Serco Group Plc Sp/Adr

Good morning everybody, Rupert Soames here and welcome to our first half results presentation which is the first without Angus Coben who stepped down at the AGM and my new responsible adult is Nigel Crossley who's been with Serco since 2014 and who has played an absolutely vital and central role in the transformation of Serco. He also speaks Queen's English so no need for instantaneous translation from Angus's Viking. Also on the call is our COO, Chief Operating Officer Anthony Kirby, who joined Serco in 2017 as HR Director and was promoted to Chief Operating Officer a year ago. So I'm just going to trot through a couple of introductory slides, hand over to Nigel to cover the finances, and then I will come back for the operational issues. continued strong growth interestingly sort of doing all the writing these slides out almost all the percentages are very similar to the ones that we achieved in 2020 and our scalable and agile government services platform has delivered what we believe is by any standards an impressive first half with revenue up 20% underlying trading profit up 62% and our margin increased from 4.3% to 5.7% and an exceptionally strong cash performance with free cash flow of $130 million. Net debt consequently is $225 million, which is up only $82 million year on year, despite during that period having spent $249 million on acquisitions and £40 million on share buybacks. That leaves our covenant leverage at one times, which is right at the bottom of our target range. But perhaps most encouraging and boding well for the future is a strong order intake at £4.1 billion. That's 190% booked to bill, and 60% of that order intake was represented by new work. Our pipeline also, which you would expect with that amount of order intake to have been really hammered, has actually been largely rebuilt and stands at 5.8 billion compared with 6.4 at the beginning of the year and is up 40% on the position a year ago. And this performance is not an accident. It's been the result of seven years of investment in building our operating platform Our culture of loose-type management, which has performed extremely well, allowing the business to grow and the people on the front line and the managers to do what they needed to do, but also within a strong compliance and governance framework. Our operating platform has proved to be extraordinarily scalable. we now have nearly a third more employees than we had a year ago. That's 21,000 additional people and taking us to about 83,000 people. And that sort of growth, to achieve that sort of growth without any loss of operational control is, I think, quite a strong achievement. At the same time, and looking forward to the second half, we have stepped up the rate of investment further in our government services platform to increase our long-term competitiveness. Just spend a few seconds on the dividend. We're proposing an interim dividend of 0.8 pence. And just to put that a little bit into context, we had planned and hoped to pay both a final dividend in respect of of 2019 and an interim in 2020, but because of COVID, we pulled both of them. But if you work back from the final dividend that we paid, that we announced with our results in respect to 2020, where we did pay a final dividend, we'll go on the basis of two-thirds, one-third, that 0.8p would imply a 15% increase over the 0.7p that we would have paid if we could last year. In terms of guidance for 2021, the UTP guidance remains unchanged, an increase of 23% year-on-year and around to about £200 million. And the free cash flow guidance has increased by 20 million to 120 million, and the net debt forecast has reduced by 25 million. We'll talk more about the drags in the second half and the slightly odd shape of the year with a very strong first half, but the important thing to note is that the $4 billion of order intake sets us up well to manage what will be the inevitable reduction over time and hoped for reduction over time of the COVID work as we come out of the pandemic. Turning over to the next slide, that's slide number six in the pack. This is, I think, in 18 years of running public companies and doing presentations, this is about my happiest slide. showing consistent track record of progress over the last four years. You know, for a government services company to achieve revenue CAGR since 2017 of 10% and underlying trading profit CAGR of 30% is, I think, pretty impressive. Our margins have gone from 2.3% in 2017 to 4.7% based on our forecast for our guidance for 21. And over that period, between January 17 and June 21, we booked 15 billion of revenue, but we booked 19 billion of order intake. And I think that that is a real, A, it bodes well for the future, but B, shows the strength and the solid nature of our recovery as we are in the growth stage of our strategic plan, which those of you who've been following us since 2014, we set out as being stabilize, transform, and grow. And I also think that the strong revenue CAGR and the profit growth rate and the order intake tends to indicate that we are performing well relative to peers in our sector. And at that point, I'm going to hand over to Nigel to take you through the financial review.

