First half in line with revised expectations; net debt substantially reduced; management team strengthened

Transcription

1 First half in line with revised expectations; net debt substantially reduced; management team strengthened Serco Group plc 2014 Half Year Results 12 August 2014

2 Agenda Overview Rupert Soames, CEO Financial review Andrew Jenner, CFO Business review Ed Casey, COO Looking ahead Rupert Soames, CEO 2

3 Summary tough first half but good progress Trading in line with revised expectations Revenue broadly level in constant currency Profits significantly down; heavy burden of exceptionals => H1 loss Free cash flow improved Balance sheet strengthened following equity placing; net debt substantially reduced 2014 full year guidance maintained Strategy Review and Corporate Renewal running to plan Strategy Review Phase 1 complete Contract reviews underway Large majority of Corporate Renewal actions complete Rebuilding trust and confidence with the UK Government Overall, a poor H1, but we have made a decent start on a long journey to restore the Company s fortunes 3

4 Leadership team strengthened Angus Cockburn Kevin Craven Liz Benison David Eveleigh Appointed CFO Interim CEO Aggreko CFO Aggreko Appointed CEO UK Central Govt. CEO Balfour Beatty Services Appointed CEO UK&E Local & Regional Govt. VP & GM UK, CSC Appointed Group General Counsel & Co. Secretary General Counsel BT Global Services 4

5 Financial overview Adjusted revenue 2,433m +1.1% Adjusted operating profit 50.7m (59.1%) Adjusted EPS 4.96p (67.7%) Group free cash flow 51.6m m Recourse net debt 559m ( 166m) Dividend per share 3.10p +0.0% Percentage growth rates at constant currency 5

6 Financial Review Andrew Jenner Chief Financial Officer Serco Group plc

7 Financial review Income statement Leverage and financing Cash flow and net debt Financial outlook and assumptions 7

8 Income statement (slide 1 of 2) HY14 HY13 Change Change at constant currency FY13 Adjusted Revenue 2, ,548.5 (4.5%) +1.1% 5,143.9 Adjusted Operating Profit (65.3%) (59.1%) Adjusted Operating Margin 2.1% 5.7% (360bps) (340bps) 5.7% Adjusted Net Finance Costs (17.4) (19.2) +9.4% +10.4% (37.6) Adjusted Profit Before Tax (73.8%) (66.4%) Adjusted measures are defined in the Appendix 8

9 Adjusted Revenue divisional analysis Adjusted Revenue reported currency 2,433m ( 115m) (4.5%) Adjusted Revenue constant currency 2,577m + 29m +1.1% Adjusted Revenue growth composition UK CG UK&E LRG Americas AMEAA Global Services Group organic (3%) +2% +7% +10% (1%) +2% acquired +1% disposed (6%) (1%) fx (1%) (1%) (9%) (16%) (6%) (6%) Organic growth driven by new US contracts started last year and various areas of growth in the AMEAA region total (4%) (5%) (2%) (6%) (6%) (5%) Disposals impact predominantly from sale of UK transport maintenance operations Adverse currency impact of 144m Adjusted measures are defined in the Appendix 9

10 Adjusted Operating Profit divisional analysis Adjusted Op Profit reported currency 50.7m ( 95.6m) (65.3%) Adjusted Op Profit constant currency 59.9m ( 86.4m) (59.1%) Adjusted measures are defined in the Appendix Change in Adjusted Operating Profit 146.3m HY13 UK CG 39.3m UK&E LRG 6.7m 10 Americas AMEAA Global Services 6.9m 19.1m 20.0m (440bps) (140bps) (180bps) (360bps) (570bps) to 3.6% to 1.6% to 6.2% to 4.2% to (0.8%) Divisional Adjusted Operating Margin change Corporate Expenses 3.6m 50.7m HY14 DIBP volume impact c 15m; other contract attrition (principally Electronic Monitoring and US contracts) c 15m Contract changes (Northern Rail, AWE, Shop Direct, AEGON, SSDS) c 25m; other cost impacts (COMPASS, PECS, Corporate Renewal, increased bid costs) c 30m Adverse currency impact of 9m (360ps) to 2.1%

