Serco Group Plc Sp/Adr

Good morning. My name is Mark Owen, Chief Exec for Serco Group. I'm joined this morning by Nigel Crossley, our Group CFO. May I start by thanking everyone who has taken the time to join us both in person and online today for our results presentation. We appreciate your time, your interest and your support for Serco. I would also like to acknowledge our chairman, John Rishton, who is with us this morning. And I'd like to welcome two new members of our group executive committee, Gillian Duggan, who has joined us in the new role of Chief People and Culture Officer, and Ruth McGowan, who has taken on responsibility as our Chief Strategy and Growth Officer for the group. As required, I need to ask you to note the disclaimer on the screen, which is also in your booklets for reference. Our plan today is for me to provide you a brief overview of our results for the first half before handing over to Nigel, who will take you through a detailed review of the business, and then I will come back with some highlights and lowlights of the year so far before closing comments and moving to Q&A. The positive results reported this morning are a credit to the commitment and capabilities of my Serco colleagues and I believe demonstrates the value of our geographic and sector diversity as well as the agility of our platform to respond to demand across our key markets. we're making good progress to further strengthen that platform to deliver profitable growth over the medium term and to achieve our strategic ambition to be the partner of choice to global governments. I believe our first half results are a good measure of that progress with double digit growth in revenue and profit backed by excellent cash generation. Revenue in the period grew by 13% to 2.5 billion pounds and underlying operating profit by 14% to 148 million in the period. Trading cash conversion remains high at over 90%. Our capital allocation model is supporting organic and inorganic growth and the return of capital to shareholders as we have done through the share buyback of £90 million, which has been completed in the half. The acquisition of ORS is the most recent example of our strategic approach to M&A. The deal was closed in September last year and is trading well ahead of expectations. Importantly, it's opened up a new geographic market for us in what we see as a long-term growth vertical for immigration services internationally. Our order intake in the period was 2.1 billion pounds, around 60% of which came from our North American business, and included the strategically important successful rebid of our Centers for Medicare and Medicaid Services, or CMS contract, that we've spoken about before. The largest single new business win was in Canada to support the Government of Ontario's Employment Services Transformation Programme. And across other regions, we've had new-ins with the UK Home Office to run the Derwinside Immigration Removal Centre, additional immigration work in the UK, and a contract to provide facilities management at a new hospital in the Neom Economic Zone in Saudi Arabia. Since the period end, We were pleased to be notified that the immigration detention facilities and detainee services management contract with the Australian Department of Home Affairs has been extended until December 2024. Our new business pipeline remains healthy, to value of 7.9 billion pounds, as does our order book, which currently stands at just over 14 billion pounds. All these positive metrics are reflected in our improved 2023 guidance as reported in our pre-closed trading update and we now expect revenues for the year to be at least 4.8 billion pounds and underlying operating profit of around 245 million pounds at the full year. I'll now hand over to Nigel to talk through the detail of our H1 results.