Thank you, Rupert, and good morning to everybody. This morning, I'll be talking about the group and the division's financial performance. And we've slightly amended the way that we've organized our finance presentation to make it a little less dense. I want to assure everybody that the detailed finance slides that were previously used are still there and in the appendix to the presentation, which we're putting on the website. So we move to slide eight, the finance overview. So the first half has been exceptionally strong, as Rupert has said. Revenue grew 19% to 2.2 billion pounds. 5% of this growth has come from, has been generated by two acquisitions of Facilities First in Australia, which would close at the end of the year, and WBB, the US defense acquisition, which closed at the end of April. Organic revenue growth was 15%, with the COVID-19 related work in Australia and the UK contributing most of this. And our three largest divisions have all grown in the period. I'll provide more information in a minute on the performance by division. Underlying trading profit for the period was £123 million, an increase of 58% on the first half of last year and delivering a 5.7% margin, up from 4.3%. Part of the increase in margin was a result of operational leverage, as our revenues grew more than twice as fast as our overheads, underlying the scalability of our government services platform. Acquisitions have contributed eight percentage points of a 58% increase in the group's profit, while there's been a negative impact from foreign exchange. Underlying earnings per share was 6.75 pence per share, This is 75% higher than the first half of 2020 due to the strong trading profit performance, flat finance costs year on year, and a tax rate of 23%, which is lower than last year, which is mainly due to the release of a tax provision that is no longer required. Free cash flow of £130 million has resulted in cash conversion of 137% and leverage at the bottom end of our target range of one to two times EBITDA. So turn to slide nine, the UK. The UK has been the standout performer in the group in the first half of the year, reporting 33% organic revenue growth, more than doubling profits, adding two percentage points to the margin, as well as securing three billion pounds of order intake. Citizen services revenue was up 73% in the period. and COVID-19-related work, particularly test centers and tracing contracts, contributed most of this growth. The leisure business is starting to show early signs of recovery after the pandemic, with both higher revenue and lower losses than last year. Assistant services also have been successful, winning two regions on the DWP restart contract, helping long-term unemployed get back into the workplace. Mobilisation of the contract had a significant cost in the second half, but revenue and profits were starting full in 2022. Justice and Immigration had a strong first half, largely on the back of a successful start-up of a new prisoner escorting contract, which covers a larger region of the south of England than the previous contract. This contract incurred significant start-up costs last year, and the swing from loss to profit has had a notable impact on the division's margin. In addition, we've seen higher volumes on the asylum seeker contract in the first half of the year. Transport and health are the two sectors that have been most impacted by the pandemic. However, we are starting to see some early signs of recovery. Staff absence levels were high in the first quarter lockdown, and our transport businesses, particularly Mersey Rail, has been hit hard by lower ridership levels. The defence business has traded in line with our expectations in the period. But the significant development in defence is the contract wins in our VIVO joint venture with ONGIE, which will be providing facilities management to defence infrastructure organisations, where we have won two regions for both BIO's estates and housing. The total value of these contract awards is £4 billion, of which £1.9 billion is Circo's share. The mobilisation of the contracts and the set up of the joint ventures management and processes have already begun, but REVI does not start until quarter one of 2022. Despite the exceptional order intake during the first half of the year, the UK and Europe pipeline has largely been replenished and includes Glen Parva, a new prison bid, and in defence there are further DIO opportunities and the next generation of a Skynet contract. Moving to slide 10, the Americas. It's clear that the Americas' results have been impacted by a weaker dollar when translating to sterling. But on a constant currency basis, revenue has grown 6% with flat organic growth and underlying trading properties up a notable 15%. In the Americas, there's modest growth in the three sectors where we operate. Defense has benefited from the WBB acquisition, which has added 30 million pounds of revenue in the period, although elsewhere there has been a small organic decline in defense, largely due to the delays by the customer in awarding new contracts. We currently have about $2.5 billion of tenders awaiting adjudication. Underlying trading profit was 57 million pounds, and America now accounts for almost 40% of the group's profits and over 24% of the group's revenue. The profit margins increased 95 basis points since last year, which is due to the higher margins and the WBB acquisition, stronger operational performance in the number of contracts, and a three million pound profit from the sale of our U.S. parking contracts. Order intake was one billion pounds. There were two important rebits which had been secured for the Canadian air base in Goose Bay and the anti-terrorism force protection for the U.S. Navy, along with a a number of new contract wins totaling 250 million pounds, which are largely in defense. The America's pipeline is the largest in the group, with defense making up the bulk of the opportunities. As our customers return to their offices post the pandemic, we expect to see an increase in the rate of awards being made and a return to organic growth in the second half. So turn to slide 11. In Asia Pacific, Revenue has grown by 38% to £458 million. 