Serco Group Plc Sp/Adr

OK, good morning, everybody, and welcome to both those in the room and online to the 2001 annual results presentation of Serco. My name is Rupert Soames, and I'm the chief executive, and I'm joined on the stage by Nigel Crossley, CFO, Anthony Kirby at the end, the chief operating officer, and Mark Irwin, the CEO of our largest division, UK and Europe. Mark will be talking about UK&E and also about one of our most exciting sectors, being space. Anthony will be talking about labour markets and the people services which support our B2G platform. John Rishton, our chairman, is also here in the room as the responsible adult for me. 2021 has been another very challenging year. And it's been another year in which, dare I say it, Serco has performed out of its socks. In my first slide, I would normally start by talking about the financial performance, but on this occasion, I just wanted to remind people what a heinous year 2021 was, with dislocated labour markets, successive waves of COVID, high absence and attrition rates, constantly changing regulations and volatile demand for COVID and related services. And I have to say that in my 35 years as a manager of international businesses, 2021 ranks as the most difficult, the most difficult for line management who have borne the brunt and stress of successive challenges. And I want to pay tribute not only to the frontline people who've been the tens of thousands, the 90% of Serco people who work on the frontline, but also to their line managers, who it has been an incredibly complex and difficult situation to manage through, very stressful, and they've done a stellar job over the last 12 months. And given the very difficult operational background, it's been all the more creditable that the financial performance of the business has been so strong. Revenue up 16% and 10% of that growth organic. Underlying trading profit was up 45% and our margins increased to 5.2%. Cash flow was very strong. And despite spending £249 million on acquisitions, we ended the year with a leverage of 0.7 times, which is just slightly more than the Nats whisker above the level of last year. Our return on invested capital, which is one of our key measures, increased from 19% to 24%. As remarkable as our strong trading performance, we had record order intake of 5.5 billion pounds, a book-to-bill ratio of 125%. And despite this very high level of order intake, our closing pipeline stood at almost 10 billion pounds, up from 6.4 billion at the start of the year. And I'm delighted to say that as a result of this strong performance, the Board has agreed a share buyback programme of up to £90 million and a proposed increase in the final dividend of 15%. In terms of guidance for 2022, this is materially unchanged from the pre-close update we gave in December, albeit it's been adjusted to take account of the lower levels of opening debt and the share buyback programme. And I'm delighted to say that we've had a strong start to 2022 with over £600 million of order intake in the first six weeks of the year. Hopefully, we're going to see far lower levels of COVID-related revenues in 2022, and we expect this to be a drag of around about 13% on our revenues. Whilst it's extremely difficult to untangle what is and what is not directly COVID related, we estimate that around about £60 million of the profit that we made in 2021 will not recur in 2022. So the strong performance in 21 does give us the opportunity to just cast our eyes back over the last five years. And I lay before you like a soggy but enthusiastic Spaniel, the track record of Serco since 2017. compound growth in revenue of 11%, UTP of 36%, ROIC increased from 9% to 24%, cash flow increased by a factor of 10, and employee engagement dramatically improved. lest anybody say that this is all the result of COVID. I would like to point out that between pre-COVID 2019 and the largely post-COVID 22, revenues are set to increase by 30% and underlying trading profit by 60%. And on that happy note, I hand over to Nigel, who will take you through the numbers. Nigel.

