Growth in many parts of the business more than offsets wind-down of Test & Trace and exit from AWE. Profits up 6% and trading margin increased. Interim dividend increased by 18%.
Six months ended 30 June
Change at reported currency
Change at constant currency
Underlying Trading Profit (UTP)(2)
Underlying Earnings Per Share (EPS), diluted(3)
Reported EPS (i.e. after exceptional items), diluted
Interim Dividend Per Share
Free Cash Flow(4)
Adjusted Net Debt(5)
Reported Net Debt(6)
Revenues: strong growth across the business offsets revenue reductions from Test & Trace. Revenue excluding Test & Trace up 12%.
Underlying Trading Margin increases: up from 5.7% to 5.9%.
Underlying Trading Profit, Trading Profit and Operating Profit all up 6%. More than three-quarters of our profit earned outside of the UK(7).
Underlying Earnings per Share up 14%: growing faster than UTP due to lower interest and tax.
Reported Earnings per Share: prior year included recognition of GBP145m UK deferred tax asset.
Interim Dividend per Share up 18%.
Underlying trading profit cash conversion: >100%.
Reduced Adjusted Net Debt: down GBP61m to GBP164m. Covenant leverage 0.5x EBITDA (2021: 1.0x).
Return on Invested Capital: 21.5%, same as prior year.
Order book up GBP0.5bn on prior year to GBP14.6bn. Order intake GBP2.0bn, book-to-bill 94%.
Healthy New Business Pipeline at GBP8.1bn, up around 40% year-on-year.
Full year guidance slightly increased to reflect trading in May and June, and additional FX benefit.
Rupert Soames, Serco Group Chief Executive, commented:
We did much better in the first half than we expected in January, and as a consequence also expect to do better than we originally anticipated in the full year. In the first six months we have maintained revenues year-on-year despite losing around GBP220m, or 10%, of our revenues as a result of the wind-down in Test & Trace. Excluding Test & Trace, revenues grew by over 12%. Profits increased by 6%, despite a GBP25m, or 21%, negative impact of the exit from AWE in June 2021 and Test & Trace. Increased demand for case management in North America, employment services in the UK, immigration services in both Australia and the UK, as well as our acquisition of WBB in April 2021, more than offset the impact of Test & Trace and AWE on revenues and profit.
Our order book remains very strong at GBP14.6bn, up GBP0.5bn over the prior year with the positive effect of wins, indexation and currency more than offsetting revenue earned over the last twelve months. Order intake in the first half of GBP2.0bn represented a book-to-bill ratio of 94%, and would have been well over 100% but for unusually low levels of contract rebids and extensions being due in the first half. New business wins, on the other hand, were above average levels. The pipeline has reduced from the start of the year but at over GBP8bn stands at a very healthy level, and is up around 40% year-on-year.
Looking at the first half performance in the round - robust revenues despite the wind-down in Test & Trace, strong margins, large and growing order book, healthy pipeline, strong cash conversion and balance sheet - tells of the agility of Serco's Business-to-Government platform and the advantages of our differentiated business model and international footprint.
We employ around 57,000 people delivering services to governments and so the balance of supply and demand in labour markets is important to us. It is our sense that the dislocation in labour markets we saw last year is beginning to ease, as more people return to work, and we have seen a reduction in our vacancy levels. However, staff turnover remains high in some contracts, and unpredictable absence levels, driven by waves of Covid-19, mean that operational management of the business remains very demanding.
I am delighted to report that we have made significant progress on our diversity and equality strategy. Since 2017, the proportion of women in our senior leadership team (around 350 leaders) has increased from 17% to 33%, while the proportion of colleagues with a declared disability or health condition has more than doubled in recent years and now stands at 5%. In the UK our median gender pay gap has fallen from 12.9% to 6.9%.
As a result of the recent surge in inflation we are increasing pay faster than we budgeted and we will be distributing an additional GBP9m in the coming weeks in one-off payments to all our colleagues outside management grades, recognising the pressure many people, particularly the lower paid, are under at this time. Increasing pay is one of the reasons why costs are expected to be higher, and profits lower, in the second half than in the first. We do have mechanisms in many of our contracts which will over time help us mitigate the effects of cost increases, but inflation that goes from 2% to 10% in 12 months, and is then forecast to fall back to 2% by the end of 2024 makes it hard for companies, customers and employees to balance their long term interests and expectations.
Guidance for 2022
We significantly increased our guidance for the full year in an unscheduled trading update on 26 May. UTP guidance was raised by 15% from GBP195m to GBP225m, and today we are slightly increasing UTP guidance to GBP230m to reflect further FX movement since the last update and trading in May and June. We also strengthen guidance for Free Cash Flow and Adjusted Net Debt. For the year, we expect currency movements to contribute around GBP150m to revenues and GBP12m to profits.
26 May 2022
4 August 2022
Organic sales growth
Underlying Trading Profit
Net finance costs
Underlying effective tax rate
Free Cash Flow
Adjusted Net Debt
NB: The guidance uses an average GBP:USD exchange rate of 1.25 in 2022 and GBP:AUD of 1.78, which is based on currency rates as 30 June 2022. Adjusted Net Debt guidance includes the GBP90m share buyback programme. We expect a weighted average number of shares in 2022 of 1,195m for basic EPS and 1,220m for diluted EPS.
Serco's resilience and strong trading performance stands in sharp contrast to a geo-political and economic landscape which continues to be miserable and dominated by the malign influence of two 'black swan' events. In March 2020, Covid-19 up-ended the world. Almost exactly two years later, the Russian invasion of Ukraine has brought death and destruction, nine million refugees, inflation, food shortages, and world-wide disruption of efforts to rebuild after the pandemic.
The concatenation of these two catastrophes will shape public policy for years to come. Governments are struggling to square promises to invest in energy transition and to 'build back better' with the realities of materially increased levels of public debt incurred mitigating the impact of Covid-19; the need to increase defence expenditure; and inflation, with its outriders of unplanned increases in debt service and other costs - notably in pay for public servants. In squaring these circles governments will need more than ever the innovation, efficiency and skilled operational management the private sector can bring to the effective delivery of public services.
We have got off to a much better start than we expected against the five-year plan we presented at our Capital Markets Day in December 2021. Our expectation then was that, from a base year in 2022 of UTP of GBP195m and margin of around 4.7%, we would over the four years to 2026 grow revenues at an average of 4-6% a year, with margins rising to 5-6%. Whilst it may be tempting to rebase our objectives to a higher 2022 starting point, any sensible plan has to allow for humps, when we do better than the average, and bumps, when we do worse; 2022 will clearly be a hump, and our margins in particular are stronger, at an earlier point in the plan, than we expected. Overall, we believe that we remain on course, even if our strong start means that we are travelling towards our destination a little faster than we expected. Importantly, the experience of the last two years, and the outlook for 2022, confirms our belief in the resilience of our model and the ability of our Business-to-Government platform to enable us to adapt to the changing requirements of governments, whilst delivering growing returns to shareholders, rewarding careers to our employees, and high-quality public services to our customers.