11 percentage points of the growth is organic, while 17 percentage points came from the acquisition of Facilities First Australia, and FX has added a further 9 percentage points. The acquisition is including the health sector results and accounts for most of their growth in the period. Justice and immigration has generated strong growth from the new-built Clarence Prison in New South Wales, which accepts its first prisoners in July 2020 and is still in the ramp-up phase, with the prison currently at around two-thirds of full capacity. There's been further growth in the immigration revenue arising from the reopening of Christmas Island and with additional variable work requested by the customer. The underlying profit margin for the period has increased by 1.5 percentage points to 5.5% due to the increased volumes on the immigration contract and population leverage of higher revenue base on lower overheads. All the overheads are weighted to the second half of the year due to some additional billing activity. Despite strong revenue growth, order intake in the period was low. with this year's revenue growth largely coming from wins in the prior year and the existing business. Encouragingly, the pipeline aspect is being rebuilt and includes the two largest opportunities in the group, the facilities management at Frankston Hospital and vehicle licensing in Victoria. The division also has the largest short-term rebid risk in the group, with the immigration contract scheduled to end later this year. But I'm delighted to say that we have recently received a letter of intent from the customer to extend the contract for a further two years from December. Moving to slide 12. The Middle East division results have been impacted by COVID-19 with revenue down 7% on constant currency basis and underlying trading profit broadly flat. The areas of the business that have been impacted by COVID-19 include air traffic control and other airport-related contracts due to the reduction in the volume of flights and passengers. Additionally, there's been lower project activity in our city services business. And we've seen limited COVID-19 response work in the region. However, we've just started a tracing program supporting one of the governments, drawing on our success and reacting to the customer demand in other regions. Despite the lower revenues, profit held up in the period, and this is largely because of above normal margins on contracts where the scope of work has increased, and through good cost control on contracts where revenues have been negatively impacted. The division's pipeline is in the process of being built after the loss of Dubai Metro, which ends in September, where the negative impacts on revenue will be greater than the loss of profit. I encourage you that there have been some wins in the period, including Ras Al Khaimah air traffic control, Dubai Airport technical manpower, as well as the mobilization of Dubai Airport customer services contract. So we're going to move on now to slide 13, which is cash flow. And cash flow was exceptional in the first half of the year, continuing our recent trend of strong cash generation. Train cash conversion was 130%, largely due to positive working capital inflow of £44 million during a period of significant organic growth. This is due to the collection of some older debts, customers paying early to support their supplier base during the pandemic, and some favourable timing effects. We have not used any financing or efforts out of the ordinary to reduce period end net debt. We continue to comply with the UK Givens Prompt Payment Code, and 89% of our UK suppliers were paid within 30 days. In the second half of the year, we expect the favorable working capital to unwind as customers revert to more normal terms. And additionally, we will repay the payroll taxes diverging the pandemic in the US, for which there was no mechanism to pay early. Overall, we expect cash conversion for full year to be around about 90%. The better than expected cash flow performance is also reflected in net debt, with adjusted net debt of 225 million pounds and leverage at one times EBITDA at the bottom end of our range. This has been achieved in a period when we've invested 250 million pounds in acquisitions, 40 million pounds in a share buyback program, and paid our first dividend for seven years. So slide seven, tax. In the June 2021 balance sheet, we've recognized the UK deferred tax asset relating to historical losses in the Serco Group of UK companies. We've been able to do this because we now have confidence that there are sufficient future profits to be made by the UK business against which we can use these historical losses. For the purposes of modeling the impact of the deferred tax asset, you should know that the historical losses can be offset against approximately 50% of the future taxable profits, having the effect of reducing the cash tax payable we expect there to be five to 10 million pounds per annum of cash benefit in the medium term. However, there'll be no impact on the tax charge in the P&L because as the assets are utilized, the tax asset value is reduced and there's an equivalent charge in the P&L. And if anybody wants any more information on the subject, you can pick up with Paul or I after the call. I'll go to slide 15, final guidance. The revenue costs and profit guidance for 2021 is unchanged from what we communicated at the half-year pre-close announcements. However, we have improved our guidance for free cash flow and year-end net debt, reflecting the strength performance we have seen in the first half. Revenue for the full year is expected to be around £4.3 billion, which is 10% higher than last year, including 6% organic revenue growth. Within our full year underlying trading profit guidance of 200 million pounds, there was a strong weighting towards profit in the first half. In the second half, we will see the profits end on AWE and Dubai Metro and the below COVID-19 related work, partially offset by some recovery of contracts adversely affected by the pandemic. We're also making a number of investments in the second half, including the mobilization of DWP restart contracts that will turn into a profit in 2022. We'll also be developing and implementing a new employee management system, PeopleFirst, accelerating the rollout of our workforce management, implementing Serco workforce solutions to manage contingent labor, bringing our European business onto SAP, preparing for UK SOX, and holding the group's cybersecurity. The total investment is around 10 million pounds and is expected to be completed by the end of the year. As I've already referred to on the previous slide, we expect the exceptional working capital inflows we saw in the first half to reverse in the balance of the year, and our free cash flows expected to be approximately £120 million for the full year. This will result in net debt of around £250 million at year end and leverage at the bottom end of our target range and one to two times the EBITDA. Looking further ahead to 2022, and while we still have our budget process to work through, it is clear that the shape of next year will be quite different. We expect there will be much lower COVID-19 response work, but there will be some offsets against this drought, including the profits from the exceptional order intake we've seen in 2021 and the reversal of this year's mobilization costs. The recovery of businesses negatively impacted by COVID-19 and the increased rates of investments we've had in the second half returning to more normal levels. The absolute scale of these offsets are difficult to predict without a detailed budget process, which we'll be running the second half of the year. And hence, we'll provide more information on 2022 later this year. And I'm now going to hand back to Rupert.

