Full year results April 2018
Agenda Debbie White Agenda What has been accomplished Mark Whiteling 2017 income statement Results of the Contract review & Balance sheet review, Energy from Waste Cashflow, net debt, bank facilities & pension Debbie White First impressions Building a better Interserve Four strategic priorities Business overviews Outlook
What has been accomplished since October 2017 Stabilised the business 2017 performance inline with expectations Established new management controls Energy from waste progress Interserve is fundamentally a sound business with significant potential for improvement Begun to strengthen the team Initiated Fit for Growth programme Secured financing Developed and commenced implementation Defining each of the business s strategies Phase 1 completed, 15m impact in 2018 Phase 2 designed, delivery in 2018/19, total phase 1 & 2 40m- 50m pa by 2020 Developed comprehensive three year business plan Conducted review of major contracts Secured bridge financing in December 2017 Refinancing of the Group now complete 3
Mark Whiteling
Income statement million YE 2017 YE 2016* % Consolidated revenue 3,250.8 3,244.6 0.2 Total operating profit 74.9 155.0-51.7 Interest (22.5) (17.7) Headline profit 52.4 137.3-61.8 Exited business and non-underlying items (215.2) (201.5) Amortisation & impairment of acquired goodwill and (81.6) (29.9) intangible assets Profit / (loss) before tax (244.4) (94.1) -159.7 Taxation (10.0) (7.5) Profit / (loss) after tax (254.4) (101.6) Minority interest (2.0) (2.1) *As adjusted 5
million 2017 2016* million Revenue 2017 TOP Margin Revenue 2016* TOP Margin Support Services Revenue TOP Margin Revenue TOP Margin Support -UK Services 1,670.7 38.9 2.3% 1,694.7 80.1 4.7% -UK -International 1,715.2 142.2 38.9 2.8 2.4% 1.7% 1,749.7 211.9 83.0 9.4 3.6% 4.7% Construction -International 142.2 2.8 1.7% 211.9 9.4 3.6% Construction -International - 19.2 7.0% - 16.9 5.5% -International -UK 1,048.2 - (19.4) 19.2-1.9% 7.0% 870.8-25.2 16.9 5.5% 2.9% Equipment -UK Services 1,048.2 229.0 (19.4) 54.4 23.8% -1.9% 870.8 224.1 25.2 48.6 21.7% 2.9% Group Equipment Services Services 229.0 10.7 (28.5) 54.4 23.8% (40.6) 224.1 (28.1) 48.6 21.7% Group PFI Disposal Services 10.7 12.3 (28.5) 7.5 (40.6) 7.5 (28.1) 2.9 PFI Disposal 3,113.1 12.3 74.9 7.5 2.4% 2,968.4 7.5 155.00 2.9 5.2% Non-underlying items 3,157.6 137.7 (299.7) 74.9 2.4% 3,023.4 276.1 (231.4) 157.9 5.2% *As adjusted All results pre non-underlying items 6 Segmental analysis 3,250.8 3,244.6
Non-underlying items m* 2017 2016 Contract review and balance sheet review 86.1 33.7 Energy from Waste 35.1 160.0 Goodwill impairment 60.0 - Amortisation of acquired intangibles 21.6 29.9 Restructuring costs and adviser fees 47.1 - Property development exit 26.0 - Equipment Services strategic review 7.1 10.7 IT development cost impairment 16.7 - Aggregate 299.7 234.3 60m goodwill write-down taken in relation to Initial acquisition Restructuring costs for Fit for Growth. Adviser fees for bank refinancing Property development activities exited, impairment booked against asset carrying value Final costs of the Equipment Services strategic review, aggregate cost as guided IT development cost impairments relate to the write off of previously capitalised costs for projects now cancelled 7
Estimated future cash impact* of Non-Underlying items million 2017 to date Future cash outflows No material future cash impacts 2018 (<1 year) 2019-2022 (2-5 years) 2022+ (> 5years) Aggregate Contract review and balance sheet review 52.7 10.7 19.1 3.6 86.1 Amortisation and goodwill impairment 81.6 81.6 Restructuring costs and adviser fees 34.7 4.7 7.7 47.1 Property development exit 26.0 26.0 Other 23.8 23.8 Aggregate 218.8 15.4 26.8 3.6 264.6 Majority of items non-cash or cash impact already felt by 31 December 2017 8 *Excludes EfW Numbers represent current best estimates