Thank you, Rupert, and good morning to everybody. I'm going to start with an overview of the group's strong financial performance, which has continued through 2021. Revenue grew 14% to £4.4 billion, including 10% organic growth driven principally by a full year of COVID-related work and higher volumes in both the UK and Australian immigration contracts. Six percentage points of revenue growth was generated by two bulk acquisitions, Facilities First in Australia, which closed at the start of the year, and WBB in North America, which completed at the end of April. Underlying trading profit for the period was £229 million, an increase of 40% on 2020, and acquisitions have contributed about 11 percentage points to the group's profit growth, and foreign exchange had a negative impact of about 4 percentage points. Underlying trading margin was 5.2%, up from 4.2%. And underlying EPS was 12.56 pence. And this is almost 50% up on 2020, due to the strong trading profit performance, slightly lower finance costs, and a small benefit from the 2021 share buyback programme. And free cash flow of £190 million is the highest in any year in Serco's history. Cash conversion was 112% and leveraged 0.7 times, which is now below our target leverage range. So I'm going to start with the Americas, whose results have been impacted by the dollar when you translate it into sterling. But on a constant currency basis, revenue has grown 12%, of which 2% has been organic growth, and while underlying trading profit is up 25%. Citizen services saw the strongest growth in the region, benefiting from higher CMS volumes as the enrollment period extended during the year, as well as growth in other parts of the sector. Defence includes around £100 million of revenue from the WBB acquisition, which was partially offset by a small organic decline in the base business. And this reduction was due to the joint support ship work in Canada Marine going back in-house during the year, as well as delays in customers awarding new work. Although we saw a strong performance in the ship modernisation part of the business. Underlying trading profit for the Americas was £118 million, which increased the profit margin by 100 basis points in the year to 10.5%. This is due to higher margin business from the WBB acquisition, the higher volumes and operational efficiencies we've seen on the CMS contract, and stronger operational performance in a number of other areas. There was also a £3 million profit from the sale of the US parking contracts. The profit contribution from WBB was about $5 million less than we expected. And we're not worried about this because at the time of the transaction, we thought the impact of COVID on the defence business, which had resulted in slow order placement and difficulties hiring people, would ease during 2021, but it did not. And all across our defence business, we saw gummed up procurement and difficulties hiring new staff. We are now back on a more even keel, and delighted to say in the last two months, WBB secured over $100 million of new business. Order intake in the year was strong, with two large important defense recompete secured for Goose Bay Air Base in Canada and the anti-terrorist force protection contract for the U.S. Army. Also, the US Navy has announced the award to Circa of the Ship Acquisition Program and Project Management Contract, which has an expected value of over 250 million pounds. But since the award was made, there has been a protest. And at the moment, we're not including that in our order intake. In addition, and gratifyingly, the US Government Accountability Office held up our protest against the award of the C21 contract to a competitor, and we've subsequently been awarded an extension to this existing contract. And the Americas pipeline remains strong at 2.2 billion pounds, with defence making up the bulk of the opportunities, and with a significant value of bids already submitted and awaiting decision by the customer. So moving on to Asia-Pacific, where revenue has grown 26% to over £900 million. Eight percentage points of this growth has been organic, while 15 percentage points came from the acquisition of Facilities First Australia. And foreign exchange has added a further two percentage points. The acquisition, which is included within the health and FM sector, has performed well. But the impact of COVID has been mixed. There have been higher volumes of cleaning offset by the customer deprioritising some of the asset management and hard FM work. But overall, profit was in line with our expectations for the year. Justice and immigration has generated strong growth from the newly built Clarence Prison in New South Wales, where the prison is currently operating at around two-thirds of full capacity. There's been further growth in immigration revenue due to higher variable work. And citizen services also perform well, particularly in ramping up COVID support contact centre activities. Underlying trading profit margin for the period has increased by 1.1 percentage points to 5.6% due to increased volumes on the immigration contract, good margins on short-term work in citizen services, and the operational leverage of stable fixed costs combined with higher revenues. Order intake in the period was relatively light as the pipeline is being rebuilt, but did include, importantly, a successful two-year extension on the immigration contract through to the end of 2023. And the pipeline in ASPAC now includes the largest opportunity in the group, being the vehicle licensing contract in Victoria. The Middle East Division's results have started to reflect the impact of Dubai Metro that came to an end in September, which has had a more significant impact on revenue than it has on profit. In a full year, the loss of the Metro contract will have an impact of around about £100 million on revenue, but only £3 million on profit. And overall, revenue was down 13% in the region on a constant currency basis, while underlying trading profit was held flat year on year. The transport sector was down on the year from both Dubai Metro ending, but also air traffic control and other airport-related contracts experienced a reduction in the volume of flights and passengers during the pandemic. But encouragingly, we are starting to see some early signs of recovery in this part of the business. Facilities management work within health and FM experienced lower levels of project work, principally as a result of customers deferring work during the pandemic. And despite the lower revenues, profit was flat in the period. And this is largely because of higher volumes on scope changes on some of the more profitable contracts that we have, and through good cost control on contracts where revenues have been negatively impacted by COVID. There's also been some wins in the period, including the Ras Al Khaimah air traffic control, Dubai Airport technical manpower, as well as the mobilization of the Dubai Metro customer services contract. There's also been good progress on rebuilding the pipeline in the region, both on a sector and a geographical basis, with the largest opportunities in air traffic control, fire and rescue services, and asset management. I'm going to leave the UK&E slide for Mark to talk us through when he gets up shortly, so I'm going to move on to cash flow. Free cash flow was exceptional in the year, continuing our recent trend of strong cash generation. Trading cash conversion was 112%, as working capital investment was a positive inflow, despite the significant organic revenue growth. And this is due to the collection of older debts, customers paying early to support their suppliers during the pandemic, the successful closed-out and debtor collection of Dubai Metro, and some favourable timing effects. We've not used any financing facilities or efforts out of the ordinary to reduce our period-end net debt. And we continue to comply with the UK government's prompt payment code, and 89% of UK suppliers were paid within 30 days of receiving an invoice. Working capital performance was better than we expected due to the continued prompt customer payments, which will now return to normal in 2022 as those contracts come to an end. And as we've previously set out, over the medium term, we expect cash conversion to be around about 80%. The better than expected cash flow in the year is also reflected in net debt, with adjusted net debt of £178 million and covenant leverage of 0.7 times EBITDA. Adjusted net debt has increased by £120 million in the period, after investing almost £250 million in acquisitions, £20 million in the shared buyback programme, and paying our first dividend for seven years. So turning to capital allocation. And in 2021, once again, delivered strong cash generation and maintained a strong balance sheet, which has enabled cash to be used in all four of our capital priorities. First, we've continued to invest in the business to generate organic growth, which has delivered revenue and profit growth in the year above our financial targets, as well as order intake of £5.5 billion and book-to-bill of 125%. In addition, we invested an incremental £10 million in systems, processes and efficiency programmes to provide improved tools to support the business, which included workforce management, Serco Workforce Solutions, SAP Europe and People First. And second priority, we've announced today a final dividend for 2021, which is a 15% year-on-year increase and puts the group on a path to sustainable increase in dividends, which over time will take our cover down towards three times. Our third capital allocation priority is to fund Bolton acquisitions. And in 2021, we've completed three acquisitions, WB in North America Defence, Facilities First Australia, and Clemeco in Defence in Europe. The total cost of the acquisitions was around 250 million pounds, and these have all been funded using the balance sheet. Our final capital priority is to return surplus cash to shareholders. And we've ended 2021 with leverage of around £90 million below the bottom of our target range. So today we've announced a share buyback programme of £90 million, which will take leverage back to the bottom of the target range whilst retaining flexibility to fund acquisitions when they arise. And I just want to touch on inflation and the protection we have in our long-term contracts, and which is particularly important in the current economic climate. And this comes in many different forms with different customers across different regions. But 86% of our revenue is covered by one of indexation, cost-plus contracts, or short-term contracts of less than one year. Cost-plus contracts enable us to pass all cost increases to the customer. Indexation clauses in our contracts allow pricing to be increased annually, which are often linked to CPI or RPI. Our other indices, for example, building materials or medical staff wage indices, if there is a large concentration of these costs in the contract. And short-term contracts, often task orders or short-term consulting type contracts, which we see most commonly in North America and the Middle East, allows to price contracts using current costs and avoid inflation risk. The other 15% of our revenues has some kind of inflation protection, whether it be an agreed fixed annual escalation increase, typically of 2% to 3%, where we take the risk or benefit if inflation is higher or lower, We have long-term agreements with our suppliers that have the same pricing terms that we have with our customers. Or there may be an agreed customer practice to go back to the customer for price increases to cover inflation, and we have seen that recently in North America. So we estimate that there's only a very small part of our revenue that has no inflation protection. Overall, we have good protection against inflation in our contracts. There will be some timing differences where indexation uplifts are after price increases have been incurred. Or there'll be some cost spikes like utilities or driver salaries that are higher than the indexation received. But conversely, there'll also be some fixed costs where there's no inflation. So we're going to 2022 wary of the impacts of inflation, but satisfied we have strong contractual protection. And at our investment committee, we continue to scrutinize the inflation protection built into our contracts that we're bidding for. And just to finish off on this point, previous history tends to suggest that overall, moderate inflation is a slight help to our business over the medium term. So finally, giving off guidance, which is broadly unchanged from what was communicated ahead of the Capital Markets Day and now includes the assumed share buyback of £90 million. Revenue for the full year is expected between £4.1 and £4.2 billion, which equals 8% organic revenue decline. Within that, COVID work ending accounts for about 13% of decline, which is partially offset by about 5% growth on our base business. And within our full year trading profit guidance of 195 million pounds, which is 34 million pounds lower year on year, there are some major moving items. Clearly, the majority of COVID work will drop away, which we expect to have a non-recurring element of around 60 million pounds of UTP in 2022, along with the annualization of the loss of AWE and Dubai Metro. However, DWP restart will move from mobilization to operation, The DIO contracts through the VIVO joint venture will commence, as well as mobilising other order intake we won in 2021. In addition, we are not expecting to repeat some of the accelerated investments that we made in 2021. Our free cash flow is expected to be approximately £100 million for the year, and the trading cash conversion around 80%, as some of the benefits in 2021 will not repeat. After factoring in the share buyback, adjusted net debt will be around £220 million at the end of the year, and leverage around the bottom end of our target range of one to two times EBITDA. So I'm now going to hand over to Mark, who will talk us through the UK and E-business.