Thank you very much indeed, Nigel. And just moving to slide 17, usual highlights and lowlights slide. Well, obviously, I'm extremely proud of the operational delivery that my colleagues have produced. And whilst it has not been easy for anybody, the fact is that for the 90% or so of our employees who work on the front line in hospitals and prisons and on defense bases and in transport, it's been particularly But what I think has been particularly pleasing this year, not only have we had the big swings and changes both on the upside and on the downside in our business from an operational point of view, we've also done two very substantial acquisitions and those have been integrating well into our business. I'm going to talk a little bit more in separate slides about both COVID-19 response and people. But I just want to reiterate this point about the platform that we have gone and built over the past few years and just look at the impact that that has had where our overheads have grown at half the rate of our revenues. And that is a time when we've increased our headcount by 30% year on year. The order intake of 4.1 billion key wins are one of the things that we pride ourselves is that we play nicely with other people in the market. And we've created this joint venture with Angie. And together, we have won a very large share of the DIO tenders, which is the largest tender that has run across Europe, let alone in the UK, for many years. The DWP Restart Programme is about retraining people to come back into the jobs market. We're very proud to be associated with that and, again, to have a significant market share there. Canada, an important foundational business contract for our Canadian business, an important one. And anti-terrorism force protection, which is a worldwide contract where we go and support US bases around the world on their perimeter security, brings through a lot of chargeable work, less so at the moment, but as COVID lifts, that will grow in importance. And finally, NHS Test and Trace. I'll talk more about what we've been doing there in a second. We talked about the pipeline growing. That's obviously, again, boding well for the future. And on the acquisitions front, as I said, that the integration is going well, but we also went and did another small acquisition of a marine maintenance business in Belgium a few weeks ago, which is helping us build up our defence business in Europe. In terms of investment in the platform, I just want to pull out a couple of these. I'll talk a little bit more about people first later. But this, what we're calling is UK SOX, and many of you will be aware of the consultation on audit and governance. which is proposing to introduce a regime not dissimilar entirely from the U.S. Sarbanes-Oxley program, where there will be far greater requirements on boards to go and validate the operational controls. This is going to be a huge investment for a lot of companies, and we're getting ahead of that curve. I think you might say that we're making hay while the sun shines, because we want to get that work done, if there's goodness in it anyway, and we'll be spending about two, between two and three million pounds in the second half, doing that work before even the final requirements are set, because we think we know what the direction of travel is. And also, just mentioned in part, in the employment and learning services, which is a platform that we are building to provide integrated access to employment and learning services off our own backs, and we were at the early stages of that, but that may well produce an important new capability. And we're bringing our European business onto the SAP system, and we are still investing money, in fact, at an increased rate on cyber security. So in terms, moving then to the lowlights, well, the dreadful impact of COVID-19 on the lives and welfare of colleagues and families, and the dreadful truth is that for many of our colleagues, their home life actually did not offer a lot of respite from work life. But that is the same for many companies up and down the land, but particularly we feel for Serco with its emphasis on frontline services. We mentioned this rather strange shape to the year where the UTP in the second half is going to be significantly lower than the first half as we get various drags of the AWE and Dubai Metro, the investment in the DWP mobilization, and we will see, we believe, a reduction in COVID-19 contracts through the second half and also increased investment, all of which, certainly increased investment, will set us up well for 2022. Bid losses, we lost Dubai Metro after many years of running that. We were sad to lose it. It wasn't our most profitable contract, but we were obviously sad to lose it and we lost Dungable Immigration Removal Centre in Scotland. And also, we were hoping to bid for the Australian defense recruitment. And those were all losses. I would mention emerging inflation. Well, it's the subject du jour, as we would say. And yes, there's quite a lot of it about. There's two particular areas that I would mention that will affect us. One is utilities, because we are looking after around about 25,000 asylum seekers in houses around the country and that requires water and electricity and the prices of those are going up we tend to buy our electricity on sort of forward head 12 month forward contracts but we are watching that carefully to see how that goes and I would also say the other sectors in insurance where we're yet again looking at a very significant increase in insurance rates in the business. We were very sad that AWE was taken back in-house by the government, but we have put our shoulders to the wheel. We take the view that you judge a company or you judge a regiment in military terms by how it leaves its barracks, not how it arrives at the barracks. And we are very pleased to say that the customers are very pleased with the way that we work with them to hand AWE There's been a lot of slippage on tender adjudications, particularly in the U.S., where as Nigel said, I think we've got about $2.5 billion of stuff waiting adjudication, but these delays are also encouraging incumbents I would say that actually, despite this, the North American business actually had very strong order intake, but a lot of that came from Goose Bay, which is a very long-lived contract. And finally, on the issue of staff, it's been difficult to recruit and retain staff in some custodial and escort settings. Particularly, we've struggled to get to the full muster, particularly in the healthcare side at Clarence. PECS has been, the Prisoner Escorting Service, has been difficult. And what we're seeing interestingly enough on Test and Trace is that a lot of the people who it was very easy to recruit into that service, a lot of them are beginning to return to their original jobs from which they left at the beginning of the pandemic. So just moving on to slide 18 and talking a little bit more about a little bit more color on the support that we're giving to governments around the world on COVID-19. Well, our total revenues from direct revenues from COVID-19 has been about £365 million in the first half, which compares to about £130 million in the first half of 2020 when really COVID only got going in the second quarter of our COVID revenues last year. And this year, obviously, we've had a full six months of it. But the majority of that is spent in the arises from the UK, but by no means all. But within the UK, we have delivered the scale of the services that have been delivered under that are enormous. We've delivered in the first half 12 million hours, the equivalent of about 14,500 full-time equivalents people to NHS Test and Trace. And since May 2020, we've made 24 million outbound calls. We've been eight million tests conducted on test sites run by Serco and we've distributed six million lateral flow devices. On tracing, we provided about 50% of tracing call handlers and the numbers vary week by week in accordance with demand from a low of 3,000 FTE to over 10,000. And at the moment, we are running at about 13,000, but expect that to drop off really quite quickly in the coming weeks. In terms of testing, we got about 25% of the Pillar 2 testing sites, which was about 200 sites. We expect this to reduce by September to around about 20% market share. It's a mixture of regional, local, and mobile test sites. We've also had increased volumes in immigration, and we're now currently looking after about 25,000 asylum seekers who we are providing accommodation to, which is an increase of about 7% year on year. In our fact, we've been providing extensive call center support for lockdown vaccination programs. Last year, we provided them with support on quarantine hotels for a brief period of time. But enduring is the temporary immigration and isolation facilities as part of our immigration contract and the reopening of Christmas Island to provide the customer with additional capacity. In the Middle East, last year, we helped mobilize the field hospital World Trade Center. And I'm delighted to say that we've actually now been asked by one of the governments there to start providing tracing support. And as of now, we've got about 150 people providing tracing. We hope that might increase in the coming months. So we've said all the way along, since we started doing this work, we put our hands up and said, look, this is ephemeral. We hope that this is going to go away. And as soon as possible, this will mean that we are returning to normal life. I am asked on a daily basis, how long do I think it's going to last and how much will it? The answer is we don't know. And the government doesn't know. What the governments have