Thank you, Mark, and good morning to everybody. I'm going to start with a summary of the group's financial performance, which has been strong in the first half. But before I get into the numbers, I just want to remind everybody that we've simplified our reporting for 2023. The trading profit line, which was established to provide transparency on any movements that we had relating to provisions on our balance sheet review that we did in 2014, is no longer required, and we no longer report that number. So we now have underlying operating profit. which is the equivalent of the old underlying trading profit and is reported before amortisation of intangibles arising in acquisition and exceptional operating items. So getting into the numbers, revenue grew by 13% to £2.5 billion in the period. And organic growth was 6%. And that was particularly pleasing because we had £80 million or a 4% headwind from COVID work ending at the end of last year. And it should also be noted that Serco's revenue excludes joint ventures. And in the first half, growth and the ramp-up of new contracts in our joint ventures added around £140 million to Serco's share of revenue in the period. And that would have been the equivalent of 6% growth had it been included in Serco's top line. And ORS, the European immigration business we acquired in quarter three last year, has traded well ahead of our expectations, and that's generating 5% acquisition revenue growth in the period. Underlying operating profit was £148 million, an increase of 14% on 2022, with margins up slightly to 6%, which is the top end of our medium-term target range of 5% to 6%. We do generally see higher margins in the first half because of the timing of volume-related work, particularly on CMS, the Affordable Care Act eligibility contract. And underlying earnings per share is up 22% to 9.4 pence. And this reflects a strong trading performance combined with the benefit of the reduced share count as a consequence of the share buyback programmes. Reported EPS is up 75%, and that includes the benefits of £51 million of exceptional credits. And this is the release of a tax provision on disposal, which has now time elapsed, as well as compensation for lost profits from a contract taken back in-house ahead of its end date. And we continue to generate strong cash flows at £98 million in the period, representing a cash conversion of 92%. And 2023 will be the fifth consecutive year that the group's cash conversion has been over 90%, demonstrating the sustainable cash-generative nature of our business. So turning to the America's division first, and this is the group's highest profit-generating region. And it's maintained its momentum from last year and continued to win new business and secure existing contracts. Revenue is up 13%, including 6% organic growth, and then benefited from the stronger dollar. The defence sector reported good organic growth, increasing by 6%. This was supported by the strong winds that were reported in 2022, particularly in maritime, from SHAPEM and the NOMARS contract. And citizen services reported 6% growth, from the start-up of new contracts for the Government of Ontario, supporting unemployed people to get back into work, and leverage of the capability we have built in the UK. As well as CMS also had strong volumes in the period. Underlying operating profit of £79 million generated strong margins of 11%, albeit down slightly on the first half of 2022. And this reduction reflected some new business mobilisations. We've got a higher mix of lower margin, lower risk, cost plus work within the portfolio, and some defence IT management contracts we had last year has now transitioned from installation to operational phase. An order intake of £1.3 billion continues to be the highlight, with a book to bill of around 180%. And the most important of these wins was retaining the CMS case management contract, the division's largest contract with a value of nearly $700 million over the next four and a half years, albeit the margins will be lower than what we've had previously. And other new business wins included securing a new contract for employment services in Ontario, And despite these strong winds, the Americas pipeline remains very strong, an increase from £2.9 billion up from £2.5 billion at the start of the year, with a strong weighting in defence. In addition, there are further important rebates secured, including our contract with FEMA. So moving on to UK&E, which reported excellent results in the first half. Revenue increased 23%, including 11% organic growth, driven by demand for our immigration services across five countries and in defence. These more than offset the end of the COVID work in 2022 and contract exits such as DWP Universal Credit and Barts Hospital Trust, which will have a greater impact in the second half. The strong performance is measured in underlying operating profit, with an 80% increase in the period to £70 million and a margin of 5.7%. This included the successful conclusion of a commercial settlement in our Mercer Rail joint venture. Justice and immigration continue the momentum from 2022, and in particular immigration, where service user numbers continue to be elevated across both the UK and mainland Europe. This enabled ORS, the European immigration business, acquired in September last year to get off to a strong start, trading well ahead of our expectations. And citizens services benefited from the ramp up of the restart contract. And as expected, these were outweighed by the end of the COVID test and trace and the exit of the DWP universal credit contract. And the defence business traded well with higher revenue after re-securing our marine services contract and growth with our air defence radar operations. The Vivo joint venture continued the ramp-up of operations under its contracts with DIO, and while significant growth in revenue is not included in our results, our share of JV profits has supported both profitability and margins. An order intake in the period is relatively slow, at £0.7 billion, with a low level of contract decisions determined by the customer. Importantly, the new business and the rebid wind works were strong at 33% and 100% respectively, bouncing back after reporting lower wind rates in 2022. And the