Nigel, thank you, and good morning to everyone. My name is Mark Irwin. I've had the privilege of leading our UK and Europe business over the past 18 months, and prior to that, led our business in Asia Pacific for six years. In the next few minutes, we will take a closer look at the FY21 results for the UK and Europe, and I will conclude, as Rupert indicated, by looking very briefly at our international space business. Rupert's opening comments regarding another year of strong operational and financial delivery for Serco Group applies very much in the context of FY21 for the UK and Europe division as well. Over the reporting period, we've seen the continued courage and commitment of our frontline teams, strengthened relationships with our customers, effective utilisation of our operating platform and disciplined management of our business underpin growth in the division, leading to revenues of £2.1 billion. Revenue from our Climaco acquisition was less than 1% in the year, so that growth actually represents 20% of organic growth during the period. We've grown in every part of our business. particularly in our citizen services business, through which we deliver our services to the Health Security Agency in the UK, the Department for Work and Pensions, and the Office for National Statistics. As you can see, we've also had strong performance in our justice and immigration business with the mobilisation of the next generation of prisoner escort and court security contract, higher volumes in the asylum accommodation contract and continued good results in our core custodial operations. We're pleased that even in parts of our portfolio, like transport and health, which experienced lingering impacts negatively of the pandemic, we've delivered year on year growth and made a positive contribution to the division and the group. Our environmental services business was particularly challenged as it was directly impacted by the driver shortages seen more broadly in the market, compounded by COVID absences and significant increases in household refuse and recycling materials as significant parts of the population continued to work from home and shop online. We are working with our teams and our customers to address these impacts as part of an ongoing performance improvement program going into 2022. In 2021, we also saw the conclusion of our services at AWE at the end of June in line with the government's announcement. Underlying trading profit for the division increased to £96 million in FY21, up from £57 million in the prior year and £38 million in 2019. You'll see that margins also improved in the year to 4.5% compared to 3.2% in the prior year and 2.8% in 2019. Order intake was particularly strong at around £3.4 billion, representing around 60% of the group's total order intake. Significant wins for us included the Defence Infrastructure Organisation, or DIO, award to our VIVO joint venture with Equans, which we estimate will have a value in aggregate to circa of 1.9 billion pounds over the initial seven year term. This contract includes responsibility for the maintenance of some 200 military sites, 19,000 buildings, and in excess of 20,000 homes for defense personnel. The order intake also includes our Department for Work and Pensions restart contract, which we had valued estimated at 350 million pounds, and the COVID-19 testing centre contract, which we valued at up to 190 million pounds at the time of award. In Europe, Clemaco has integrated us into the Belgian Navy's support system and has allowed us to leverage our global maritime capability to now provide maintenance and support for the Navy's Mine Hunter class of ships, which it shares in a cross-border program with the Dutch Navy. In addition, we've had a positive start to 2022 with the award to operate Her Majesty's Prison Glen Parva, valued at over £300 million, and a new two-year contract for the post-COVID single service centre for the UK Health Security Agency, providing us the opportunity for service continuity as the government leads the country through the living with COVID phase, as well as other UK HSA services like the flu hotline. Looking ahead, we have a positive and healthy pipeline for our business across all of our chosen market segments. The current pipeline also reflects our active portfolio management to shape the type of business we want to have by the end of our current strategic period in 2026. Key bids include various opportunities related to Skynet, the armed forces recruitment and inland border facilities opportunities, and a robust pipeline of existing and new prison operation opportunities, as well as CPMS, which is the continued provision of marine services which provide operation and maintenance services to the Royal Navy's support fleet. So in summary, when we look across the division and our performance in 2021, we've delivered strong operational, financial and growth performance in our business for the year. I'd now like to conclude by just taking a minute or so to highlight our work in the space sector as one of the key areas of opportunity for the division and for the group. From a UK and Europe perspective, we're excited about the opportunity we have to grow geographically in Europe as governments increasingly look to the private sector to help them with both skills and budget deficits. And within that space, which currently represents 60% of our European portfolio, is a strategic sector that allows us to leverage deep sector expertise and international breadth through our B2G platform to deliver future growth. Today, we have more than 1,000 specialists across our business supporting end-to-end operations and the entire lifecycle of the satellite from concept to launch and into operations. We manage over 500,000 registered users globally for the Earth observation Copernicus services and process 47 million Earth observation images on our data platforms. In 2021, notable contract wins in the sector for us included a new contract with the European Space Agency to support satellite operations in Germany and a new contract with the same agency to provide operations and evolution of data access and user support services. But beyond the work we do with the UK MOD and the space agencies in Europe, we have long-term and valued relationships with the US Space Force through the acquisition of WBB. So I hope you'll see that we already have a credible and growing presence in the sector, and we know that governments in all of our operating geographies have space ambitions, have existing or evolving space strategies, and space agencies that have varying degrees of maturity. as a services provider rather than an OEM. Serco is technology agnostic, and so we offer a differentiated value proposition as a managed service integrator, bringing together alliances and partnerships to offer governments highly effective end-to-end solutions. Recent examples of this include the alliance we have in the UK, where Serco has partnered with Lockheed Martin, CGI and Inmarsat, and the Onda Dias collaboration we have in Europe, where we partner with cloud technology providers like OVHcloud and geospatial service providers like Airbus. So I hope this has given you just a glimpse into the current space business and how the market differentiation that has been enabled by our B2G platform is supporting our plans for future growth. Thank you. I'd like to welcome Anthony Kirby.