put in place, though, is an extremely flexible framework. that allows them to flex their capacities to respond up or down. We made our best guess for this year, which is part of our guidance of 200 million for 2021. But whenever it comes off, it's going to leave an endearing legacy for our business. It's going to be a legacy of an enhanced reputation because I think the government believes that we've done extremely well for them. It's improved our systems, our skills, our know-how, and ability to respond to absolutely astonishing increases of scale. A year ago, we stood up 10,000 people in four weeks. to provide additional tracing capacity. And as I say, this is going to have given us a legacy of knowledge, understanding, and know-how, and also reputation that will stand us in good stead in the future. Moving on to the next slide, slide 19, around people. I mentioned that we've increased our headcount by nearly 30%, which is 21,000 people year on year. Most pleasing though is that Serco has become a sought-after employer, which I have to say was not necessarily the case when I joined in 2014. In fact, I was knocked over by the rush of people over the door. But if I tell you that on an average basis each month, 30,000 people apply to work for Serco worldwide, And that's an increase of 22% year on year. Naturally, we've repaid all our furlough claims. And at any one time, we've got about 500 people who we keep on full pay whilst they are shielding. Part of our government services platform is People First. That is a significant amount of software, partly adapted existing systems such as ServiceNow Partly using tools like Boomi to go and integrate with the HR core systems and using a system called Appian to go and produce proprietary content for us to allow us to be really efficient in terms of recruiting and onboarding and managing people. We think that that's going to give us some efficiencies in our offshore back office. We're in fact moving quite a lot of our back office from India back into the UK because there's more and more that gets automated. But that's not really the point. The point is for the managers themselves, the system is much easier to use and more attractive. We've set up Serco Workforce Solutions, which is an in-house contingent labor resourcing and management system, and we will have 5,000 people on the books of Serco Workforce Solutions by the end of this month. Workforce management, we now have covering 27,000 employees, and as I mentioned earlier, we're developing a new employment and learning services platform. But it's not been without its challenges. The restrictions on movement at the moment are particularly severe in Australia. Not only can, you know, people can't come in and that particularly affects the availability of nurses and other medical staff but actually within Australia the states have shut their borders and you know we've seen several weeks now where maybe you can move really into Western Australia or the other states it is locked down very very tight we've had the issue of EU workers who might have a right to work in the UK simply not returning and within businesses people who joined us on a temporary basis going back to former careers. We've had to do a lot of refresher training because people have not been doing their jobs, and most obviously that might be air traffic controllers who are having to retrain because there's just not been a lot of air traffic. But also, perhaps bizarrely, you think lifeguards were having to go through retraining in our leisure business. And custodial officers who we've taken on and recruited during the crisis used to working in prisons where the prisons are basically locked down for 23 hours a day and now having to adapt to their first experience of having prisons open with free association. The pingdemic that is called unshielding, well, we're taking that in our stride. We're running in the UK about 7% to 10% daily absence rate in the UK, which is, you know, compares to a normal rate of 5% to 6%. It is very annoying in some of our contracts, particularly environmental services and, to a lesser extent, transport. But I think that we are managing through that quite well. In terms of pay inflation, I think what I would say is I think that around the world, a lot of the labor markets are in sort of spasm at the moment. As restrictions get lifted, people are thinking about where they want to go. There are some big demands from some unions taking intransigent positions to make sure that people that they haven't seen remember that they are representing them. But we think that we have paid pay increases. We paid them last year. and we pay them again this year for our staff. So it's not that we've been in a pay freeze, and this year we've already paid 2%. How that's going to work out in H2 and into 2022, we can't tell. We will have to play that one. But my feeling is that as more and more people come back to work with furlough coming off, some of the stiffness in the labour market will start to ease. And you may have seen that we got surprised to find in part of our supply chain, some of our suppliers were using mini umbrella companies to reduce their employment costs, which was completely unacceptable to us. say about that is how fast we were able to react to that. And as soon as we got literally, you know, some thousands of people were moved from out with the suppliers who were supplying through those market companies into our own Circa workforce management solutions or employed directly, whatever. But we got that tidied up within about eight weeks of discovering it. Over on the next slide, slide 20, my second favorite slide of all time is our engagement scores. You will remember that we do, we test the engagement every September. We're just preparing for the next engagement scores and over time they've been improving. But I just want to make the point that we also do pulse checks where we think, where we want to check whether there's an issue. Pleasingly though, I would draw attention to a couple of those ones. One is NHS testing where we did and we had, you know, a huge response, over 70% response, and a very high score from the NHS testing, both in February when we did it, and again when we went back in June 21, we saw a score in 79, which is actually above the average for the company, and that's quite similar to how many people there have not been working for very long. Sharjah Airport and Victoria Police were ones where we We're worried about the morale within those contracts, so we went and did some pulse checks there. But also particularly pleasing for me is we did a post-acquisition pulse check of facilities first in April 21, which would have been four months after acquisition, and got a very high score from that. So that is all quite pleasing. Moving to summary and outlook, and that is slide 22. I mentioned four years of strong delivery, a 10% CAGR in revenue since 2017, and UTP of 30%. A book-to-bill since 2017 of 126%. For the last 18 months' performance, as I say, it was not an accident. We've been working on transforming Circe to try and make it an agile and scalable government services platform for that time. Our loose type management philosophy has worked well. I think that we've shown that despite a lot of the press, we're still a trusted and valued by governments, and we've got a motivated, strong, and very highly experienced management team. Very strong 2021 in prospect, 10% revenue growth, 23% UTP, and strong cash conversion. We mentioned that H221 will be lower for reasons we've got into. I would point out that it's going to be partly offset, those drags by WBB and facilities first, and also reducing drag from those areas of the business that have been hit by COVID as the COVID contracts come off. And the 4.1 billion of order intake, will start to flow through in 2022, including beginning to see revenue from DIO and DWP, and that sets us well to manage the rundown of the COVID work. We're going to have a capital market today in the fourth quarter, probably the end of November or beginning of December. We'll let you know the dates as soon as we But just to remind you all, in the future, we believe that the four forces, which we introduced an unsuspecting world to in 2015 when we announced our strategy for our turnaround plan, the four forces still rule okay and will rule even more okay going forward. That's governments having to deal with growing costs of healthcare, aging population and investment in infrastructure, rising expectations of choice and service quality, and one of the things that COVID has brought is brought many more people into contact with government services. And it's also given people, got them into the habit of comparing government services across different countries. People now know what the vaccination rate is in Germany or Australia or of the United States and this feeling that public services are important not only for people who are less well-off and vulnerable but also to the middle classes is going to have a profound political impact, we believe. Governments will need to balance public income and expenditure and reduce debt and voters are going to be no more willing to tolerate higher taxation than they ever were before. So that's going to lead to fierce pressure on governments to deliver more public services of better quality and greater resilience for less money, and that plays to what we offer government. Thank you all for your attention, and we'll now hand over to Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the or hash key. Please do stand by while we compile the Q&A roster. Your first question is on the line of Paul Sullivan from Barclays. Please ask your question.