pipeline remains attractive at around £3 billion. So moving on to Asia-Pacific. which is the one part of the portfolio that's encountered strongest headwinds in the year, in the half year. And this is an area we are focused on to address the underlying issues impacting our performance. Organic revenue declined 4%. As expected, lower volumes in immigration services materialised, combined with reduced volumes in citizen services, where tight labour markets hampered our ability to fill vacant roles. An underlying profit margin for the period decreased by 360 basis points to 3.1%. And this was impacted by the immigration volume mix. Lower levels of facility management project work, some contract exits, and the impact of the tight labour markets on citizen services. And order intake was less than 0.1 billion pounds. And it's an important focus for us to improve the division's recent win rates and to strengthen and broaden the quality of the pipeline of opportunities. But the pipeline does include a very material opportunity, defence-based services, which is a large integrated FM contract for the Australian Defence Force. And moving on to the Middle East, and the Middle East has returned to growth in the first half of the year, with our new advisory business in citizen services making good progress. However, profit did decline in the first half from the exit of some higher margin facilities management contracts and the demobilisation of an air traffic control contract at the end of 2022. This reduction in profit is reflected in the margin decline to 6.8%. But given the size of the Middle East business, order intake was strong. This included new contracts for gigaprojects within the Kingdom of Saudi Arabia for Red Sea mobility services and facilities management at a new hospital in the Neom economic zone. Further contracts have been signed since the half year, and we are preferred bidder on others. And there remains a healthy pipeline of new opportunities, particularly in Abu Dhabi and Saudi. So that brings in the division. So moving now on to the cash flow. And the group continue to deliver strong trading cash conversion at 92%, generating cash flow of 98 million in the period. And once again, our focus has been on issuing timely and accurate sales invoices to ensure we get paid promptly by our customers. While at the same time, we continue to pay our suppliers on time and comply with the UK prompt payment code. While there always is some lumpiness in the timing of working capital flows, no unusual actions were taken at the period end, and this is demonstrated by our average daily net debt being only £45 million higher than the closing net debt position in June. Just to point out, the £32 million other on the cash flow relates largely to the timing of dividends from JVs, which we will catch up in the second half, and some other non-cash movements. Adjusted net debt at the end of June was better than we expected at £216 million. And this is only £12 million higher than the position at the end of December, despite approximately £110 million returned to shareholders in the form of dividends and share buybacks. And leverage of 0.9 times EBITDA remains slightly below our one to two times medium term target and underlies our balance sheet strength. So let's turn on to capital allocation. And there are no changes to our capital allocation framework that we've shared with you previously. And in the past six months, we've continued to build on a very strong progress from the last two years. Generating organic growth will always be the number one priority. And we've continued to invest in our pipeline and bidding development. We've also started a number of small pilot programs to partner with technology businesses to further improve the capability which supports both organization efficiency and organic growth. And our second priority is to increase dividends. And we've announced today an interim dividend of 1.14 pence per share. And this is a 21% increase on last year's interim dividend. And we are on track to reduce dividend cover towards three times in the medium term. And our third priority is to fund acquisitions. And there were no new acquisitions in the period, but we continue to be busy in the M&A area. We maintain a disciplined approach to both value and strategic fit, and we're currently praising some interesting opportunities. And our final priority is to return surplus capital to shareholders. And in June, we completed the £90 million share buyback, which we announced in February. That followed the £90 million from 2022 and the £20 million in 2021. So finally, on guidance, which is laid out clearly on the screen here for 2023, and you remember that we upgraded our outlook for the year at the June pre-close. Revenue and profit expectations today are unchanged from that, but we have upgraded cash and debt guidance following the strong cash conversion in the first half. Revenue is expected to be at least £4.8 billion, with organic growth around 4%, supported by strong new winds performance in the Americas and immigration volumes in the UK and mainland Europe. Underlying operating guidance of around £2 million or £5 million is unchanged. We expect profit and margin to be lower in the second half, and this is because of the impact of the CMS seasonality and moving to its new contract terms, the non-repeat of a commercial settlement, and the end of some contracts that we've previously communicated. Our free cash flow is expected to be approximately £150 million and net debt £170 million. And guidance for finance costs is unchanged, but we do expect this to increase beyond 2023 due to higher interest rates. And it should also be noted that in the UK asylum seeker contract, we expect to lease more properties to house higher numbers of service users and to support the customer moving out of hotels. And the effective tax rate is anticipated to be temporarily lower than the original guidance for 2023, due to the mixed effect from higher JV profits and a small one-off benefit. Our medium-term guidance is unchanged, with the group's effective tax rate expected to be closer to 25%, as higher UK rates, changing mix of profits, and the introduction of tax in the UAE will all have an impact. So I'm now going to hand back to Mark.