11 Income statement (slide 2 of 2) HY14 HY13 Change Change at constant currency FY13 Adjusted profit before tax (73.8%) (66.4%) Amortisation of intangibles arising on acquisition (5.8) (12.5) (21.4) Exceptional items (29.4) (90.5) Other costs related to UK Government reviews (2.7) (21.0) Transactionrelated costs (2.7) (3.5) Share of joint venture tax (2.7) (5.8) (11.4) (Loss)/profit before tax (7.3) (106.9%) (99.2%) Adjusted measures are defined in the Appendix 11

12 Exceptional items and other costs related to UK Government reviews HY14 HY13 FY13 Provision for settlement relating to pension deficit funding (7.5) Net gain on disposals Adjustment to deferred consideration 10.3 UK clinical health provisions (3.9) (17.6) Restructuring costs (14.5) (14.9) Asset impairment Australian rail tourism (9.6) Settlement relating to UK Government reviews (66.3) Direct costs associated with UK Government reviews (5.7) (11.6) Net exceptional items (29.4) (90.5) Other costs related to UK Government reviews (2.7) (21.0) Total (32.1) (111.5) 12

13 Earnings Per Share and Dividend Per Share HY14 HY13 Change Change at constant currency FY13 Adjusted effective tax rate 24.9% 24.1% 24.0% Adjusted profit after tax 25.0m 96.5m (74.1%) (66.8%) 193.3m Weighted average share count (basic) 503.6m 490.1m 2.8% n/a 489.0m Adjusted Earnings Per Share (basic) 4.96p 19.69p (74.8%) (67.7%) 39.53p (Loss)/Profit after tax ( 6.4m) 84.2m (107.6%) (100.5%) 95.4m Earnings Per Share (basic) (1.27p) 17.18p (107.4%) (100.5%) 19.51p Dividend Per Share 3.10p 3.10p 0.0% n/a 10.55p Adjusted measures are defined in the Appendix 13

14 Leverage and financing Net debt substantially reduced Improved free cash flow driven by reduced working capital Proceeds from the successful placing Financial covenant leverage ratio (based on consolidated total net borrowings to an adjusted EBITDA measure) 2.41x as at 30 June 2014; calculation in Appendix Covenant limit of 3.5x; tested each statutory balance sheet date (on a rolling 12 month basis) 1.3bn committed facilities; 730m fiveyear revolving credit facility matures March 2017; 558m US private placements maturities out to 2024; 585m headroom 14

15 Free Cash Flow HY14 HY13 FY13 Adjusted Operating Profit Less: joint ventures (16.7) (29.0) (58.9) Adjusted Operating Profit excluding joint ventures Noncash items Adjusted EBITDA excluding joint ventures Working capital movement 0.6 (93.2) (144.0) Adjusted operating cash flow excluding joint ventures Interest (17.3) (18.2) (38.2) Tax 4.1 (8.8) (18.8) Net expenditure on tangible and intangible assets (23.5) (21.6) (51.8) Dividends from joint ventures Free Cash Flow Adjusted measures are defined in the Appendix 15

16 Free Cash Flow to movement in recourse net debt HY14 HY13 FY13 Free Cash Flow Exceptional items and other costs re UK Government reviews (18.7) (92.9) Dividends paid (36.4) (36.4) (51.5) Acquisition of subsidiaries (net of cash acquired) (5.3) (18.6) (18.6) Disposal of subsidiaries (net of cash disposed) 6.8 (2.1) 40.6 Transactionrelated costs (0.5) (2.8) Purchase of own shares (net of share scheme issue proceeds) 2.3 (14.8) (14.9) Placing net proceeds Special pension contribution (19.2) (19.7) New and acquired finance leases (4.5) (23.1) (33.0) Repayment of non recourse debt (1.4) (4.9) (10.2) Foreign exchange 15.6 (34.0) Movement in recourse net debt (124.6) (118.2) Adjusted measures are defined in the Appendix 16

17 Analysis of net debt HY14 HY13 FY13 Recourse net debt opening (725.1) (606.9) (606.9) Movement in recourse net debt (124.6) (118.2) Recourse net debt closing (559.3) (731.5) (725.1) Nonrecourse debt (21.5) (22.6) (20.3) Net debt (580.8) (754.1) (745.4) Proportional share of joint venture net cash Adjusted net debt (528.0) (681.4) (701.1) Covenant definitions are defined in the Appendix 17

