2020 Half Year Results

For the six months ended 30 June 2020

Serco Group plc

Disclaimer

Forward-looking statements

This presentation contains statements which are, or may be deemed to be, "forward-looking statements" which are prospective in nature. All statements other than statements of historical fact are forward-looking statements. Generally, words such as "expect", "anticipate", "may", "could", "should", "will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" and similar expressions identify forward looking-statements. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Factors which may cause future outcomes to differ from those foreseen or implied in forward-looking statements include, but are not limited to: general economic conditions and business conditions in Serco's markets; contracts awarded to Serco; customers' acceptance of Serco's products and services; operational problems; the actions of competitors, trading partners, creditors, rating agencies and others; the success or otherwise of partnering; changes in laws and governmental regulations; regulatory or legal actions, including the types of enforcement action pursued and the nature of remedies sought or imposed; the receipt of relevant third party and/or regulatory approvals; exchange rate fluctuations; the development and use of new technology; changes in public expectations and other changes to business conditions; wars and acts of terrorism; cyber-attacks; and pandemics, epidemics or natural disasters. Many of these factors are beyond Serco's control or influence. These forward-looking statements speak only as of the date of this presentation and have not been audited or otherwise independently verified. Past performance should not be taken as an indication or guarantee of future results and no representation or warranty, express or implied, is made regarding future performance. Except as required by any applicable law or regulation, Serco expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this presentation to reflect any change in Serco's expectations or any change in events, conditions or circumstances on which any such statement is based after the date of this presentation, or to keep current any other information contained in this presentation. Accordingly, undue reliance should not be placed on the forward-looking statements.

2 Serco Group plc - 2020 Half Year Results

Agenda

Overview

Rupert Soames, Group CEO

Financial Review

Angus Cockburn, Group CFO

Operational Review

Rupert Soames

Q&A

Rupert Soames

Angus Cockburn

3 Serco Group plc - 2020 Half Year Results

Overview

Rupert Soames

Group Chief Executive

4 Serco Group plc - 2020 Half Year Results

Guidance reiterated after strong first half

  • Strong financial and operational performance
    • Revenue £1,822m, up +24% at CFX; +15% organic; +9% from NSBU acquisition
    • Underlying Trading Profit of £77.6m, up +53% at CFX; margin increased from 3.4% to 4.3%
    • ~15,000 people recruited to support governments around the world; 10,500 tracers mobilized in 6 weeks for NHS Test & Trace; >500,000 tests delivered through Serco-operated test centres
    • 90% of Serco people working on the front line in hospitals, prisons, call centres, defence bases, trains
    • People, processes, systems, strategy and "Loose-Tight" business model respond well to crisis
  • Covid-19had limited impact on UTP
    • Net impact of +£80m on revenue as a result of new contracts to assist governments in responding to the crisis offset by fall in demand in leisure, aviation and UK transport; mitigated by some customer support to maintain services
    • Neutral to UTP as additional work and support schemes, such as UK furlough and emergency agreements on some UK transport contracts, offset fall in demand and higher costs
    • Customer demand for Serco and ability to respond are the result of changes and investment over last few years
  • Solid order intake and order book
    • £1.9bn order intake; slightly ahead of revenue
    • Order book increased to £14.5bn, up from £14.1bn at start of year
  • Robust balance sheet and good liquidity
  • 2020 guidance reiterated having been reinstated in June

5 Serco Group plc - 2020 Half Year Results

Profit: ~27% CAGR 2017-20

Revenue: 8% 2019 organic, ~9% 2020

£m

UTP

~£143m

160

Mid-point of guidance

~3.9% margin

£120m

120

£93m

3.7% margin

£69m

3.3% margin

80 2.3% margin

40

0

FY17

FY18

FY19

FY20e

  • In the "Grow" stage of the strategic plan
  • Strong revenue and UTP growth anticipated in 2020, despite disruption from Covid-19
  • Revenue growth in 2019 and 2020, as well as strong order intake, indicates we are outperforming our overall market

6 Serco Group plc - 2020 Half Year Results

Financial Review

Angus Cockburn

Chief Financial Officer

7 Serco Group plc - 2020 Half Year Results

Income Statement - Revenue and Trading Profit

Revenue excludes share of JV&A revenue

Trading Profit measures include share of JV&A PAT

Contract & Balance Sheet Review adjustments and other one-time items excluded from UTP

£m

HY20

HY19

FY19

Revenue

1,822

1,476

3,248

Trading profit

80.5

50.6

133.4

Exclude: Contract & Balance Sheet Review items

(2.9)

-

(13.2)

Underlying Trading Profit (UTP)

77.6

50.6

120.2

UTP margin

4.3%

3.4%

3.7%

  • Currency impact in HY20: Revenue -£4.4m; UTP +£0.2m
    • Sterling weakened against the US$ but strengthened against the Aus$
  • Translational FX sensitivity:
    • FY19 £:US$ av. rate of 1.28; 5c move = ~£50m Revenue, ~£4m UTP (based on Americas + Middle East)
    • FY19 £:Aus$ av. rate of 1.83; 5c move = ~£20m Revenue, ~£1m UTP (based on AsPac)
  • Estimated FY20e currency impact: Broadly flat
    • Assumes FY20e £:US$ av. rate of 1.28 and £:Aus$ av. rate of 1.88, based on applying YTD average rates and the 31 July 2020 spot rate for the rest of the year

8 Serco Group plc - 2020 Half Year Results

Revenue divisional analysis

UK&E, Americas and AsPac all delivered good

growth

UK&E - AASC contract and Covid-19 work

Americas - FEMA, Field Office Support and CMS

AsPac - growth from AHSC and Citizen Services

Middle East - decline due to Covid-19 impact on transport portfolio

Revenue - growth composition HY20 vs HY19

HY19

HY20

FY19

£m

Reported

Acquisition/

Reported

Constant

Reported

Currency

Organic

Disposal

FX

TOTAL

Currency

Currency

Currency

UK&E

658

+19%

-

-

+19%

784

784

1,362

Americas

372

+8%

+35%

+3%

+46%

542

531

916

AsPac

280

+25%

-

(6%)

+19%

332

350

621

Middle East

166

(2%)

-

+1%

(1%)