Great. Thanks Mark and good morning everybody. So over a number of years you will have seen that we've been building our capability to deliver superb public services and have an ambition to become the best managed business in our sector. We need to bear in mind two key characteristics of our business. The first is that the services we deliver are all people powered, enabled by technology. The second is that our customers everywhere in the world don't do standard. They demand almost every contract should be different and bespoke. They also demand that they should be low cost and wrapped in a blanket of assurance and compliance. So this is the conundrum we invented our B2G platform to resolve. Bespoke services delivered on an industrial scale. Serco is now a team of more than 60,000 people representing around 60% of our cost base, all enabled by scaled processes and a platform of resilient and responsive shared services. And I want to focus for a moment on how that B2G platform provides people services across the group. Focusing specifically on last year, we hired around 22,000 people across 300 varied job roles, an example of some of them you can see on the slide there, having received just short of 400,000 applications. To hire that many people on that scale, our processes have to be effective and responsive from both a candidate and a hiring manager perspective. Our ability to mobilize, to ramp up and ramp down workforces, to meet the ever-changing demands of our customers around the world has to be agile, nimble, and cost-efficient. I feel that this really does position us well, more so than ever before, to deliver for our current and future contracts. To illustrate the point of agility and capability from a labour management perspective, we've leveraged the scale and consistency of that B2G platform by moving from 4,000 to 13,000 to 600 test and trace agents over the past 12 months, as well as stepping up more than 1,000 people for the Department of Health in Victoria. We've had to onboard them, train them, manage and engage them, and pay them. We've scaled up to cope with the annual CMS surge in the US. We've ramped up, down, and back up again our resources on the Dubai airport contract and the DES contract in Canada, and provided additional resources in healthcare settings in both the UK and Hong Kong. All of this at the same time as onboarding and integrating more than 3,500 people through the three acquisitions, demonstrating resilience in the platform, agility in our approach, and the breadth of capability to deliver in the future. But 2021 presented many challenges, and once again, we spent the year adapting to and living within a complex landscape brought on by COVID and its impacts, and those felt no more acutely than by our line managers. It's felt that the labour markets have changed more rapidly and dramatically than ever before, and certainly more so than many of us have ever seen or experienced. And I think this has been driven by a combination of factors, really. Most notably, border restrictions within or across countries, the change in expectations of people who have chosen different career paths, the draw of significantly more money, or those who have retired earlier than planned, or earlier than they planned to do so. And there's many other examples as well. In addition, the change in approach in some parts of the world to vaccine mandates has not helped with some of those challenges, such as the federal mandates in the US or state mandates in different parts of Australia. During 21, our average vacancies increased to around 5,700 from a 2019 average of around 4,000. And as we entered 22, our vacancies stood somewhere near 7,000. This was despite the high level of interest from people wanting to work at Serco and the record number of hires that was driven by a combination of new business, organic growth and labour turnover. Inflationary pressures across the globe, as Nigel spoke to, have played a part in the change in labour markets, and we see some of that being reflected in wage demands and wage negotiations. But if I just ask you to dare cast your mind back to a world pre-COVID, absence rates in Serco were relatively predictable and manageable. Our average rates were between 3% and 4% globally. Thankfully, we didn't experience absence rates as we experienced in April 2020 at any stage during 2021, albeit at the start of 21 and towards the end of 21, when Omicron appeared, they did peak at around 7.3%, but averaged across the year at 5.5%. When you've got well-trained and motivated people who are able to deliver in the face of adversity as we do at Serco, they're always going to feel well in a candidate market. And we've seen a slight uptick in the voluntary attrition, particularly in Q2 and Q3 of 21, but I'm glad to say that we can see those plateauing out over the last three months. So I think I've given you a snapshot of the challenges there, but I'd just like to help you understand what we've been doing to address them, particularly on the right of the slide. We've accelerated the rollout of our WFM workforce management platforms and processes around the world with more than 27,000 people now using those systems. Not only does it help our contract managers plan labour demands and costs accordingly, it also allows our people to manage their working weeks and rostered months well in advance and where we've deployed workforce management we actually see labour attrition reducing. We've invested heavily in our new people platform called People First which has improved significantly a number of processes which either the individual or the line managers have to complete such as recruitment, onboarding, issuing new contracts and so on. In fact, the other day when we were reviewing people first implementation, it was 45 minutes between a hiring manager pressing hire on the system following the interview and the contract being returned by the individual. Now, typically, that would have taken days previously. And people have choice. They will go and work somewhere else. So we're very happy with the progress that we've made there. And in addition, we've also launched our new Serco Workforce Solutions platform, which allows us to rapidly recruit on board and deploy labor into high volume environments, such as testing centers in the UK and soon to be call center operations in Australia. SWS now deploy around 5,000 people a day and acts as the contingent in-house labour supplier to all of our contracts. We've invested in our technology platforms and now have access to both leading edge market analytics and insights, along with a suite of internal lead indicators that is enabling us to identify early attrition risks and labour turnover hotspots. Unlike many organisations in 2020 and 21, we continue to invest in our graduate schemes, recruiting 30 new leaders of the future from more than 2,000 applications around the world. This says to me that Serco's employment brand stands out in the market. We've reinvigorated our wellbeing support for our people. Today, more than 26,000 of our colleagues have engaged with our wellbeing resources, everything from mental health awareness to resources for helping their families access our assistance programmes. And for the second year, we've made a recognition payment to more than 50,000 frontline colleagues at a cost of around 6 million. We also took the decision to invest and make a £4 million donation to the Serco People Fund, a new independent charity that supports Serco people and their families when they face extraordinary circumstances. Since launching in the UK and soon to be rolled out in the other divisions across the world, the fund has already helped 40 Serco people, ranging from supporting an 11-year-old of a relative to be provided with a bionic arm to multiple victims of domestic abuse. All of these things we know will help us stand out from the crowd and attract good quality, capable people. Our objective, our ambition, which thankfully often we achieve, is that top class people join us for our mission and stay for our culture. Thank you Rupert.