Yeah, good morning, everyone. Three for me. Just firstly, the enduring benefit from COVID that you speak of, Rupert, I mean, how should we think about that in terms of medium-term growth expectations? And are you seeing it starting to come through in the emerging pipeline in the conversations that you're having? Secondly, can you talk about the timing and conversion of the existing pipeline? And given the higher first half win rate, should we be expecting you to win more of it going forward? And then finally, given the good progress on debt reduction, can you talk about your capacity for another deal and give us some colour on the acquisition pipeline? Thank you.

Thank you, Paul. Nigel, would you take the timing conversion of the pipeline? In terms of enduring a benefit, it's hard to... But I think it's going to make us a better competitor in the marketplace. And if you want evidence that participating in this has done us good, then only just look at the $4.1 billion of order intake. I mean, these were decisions that were taken at the time when we were in the middle of going and responding to it. And had governments been in any way cross or thought that we weren't doing well, I don't think it would have happened. But we must be complacent here. But I think that when we're saying that there's enduring benefit, I'm not going to say that we will grow faster than we would have done otherwise. But I think that there's a danger in just saying, oh, well, this is just a one-off, which it is. is going to go away, and then the company will be no different to what it was in 2019. Our company in 2022 is going to be a profoundly, I think, a more capable company than it was in 2019 as a result of what we've done over the last year and will continue to do in the second half. Nigel, do you want to talk a bit about the timing and conversion of the pipeline?