18 Guidance maintained for full year 2014 Adjusted Revenue Adjusted Revenue at constant currency anticipated to be at least 4.8bn (c 4.6bn at reported currency) Greater level of contract attrition impact in H2, together with reductions from renegotiations such as Northern Rail Greater impact of volumerelated reduction in Australian Immigration Services Adjusted Operating Profit Adjusted Operating Profit at constant currency anticipated to be not less than 170m (c 155m at reported currency) As previously anticipated, H1:H2 phasing of approx.1/3:2/3; whilst revenue pressures are greater in H2, continue to anticipate an improvement in H2 profitability Normal seasonality weighting of profits to H2 c 15m improvement H2 v H1 Charges such as COMPASS onerous contract provision and SSDS closure costs taken in H1 c 20m improvement H2 v H1 Increased cost savings and other improvements in underlying contract performance c 20m improvement H2 v H1 Strategy Review outcomes may impact stated expectations 18

19 Other 2014 assumptions and 2015 early view Adjusted net finance costs c 35m; Adjusted effective tax rate of c25%; Weighted average share count (basic) of c522m Adjusted EPS at constant currency anticipated to be not less than 19p (c1718p at reported currency) Net exceptional charge c 4045m H1 net charge, together remainder of 1520m restructuring charge and remainder of c 15m oneoff costs to implement corporate renewal Free Cash Flow targeted to be higher than 2013, despite reduced profitability Year end recourse net debt of c m and leverage of between 2.5x and 3.0x Early view of 2015 Expect lower revenue current known net attrition of c5%; will also be determined by the outcome of further bid opportunities, rebids and volumerelated pressures Hard to achieve anything other than a slight improvement in margin, notwithstanding the benefit of current cost saving actions 2015 guidance in due course will follow progress in H and Strategy Review 19

20 Summary Poor first half, but in line with revised expectations Revenue broadly level, though profitability significantly reduced Net debt substantially reduced and leverage improved Free Cash Flow increased through lower working capital Successful placing Interim dividend held Whilst many challenges and uncertainties remain, guidance for the full year maintained 20

21 Operational Review Ed Casey Chief Operating Officer Serco Group plc

22 Business challenges put pressure on profitability Significant changes in contract volumes (e.g. Australian Immigration) Margins diluted by losses, wins and extensions Higher margin contracts lost (e.g. Electronic Monitoring, FRTIB) New contracts at lower margins (e.g. US Affordable Care Act) Contracts extended at lower margins (e.g. Northern Rail, AWE) Lower win rates Contracts losing money (e.g. COMPASS, PECS, Defence Maritime Services) Increased costs (e.g. Corporate Renewal, closure of Australian garrison support following loss) 22

23 Operational delivery remains at the heart of Serco First amongst 50 prime contractors on Work Programme for supply chain management Merseyrail tops customer satisfaction tables in National Rail Passenger Survey All four hospitals in Suffolk achieve excellent Care Quality Commission reports Top cleanliness rating at Derriford Hospital Champions of Veteran Enterprise Award in US Military college in Qatar congratulates first graduates Top awards highlighting excellence and innovation in BPO 23

24 Contract awards and order book Signed contracts valued at 2.4bn including Caledonian Sleepers ( 800m) and Northern Rail ( 520m) Lost eight major new bids (e.g. DIO, Magnox, North West Rail Link, Ravenhall) and two major rebids (DLR, Australian garrison support) Order book level at 17.1bn Pipeline of 8bn of major new opportunities, down from 12bn Order Book 17.1bn ( 2.4bn) 2.4bn ( 0.2bn) 0.2bn 17.1bn 31 Dec 2013 Revenue Signed contracts FX Other 30 Jun

25 Visibility and rebids Order book revenue visibility 2014: 96% 2015: c70% Net attrition of c5% known for 2015 Including DLR, NPL, Australian garrison support, NVC/KVC, US intel, Westminster City Council 24% 1% Major contracts due for extension or rebid: Australian immigration National Citizen Service US DHS records management US FAA % 1015% 510% 10% 70% New business to be won Recurring task orders/ projects Extensions & rebids Order book 25