Nigel, thank you. I will now touch on some highs and lows from the first half of 2023 on where we are with setting our direction and on the three strategic enablers I identified at our FY22 results just a few months ago, namely customers, colleagues and capabilities. In terms of highlights, the year has clearly started well, and our results and the full year guidance for the year hopefully reflects that. And we continue, as Nigel said, to generate excellent free cash flow. From a macro market perspective, we're continuing to see growing government customer demand in areas like defence, immigration and citizen services, where we already have deep operational knowledge and growing global reach. Growth in our North American business has been driven by robust demand for defence services and case management, and the high order intake that we saw at the end of last year has continued into 2023 and sets up the division for another year of good order intake. Of particular importance to us was the renewal of the CMS contract. We were a foundation partner to our customer when the Affordable Care Act was announced more than 10 years ago. Through close customer partnership and continuous innovation, We have now been awarded the third generation of this contract, and as of the 1st of July, we are now entering the 11th year of partnership on CMS. Canada is also a highlight for us. After several years of low to no growth, the last three quarters has seen sustained growth in our Canadian business and excellent outcomes for our Canadian team. If we turn to the UK and Europe, see that profit has increased by 86% to 70 million pounds in the period. Strong demand in immigration services, the ramp up of contracts signed in prior years and improved performance across a range of existing contracts, as well as the ORS acquisition more than offset the drag from COVID related work, which ended at the end of the first quarter last year. I'd also like to highlight the continued growth for us in the space sector, including the recent award by the European Space Agency to lead a consortium for the implementation of the Destination Earth core services platform. This is a core program for the European Commission to set up an open, flexible, and secure cloud-based computing system that will monitor the effects of natural, and human activity on our planet to anticipate extreme events and to help to adapt policies to climate related challenges. Overall, we've delivered significant growth in our European business from circa 100 million pounds of turnover annually to almost 300 million pounds of turnover in just three years. We think this is a positive marker of how we can build a geographically diverse business by leveraging deep sector expertise. We've also seen recent growth momentum in our Middle East division, with order intake of more than 100 million pounds in the period and further opportunities, as Nigel said, currently in the preferred better stage. This includes the building of our advisory business in the region, which has seen significant growth. in the Kingdom of Saudi Arabia in support of the country's Vision 2030. Strengthening our core competencies in mobilisation and integration has been a highlight during the period. ORS is an example, not only of market expansion, but how we focus on effective integration of our acquisitions and our ability to scale good businesses that we acquire. We've also successfully mobilized HMP Fosway, the new prison in England. And Vivo is a highlight of mobilisation and startup. At the beginning of last year, Vivo did not exist. We operationalised Vivo in February last year, scaled it up during the year, and on a full year basis, we expect at the joint venture level, Vivo to be generating revenues in excess of 500 million pounds this year. Our win rates, which took a dip in the second half of 2022, rebounded in the first six months of this year for both new business and rebids. Our new business win rates now are just over 30% and our rebids in excess of 90% respectively, therefore moving back to the levels that we've delivered on average in recent years. Our order book remains healthy at 14.1 billion and if we add the joint venture work then that adds another 1.8 billion to our order book. Our new business pipeline is healthy but we also see a good distribution of opportunities. We have more than 40 bids with annual contract value averaging more than 30 million pounds and an average contract length of around seven years. On the other side of the ledger, our Asia-Pacific business has had a difficult start to the year. Volume variable work, which as part of our portfolio we do expect to ebb and flow, reduced quite significantly in the period. We saw tight labour markets creating operational challenges in our citizen services business and new business wins did not meet our expectations. We've taken actions to ensure that the business is well positioned