Contract review and balance sheet review Contract review and balance sheet review undertaken using both PWC and internal resources. 125 contracts in total from across the business. Results examined by EY as part of their Independent Business review Judgements taken at the 2016 balance sheet date have been reassessed balance sheet derisked Provisions and write-downs relate to 18 contract issues. As at 31 December 2017 7 are operationally complete* 9 are financially complete** 2 are on-going Aggregate charges of 86.1m in year 43.7m of provisions on loss making or onerous contracts entirely relating to UK Support Services 42.4m of WIP and receivables write downs - c80% relating to UK Construction *Interserve has ceased to provide significant services to the client but final account negotiations have not concluded **Interserve has ceased to provide significant services to the client and final account negotiations have concluded 9
Energy from Waste operations and cashflow 95.9m net cash outflow in 2017 Completion continues to progress to expected timelines c 215m cumulative cash outflow contracts to end of 2017 Significant, in excess of 20m, insurance receipts constituting partial payment on a number of claim items, received in Dec 2017 2018 expected to be broadly cash neutral over the full year H1 gross cash outflow offset by H2 inflows from insurance and other recoveries 35.1m in year charge, as highlighted in Oct 2017 trading update Derby ROCs accreditation received from OFGEM Anticipated completion date* Percentage completion** Derby H1 2018 >90% Dunbar H2 2018 >90% Margam H1 2018 >95% Rotherham H1 2018 >95% Peterborough Completed 2015 Complete Glasgow n/a n/a *Defined as completion of construction activity by Interserve Construction Limited ** Defined as %age of anticipated final costs incurred, as at Feb 2018 10
Gross operating cashflow 2017 2016 EBITDA 116.0 194.0 Net capex (25.3) (39.0) Gain on disposal of PPE (22.4) (16.0) Dividends in excess / (deficit) of JV profits Working capital movement (8.3) 11.5 (46.8) 96.1 Other 6.9 7.3 Gross operating cashflow 20.1 253.9 Gain on disposal of PPE a standard route to market for Equipment Services Dividends below profits in the ME after strong 2016 100% EBIT: dividend conversion over 2016/17 Underlying performance good, aggregate ME debt & WIP days broadly flat on 2016 Working capital reversal year end working capital stretch not repeated. Significant EfW insurance receipt in Dec 2017 Further 33.3m of VAT and payroll creditors settled in Jan / Feb 2018 c 20m of early customer receipts (Jan 2018 monies received Dec 2017) 11
Cashflow and change in Net Debt 2017 2016 Gross operating cashflow 20.1 253.9 Energy from Waste (95.9) (116.9) Non-underlying items (64.7) (17.8) Pension, interest & tax (45.9) (48.5) Investments in JVA (32.0) (9.8) Dividends paid - (37.1) FX & other (9.8) 10.6 Change in net debt (228.2) 34.4 Closing net debt (502.6) (274.4) Non-underlying items 29.8m of restructuring and professional adviser costs 34.9m of costs related to issues identified in the Accounting review Investments comprise equity injections into Derby Waste and Haymarket FX and other Net of the disposal of our hedging instruments and the associated revaluation of our US private placement debt. 12
2017 net debt 13 m 2017 closing net debt (503) Adjusted for Time to pay (11) Q4 VAT payment (23) Advance customer receipts unwind (circa) Rebased closing net debt H2 2017 average* net debt (20) 557 545 2017 closing net debt flattered by some significant items Settlement of 11m of Time to pay liability with HMRC in Jan / Feb 2018 Timing of Q4 VAT payment settled 5 Jan 2018 c 20m unwind of advance customer receipts (Jan 2018 payments received Dec 2017) Rebased closing net debt broadly comparable to H2 2017 average net debt *Based on 6 month end balances Year end net debt 502.6m Full year average net debt* 501.1m H1 457.3m, H2 545.0m Business running far too close to limits of aggregate available facilities Significant creditor stretch at YE16 & HY17. Not repeated at YE17 Significant EfW insurance receipts, received in Dec 2017 No factoring or reverse factoring used