Thank you. Right, so as many of you will know, for the last 18 years as a public company CEO, I've been presenting results talking equally about both the highlights and the lowlights of our years to help investors and others gain a balanced view of the triumphs and the disasters of the year. And as always, I'm going to start with the lowlights. And the first amongst these must be the fact that whilst COVID has been compared to war without the killing, it has certainly not been without the dying. And over the last two years, 28 of our colleagues have died of or with COVID. And nearly all of these people were working on the front line in hospitals, prisons, defence establishments or wherever. At the beginning of 2021, we thought that the fight against COVID would have been pretty much won by the half year, and it turned out that that was not a correct judgment. And it lasted much longer than we expected and had a notable impact, as Nigel was mentioning, on both WBB and FFA, who suffered from gummed-up procurement processes and also difficult labour markets. And across nearly all of our businesses, we had high rates of absence due to sickness at different points of the year. But the flip side of this was that COVID lasting longer than we had anticipated meant that we had higher than expected COVID related revenues, albeit that these were highly volatile from month to month. The number of traces that we had in the UK rose from 4,000 in April to 13,000 in August and back down to 600 in December. As always, we lost some contracts, and the largest we lost in 2021 was Dubai Metro, which accounted for annual revenues of a little over £100 million, albeit at very low margins. But perhaps the greatest challenge of the year, as Anthony was describing, were our dislocated labour markets. In the UK, the ASC business has had to deal with a very rapid increase in the number of asylum seekers we were looking after during the year. And this meant that we had to fall back on using hotels quite extensively, rather than the preferred model of finding houses for people to live in the community. And hotels are not a good solution for either asylum seekers or the local communities, and we'll be working hard throughout 2022 to find extra accommodation for our service users. We were also pretty badly hit by the increase in energy costs in the AASC business. Particularly upsetting for us was the discovery that some of the agencies that supplied us with contingent labour, unbeknownst to us, were employing temporary staff through structures called mini-umbrella companies, which were specifically designed by the agencies to avoid government levies such as national insurance and the apprenticeship levy. For the avoidance of doubt, Serco paid all the appropriate taxes and levies to our suppliers. But at some point in the supply chain, those monies were not paid over as they should have been to the authorities. And as soon as we discovered this, we removed these agencies and informed the authorities. Finally, and as we have previously reported, we had a cyber attack on our European business, which happily led to only minimal disruption to our services to clients, but it was expensive and distracting to resolve. And now, with some relief, let's go to the happy list. Clearly, the financial performance was outstanding, and I would just draw your attention to a couple of facts. Notably, that our return on invested capital, our ROIC, now stands at 24%, and the cash flow was so strong that despite 249 million spent on acquisitions, we still ended up with leverage of only 0.7 times. It's also a reflection of the type of business that we are and the reach that we've got and on our international footprint that despite an outstanding performance in the UK in 2021, two-thirds of our profits actually come from outside the UK. And we think that this reflects our position as a truly international provider of government services and our exposure to over 65% of the world's government outsourcing services marketplace. And I want to also re-emphasise, if I haven't told you twice, I'll tell you a third time, the strong growth in our non-COVID business and the fact that between pre-COVID 2019 and the largely post-COVID 22, we estimate that our revenues will increase by 30% and our profits by 60%. And I think that this underlines the fact that COVID has brought a huge number of benefits to us as an organisation. It's brought scale, it's brought capability, and that this is going to be an advantage to us beyond just short-term revenues. I would also highlight, indeed, the achievement of the fact that we've managed to do three acquisitions during the year, all of which are now integrating well into our business. Despite WEB not performing exactly as we'd anticipated during the year, we are completely confident that it and Facilities First in Australia will be important contributions to our strategy in the year ahead, and we're very pleased with these acquisitions. I'm not going to reiterate the numbers around order intake and pipeline other than to say that they are magnificent and by any standards, incredibly strong. I'm also pleased with a strong start to 22 and the fact that we have won the contract to operate the new prison being built by the Ministry of Justice, HMP Glen Parva. And there are a million examples of really strong operational performance during the year, despite the huge challenges. And perversely, I'm going to call two out that are actually contract exits, which are never easy to manage. It's said that you judge a regiment by the way it leaves its barracks, not the way it arrives. And I'm very proud of the professional way in which we manage exits of both the Dubai Metro and AWE. And in the same vein, I'm delighted with the way that the mobilisation of the first Vivo contracts in early February have gone as well. I would also point out that prisons have been really hard places over the last two years, both for our staff and indeed for the men themselves, who have in many instances been locked down in their cells, tiny cells, for 23 hours a day for months on end and unable to receive visitors. My respect goes both to our staff and the prisoners themselves who were incredibly stoical under really difficult and tough conditions. I'm going to end this highlight slide by noting that during the year we recruited some 21,500 people. Our engagement scores remain strong at over 70. Our gender pay gap reduced by 4 percentage points to 7%. And we diverted 10 million of our profits into frontline bonuses for 52,000 people and made a £4 million donation to a new charity we've set up called the Serco People Fund. whose purpose is specifically to help Serco colleagues in times of need. Now, I'm just going to wrap up quickly with a few words to remind you, as we talked about at our Capital Markets Day, about our management framework and the B2G platform and the competitive advantages that brings us. The agility to be able to respond to government requirements as they change really quickly across the world. the breadth of skills that we have, of the areas of government expenditure we cover, the reach that we have internationally, the efficiency that comes from having our business to government platform and large and efficient shared services organisation, and the resilience that both of those give us. And this unique business model allows us to focus on areas of fastest growth and greatest government need, around the world and thereby grow faster than the market. The key messages after a successful year are our markets are liquid, diverse, and growing. Private sector expertise is valued. We've got a consistent track record of success. We've got a strong and differentiated position. And our powerful and scalable B2G platform is an engine for efficiency and growth. And there's still a lot more to do. We're a valued and trusted partner of government, never more so at this as COVID runs out and becomes part of our history. And we expect over the medium term to our revenues to grow at about twice the speed of the rate of the market. We expect profits to grow faster than revenues. We expect to have over 80% conversion of profits into cash, and we expect returns to shareholders to grow faster than profits. And on that, we will cut over to Q&A, first of all in the room, and then we will go to those who are accessing the meeting remotely in the room. David Brockton. If you can say your name so people know the cheeky questions that you're asking where you come from so we know where you live.