for the opportunities we expect to come in future years because the Asia Pacific market remains an important and attractive market for Serco. We've recently strengthened the aspect team and we've commenced the search for a new leader for the business. And in the meantime, I'll be providing additional oversight from the UK for our exec team in the region. In terms of our workforce, we have reduced significantly the overall vacancy levels, but we recognise that the employment market remains very tight and competitive in certain specialist roles and in some of our geographies. And in the UK, Our Caledonia sleeper contract was returned to the Scottish Government in the period. And while we respect the decision of the Government and have transitioned the contract back well, we are nonetheless disappointed after Serco had introduced new rolling stock, significantly improved operational performance and delivered widely recognised enhanced journey experience. Across the group, there are a number of high value opportunities which are awaiting adjudication from procurement authorities. So we see the buildup of a backlog of decisions and we also see a couple of strategically important opportunities in the UK and Australia from a timing perspective moving to the right. In terms of setting our direction, Our purpose to impact a better future through our work is at the heart of what we do. Every day, our 50,000 plus colleagues around the world drive measurable outcomes for our customers, enable the delivery of improved public services, and partner with governments to respond to the considerable challenges that they face. Alignment to this purpose allows us the opportunity to create value for all of our stakeholders, centred around deliberate, sustainable and profitable growth. We are working hard to be the partner of choice to discover, design and deliver responses to the critical and complex challenges that governments face in order to effectively serve their citizens, to address national and international security and to work towards their goals for sustainability. We're now setting this out with clarity through our purpose, our vision, and our mission. And this will start to form part of our refreshed brand narrative. All of this will continue to be underpinned by our values. We are also making good progress in the first six months. with our three strategic enablers, customers, colleagues and capabilities, which was laid out at our FY22 full year results at the end of February. For our customers, we are working on building stronger and broader relationships, allowing us to be involved earlier and at all stages of their response, from discovery through to delivery. We are advancing opportunities such as our new advisory to operate business in the Kingdom of Saudi Arabia, which is focused on supporting the country in its development of sustainable future cities. With more than 100 advisory colleagues already active on the Giga projects during the planning and construction phases, we are working to build the trust of our customers to contribute to the full delivery of the Kingdom's Vision 2030. For our colleagues, our commitment to their safety and wellbeing is unwavering and we've seen measurable improvement in our safety outcomes in the first half. But we continue to explore new and better ways through people, process and technology to assure the physical and mental wellbeing of our colleagues. And we are constantly evolving our employee value proposition, which is purpose-led, values-driven, and underpinned by a genuine commitment to diversity, equity, and inclusion. And for capabilities, we've begun to optimize our existing IT platforms, as well as selectively piloting artificial intelligence systems to enhance our productivity. As we explore the positive impacts of AI, we are also mindful that AI is enabling an expanded cyber threat landscape that requires adaptive risk and response management and continuous vigilance throughout our business and into our supply chain. So with confidence in our strategic priorities, execution remains key to achieving our growth targets. As part of this, we are increasing our focus on operational excellence, becoming relentless in our attention to exceptional contract delivery and driving efficient operations to improve productivity and to support our competitiveness. Move to the next slide, please. And so to wrap up, we're pleased with the progress that we've made in the first six months, and we are confident in the outlook for the growth of our business and for shareholder creation through 2023 and beyond. Our medium-term targets for growth of 4% to 6% at margins of 5% to 6% remain unchanged. We've got good momentum in the business and absolute focus on execution to deliver deliberate, sustainable and profitable growth over the medium term. Thank you. And we'll now move to Q&A in the room and then to Q&A for our online participants.