164

162

350

Total

1,476

+15.0%

+9.0%

-0.5%

+23.5%

1,822

1,827

3,248

HY20 v HY19

+£221m

+£132m

-£7m

+£346m

  • +15% organic; compared to +4% in H1 2019 and +12% in H2 2019
  • ~5% of the organic growth was from Covid-19 related work
  • +9% acquisitions; Naval Services Business Unit of Alion acquired in August 2019

9 Serco Group plc - 2020 Half Year Results

Underlying Trading Profit (UTP) divisional analysis

UTP increase led by Americas and UK&E

UK&E improvement driven by AASC contract moving from mobilisation to operational phase

Americas driven by NSBU acquisition (£10m) plus high activity in CMS and FEMA contracts

AsPac growth supported by AHSC

Middle East decline includes reduced air traffic control work

Underlying Trading Profit and margin

HY20 UTP

HY19 UTP

HY change

FY19 UTP

£m

Reported

Constant

Reported

Reported

Reported

Constant

Constant

Reported

Reported

Currency

Currency

Margin

Currency

Margin

Currency

Currency

Currency

Margin

UK&E

26.5

26.5

3.4%

15.2

2.3%

+11.3

+74%

38.4

2.8%

Americas

53.4

52.4

9.9%

37.7

10.1%

+14.7

+40%

82.1

9.0%

AsPac

13.3

14.0

4.0%

11.8

4.2%

+2.2

+19%

31.3

5.0%

Middle East

7.0

7.1

4.3%

7.4

4.5%

(0.3)

(4%)

13.9

4.0%

Divisions

100.2

100.0

5.5%

72.1

4.9%

+27.9

+39%

165.7

5.1%

Corporate

(22.6)

(22.6)

(1.2%)

(21.5)

(1.5%)

(1.1)

+5%

(45.5)

(1.4%)

Total

77.6

77.4

4.3%

50.6

3.4%

+26.8

+53%

120.2

3.7%

  • UTP growth of +53% at CFX and RFX
  • Margin increased from 3.4% to 4.3%
  • Favourable FX of £0.2m increases the HY change from +£26.8m to +£27.0m

10 Serco Group plc - 2020 Half Year Results

Income statement - EPS and DPS

Net finance costs higher due to increased interest on lease liabilities

Effective tax rate increased from 24.4% to 26.2% due to change in geographic mix

Underlying EPS up +47%

Non underlying items (contract & balance Sheet review items) net credit of £2.9m

Interim dividend decision deferred until Q4

£m

HY20

HY19

FY19

Underlying Trading Profit (UTP)

77.6

50.6

120.2

Net finance costs (NFC)

(12.7)

(10.5)

(21.8)

Underlying PBT

64.9

40.1

98.4

Tax on UTP and NFC

(17.0)

(9.8)

(24.4)

Underlying PAT

47.9

30.3

74.0

Non underlying items

2.9

-

13.2

Amortisation of intangibles arising on acquisition

(5.0)

(2.3)

(7.5)

Non underlying tax

11.3

1.3

(3.0)

PAT before exceptionals

57.1

29.3

76.7

Exceptional items, net of tax

13.2

(30.7)

(26.1)

Profit /(loss) after tax

70.3)

(1.4)

50.6

Less: attributable to non-controlling interests

(0.1)

(0.3)

(0.2)

Attributable to equity owners

70.2

(1.7)

50.4

Weighted average share count for diluted EPS

1,244.7m

1,146.3m

1,199.0m

Underlying EPS, diluted

3.86p

2.62p

6.16p

Impact of non underlying items

0.74p

(0.09p)

0.23p

Statutory EPS before exceptional items, diluted

4.60p

2.53p

6.39p

Impact of exceptional items

1.06p

(2.68p)

(2.18p)

Statutory EPS, diluted

5.66p

(0.15p)

4.21p

DPS

0p

0p

0p

11 Serco Group plc - 2020 Half Year Results

Exceptional items

Net exceptional credit of £13m

Exit of Viapath JV is biggest component with gain on disposal and loan repayment

This year saw no exceptional restructuring costs (2019: £5.4m), marking the end of our exceptional restructuring programme

£m

HY20

HY19

FY19

Exceptional (loss)/profit on disposals

11.0

-

-

Other exceptional operating items:

Restructuring costs

0.1

(5.4)

(12.8)

SFO fine and investigation costs

-

(22.9)

(22.9)

Other costs re UK government reviews

(1.2)

(1.1)

(2.3)

Acquisition costs re NSBU

(1.4)

(1.7)

(4.7)

Release of provision re 2014 commercial dispute

-

-

19.3

Reversal of impaired loan balances

1.2

-

-

Reversal of impairment in joint ventures

1.3

-

-

Legal settlement on commercial dispute

2.6

-

-

Exceptional operating items

13.6

(31.1)

(23.4)

Tax on exceptional items

(0.4)

0.4

(2.7)

Total exceptional items, net of tax

13.2

(30.7)

(26.1)

Memo:

Cash flow on exceptional items

(4.2)

(12.1)

(49.2)

Cash flow on disposal of Viapath investment

11.0

-

-

6.8

(12.1)

(49.2)

12 Serco Group plc - 2020 Half Year Results

Dividends

  • Background to Board's recommendation of resuming dividends in respect of FY19
    • Followed very strong operational and financial performance
    • 2019 was also the last year of significant outflows on OCPs and cash exceptionals
    • Expectations were for increased underlying earnings and reducing financial leverage in 2020
  • Recommendation of paying a final 2019 dividend subsequently withdrawn
    • Risks and uncertainty of Covid-19 and unknown impact on financial performance and liquidity
    • Potential to use government support where available including the deferral of tax payments
  • Interim dividend decision deferred
    • Good operating performance and strong balance sheet, however
    • Currently using government support, therefore inappropriate to pay an interim dividend
  • Board will review dividend again in Q4
    • We anticipate repaying the deferred taxes, where possible, towards the end of the year
    • Board will then consider whether it should distribute all or part of what would have been paid as the final dividend in respect of 2019
    • Interim dividend will also be revisited at that point

13 Serco Group plc - 2020 Half Year Results

Free cash flow and trading cash flow

Free Cash Flow was £32m

excluding tax deferrals

Capital repayment of lease liabilities higher than depreciation due to AASC contract