David Brockton at Numis. Could I ask two questions please? Firstly related to capital allocation, I think you gave very clear reasons for the buyback this morning, but could one read into that that there aren't sizeable opportunities in the pipeline for M&A? I think that would be the first question. And the second question actually relates to it, so I'll give that at the same time. I note the enhanced divisional disclosure by sector, which you've historically had but now in the presentation, And I just wonder what your current thinking is with regards to filling out those sectors in each of those regions. So is there a justice opportunity in the Americas, for example?

Shall I leave the M&A to you and I'll do the segments?

Do you want me to say the capital allocation question? Yeah, happy to do that. If we look at our capital allocation, we're going to do a share buyback that gets to the bottom of our range. We think EBITDA this year is going to be around £260 million. That leaves an awful lot of capacity to go out and make acquisitions without breaching the top of our leverage range. So when we look at that, we think there are opportunities out there. Sorry, we think if there are opportunities out there, we have the balance sheets built to go and do more M&A work.

And, of course, it's a matter of balance between keeping your powder dry and returning money to shareholders. And we think we've got about the right balance. In terms of going, expanding into new areas, we're always on the road. But we do cover sort of 65% of government spend. And we've got this breadth. We've also got the ability to go and help other divisions. So I think our guardrail, really, is government. work. To the extent that stuff comes up with our current work, we call it citizen services, which is a pretty good catch-all. Next question, please. Yeah, Paul. Paul Sullivan from Barclays.

Thank you. Yeah, it's Paul Sullivan from Barclays. Just a couple from me. Firstly, I mean, what does the pipeline say about your expanding capabilities and the expansion in your addressable markets? It looks like there's a few bids in there which are fairly new in that you may not have been capable of bidding for those before. And does it effectively, I mean, the size of it, does it effectively underwrite the mid-single-digit ambition now for 23 and even 24? That's the first question. And then when you look at 2022, coming back closer to home, what are the known moving parts that could materially impact the financial outcome for this year?