Why don't we start with James, yeah?

Thank you. Good morning. It's James Rose from Barclays. You touched on immigration being a structural opportunity for you. Perhaps you could add some color to that and maybe touch on your thoughts for the UK business and ORS as well. And then secondly, on Asia Pacific, perhaps you could give us an outlook on profitability for the second half and perhaps outline what changes you would hope to see in that business.

James, thank you for the question. We do see immigration as a long-term structural area of challenge for government, one where we can participate and actively contribute to successful outcomes. If we look at studies from the International Centre for Migration Policy Development, What they report is that we're seeing a number of crises that are interacting with each other with increased velocity and impact, what they call polycrisis. What drives this is economic and demographic disparities, climate change, growing geopolitical impacts, the instrumentalisation of migration as... a proxy threat to other countries. And so all of these factors is driving higher levels of mobility, both voluntary and forced, as well as legal and irregular. And so we see, for example, for the EU states, 64% increase in the detection of irregular border crossings in the last 12 months in 2022, and a 46% increase in asylum applications in the EU countries. But the EU is not alone. We see this internationally. The US has recorded a 41% increase in... crossings at their southern border, and more than seven times the number of boat arrivals into the US in 2022. So these are sort of data points that show us that this is widespread, it's significant, and it's a really complex issue. And for us, our ability to bring sector expertise that we've built over decades of working with governments across multiple geographies hopefully gives us the opportunity to partner to develop more effective solutions going forward. So it's not short-term. We see this as a longer-term issue and one where we can contribute to better outcomes.

And if I pick up on Asia-Pac, where do we expect the full year to come out? We probably expect the second half to be about the same, maybe a little bit lower. We've seen some of the immigration volumes drop during the year, so quarter one benefited slightly more. And then we said, where do we want to make improvement? I think we've got to make improvement in a couple of areas. One is around productivity and efficiency and looking at some of those contracts that have probably underperformed and how do we get them back up again. back up to the levels that we'd like to see them at. I think we can make some progress on that in the first half that should benefit 2024. But as I said already, the other area we're going to focus on, how do we get our wind rates back up and how do we get a higher quality pipeline? And the reality is that pulling that lever takes a little bit longer for that to come through into the bottom line. So we're still working through the details of that, but that's where we're putting our focus at the moment. Should we go to Oscar? Yeah, let's just go.

Good morning. It's Oscar from JP Morgan. I have three questions. The first one's on the, I guess, the upgraded or slight upgrade to the guidance on cash flow. Could you give us color on if that's one specific contract or is that broad-based? The second question is on wage inflation or employee scarcity. You've talked about Australia as being an area that's difficult. Can you talk about other regions? I know in the past U.S. defense has had some employee shortages. Is that getting easier in the U.S.? ? And then the final one, you re-won CMS a few months ago. It's a contract that from the outside has a lot of automation, a lot of AI potential. Is there more opportunity with these federal contracts leveraging technology?

Let me take the first one of those, which was the cash flow question. Oscar, it isn't down to one contract. I think where we are here is we've been, and I've said already, the way we improve our cash flow is actually let's make sure we collect our cash from our customers as quickly as possible. And the way we do that is if we get our invoices out quickly and accurately, our customers are really good at paying us. And we've put a lot of effort into that over the last few years, and that's how we're making progress. And we're happy to add another £20 million to the cash flow outlook for the year because we know some of those changes are structural. a good performance in the US and some good performance in the UK. Those are key places where we've got progress, but it's a programme of continuous improvement rather than spotty bits of progress that we've made.

Oscar, then on wage inflation and the labour market, I think we've managed wage inflation impacts in the business well. I think the reason for that is because we continue to build annually on regular and equitable wage increases. So across our portfolio, we didn't have the challenges of big catch-up, and we continue to have constructive discussions from an industrial relations perspective, as you would see in the relatively small impact that we've had from strike activity over the last 12 months. So we think that's in a good place. The structural challenges in the labor market continue. And as I said, what we're seeing is markets easing in some geographies. but still staying tight in some skill types. So in the US, for example, you referenced defence. Engineering skills are still tight, but we are closing vacancies there. Air traffic control is an international difficult area that I think will take a number of years to catch up to. And then Australia as a geography is very, very difficult. across almost all of the work types, and that is not a function of wages. It is simply that there are not enough people to do all of the work, and that's why we're focusing so heavy on where we can automate, where we can introduce technology to supplement and augment our workforce and to drive productivity. But we continue to pay really close attention because we know that people in the market of choice. How do we appeal to that? How do we make sure that from the very first point of contact with Serco that it is a good experience, that we can have people join us for a job and stay with us for a career, that they can be part of this international organization and that's part of that. employee value proposition evolution that I was speaking about earlier. And then in terms of CMS, you asked about automation. We've significantly automated that contract through robotic process automation. We are now looking at what we can do further. I think the big step has been taken. And from here, we will see incremental improvement as we are now in the third generation of this contract. So we saw that massive step in automation in the previous generation. I think now it's about incremental improvement over the next five years.