Working capital had £45m benefit from tax deferrals

FCF step up due to improved profitability and reduced OCP utilisation

Average working capital days broadly unchanged

No use of working capital facilities across the

Group

UTP to Trading Cash Flow conversion was 78% excluding tax deferrals

£m

HY20

HY19

FY19

Operating profit before exceptionals

75.5

48.3

125.9

Share of profit of joint ventures and associates

(7.0)

(13.5)

(27.5)

Depreciation and amortisation of owned assets

20.3

18.6

43.3

Depreciation and impairment of leased assets

46.4

32.5

75.6

Working capital movement

19.2

(7.5)

(0.1)

OCP utilisation (excl. accelerated OCP utilisation re IFRS16 leases)

(1.7)

(29.5)

(40.9)

Accelerated OCP utilisation re IFRS16 leases

-

(12.6)

(12.7)

Other movements in provisions

7.3

6.7

10.5

Other non-cash movements

6.4

5.6

9.2

Tax paid

(12.0)

(17.2)

(31.2)

Net cash flow from operating activities

154.4

31.4

152.1

Dividends from joint ventures and associates

12.4

13.4

25.4

Net interest paid

(12.6)

(10.5)

(22.2)

Capital repayment of lease liabilities

(52.8)

(22.3)

(70.2)

Net capital expenditure

(20.6)

(11.7)

(23.3)

Purchase of own shares net of options proceeds

0.1

0.1

0.2

Free Cash Flow (FCF)

80.9

0.4

62.0

Add-back: tax paid and net interest paid, as above

24.6

27.7

53.4

Add-back:non-cash R&D, within other movements

-

-

0.1

Trading Cash Flow

105.5

28.1

115.5

Memo: UTP to Trading Cash Flow conversion

136%

56%

96%

>conversion excluding tax deferrals

78%

n/a

n/a

14 Serco Group plc - 2020 Half Year Results

Net debt and leverage

HY19 is presented on a pro forma basis to exclude the £139m net proceeds of the Equity Placing

£143m closing adjusted net debt compares to a daily average of £283m (2019 £219m)

Average and closing net debt difference due to: Mobilisation of Covid-19work in advance of payment, FEMA billings, tax deferrals and JV disposal

Covenant leverage of 0.7x, or 0.9x excluding tax deferrals

Net debt of £503m including leases

£m

HY20

HY19

FY19

Free cash flow

80.9

0.4

62.0

Exceptional items (see Appendix 5)

(4.2)

(12.1)

(49.2)

Net (acquisition)/disposal of subsidiaries and operations

7.4

(9.3)

(193.2)

Equity Placing net proceeds

-

-

138.7

Other movements in investment and loan balances

0.6

0.3

0.3

Cash movements on hedging instruments

(0.9)

(7.0)

(2.0)

Foreign exchange movement on net debt

(12.2)

0.3

2.1

Movement in adjusted net debt (HY19 pro forma)

71.6

(27.4)

(41.3)

Opening net debt

(214.5)

(173.2)

(173.2)

Closing adjusted net debt (HY19 pro forma)

(142.9)

(200.6)

(214.5)

Covenant adjustments (see Appendix 6)

(5.7)

(11.5)

(20.6)

Net borrowings (HY19 pro forma)

(148.6)

(212.1)

(235.1)

HY19 pro forma: Equity Placing net proceeds

n/a

138.7

n/a

Net borrowings per covenant

(148.6)

(73.4)

(235.1)

EBITDA per covenant (see Appendix 6)

222.7

170.5

200.7

Exclude non-underlying items

(18.6)

(15.8)

(21.5)

EBITDA underlying

204.1

154.7

179.2

Leverage ratio per covenant

0.67x

0.43x

1.17x

Leverage ratio underlying (HY19 pro forma)

0.73x

1.37x

1.31x

15 Serco Group plc - 2020 Half Year Results

Guidance for 2020

2019A

2020 guidance

Revenue

£3.2bn

~£3.7bn

Organic sales growth

8.2%

~9%

Underlying trading profit

£120m

£135m-£150m

Net finance costs

£22m

~£27m

Underlying effective tax rate

24.8%

~25%

Free cash flow

+£62m

Broadly similar to 2019

Adjusted net debt

£215m

~£200m

NB. Full year cash flow and net debt guidance assume repayment of deferred tax by the end of the year, where possible.

  • Short term outlook:
    • The relatively wide range of UTP outcomes reflects the continuing uncertainty
    • Uncertainty likely to persist well into 2021 as the world grapples with recurring outbreaks of infection
    • Upsurges in cases can affect both our revenue and profit
    • Net impact of Covid-19 in HY20 was neutral due to additional Covid-19 related work. These contracts are short-term by their nature

16 Serco Group plc - 2020 Half Year Results

Operational review

Rupert Soames

Group Chief Executive

17 Serco Group plc - 2020 Half Year Results

HY20 highlights & lowlights

Highlights

  • Response to Covid-19 (see following slides)
  • People, systems, processes prove to be scalable and agile; business and management model "fit for purpose"
    • Call centres: from Ugly Duckling to Belle of the Ball
  • Extremely strong financial performance Revenue +24%, UTP +53%, OCP utilisation £2m, down from £42m; strong cash flow; On track for >25% CAGR in UTP 2017-20
  • Order Intake: >100% Book-to-Bill in difficult environment. Key wins Northern Isles Ferries, Gatwick IRC, Fiona Stanley, GEODSS, Fylingdales.
  • Successful mobilisations despite lockdown: Gatwick IRC, Clarence; PECS goes live in August
  • NSBU / METS performing to plan; FEMA running well; strong operational response to additional unexpected CMS volumes
  • AASC finds accommodation for >2,700 additional service users
  • Management: new appointments to Exec; 7,500 applications for 40 Graduate positions
  • Necessity the mother of invention: learning how to do things better/faster; slicker processes such as SpeedyBoarding

Lowlights

  • 7 Covid-19 related deaths
  • Bid Losses: Viapath, ATC training in US
  • Some tenders delayed, customers distracted; pipeline weaker, but extensions benefit
  • Hard to maintain momentum on productivity improvements whilst in lockdown
  • Icebreaker delayed
  • Negative press on Test & Trace
  • Health: margin improvement challenging; PFI audits continuing

18 Serco Group plc - 2020 Half Year Results

Covid-19 has been a huge test of Serco's operational capability

Setting priorities

"Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can to protect our employees from harm and our shareholders from loss"

Trading Update 2nd April

Questions: Group

  • How do we manage this?
  • Same or different impact by country?
  • How many people would turn up for work?
  • How do people get in to work?
  • At what level of attendance would we be unable to function?
  • Would our offices be open fully / a bit / at all?
  • Can we provide secure IT at home?
  • Would our supply chain hold up?
  • Was this nasty flu, or something worse?
  • How long should we plan for it to last?
  • Would governments be able to function?
  • What was our liquidity position?
  • What PPE do we need, and how do we get it?