Yeah, so for a pipeline of 5.8 million pounds, within that we've talked already about the US and this backlog of decisions to be made. Our expectation is that's going to get made in the next quarter or so, and we'd expect that to come through relatively quickly. And there's also some decisions still to be made on DIO work, which are relatively near term in the next six months. The other stuff that we've got, the big stuff we've got in the pipeline, Glen Parva Prison, Frankston Hospital, Victoria Road, are a bit further out. It's going to be a 2022 decision. And in some of those, it's even 2023 before the revenue starts to kick in.

So the big stuff in the pipeline tends to be quite further out. In terms of capacity for M&A, well, clearly we have... balance sheet that is in a pretty good position, and that's pleasing. I think that we have shown ourselves willing and capable to do acquisitions, but I just want to say we are pretty pragmatic, opportunistic. We don't chase stuff around the market. We are not a sort of M&A engine. We see it as being a useful addition. I think we're getting quite good at it, and we have a strong internal capability. But we don't, as I say, go around drumming up M&As, but we do keep our ear to the ground, and people know that we are in the market. So I think it's sort of yes, we're there, but we're not desperate to do it and we don't run to a timescale. Paul, does that answer your questions?

Yeah, that's great. Just a quick follow-up on the deals you've done so far. How should we think about the progress you're making and the performance there?

Yeah, I think, I mean, they're both... I would say that following our experience with the previous acquisitions, BTP and... We've moved to integrate them faster than we did the others. And in terms of FFA, that means quite a big systems challenge. We're having to bring them on to SAP. We're having to do a lot, but it's going well. And their contribution so far has been kind of where we thought it would. WBB, likewise, is doing pretty well. We have promoted the number two in that business to be running it, and Robert Olsen, who was the CEO, has left. But we're very impressed by both the people and the business that we have So we're happy with that, and we're getting already quite a lot of synergies between the overlap between them and our other military businesses. So I think we're pleased, but it's early days still. Great. Thank you very much. Okay. Next question.

Comes from the line of Key and Martin from Jefferies. Please answer our question.

Morning all. I've got three as well. Just first of all, expanding a little on your people slide. Just looking at resourcing in the US, I think Biden recently suggested that anyone operating in the public sector would need to have a double jab. I'm wondering how that affects your business and the potential resourcing complications that that may present. Secondly, you mentioned people first, which I think has been in the pipeline for quite some time. As you're starting to implement, can maybe you share some initial insights into the sort of savings that that might produce over the next few years? And then thirdly, on the in-house contingent labour pool, is there a trade-off between higher costs and flexibility here, or is that not part of the equation?

Thank you, Keane. And for all those, I'm going to hand over to Anthony Kirby for his first time out on a conference call. Anthony.

OK, thank you. In terms of the federal order for the double vaccination, that hasn't trickled down into commercial operations at the moment, into commercial businesses. Our policy is that we are not insisting on vaccinations to enter the workplace until it becomes a requirement by law. So in the US, we were currently about 84, between 84 and 86% of our population have received their first job and a slightly lower number of employees have received their second job. If you quickly then just take the view in Asia Pacific, the Australian government have insisted that if our employees are working in aged care environments, that they are to receive the job before they can enter the workplace. So again, we're following the legislation in each of those different jurisdictions. In the U.S., we don't think it's going to impact our ability to recruit on the basis that in the mid to high 80s is a really good position to be in at the moment.

People first?

So people first, yeah. system is due to operate in, well, it's gone live actually. We've had a soft launch. We've launched it in all of the divisions around the world outside of the U.S. purely for security reasons at this stage. We're going to follow into the U.S. in due course. And it's due to be live in all of our contracts from about January 2022. And the third question, sorry.

How is it going to save us money? I mean, not without quantifying, but why is it going to make any difference?

So it's going to reduce duplication. We have a Over a number of years, we've built system on system on system. The people first is integrating all of those back office processes. It's taking process steps out by automation, and it's reducing unnecessary non-value-added processes that we are currently operating in the contract. So it's becoming more efficient, less process, more automation.

Okay. And in-house contingent labor, what are we doing that for?

So we're doing it for two real reasons, which is quality, to improve the quality of the folks that we're able to send into our contracts. And actually, by offering people more work on a regular basis, we hope that that will retain people in the organization for longer, so the workforce becomes less transient. And overall, it will actually save us costs because we're no longer paying the agency margin to third-party providers.

Keynes, does that do it for you?

It does. I guess with two quick follow-ups. So just on the contingent labour, so is your intention here to allow people in that labour pool to move amongst Serco contracts, so potentially into other disciplines, and so you end up with a more flexible pool of labour? And then on people first, I don't know whether, Rupert, whether you'd like to give an initial view here, but does this lead to a a sort of permanent cost saving or do you reinvest that in the business to drive harder? It will create more flexibility. We now have a system whereby people can choose their own shifts, so we put shifts onto a system and then people are able to choose the shifts that allow them to fit work around life, so that's really helpful. Already we've seen a huge reduction in labor turnover that we would normally see from a contingent workforce. And then what we also do is once people have been working in Circo Workforce Solutions for four weeks, they then get access into other roles in the wider Circo Workforce. We've already seen, I think it's about 70 to 75 people who joined Circo Workforce Solutions four weeks ago, now in a full-time role in Circo in other parts of the business.

So yes, we do allow people to access the whole of Circo UK's business through this. And I have to say, having your own in-house contingent labor is something that is done by several of the larger employers anyway. So it's a well-established version. In terms of the benefits of people first, I just refer you to the idea of continuous improvement. You must not stop because we need to be a competitive employer and part of that is being able to onboard people really quickly at scale, at volume. One of the few things we do at industrial scale is employ people. So doing that better, faster, cheaper is a good thing. It should reduce our cost per employee, but I'm not going to put a a number on it. We don't justify it to ourselves by saying that having a better process for employing people is going to save us X million pounds. We actually have faith in saying it's a good thing to do. There is an element of saying we want to accelerate this work Now, because having learned that we can be asked to go and recruit lots of people, we want to be, and having a much larger workforce now than we had before, being able to have efficient systems is really important. Moving on to the next question. Can we have the next question, please?

It comes from the line of Oscar Valmes from JP Morgan. Please ask your question.