26 Performance improvement actions Detailed contract reviews Simplification of organisation structure Reduction of overheads Rationalisation of BD spend Disposal of noncore activities More than 20m benefit in H2 26

27 Portfolio spread across geographies and sectors Middle East and Other 12% Australia 16% US 14% Geographic UK 58% Global Services 14% AMEAA 19% Americas 15% Division UK Central Government 34% UK& E Local & Regional Government 18% Defence & Science 18% Home Affairs 8% Transport Citizen 6% Services 2% 27

28 UK Central Government 2014 H1 Revenue 836.2m ( 32.0m) (4%) 34% Adjusted Op profit 30.5m ( 39.3m) (56%) Sectors: Defence, Science, Justice, Immigration, Citizen Services and Transport Performance summary Organic growth*: 3% Profitability pressures: PECS, COMPASS, DIBP share arrangements, Corporate Renewal costs Extensions and expansions: Northern Rail, NPL, Defence Business Services Losses and unsuccessful bids: Electronic Monitoring, DIO, Magnox Pipeline: Defra Laboratories, Defence Fire & Risk Management Organisation, TransPennine Express * Adjusted for 1% adverse currency impact 28

29 UK & Europe, Local & Regional Government 2014 H1 Revenue 425.3m ( 23.8m) (5%) 18% Adjusted Op profit 6.9m ( 6.7m) (49%) Sectors: Health, Transport, Environmental Services, Leisure, Infrastructure Services, Facilities Management and IT Performance summary Organic growth*: +2% Disposal impact: Transport Maintenance & Technology Profitability pressures: Corporate Renewal, seasonality Awards: Caledonian Sleepers, European Space Agency, Wet n Wild, European Parliament IT Extensions and expansions: Milton Keynes environmental services Losses: DLR Pipeline: Limited over next 12 months; then further European IT, environmental and nonclinical health * Adjusted for 1% adverse currency impact and a 6% disposals impact 29

30 Americas 2014 H1 Revenue 367.6m ( 7.0m) (2%) 15% Adjusted Op profit 22.9m ( 6.9m) (23%) Sectors: Defence, Transport, Health and Business Services Performance summary Organic growth*: +7% Extensions and rebids: Affordable Care Act Option Year 1 confirmed, US Intel (1 of 2) Awards: Navy aircraft carrier IT installation support, Marine training systems support Losses: FRTIB, NVC/KVC, US Intel (1 of 2), VA Pipeline: DoD Passport Support Services, Transport Operations & Maintenance * Adjusted for 9% adverse currency impact 30

31 AMEAA 2014 H1 Revenue 470.1m ( 30.1m) (6%) 19% Adjusted Op profit 19.7m ( 19.1m) (49%) * Adjusted for 16% adverse currency impact Sectors: Transport, Justice, Immigration, Health, Defence and Facilities Management Performance summary Organic growth*: +10% Profitability pressures: DIBP volumes, Defence Maritime Services, Garrison Support Awards: Healthcare Support Services Abu Dhabi, FM for Abu Dhabi National Oil Company Extensions and Rebids: Bahrain Air Navigation Services, FM Melbourne, FM Abu Dhabi Losses and unsuccessful bids: Garrison support, Ravenhall Prison, North West Rail Link Pipeline: Sydney Light Rail, Abu Dhabi Traffic Management, immigration and justice opportunities, nonclinical health 31

32 Global Services 2014 H1 Revenue 334.0m ( 22.4m) (6%) 14% Adjusted Op loss ( 2.6m) ( 20.0m) (115%) Sectors: Business Process Outsourcing to Banking, Insurance, Travel, Healthcare, Telecommunications, Local Government Performance summary Organic growth*: 1% Profitability pressures: Transition from transformation to operational phase of new contracts, attrition and underutilisation of delivery centres, less project work Awards: Lincolnshire County Council, private sector contact centres US, Australia and Qatar Extensions and expansions: Peterborough CC, Australia Traffic Camera Services, London Borough of Enfield Pipeline: Private sector customer management services, Local authority strategic partnerships * Adjusted for 6% adverse currency impact and excludes a 1% acquisition benefit 32

33 Summary Poor first half, but in line with revised expectations Operational delivery remains at the heart of Serco Signed 2.4bn of contracts, but win rates and pipelines need strengthening Action underway to rationalise the structure of the business and reduce cost Additions to management will help to stabilise business 33