If anything at all. The outcome for a year is always uncertain. And Nigel can talk about all the many uncertainties that he will be imagining in his mind, particularly at this stage of the year. If I can talk about the pipeline, I think it's a fair question. Are we bidding for bigger stuff than we've ever done before? And I think the answer is yes, we feel more confident in our capability. And if you go and take that we are bidding to possibly build the fleet solid support, which is three large ships for the Royal Navy, based on a Dutch design by our Dutch partners, Darman. But then we just delivered the icebreaker to Australia. So it's what we've done before, but bigger. And I think that the biggest opportunity in our pipeline, but everything is capped at a billion in terms of value, would be the Victoria Roads franchise, which is a... bidding with partners with a consortium to go and run for a period of 20 or even 40 years the driver vehicle licensing in Australia. So I think that Yes, we feel that we are able to go and our capabilities are strong. We've proved ourselves the ability to do it. But we're not stepping out of stuff that we've done before. But we are maybe going up the range a bit. Things that could derail 22.

Where do I start? Where do you start? I think 2022 is a year where we're going to see some transition as the COVID work goes away and how do we fill that hole that's left by it? We've said already that COVID work £60 million. We know that AWE is coming out. But we had a heck of an order intake last year. And it's really, I think the big challenge for us this year and what will determine the success is how good a job we do with mobilising those. So the Vivo contract to do the DIO work I think is important. And also the restart, making sure that the mobilisation we did last year actually turns into a good profit this year. So those are the two biggest ones. But there's plenty of other work that we had in our in our order intake last year that we need to mobilize and make successful. But those will offset the gap that gets us back to the profit number that we're going to at the moment.

And I think the issue about the pipeline being very big, but it's also an incredibly volatile number. It goes from 6.4 to 9.9. I don't know what it'll be in June, but there's stuff coming in and going out of it all the time. I think it is unusual to have three opportunities within it that all are capped at a billion. So actually its value uncapped would probably be higher, but those will be adjudicated probably in the first half or shortly into the second half and could disappear like that and we could be back down to six billion. So I just wouldn't hang too much of your hat, a nice hat though it undoubtedly is, on the progression of our pipelines. It can be quite volatile. Thank you. Yes, another question in the room. Oscar.

Thank you. Yes, it's Oscar Valmas from JP Morgan. I have two questions. So the first one on the U.S. defense, so the U.S. division or more defense, you've had a lot of order intake, but you've also had some supply chain shortages around people and some project kind of delays to them restarting. How should we think about that in 2022 in terms of the wash between the two and any visibility on when some of those people issues will recover? that's the first question and then the second question you've touched on the pipeline but maybe if we focus on the uk maybe for mark have you seen a change in behavior now that we've turned the corner on covid you've won the inland border or you're bidding for the inland border facility is there more work to come in the uk maybe with brexit

Fine. So if I take the US one, and Mark, you can then talk about the UK. The point that we made earlier, which is this thing about dislocated labor markets is a feature of all of our markets, but in subtly different ways. So in Australia, you've had, broadly speaking, for large amounts of time, a population that's free to move and then got locked down really, really hard. In Western Australia, we still can't move people from literally from South Australia to Western Australia and won't be able to do so for a month or more. In the US, we've had added complications around the vaccine mandate. whether people you know the federal government saying you can't come on to federal sites unless you have a massive and then lots of people kicking off and saying uh no it's it's it's a complex um area and it is difficult to um uh recruit it's a very very tight uh labor market for particularly for the sorts of skills that we need and if you can imagine a niche skill being a welder who has top secret security clearance, that is a highly sought after skill and that a lot of people were nervous about coming back to work. I think we do see that easing. The other thing is that our customers themselves are working out to the extent that they want to be back at work. And the advantage that we have is we have scale. We've got how many people in the US? 9,000? No, 9,000. About 9,000 people. We are a significant player with very, very strong local management. And they manage it. And as you can imagine, it's different on the West Coast than it is on the East Coast. I don't see this as being, this will resolve itself. The market labor, the dislocation between supply and demand in the labor market will resolve it itself. But it is true, I think that in common with many of our peers, When you win new business in defence, your task then is to go and find the people to do it. And particularly with WBB, where to a certain extent, if you can get your subject matter experts into the business, you can go and win new business with them. It's been tough because a lot of the subject matter experts have been holed up in Montana or... saying, I'll stay here. Now, they are coming back into the market, and that is hopeful. So I see that situation as easy. Mark, UK.

So, Oscar, in terms of the UK, a little more than half of that group pipeline is currently in the UK, and we've added to that since that figure was published with inland borders the visa opportunity for the Home Office. visa processing, and so we do see ongoing demand. In terms of Brexit, there are two active programs at the moment, one for the Home Office, which is actually border security on both sides of the channel, and then we've referred to inland borders, which is actually an opportunity with HMRC around oversight for goods and vehicles coming in to UK borders and we expect that as we go through coming months there will be other areas including further potential work with the Home Office as changes in immigration laws may come into effect and then as I said during my initial summary, there is already a strong identified pipeline of opportunities with the Ministry of Justice where the current estate which has been PFI's largely are rolling off and all of that work is retended as operations support contracts for the existing prison estate and there are four more new prisons. which will come to market later this year, three of which will be competed for in the private sector, and one will stay with the public sector. So we certainly see, just in terms of the market dynamics, there is certainly opportunity driven by demand. I think the last thing that I would add, we also see agencies catching up, wanting to catch up with backlogs and further work, and that is not just about putting that work to market, but looking for better ways to deliver these services, to deal more efficiently with processing. and digitisation of these services. And certainly there is opportunity for us to leverage what we do, not just in the UK today, but some of the experience we have with colleagues in other divisions.

Right. Any more questions in the room? Mr Rawlinson.