Good. So we've got a Joe.

Good morning. Joe Brent. Three questions for me as well, please, if I may. Just following up on the cash flow question, you did 98 million free cash H1, guidance of 150 H2 for the full year. That suggests 50 million H2, even though JV dividends are coming in the second half. So is that just caution, or why is the second half so much weaker than the first? Secondly, with regard to the Australian immigration contracts, could you give us an indication of what that means for profits in 24, having extended it versus a scenario where you re-won the bid? And finally, just on margin, you've got a margin target range of 5% to 6%. You've just delivered 6%. The U.S. margin is above that, and the U.S. seems to be growing well, supported by the strong book to bill in the U.S. Is it time to reconsider the margin target?

Right. Let me take the first of those. So you're asking whether our cash flow guidance is cautious. I think the big difference is we are going to generate less cash in the second half. And the reason why we're going to generate less cash in the second half, we're going to generate less profit. We know we have this waiting to profit in the first half because of seasonality. And if you look at our cash conversion in the second half, it's still north of 80%. So 50 million pounds of cash generation in the second half is still a good number. So we're comfortable with where we're coming at. Do you want to take the Aussie immigration?

So on Australian immigration, Joe, two parts is the core contract and then the variable work. We've seen a reduction in the variable work in the first half in line with our expectations. And so the net negative impact for the division was actually the lack of upside in that variable work during the period. So we're now at an operating volume that we think is... going to continue through the second half of 23 and into 24. Our assumptions for 24 included a successful rebate and so we are really in line with what we expected for the year ahead. It just takes away the uncertainty really for us. We've got security of the contract now for 12 months. We expect that the procurement will still move forward and most likely be formalised through issue of documents at some point later in this year.

Isn't the extension the same as the old terms? Wouldn't a rebate be on new terms, which would be less advantageous?

We expected, as I said, that there would be a significant adjustment in the variable work in terms of the scope of the contract. But I don't think, Nigel, that there is anything really from a margin expectation that's materially different in the core contract.

That's right. That's right. And then you asked a question about margin. We've achieved 6%, so why is 5 to 6 still the right number? We always say that we over-index in the first half because of the seasonality, and we expect that to come down to low fives for the full year. I think the point here is we continue to keep that. Is that the right target range to be having our margin under review? There are definitely opportunities for us to improve productivity and improve efficiency. But at the same time, we have to stay competitive. We have to stay competitive on cost and we have to stay competitive on price. So we'll continue to keep that under review. But there are a pipeline of opportunities for us to drive efficiency and we will work through how much of that hits the bottom line and how much is spent back to retain competitiveness.

I think the other factor there for us, Joe, is your mix as we grow the business. We're mindful of the mix and the contribution. So even in US defence, if we see a disproportionate growth in cost-plus work compared to fixed-price work, we see that mix impact play through, still delivering growth, still delivering increased profit, but we may see an impact of that mix on the margin.

Thank you. No question.

Morning, Chris Bambury, Peel Hunt. Three questions. Looking at the margin on ORS, it's obviously improved significantly since you acquired the business. Is that down to purely operational leverage or are there some other steps you've taken? Secondly, we've seen obviously a ramp up in Vivo revenues. When would you expect to see a ramp up in the margin there? And finally, could you please elaborate on some of the big decisions in the pipeline for the second half? Thank you.

So on ORS, certainly we're benefiting from scaling up the business as quickly as we have really providing the operational support for the business to respond to demand in Switzerland and Germany in particular. And then managing it really closely. So it is now part integrated fully into the Serco system. So from a financial perspective, from a review perspective, we manage that the same as we do now for the rest of our portfolio. And we'll continue to look at other areas of optimization as that business continues to grow.