34 Looking ahead Rupert Soames Chief Executive Officer Serco Group plc

35 Update on Strategy Review Phase 1 completed Data collection Market segmentation, position analysis Phase 2 Detailed assessments of markets Organisation study Phase 3 Planning and decisions Presentation to investors at Full Year Results 35

36 Early observations What I have found: Customers We do lots of very difficult things very well; vast majority of customers think we do a good job and value what we do UK Government keen to see us rehabilitated; customers outside UK largely undisturbed by traumatic events in UK Colleagues: Many skilled and dedicated people working hard to please our customers Traumatised, confused, worried, thirsty for direction and leadership Keen to see Serco restored to being a company they can be proud of 36

37 Early observations Strengths: International reach Strong positions and deep capability in some large and growing markets Customer relationships Devolved structure and focus on contract management Weaknesses: Poor central functions caused by troubled transition to a shared services model Economies of scale have not been realised with revenue growth Poor operational and financial management information Too many lossmaking contracts in too many sectors Too much focus on revenues, not enough on returns on capital and risk Threats Returns in many of our markets are being squeezed by both customer and competitor behaviour 37

38 What Serco needs to focus on Developing international positions in chosen markets Pleasing our customers by offering flexibility, innovation and valueformoney Being formidably efficient and agile in all parts of the business Make our shared services world class Improve cost structure Having the information to make good decisions, avoid and fix mistakes Financial and operational management information systems Risk management processes Risk adjusted cash flow return on capital, not revenue Increasing our win rates Restoring our reputation Rebuilding confidence, trust and belief in our culture amongst colleagues Be a talent magnet 38

39 It s really quite simple.... Develop the right strategy Execute it immaculately.... but really quite hard in a company of Serco s size, complexity, diversity & fragmentation 39

40 Summary and outlook 2014 full year guidance maintained At constant currency, Adjusted Revenue of at least 4.8bn and Adjusted Operating Profit of not less than 170m As previously stated in early July, the Strategy Review involves a detailed analysis of our contracts. This process is expected to be completed in time for our fullyear results, and to the extent that there are financial consequences of this review, these may impact our currently stated expectations for the year. Summary We have had a poor first half, and we have not won as many new contracts as we would have liked, but there is some good news. We expect financial performance in the second half to be much stronger than in the first; we have strengthened our balance sheet with a successful equity placing; made good progress in Corporate Renewal and in rebuilding trust with the UK Government; our Strategy Review is running to plan; we have made some strong senior management appointments; and we have taken action to rationalise the structure of the business and save cost. All these things are important steps forward on what will be a long journey to restore the Company s fortunes. But restore them, we will. 40

41 Serco Group plc 2014 Half Year Results 12 August 2014 Q&A

42 Appendix

43 Notes and definitions Adjusted measures include Serco s proportional share of joint ventures. Adjusted Operating Profit and Adjusted Profit Before Tax are before amortisation of intangibles arising on acquisitions, transactionrelated costs and exceptional items, as shown on the face of the Group s consolidated income statement and the accompanying notes. They are also before management s estimate of oneoff costs incurred in relation to the UK Government reviews and related activities. The Adjusted Earnings Per Share measure also takes account of the tax effect of these adjusting items. Reconciliations to GAAP measures, together with descriptions of each adjusting item, are included in the Finance Review on pages 12 to 25 and the income statement is presented on page 28. Change at constant currency has been calculated by translating nonsterling revenue and earnings for the six months to 30 June 2014 into Sterling at the average exchange rates for the same period in Organic revenue growth is the change at constant currency in Adjusted Revenue from ongoing activities (thereby excluding disposals) and also excludes incremental revenue from acquisitions completed in the current or prior financial year. Free Cash Flow is from subsidiaries and dividends received from joint ventures, and is reconciled to recourse net debt in Section 6 of the Finance Review, and to the movement in cash and cash equivalents in Section 3 of the Finance Review. The order book reflects the estimated value of future revenue based on all existing signed contracts, including Serco s proportional share of joint ventures. It excludes contracts at the preferred bidder stage and excludes the award of new Indefinite Delivery, Indefinite Quantity (IDIQ) contract vehicles and Multiple Award Contracts (MACs) where Serco are one of a number of companies able to bid for specific task orders issued under the IDIQ or MAC. The value of any task order is recognised within the order book when subsequently won. The pipeline of new bid decisions over the next two years is the aggregate value of potential new contracts that are anticipated to be bid in the near term, where annual revenue for each is estimated to be in excess of 10m and where the estimated total contract value of each is capped at 1bn. 43