Answers: Group

  • Well-rehearsedbusiness continuity plans worked
  • Largely the same by country; different timings; different government responses
  • "Loose-Tight",devolved structured, with people used to sharing ideas worked
  • Initial high level of absence soon normalised
  • At >30% absence it is very difficult to sustain
  • 90% of our people work from government facilities - prisons, hospitals, call centres, defence locations
  • 10% of our people homeworking worked well
  • Supply chain held up
  • Much worse than flu and plan for it being around for a long time
  • Governments functioned well
  • Liquidity position strong as we were paid and we have been paying
  • PPE - endless war-stories

19 Serco Group plc - 2020 Half Year Results

Absence trends - UK

Almost back to normal: 7.2%, of which 2.3% Covid-19 related

27.8%

6.4

23.8%

5.5

15.8%

14.8%

3.6

3.4

11.0%

2.5

7.2%

1.6

Mar-20

Apr-20

May-20

Jun-20

Jul-20

Current

Employees Absent '000

% of Headcount Absent

20 Serco Group plc - 2020 Half Year Results

Covid-19 has been a huge test of Serco's operational capability

Each sector presents different challenges

Questions: by sector

  • Hospitals: what PPE? What shifts? What cleaning regimes? Food supplies?
  • Prisons: Lock down? Visitors? Control & Restraint?
  • Transport: to run or not to run? How much capacity?
  • Driver Test & Examination
  • Leisure Centres
  • Environmental Services
  • Asylum seeker accommodation
  • Call centres: how many m2 per person? Which customers will allow home working?
  • Defence: who will be allowed on sites? How do we assure tug crews for essential movements?

Serco people have risen to the challenge and behaved in exemplary fashion

Answers: by sector

  • Hospitals: same PPE standards as NHS; additional staff to manage absences; food supplies as normal
  • Prisons: lock down regimes & no visitors worked surprisingly well; in-cell exercises & video; many prisoners well aware of their own fragile health
  • Transport: Merseyrail, Northlink Ferries, Dubai Metro, Dubai Airport, Caledonian Sleepers all running <20%
  • Driver Test & Examination: closed down
  • Environmental: deal with 25% increase in volume
  • Leisure Centres: close down, care & maintenance
  • Asylum seekers: stop "move-ons"; population increases by >2,700 since March
  • Call centres: reduced capacity by ~70%; most, but not all, customers accepting home working
  • Defence: some sites tightly shut down in early days; mission critical crews isolate for 14 days before task

21 Serco Group plc - 2020 Half Year Results

Covid-19 has been a huge operational test for both Serco & governments

Setting priorities

"Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can to protect our employees from harm and our shareholders from loss"

Trading Update 2nd April

  • Mobilise immediately, sort out commercials later, open book, lower margins, collaborative working with government, agencies, and other companies
  • >15,000 people hired, 2,800 furloughed, ~800 layoffs, hundreds re-deployed
    • UK: Drive-through & mobile test centres (0.5m tests delivered, 25 fixed / 64 mobile sites) NHS Test & Trace (10,500 people), Dept Work & Pensions (1.8m calls last quarter), Public Health England, NHS111, Louisa Jordan Hospital, NHS Trusts
    • Middle East: Dubai World Trade Centre field hospital; Saudi hospitals; Defence base support
    • Australia: quarantined returning travellers; increasing immigration & extradition cases; Services Australia, Dept Health Services
    • US: increased volumes on CMS; Navy demands continued throughput

Serco response to "Can you help?"

"Yes, we can"

Total additional revenue ~£130m in H1, offset by £50m revenue losses.

Net profit impact negligible due to puts and takes.

22 Serco Group plc - 2020 Half Year Results

Covid-19 will be net positive for our relationship with governments

Long-term impact

The Four Forces

  • Four Forces will speak with louder voice:-
    • Governments will have more debt
    • Citizens will be more aware of the importance of public services
    • Deficits will have to be stabilised
    • Increased taxation will continue to be unpopular
  • We have built battle-proven relationships with many customers
  • Realisation of the value of the private sector as a nation's reserve army
  • Response of UK private sector really strong:
    • Ventilators: Dyson, Babcock, Maclaren, Penlon
    • Nightingale Hospitals: Mitie, Interserve, Balfour Beatty, Kier, British Army, Serco
    • Drive-throughtest centres: Boots, Deloitte, G4S, Sodexo, Serco, British Army
    • Test & Trace: Sitel, Serco, NHS Professionals, PHE
  • Public and private sectors have worked really well together

23 Serco Group plc - 2020 Half Year Results

UK & Europe summary of HY20

HY20 Revenue

£784m

CFX change:

+£126m

+19%

% of Group Revenue

43%

HY20 UTP

Sectors

Justice, Immigration, Defence, Health, Citizen Services, Transport

  • Revenue +19% organic
    • Growth driven by: AASC contracts and additional Covid-19 work
    • Negatives: Leisure, Northern Isles Ferry, some lost healthcare work
  • UTP +74%
    • Margin: increased from 2.3% to 3.4%, or 2.9% JV&A-adjusted (HY19: 2.1%)
    • Growth driven by: AASC move from loss-making (mob costs) to profitability, Covid-19 work (at lower than average margin), Viapath exit (non-recurring)
    • Negatives: Covid-19 impact on Leisure, Merseyrail, additional costs in Health

£26.5m

CFX change:

£11.3m

74%

% of Group UTP (before corp. costs)