Let me pick the Vivo one up. And Chris, the point on Vivo is... We've started this contract. It is significantly bigger than we expected it to be when we first started off on these contracts, plural, are bigger than we expected. We only started this going in quarter one of last year, so there's been a big ramp-up and a big ramp-up and a big growth at the same time. Profits are in the first half, so we're very pleased with the profits that we've made on this business in the first half. The question is, when do the dividends come through to be cash? Well, we gave the division, both partners gave the Vivo a relatively small working capital loan, and they're still working through that. So the ramp-up and working capital requirements are ramping up. So that means we probably expect to see dividends later next year. And then as far as ongoing profitability, we think there are opportunities to do more there, not necessarily for the volume, but that ramp up has meant that there's opportunities to do more efficiency and more economies of scale. So I think the Vivo joint venture will be working through that. And then you asked a question about pipeline. Look, our pipeline is about £8 billion. We've got about 60% of that pipeline is in defence. And then if I look at it across the regions, there's a kind of about 75% spread equally across both the UK and North America, and then smaller amounts in Australia and the Middle East. As far as kind of what are the really big contracts, there are a few big ones. There's base services for the Australian Defence Force that we've talked about. There's a... potential recruitment one in the UK for the Ministry of Defence. Those are kind of the big ones. But really what we've got now is look at our pipeline. We've got a big rump of contracts that are in the 200, 300, 400 TCV range, which there's a good number of those to go out. So I think the risk on our pipeline is spread more broadly than perhaps what we've seen in the past. To Arthur. Thank you.

Thank you very much. Yeah, a few from me, please. First one was just on your guidance and how the UK migration sort of feeds into that and what's going on there. So my understanding was that to some degree, migrants were supposed to be being moved out of hotels, as you mentioned. And I just wondered... sort of how's that going and kind of what's baked into your existing guidance on that and what are you seeing in terms of what's actually happening on the ground and then kind of connected to that are we seeing any sign of an uplift in the processing of sort of asylum claims if that makes sense um second question um you know i know it's probably a bit early but um I guess, what are your thoughts on the buyback, on another buyback? In what sort of scenario could you see yourself doing one early next year? And then the final question was just on ramp-up costs. Obviously, it's something that you sort of mention periodically. I just wondered, roughly speaking, how significant they were in the first half, and are they running higher than normal at the moment? Thank you. Do you want to take the first one?

Yeah. So on the UK immigration contract, Arthur, we're not involved in processing. So what we do is provide the accommodation services in two of the six regions for the UK Home Office. So we're completely aligned in working with the customer on the transition of service users from hotels into community. But that requires significant acquisition leasing of dispersed property. That is going slower, and it's driven not by a desire to move people into community, but simply by the practical availability of property in the regions. But we're working through that as effectively as we can in partnership with the Home Office. So we do expect some changes in the mix. between hotels and DA over the second half, but we don't think that's going to be significant just because we're dealing with this demand supply issue in the property market.

So, Arthur, you asked about the buyback. We know we've completed the buyback in the first half of this year. But we have buyback as really our returning capital to shareholders is our fourth priority of four. So we want to make sure we grow the business first, we want to increase our dividend, we want to do M&A. And I think if there's cash left over, we will return that to shareholders, and buyback seems to work well at the moment. We continue to look in the M&A markets. So we will take a view as we get to the end of this year, look at our full year numbers, look at our balance sheet strength, and that will really be determined whether we do M&A or not in the second half. And that will be determined whether we do another share buyback or not. But we need to sit down with the board, look at the balance sheet, and take a view on that. So there'll be no news on that, I don't think, until we get into the first part of next year. And then you asked about ramp-up costs. I mean, I... because of the change of accounting, we do end up with mobilisation costs now. The big mobilisation we've got in 2023 is the Fosway prison, the new-built prison, which is quite a significant number. There's a small amount of that spend in the first half. There's more in the second half. And as we look at our pipeline, some of our pipeline's got some mobilisation and others doesn't. So we'll keep you informed. as we ramp up new businesses, we mobilize about what those costs are likely to be. But it's lumpy. You can't say there's an average amount of spend. Thank you. It looks like we are finished with questions in the room.

Any other questions? Are there any questions on the telephones?

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Okay, so no questions from the telephone. That's all the options.

Can I then just wrap up by, again, thanking everybody for their time and interest, and we are happy following this for the people who are here to have any questions out of the room. Thank you again. Have a good day.