Yes, good morning, Rupert and Nigel. I have two quick questions. The first one, going back on COVID-19, can you remind us your rough expectations for COVID-19 demand in the second half, following the 365 million in H1, given the strong start in July? And then the second question is a bit more less sealed, but previously, a few years ago, you've talked about Brexit being a potential generator of new opportunities. How do you see that part of the opportunity? Thank you.

Nigel, will you take the second half COVID expectations?

Yeah, so Oscar, the 3.65 in the first half, we expect that to drop off in the second half. So we're expecting something to be a little bit more than £100 million less than we've seen in the first half. But also within the second half, there's a split as well. We expect the number to be relatively high in quarter three and really start to drop off in quarter four.

So about 100 million less in revenue and maybe a bit more than 100 million less for COVID revenues in the second half. In terms of Brexit, we have not seen sight nor sound or hand nor hand of additional work. bidding at the moment for some work uh around border controls which are arguably brexit um uh uh related but in terms of um about being widespread additional work coming from that we we don't see them either frankly government has been so tied up with um uh covid and they have done what they needed to do in terms of some of the trading, but in terms of the long-term regulatory environment, actually it has not been so much done on that at the moment, and we're not holding our breath. Does that do it for you, Oscar?

Yes, yes.

Next question.

Once again, for any questions, you may press star 1 on your telephone. Your last question is from the line of Joe Brent from Liberum. Please ask your question.

Good morning, gentlemen. Good morning, Joe. Can I go for three questions? That seems to be the order of the day. Maybe take them one at a time. So firstly, on inflation, you say rightly that's the plat du jour. And there's a good chart in your appendix which shows your exposure. Could you... Based on what you know, do you see the principal exposure as being asylum, and do you see this being something we need to worry about?

No, because I think that compared to, A, we've got quite a lot of protection within the contracts. From all of our long-term contracts, we have a variety of protections for inflation, ranging, it can be CPI, it can be specific, indexes like utilities or labor. And then for the short-term stuff, we're going to be bidding at the spot rate. So if it is a short-term issue, it normally corrects itself over time. The other thing I would say on ASE is that the volumes are far bigger than we expected anyway, so there might be some short-term dilution in terms of per head in terms of if the utility costs go up, but against that is that we've got many more people. We've sort of added 7%, and we're now running at about 25,000 people. But most of our revenues are inflation, get inflation adjusted, and mostly that works in our favor because we do a bit better than inflation in terms of our driving out costs out of the contract.

Thank you. And the second question was on your distribution plans. Do you have a stated dividend policy? And what are your buyback plans?

So we will address our, you know, we'll give an update on our capital allocation and our plans for that at the capital market today. We've started at a four times cover at the last December. And I think that we recognize that that is a pretty prudent level of coverage. However, as I say, it's notionally a 15% increase on their interim. We will clearly take a decision about the final nearer the time. But we would expect to give more clarity on the dividend policy at the capital markets but I think that you will see a 15% increase. It shows that we are interested in increasing the dividend over time. In terms of the other elements, in terms of share buybacks, you will know that we have been, we regard that as a tool in the armoury. It was used for a very specific purpose back in the first half of this year to try and find a way of returning some value to shareholders who have been denied a final dividend for last year and interim for 2020. So that was a sort of pragmatic approach. and I think that we will, you know, let's just get through the next four or five months before we sort of take a further view forward on which of the tools that we might use, and we will give a full update at the capital markets day.

Thank you. And the final question, I mean, I'm struggling a bit with this, so if Nigel could come up with some numbers, it would be great, but you talk about reducing drag in capital leisure, transport, and health. Can you give some details of what that means for the second half and maybe 22, and particularly some detail on Mersey Rail? I have no real sense personally of where that's going, although I suspect it's getting better.

Yeah. I mean, listen, this is a difficult one to try and predict and guess. What we can tell you about on Mersey Rail is that we are seeing ridership go up, but we're only at the moment about two-thirds of what we'd ordinarily expect to be at this time of year. But there's an interesting mix within that. We're seeing less than the two-thirds of the weekdays and more at the weekends. There's more recreation. So I think really, to give you an honest answer to what's going to happen on Merseville, I think we have to see what happens to commuters and how they approach commuting when they come back. September, October, we'll get a better feel for that. As far as ledger's concerned, We're starting to see some pick-up. Obviously, lockdown was there for sporting machines. We're seeing some pick-up. Passion is about 60% of what we would expect to be. A little bit of a drop-off in July, but nothing that we would be concerned about. And then health really is about absence and is about managing costs. And we see progress in elastin levels come down compared to what we saw in the first quarter. So that's what we're seeing, but the first quarter was poor, the second quarter got better, and we're expecting further improvement in quality.

And in terms of the absence rates across the business in the UK, they come down from about 10% down to about 7%. So there is some progress there. But I'm slightly unwilling to go and put hard numbers on what that might represent. I mean, the biggest one of them, I mean, Mersey Rail was a very big company. hit for us and we got no government support for that almost uniquely amongst operating companies so that is quite highly leveraged and as Nigel was saying we're running now at about 60 to 65% of our normal levels but it ain't going to get much above that until people start going back to offices Great, thank you. Thank you. Any more questions?

Once again, please press star number one if you have questions.

Okay, I think we are done. Thank you all very much indeed for your attention. And as always, Paul Checketts is here to ask any other questions that you might have. And of course, myself and Nigel are free. Thank you all and goodbye.