26% 34%

  • OCP journey now virtually complete: £1.5m utilisation (HY19: £36m)
  • Contract awards of >£1bn incl: Northern Isles Ferry ~£450m; Gatwick Immigration Centres ~£200m; various contracts to provide services in response to Covid-19, the largest being NHS Test & Trace
  • Pipeline / rebids / extensions: Test & Trace, Herts CC, FPMS, Skynet Athena consortium; DIO Defence infrastructure; new build prisons; Belgium military bases

24 Serco Group plc - 2020 Half Year Results

Americas summary of HY20

HY20 Revenue

£542m

CFX change:

+£159m

+43%

% of Group Revenue

30% 25%

HY20 UTP

£53.4m

CFX change:

+£15.7m

+39%

% of Group UTP (before corp. costs)

Sectors

Defence, Citizen Services, Transport

  • Revenue +46%: +36% NSBU, +8% organic, +3% FX
    • NSBU +36%: Acquisition performing in-line with our expectations
    • Organic +8%: main contributors new FEMA contract, PBGC and temporary uplift in volumes on CMS
    • Covid-19:Limited impact as vast majority of work classed as essential
  • UTP +42%: +27% NSBU, +12% organic, +3% FX
    • Margin: reduced from 10.1% to 9.7%, mainly as NSBU margin lower
    • CMS: Margins stable due to temporary work that has now ended, we don't expect margins to recur at the FY19/HY20 levels in the future
    • Covid-19:Limited impact
  • OCPs: None (HY19: £4m)
  • Contract awards of £0.3bn incl: U.S. Space Force to manage, operate and maintain the Ground-BasedElectro-Optical Deep Space Surveillance (GEODSS) system
  • Pipeline / Rebids / extensions: METS ~£1.9bn of opportunities (40% of NA pipeline); FAA Towers; ATFP; Goose Bay; CANES; FMS FOTS; GATCS II;
    TACNET ISEA

53% 25%

25 Serco Group plc - 2020 Half Year Results

AsPac summary of HY20

HY20 Revenue

£332m

CFX change:

+£70m

+25%

% of Group Revenue

25%

18%

HY20 UTP

£13.3m

CFX change:

+£1.5m

+19%

% of Group UTP (before corp. costs)

25%

34% 13%

Sectors

Justice, Immigration, Defence, Health, Citizen Services, Transport

  • Revenue +19%: +25% organic, -6% FX
    • Organic growth driven by: strong growth in our Healthcare, Citizen Services and Justice & Immigration sectors. Largest contributor AHSC defence garrison healthcare services contract, which started in H2 2019
    • Covid-19:Small net positive; Some extra work from quarantine accommodation and Citizen Services, negative impact from delays to testing ASRV Icebreaker
  • UTP +13%: +18% organic, -5% FX
    • Margin: reduced from 4.2% to 4.0% due to ASRV and additional overheads
    • Growth driven by: AHSC move from loss-making (mob costs) to profitability, other new contracts and expanded Citizen Services work
    • Covid-19:Small net negative
  • OCPs: £0.2m utilisation (HY19: £2m)
  • Contracts awards of £0.5bn: Fiona Stanley extension ~£400m, ATO extension, quiet phase for new work following significant wins in recent years.
  • Pipeline / Rebids / extensions: DIBP, SQCC, Department of Human Services; Acacia Prison; Australian Tax Office; Defence Marine Services; Victoria Justice Health, Hong Kong infrastructure

26 Serco Group plc - 2020 Half Year Results

Middle East summary of HY20

HY20 Revenue

Sectors

Transport, Defence, Health, Citizen Services

£165m

Revenue -1%: -2% organic, +1% FX

CFX change:

- Covid-19: Largest negative impact from Covid-19; sudden reduction in

activity in parts of the transport portfolio and limited Covid-19 response

(£4m)

work to act as a counterbalance

(2%)

- Organic decline: Reduced revenue on Baghdad Air Traffic Control,

Serco Saudi Services, Dubai Air Navigation Systems and Dubai

% of Group Revenue

Airport FM

25%9%

UTP -5%: -4% organic, -1% FX

- Margin: reduced from 4.5% to 4.3% due to drop-through margin on

HY20 UTP

Covid-19 impacted work being higher than segment average;

- UTP decline: Main drivers were lower revenue in air traffic control work

and Serco Saudi Services

£7.0m

CFX change:

(£0.4m)

(4%)

  • OCPs: no OCPs
  • Contract awards of £0.1bn incl: Extention of Dubai airports FM
  • Pipeline / Rebids /extensions due before end of 2022: Dubai Metro; Dubai and Baghdad ANS, MELABS extensions; Saudi rail operations

% of Group UTP (before corp. costs)

34% 25%7%

27 Serco Group plc - 2020 Half Year Results

Summary & outlook

Rupert Soames

Group Chief Executive

28 Serco Group plc - 2020 Half Year Results

Summary and Outlook

  • Very strong operational & financial performance
  • Serco people, processes, systems, strategic positioning and "Loose-Tight" business model have responded well to unprecedented scale of challenges presented by Covid-19
  • We will revisit in Q4 decision on final dividend, withdrawn in April, and also of interim dividend
  • Expect to pay taxes deferred in Q4
  • Short-termoutlook: wide range of UTP guidance for 2020 due to significant uncertainty, which is likely to persist well into 2021. Government contracts offsetting negative impact of Covid 19 are short term and unlikely to continue much into next year. Recurring outbreaks (e.g. Australia, US) may cause operational issues
  • Long-termoutlook: Four Forces will be stronger than ever; more will stay the same than will change

Plus ça change, plus c'est la même chose.