Please may I ask three? One about space and two about asylum. Steven Rawlinson from Applied Value. Firstly, on space, just so you're right, the people for whom you'd be working may imply some sort of creep away from public sector customers. I may be wrong on that matter, but if I am wrong, please correct me. But if not, is there a bit of creep going on there, and is that meaningful in any way? And secondly, on asylum, Nigel's comment on the slides implies that you may have some liability for additional energy costs. Could you just sort of help us a little bit on the asylum seeker's contract, to what extent inflation is covered? I wouldn't ask normally, but of course the interest in energy costs could be substantial during the course of the next 12, 18 months. And a more topical question, forgive me on this one, but in terms of asylum, quite clearly with events over the last week or so, there might be a significant increase in the number of asylum seekers in the UK, some willingly accepted by the UK government. Is there a comment you're able to make on the capacity of the system to cope with that?

If I may, Mark, you can handle the assignment questions. If I can take the space one. Steven, nature never draws lines. She merely smudges them. We try to avoid debates about whether the ONDA consortium for providing data from the Copernicus satellite is actually being used by academics or by market research. Essentially, most of the effort that we're doing in space is funded one way or another by governments. So I accept your admonition that at some point there may be smudging of lines.

It was about admission creep, not admonition.

Yeah, yeah. Well, we don't regard... This is not the worst creep that I get confronted with by colleagues who want to go and provide call centres to people or whatever. But it's near enough government as makes no difference. On asylum, energy costs...

Yes, so two parts to your question on asylum. The first are on energy costs. Yes, we do, for the asylum accommodation contract, take the risk on energy costs. We've seen that increase certainly from 2020 to 2021 quite significantly, particularly through the back half of the year, about almost £10 million, and we will see some of that obviously flow through into 2022 as well. But we do have, obviously, our purchasing structured around that. And so we are hitched forward through the rest of 22 and into most of 23 at this stage. In terms of their numbers and our ability to accommodate, we saw in 2021 the asylum accommodation service user numbers that we are responsible for increased by 6,000. So we started the year at around 24,000 and ended at 30,000. And so we've shown the flexibility. including the challenges that were posed by COVID around safety and safeguarding people, placing them into COVID-safe environments to be able to adapt to that. Ultimately, it requires really strong collaboration between ourselves as a service provider, the Home Office in their ability to both bring people in but also begin to process people out of the system, and then working with local authorities because ultimately we need their buy-in to be able to place people into communities. And that is active collaboration that we continue to work on. So the capacity constraint really is access to properties and our ability to safely place people in community.

Fine. Good. Any other questions in the room? If not, let's go online. And can we have the first question online, please?

Thank you. To ask a question over the phone, the price is R and 1 on the dollar book keypad. So your first question over the phone comes from the line of Joe Brent from Libero. Please go ahead, Joe. The line is now open. Good morning, everybody.

Morning, Joe.

Three questions, if I may. Firstly, just on the COVID revenues, I think you talk about a drag of 60 million. MITEI were quite bullish, I think, about their Q4, which graced your Q1. So I was hoping that 22 might be slightly better than the previous. Can you give us an indication of what the move is, 21 to 22, to give that 60 million number? And then secondly, on the order intake, it seems to be stronger in the UK, and the UK has a lower margin than the US. Does that impact the group margin going forward? And then thirdly, you talk about labor challenges quite a lot, and make it to a very interesting observation. including the point that you made a $6 million frontline bonus in 2021. Do you think that is a drag or a pushback to in 2022? Is it getting worse and will it be incrementally bad? And will that bonuses to start repeats in 2022?

So, Anthony, will you in a moment take the issue about whether the six million bonus will repeat? Nigel, do you want to just take the COVID, it wasn't revenues, the profit drag I think Joe was referring to?

Yeah. Joe, when we put our budgets together, we assumed that there would be some testing volumes in quarter one, and then it would die off pretty quickly. I think what's happened since then is actually our volume has been a little bit busier in our quarter one at the start of it, but it's probably going to end a bit quicker than we previously thought. So net-net. But our expectations of the revenue and profit on that COVID work is not dissimilar to what we had at the time of the budget and the guidance we gave in January. So it's going to be about a £550 million of revenue. It's going to be about £60 million of profit, as we've already said, is what we expect to come out of the 2022 numbers that we got in 2021.

Anthony, on labor. Yep. So Joe, thanks for the question. I think first of all, you alluded to the labor market. And as I mentioned earlier, our attrition is improving. So over the last three months, we've seen improvements in attrition. We don't actually budget for the 6 million cost of frontline bonuses. We take a decision as we move through the year. And like I say, we haven't budgeted for that this year. So hopefully that answers the question.

And so in terms of the UK possibly being a drag going forward, I don't think Mark intends to be a drag in any respect going forward. I should say that he previously ran our business in Australia, so pretty much it's all his fault between Australia and the UK. But no, I mean, our target, Joe, is to get back into the five to six percentage point margin. And we've got to get that. And one of the ways will be improving the margin in the I think it's quite likely that over a period of time, some of our margins in the US may fade a bit because they are very high in the US. But in aggregate, as a group, we think that we can get back into that 5% to 6% margin range. We're at 5.2% at the moment. They're coming back to about 4.7%. That 4.7%, if you go back to 2019, it's still a full margin point. Yeah. ahead of where we were in 2019. So we're still progressing. Joe, do you want another three questions, or can we move on to someone else? You OK with that, Joe? Yeah, OK. Right, next question, please. Lovely. Thank you all very much indeed for coming. We'll be around for a little bit longer if anybody wants to have any other questions. Thank you for coming to our annual results meeting on this very grim day for Europe. And look forward to seeing some of you this evening indeed. Thank you for coming.