Refinancing Summary of facilities 834m of committed facilities 249m of US PPN - $350m free floating 585m of GBP facilities All facilities expire Sep 2021 10p / share warrants provided to debt holders which if exercised, would provide the warrant holders with an interest of up to 20% of the post-issue share capital. Agreement with pension fund on 2018/2019 contributions Pricing Old money LIBOR + 6.43% (3.43% PIK) Old money US $ LIBOR + 7.61% (2.0% PIK) New money LIBOR +8.75% (5.5% PIK) Financial Covenants Absolute EBITDA Absolute cashflow Net debt to EBIDA Interest cover Minimum Net worth Other covenants Term loan step down 70m (2019), 60m (2020) Gross debt < 450m by June 2020 Targets non-core disposals 14
2018 Cashflow & Net debt Major outflows in H1 EFW 60m Advisors 25m Loss provisions 20m Mobilisations 10m Inflows Haymarket disposal (subject to timing) c 40m First Half net debt expected to be in the range of 650-680m 15
Debbie White
First Impressions Organisation Federated, enormously inefficient Committed people, strong values but no one Interserve mentality Strong client relationships Clarity on role of Group and business segments Plan and Priorities Coherence of approach Decision making dispersed Lack of train tracks Energy from Waste Visibility and transparency Disjointed systems and management processes Limited visibility at Group level of operating performance Inadequate review process 17
Building a better Interserve Four Strategic Priorities Fit for Growth Simplified organisation Leverage our scale Reduced costs A nimbler business Improved purchasing Competitive value propositions Greater selectivity Deploy depth and breadth of capability Deeper client relationships More effective in the market place Disposals/managed exit of minor non-core activities Rigorous pipeline management Operational delivery Standard suite of products and services Internal and customer-facing technology Efficient and effective mobilisation and project delivery Predictable results Focused and selective IT investments Standard KPI s One Interserve Standard approach to leadership, performance management, reward and recognition Deepening our core values and behaviours Safe workplace Motivated and engaged employees 18
Fit for Growth Phase 1 Stop all non-critical discretionary spend Defer internal projects First phase role eliminations Strengthen management processes and controls 2018 15m pa benefit Phase 2 Implement programme governance Fundamental organisation re-design Centralise and leverage group purchasing activities Consolidate property portfolio Design and implement Group shared services 2020 40-50m pa benefit 19
Support Services Way Forward Background Number of people 48,500 Number of Clients 2000 2017 Revenue UK: 1,715m International: 142m Positives Strong client base Acceptable operational delivery Potential for work winning in key markets Challenges Market pressures Growth in indirect cost leading to margin deterioration Payment by results risk (CRC s) Standardised efficient services Optimised organisation and clear governance Rigorous process to improve selling Operational discipline Improve management data and systems 20
Equipment Services Way Forward Background Number of people 1,800 Number of Clients 5,400 2017 Revenue 229m Positives Significant profit growth in recent years Strong customer relationships and brand Growing services portfolio Top 3 market position in most markets Challenges Headwinds in some markets Ensuring critical mass across individual countries Maximise current business opportunities in existing markets Improve cost efficiency through better process Introduce new services (e.g. ground-shoring) in selected markets 21
Construction Way Forward Background Number of people UK: 2,300 Middle East: 23,000 Number of Clients 600 2017 Revenue UK: 1,048m Positives Established customer base Ongoing framework agreements Good progress in Middle East businesses Capability Challenges Challenging market with limited growth outlook (UK) Poor margin performance in 2017 (UK) Reduced overhead and better economies of scale Stronger bidding discipline Focus on profitability and risk management Higher proportion of framework projects Standardise product offerings 22
Current trading and outlook First quarter trading in line with board s expectations Peak net debt in H1 Future workload stable at 7.8bn Fit for Growth on track to deliver 15m benefit in 2018 23
Questions