Jean-Baptiste Karr, a year after the 1848 French Revolution

SERCO - AND REALLY RATHER PROUD OF IT

29 Serco Group plc - 2020 Half Year Results

Q&A

30 Serco Group plc - 2020 Half Year Results

Appendix 1 - notes and definitions

  • Revenue is as defined under IFRS, which excludes Serco's share of revenue of its joint ventures and associates. In prior periods where relevant, revenue including that from any discontinued operations has been shown for consistency with previous guidance and disclosures.
  • Organic revenue growth is the change at constant currency after adjusting to exclude the impact of relevant acquisitions or disposals.
  • Trading Profit is defined as IFRS Operating Profit excluding amortisation of intangibles arising on acquisition as well as exceptional items. Consistent with IFRS, it includes Serco's share of profit after interest and tax of its joint ventures and associates. Underlying Trading Profit excludes Contract & Balance Sheet Review adjustments (principally Onerous Contract Provision (OCP) releases or charges) and other material one-time items. In prior periods where relevant, it has also excluded the beneficial treatment of depreciation and amortisation of assets held for sale. In prior periods where relevant, Trading Profit measures have included discontinued operations for consistency with previous guidance and disclosures.
  • Change at constant currency for Revenue and Underlying Trading Profit is calculated by translating non-Sterling values for the period being reported into Sterling at the average exchange rate for the comparable period.
  • Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects.
  • Trading Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group's Consolidated Cash Flow Statement and is stated after net capital expenditure on tangible and intangible asset purchases, adding dividends we receive from joint ventures and associates, and adjusting to remove net tax paid.
  • Free Cash Flow is Trading Cash Flow after adjusting to deduct net interest paid and net tax paid.
  • Pre-taxROIC is calculated as Underlying Trading Profit or Trading Profit divided by the Invested Capital balance on a two-point average basis. Invested Capital assets are: goodwill and other intangible assets; property, plant and equipment (excluding ROU lease assets); interests in joint ventures and associates; contract assets, trade and other receivables; and inventories. All other assets are excluded from Invested Capital, being: ROU lease assets; tax assets; derivative financial instruments; retirement benefit assets; and cash and cash equivalents. Of the total liabilities on the Balance Sheet, Invested Capital liabilities are contract liabilities, trade and other payables. All other liabilities are excluded from Invested Capital being: lease liabilities; tax liabilities; provisions; derivative financial instruments; retirement benefit obligations; and loans. In prior periods where relevant, assets and liabilities classified as held for sale were also included in Invested Capital.
  • The order book reflects the estimated value of future revenue based on all existing signed contracts, excluding Serco's share of joint ventures and associates. It excludes contracts at the preferred bidder stage and excludes the award of new Multiple Award Contracts (MACs) or Indefinite Delivery / Indefinite Quantity (IDIQ) contract or framework vehicles, where Serco cannot estimate with sufficient certainty its expected future value of specific task orders that may be issued under the IDIQ or MAC; in these situations the value of any task order is recognised within the order book when subsequently won. The definition excludes unsigned extension periods as well as option periods in our US business.
  • The pipeline is defined as new bid opportunities with estimated Annual Contract Value (ACV) of at least £10m, and which are expected to be bid and awarded within a rolling 24-month timeframe. The TCV of individual opportunities is capped at £1bn. The definition does not include rebids and extension opportunities related to existing contractual relationships. FOR MACs or IDIQs, only the potential value of any individual task order is included.
  • Where relevant, prior year numbers in this presentation have been restated to reflect restated numbers within the Condensed Consolidated Financial Statements, where explanations of the restated numbers have been provided.

31 Serco Group plc - 2020 Half Year Results

Appendix 2 - focus on five sectors across four regions

HY20 revenue mix, including share of JV&As*

UK &

Asia

Middle

£m

Sector

Europe

Americas

Pacific

East

Defence

233

364

64

13

£674m

34%

Justice &

179

-

141

-

£320m

16%

Immigration

Transport

110

42

4

101

£257m

13%

Health

139

-

50

6

£195m

10%

Citizen

310

136

73

45

£564m

28%

Services

Total

£971m

£542m

£332m

£165m

£2,010m

48%

27%

17%

8%

* Reflects £1,822.2m reported revenue, adjusted to include Serco's share of joint ventures and associates revenue of £187.9m

32 Serco Group plc - 2020 Half Year Results

Appendix 3 - cash management normalisation

Pre 2014, net debt at statutory Balance Sheet dates had been as much as £200m+ better than the 365-day average

Previous cash management has been unwound, removing the cash inflow 'spikes' seen at the open/mid/closing statutory dates of FY13 and FY14

By FY16, the in-year cash cycle swing narrowed the peak/trough range; the difference between statutory Balance Sheet and average net debt has since been ~£50m

Some daily volatility can still result from the timing of contracts starting and ending; statutory dates will be persistently better than the average due to 4-4-5 billing cycle in the US

FY13

FY14

FY15

FY16

FY17

FY18

FY19

£250m

31/12/12

30/06/13

31/12/13

31/12/13

30/06/14

31/12/14

31/12/14

30/06/15

31/12/15

31/12/15

30/06/16

31/12/16

31/12/16

30/06/17

31/12/17

31/12/17

30/06/18

31/12/18

31/12/18

30/06/19

31/12/19

£200m

£150m

£100m

£50m

£0m

(£50m)

(£100m)

(£150m)

(£200m)

(£250m)

Key:

Net debt 365-day average, indexed

Difference between daily net debt and 365-day average

Difference at statutory balance sheet date

Peak/trough range

The impact of net proceeds from the May 2014 Placing, the April 2015 Rights Issue and refinancing, and the December 2015 BPO disposal are all adjusted for in the above charts. In FY19, the effect of the

28 May 2019 Placing proceeds (cash inflow of £139m for ~7 months of the year) and the completion of the NSBU acquisition on 1 September 2019 (cash outflow of £184m for ~5 months of the year) have also been adjusted for; for the purpose of the above chart this has the effect of changing the 365-day average from £231m to £237m, and changing the year-end Adjusted Net Debt from £215m to £169m.

