announced on that yet. There's no further bidder, but we hear rumours that somebody else has won it, and I don't think it's appropriate really to... We haven't had any feedback yet from the customers as to where our bid was, but we think it unlikely that we've been successful based on what we read in the BBC, but there's lots of others coming along. There's Glenn Parver and others, and there's opportunities also in Australia. We win some, we lose some. So we are disappointed but not disheartened if that turns out to be the case on Wellingborough. On Viapath, the situation there is that Viapath, the Bedford contract was a relatively small part of the overall, the main contract was providing pathology services to guys in St Thomas' Hospital in London. We were not successful in that, Viapath was not, we had a 30% shareholding in it, but guys in St Thomas' and King's who were the the other shareholders, who were also the buyers. And they wanted to retain the buyer path JV structure and to perform with the new supplier the contract under that structure. So we said a fond farewell, we exited JV, and I think on very fair financial terms. But it now means that we are no longer operating in the biology space. But as you know, we have always said that we prefer not to be near any needles when it comes to health care. We prefer the non-clinical space for that. So it's been, you know, Biopath was in a much worse shape when we first started. It owed us quite a lot of money. It had quite a lot of debt. We got it back with our partners in the position where it was solvent, but with no exitude. As far as CMS is concerned, yes, it's quite a seasonal business. We expect volumes to decline, as they always do over this year. We had a particular lift in the first few months of the year because there was a particular processing issue they had with inbound stuff coming into us that involved us having to do a whole lot more pay-for-processing, which we had automated to a very high degree. So the drop-through of that into our margin was very strong, and we do think that this is going to sustain into the second half, and it's going to be a very tough comparator for next year.

Thank you.

And there are no further questions at this time. I will hand back to the speakers for closing remarks.

Thank you all very much indeed. And meet you on the road, no doubt. If you have any more questions, please contact either Paul or Angus or Nigel or, in desperation, me.

Thank you all. Thank you, everybody.