44 Fiveyear revenue, profit and margin Adjusted revenue ( m) and organic growth (%) 9.6% 8.5% 9.4% HY FY 3, % 4, % 3.5% 4, % 3.3% 4, % 5.9% 2.0% 5,144 Adjusted operating profit ( m) and margin (%) 5.8% 6.0% 6.2% 6.4% 5.6% 5.8% 5.9% 5.9% 5.7% % % 51 1,950 2,140 2,246 2,342 2,549 2, All figures at reported exchange rates restated for changes to accounting standards IAS 19 Revised (Employee Benefits) Adjusted measures are defined in the Appendix 44

45 Fiveyear free cash flow Free cash flow ( m) HY FY Free cash flow is defined in the Appendix 45

46 Covenant leverage ratio Covenant leverage ratio 2.50x 1.98x 1.53x 1.38x 1.07x 1.41x 1.97x 1.83x 1.61x 1.80x 2.25x 2.41x FY08 FY09 FY10 FY11 FY12 FY13 HY14 Calculation provided in the Appendix 46

47 Covenant calculation 1 of 2 HY14 HY13 FY13 Adjusting Operating Profit (rolling 12 months) Reconciling items to statutory operating profit* Statutory operating profit before exceptional items Exclude: share of joint venture posttax profits Include: dividends from joint ventures Addback: depreciation Addback: amortisation (including arising on acquisition) Addback: sharebased payments charge Other adjustments (eg pro forma for transactions) EBITDAS per covenant (47.9) (37.9) (42.6) (56.0) (1.2) (57.7) (47.1) (4.1) * Reconciling items are those items excluded from Adjusted Operating Profit as defined in the Appendix, being: share of joint venture interest and tax; amortisation of intangibles arising on acquisitions, transactionrelated costs and management s estimate of oneoff costs incurred in relation to the Corporate Renewal Programme and related workstreams. 47

48 Covenant calculation 2 of 2 HY14 HY13 FY13 Recourse net debt Adjust for encumbered cash and other items Consolidated Net Total Borrowings (CNTB) per covenant (559.3) (25.6) (584.9) (731.5) (20.5) (752.0) (725.1) (21.7) (746.8) Statutory net finance costs Net interest retirement benefit obligations Movement in discount on other debtors Interest payable on non recourse Movement in discount on provisions and deferred consideration Net finance costs per covenant (35.4) (2.6) (0.5) (37.2) (36.6) (3.6) (37.3) (37.2) (2.3) (0.5) (37.7) Covenant CNTB / EBITDAS (not to exceed 3.5x) Covenant EBITDAS / net finance costs (at least 3.0x) 2.41x 6.5x 1.80x 11.2x 2.25x 8.8x 48

49 Pensions Serco sponsor a number of defined benefit pension schemes Non contract specific not related to specific contracts or franchises, largest of which is main Group scheme (SPLAS) Contract specific related to specific contract or franchise where the deficit expected to pass back to the customer or next contractor. Intangible asset is recognised at the start of the contract and amortised over the contract life Total net balance sheet assets across defined benefit schemes as at 30 Jun 2014 of 63m (31 Dec 2013: 43m) on asset base of 1.4bn Over 1bn of 1.4bn assets allocated to conservative liability driven investments Main Group scheme (SPLAS) has a balance sheet accounting surplus as at 30 Jun 2014 of 85m (31 Dec 2013: 64m) and an estimated actuarial deficit of 2m (31 Dec 2013: 13m) Most recent triennial full actuarial valuation of SPLAS was a deficit of 24m as at 5 April 2012 (6 April 2009: deficit of 141m); no further oneoff contributions were required 49

50 Currency rates HY14 Average rates HY13 FY13 Closing rates 30 Jun Jun Dec 2013 :US$ :Aus$ :Eur :INR