33 Serco Group plc - 2020 Half Year Results

Appendix 4 - cash flow breakdown 1 & breakdown 2

£m

HY20

HY19

FY19

Breakdown 1 - depreciation, amortisation and impairment

Depreciation (excluding lease assets)

7.8

6.9

15.3

Amortisation (non-acquisition)

7.5

9.4

18.1

Depreciation and amortisation

15.3

16.3

33.4

Impairment of PPE (excluding lease assets)

-

-

2.4

D&A inc. impairment (excl. lease assets and acquisition intangibles)

15.3

16.3

35.8

Amortisation of intangibles arising on acquisition

5.0

2.3

7.5

Total depreciation, amortisation and impairment (excluding lease assets)

20.3

18.6

43.3

Breakdown 2 - other non-cash movements

Share-based payment expense

5.9

5.6

11.6

Loss/(profit) on disposal of PPE, intangible assets and leases (including termination)

0.4

0.1

(1.1)

Non-cash R&D expenditure

-

-

(0.1)

Other non-cash movements

0.1

(0.1)

(1.2)

Other non-cash movements

6.4

5.6

9.2

34 Serco Group plc - 2020 Half Year Results

Appendix 5 - cash flow breakdown 3

£m

HY20

HY19

FY19

Breakdown 3 - cash flow and net debt exceptional items

Restructuring and costs related to Strategy Review

(1.1)

(11.1)

(19.2)

SFO fine and investigation costs

-

-

(22.9)

Other costs re UK government reviews

(0.1)

(1.0)

(2.2)

Acquisition costs re NSBU

(1.4)

-

(4.7)

Costs re legal claims previously provided for

(1.6)

-

-

Other cash flow exceptional items

-

-

(0.2)

Exceptional items cash costs

(4.2)

(12.1)

(49.2)

35 Serco Group plc - 2020 Half Year Results

Appendix 6 - leverage covenant calculation

£m

HY20 LTM

HY19 LTM

FY19

Trading Profit

163.3

121.9

133.4

Exclude: share of joint venture and associate post-tax profits

(21.0)

(27.3)

(27.5)

Exclude: foreign exchange credit on investing and financing arrangements

(0.1)

(0.9)

(0.8)

Include: dividends from joint ventures and associates

24.4

27.0

25.4

Add-back: D&A inc. impairment (excl. lease ROU assets and acquisition intangibles)

40.5

38.0

35.8

Add-back:share-based payments charge

11.9

13.4

11.6

Add-back:non-exceptional net charge to OCPs

6.6

-

7.2

Covenant adjustment to reflect GAAP pre IFRS16

(4.5)

(1.6)

3.5

Covenant adjustment to pro-forma for NSBU acquisition

1.6

-

12.1

EBITDA per covenant

222.7

170.5

200.7

Adjusted Net Debt (closing, pro forma for HY19)

(142.9)

(200.6)

(214.5)

Add: finance leases (as covenant reflects GAAP pre IFRS16)

(6.8)

(11.7)

(8.9)

Exclude: disposal vendor loan note, encumbered cash and other adjustments

(5.3)

(4.2)

(4.1)

Covenant adjustment for average FX rates

6.4

4.4

(7.6)

Net borrowings, pro forma

(148.6)

(212.1)

(235.1)

Equity Placing net proceeds

n/a

138.7

n/a

Net borrowings per covenant

(148.6)

(73.4)

(235.1)

Leverage ratio per covenant (not to exceed 3.5x)

0.67x

0.43x

1.17x

36 Serco Group plc - 2020 Half Year Results

Appendix 7 - interest cover covenant calculation

£m

HY20 LTM

HY19 LTM

FY19

Net Finance Costs

(24.0)

(18.1)

(21.8)

Exclude: Finance charge on lease obligations recognised under IFRS16

9.1

2.2

6.6

Exclude: foreign exchange credit on investing and financing arrangements

0.1

0.9

0.8

Exclude: net interest receivable on retirement benefit obligations

(1.6)

(1.5)

(2.1)

Exclude: movement in discount on other debtors

-

(0.6)

(0.1)

Add-back: movement in discount on provisions and deferred consideration

0.1

1.3

1.2

Net finance costs for covenant calculation

(16.3)

(15.8)

(15.4)

EBITDA per covenant (Appendix 6)

222.7

170.5

200.7

Interest cover per covenant (to be at least 3.0x)

13.7x

10.8x

13.0x

37 Serco Group plc - 2020 Half Year Results

Appendix 8 - balance sheet summary

£m

HY20

HY19

FY19

Goodwill

710.3

581.4

674.2

Other intangible assets (excluding leased assets)

91.3

58.5

96.5

Property, plant and equipment (excluding leased assets)

58.6

40.4

47.3

Contract assets, trade and other receivables

702.9

623.3

633.9

Inventories

20.3

18.9

18.3

Interest in joint ventures and associates

19.6

21.1

23.6

Invested capital assets

1,603.0

1,343.6

1,493.8

Cash and cash equivalents

244.9

173.4

89.5

Leased assets

340.7

120.9

345.3

Other assets (tax, derivative financial instruments, retirement benefit assets)

203.5

179.9

152.0

Total assets

2,392.1

1,817.8

2,080.6

Invested capital liabilities (contract liabilities, trade & other payables)

(701.3)

(618.1)

(629.7)

Loans

(390.4)

(240.6)

(305.0)

Obligations under leases

(359.9)

(144.8)

(369.9)

Provisions

(169.5)

(214.7)

(161.8)

Other liabilities (tax, derivative financial instruments, retirement benefit liabilities)

(87.8)

(67.7)

(71.3)

Total liabilities

(1,708.9)

(1,285.9)

(1,537.7)

Net assets

683.2

531.9

542.9

38 Serco Group plc - 2020 Half Year Results

Appendix 9 - Return on Invested Capital (ROIC)

£m

HY20

HY19

FY19

Invested capital assets

1,603.0

1,343.6

1,531.3

Invested capital liabilities

(701.3)

(618.1)

(667.2)

Invested Capital (IC)

901.7

725.5

864.1

Average IC (two-point)

813.6

730.0

782.7

Trading Profit

80.5

50.6

133.4

Trading Profit for rolling 12 months

163.3

121.9

n/a

Underlying Trading Profit

77.6

50.6

120.2

Underlying Trading for rolling 12 months

147.2

106.1

n/a

Pre-tax ROIC:

Trading Profit / Average IC

20.1%

16.7%

17.0%

Underlying Trading Profit / Average IC

18.1%

14.5%

15.4%

39 Serco Group plc - 2020 Half Year Results

Appendix 10 - pension assets mix and IAS 19 valuation

SPLAS, the main Group scheme, represents 90%+ of total assets and liabilities; ~90% of SPLAS assets historically allocated to LDIs

June 2017 'buy-in': assets transferred to purchase a bulk annuity policy covering ~45% of SPLAS members

Insurer funds future payments to members; gross liability remains, but an equal and opposite insurance asset recorded

Transaction establishes a perfect hedge for the insured liabilities - fully removes longevity, investment and accounting risks

£m

HY20

HY19

FY19

Scheme assets at fair value:

Liability driven investments (LDI)

425.8

488.8

447.4

Bonds except LDI

349.0

198.8

302.2

Equities

52.1

52.6

54.7

Cash, property and other

72.4

77.1

10.9

Annuity policies

663.6

611.1

614.0

Fair value of scheme assets

1,562.9

1,428.4

1,429.2

Present value of scheme liabilities

(1,485.3)

(1,361.1)

(1,384.5)

Net amount recognised

77.6

67.3

44.7

Franchise adjustment and members' share of deficit

12.8

8.2

9.6

Net retirement benefit asset (before tax) as per

consolidated Group balance sheet

90.4

75.5

54.3

40 Serco Group plc - 2020 Half Year Results

Appendix 11 - currency rates

Spot rate for

Average rates

Closing rates

FY20e

30 Jun

30 Jun

31 Dec

30 Jun

31 Dec

30 Jun

31 Dec

2020

HY20

FY19

HY19

FY18

HY18

FY17

2020

2019

2019

2018

2018

2017

£:US$

1.23

1.27

1.28

1.30

1.34

1.38

1.29

1.23

1.32

1.27

1.28

1.31

1.35

£:Aus$

1.79

1.94

1.83

1.83

1.78

1.78

1.69

1.79

1.88

1.81

1.81

1.78

1.73

£:Eur

1.09

1.16

1.14

1.15

1.13

1.14

1.14

1.09

1.18

1.11

1.12

1.13

1.13

  • Currency impact in HY20: Revenue -£4.4m; UTP +£0.2m
  • Translational FX sensitivity:
    • FY19 £:US$ av. rate of 1.28; 5c move = ~£50m Revenue, ~£4m UTP (based on Americas + Middle East)
    • FY19 £:Aus$ av. rate of 1.83; 5c move = ~£20m Revenue, ~£1m UTP (based on AsPac)
  • Estimated FY20e currency impact expected to be negligible
    • Assumes FY20e £:US$ av. rate of 1.28 and £:Aus$ av. rate of 1.88, based on applying YTD average rates and the 31 July 2020 spot rate for the rest of the year

41 Serco Group plc - 2020 Half Year Results

Appendix 12 - Tax

HY20 Underlying ETR increased slightly due to geographic mix

Expect ETR to be ~25% in FY20 and remain at this level

Cash tax rate higher than ETR due to timing differences re tax deductions

UK deferred tax asset available to offset against future taxable profits

  • HY20 underlying tax of £17.0m, which, on UTP (£77.6m) less net finance costs (£12.7m), is a 26% effective tax rate (ETR)
    • Tax charge on overseas profits blends to ~30%, reflecting the mix of Australia, US and Middle East local rates
    • Calculation affected by proportion of JV&A profits which are consolidated within Underlying PBT but on an after-tax basis
  • Higher rate than 24% in HY19 due to change in geographic mix of profitability and relative movement in some tax provisions.
  • Expect Underlying ETR to be around 25% for FY20 and to continue at this level, although this is sensitive to the geographic mix of profit
  • Cash tax will likely be sustainably 1-2% lower than an Income Statement ETR of ~25% primarily driven by use of UK losses and tax amortisation of NSBU goodwill in the US, though timing of cash tax payments on account can impact the outflow in any single period
  • To date, the outlook of future profitability has resulted in recognising £23.5m of UK deferred tax asset. There is a total additional potential deferred tax asset of £144m in relation to UK tax losses; recognition of more of this balance is contingent on further improvement in the UK outlook

42 Serco Group plc - 2020 Half Year Results

Appendix 13 - contract nature and inflation mitigation

  • Around ¾ of revenue is from contracts where pricing is "fixed" in advance and on a longer term contractual basis; a "long term fixed price contracting" model requires careful cost inflation consideration
  • The remainder is the "non-fixed" revenue base, which includes: work on shorter term task order basis or "cost plus" contracting (which represents a large proportion of the Americas division); pricing based on

"time and expenses" or other project-based mechanisms; and revenue linked to that received direct from end users (eg Transport fares). This "non-fixed" revenue base should have relatively direct mechanisms for cost inflation pass-through.

  • Whilst our contracting model is therefore dominated by "fixed" pricing, in fact >90% of that has a significant amount of inflationary protection, via
    • Generic adjusters (RPI, RPIx, CPI, etc), wage indices or 'basket of goods' indices
    • In some instances there are specific inflation adjusters for labour rates (eg Barts, re London Living Wage), or for other particular cost categories (eg fuel price adjusters)
  • Whilst any pricing mechanism offset is unlikely to perfectly correlate to the actual cost base pressure, Serco has some significant protection against cost inflation even though our contracting model is largely considered "fixed" in nature

Revenue base mix

Non-fixed Fixed

43 Serco Group plc - 2020 Half Year Results

Fixed, but with

inflationary protection

Appendix 14 - American Depository Receipt (ADR) program

Serco Group has a sponsored Level 1 ADR program, for which Deutsche Bank act as the depositary bank and custodian

Ticker: SCGPY

ADR key benefits

Exchange: OTC

• Convenient means of trading/holding foreign shares

CUSIP: 81748L209

• USD-denominated security - reducing custody costs

ISIN: US81748L2097

• Trade, clear and settle like other US securities

Ratio: 1 ADR : 1 Ordinary Share

• Dividends (if declared by the Board) paid in USD

• Purchased or sold through US brokers

For assistance with converting Ordinary Shares into ADRs (or vice versa), please contact Deutsche Bank's ADR broker helpline:

New York: +1 212 250 9100

London: +44 207 547 6500

Hong Kong: +852 2203 7854

e-mail: adr@db.com

ADR website: www.adr.db.com

44 Serco Group plc - 2020 Half Year Results

www.serco.com

Serco Group plc Serco House

16 Bartley Wood Business Park Bartley Way, Hook Hampshire RG27 9UY United Kingdom

For general enquiries contact: T: +44 (0)1256 745900

E: generalenquiries@serco.com

45 Serco Group plc - 2020 Half Year Results

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