2019 Half Year Results - Serco Group plc 31 July 2019
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2019 Half Year Results Serco Group plc 31 July 2019 1 Serco Group plc – 2019 Half Year Results
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; and cyber-attacks. 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 – 2019 Half Year Results
Agenda
Overview Rupert Soames, Group CEO
Financial Review Angus Cockburn, Group CFO
Operational Review Rupert Soames
UK & Europe Update Kevin Craven, Divisional CEO
Q&A Rupert Soames
Angus Cockburn
Kevin Craven
3 Serco Group plc – 2019 Half Year Results
HY19 Overview Rupert Soames Group Chief Executive 4 Serco Group plc – 2019 Half Year Results
HY19 – building on the inflection
• Good trading and financial performance
– Revenue £1,476m, up +6% at CFX; +4% organic, the first period of growth since 2013; +2% acquired
– UTP £51m, up +29% at CFX (or +25% excluding IFRS16); increase driven by the Americas division
– Underlying EPS 2.62p, up +35% at CFX; tax rate reduced with improving mix of profits
– Free Cash Flow also turned positive for the first time since 2014
• Very strong order intake and order book
– £3.3bn order intake; 2019 will be third year in a row that order intake exceeds revenue
– Order book increased to £14.0bn, up from £12.0bn 6 months ago and £11.0bn 12 months ago
• NSBU acquisition materially adds to scale and capability of US defence business
– Adds naval design, systems engineering, procurement and lifecycle support services to Serco’s existing
skills in ship modernisation, integration and naval logistics
– Doubles our US Navy work; long-term and growing demand for fleet expansion and maritime support
• Robust balance sheet
– Underlying leverage 1.37x EBITDA; Adjusted Net Debt £201m on a pro forma basis
– No use of working capital facilities; pension schemes well funded; no refinancing required near-term
• 2019 guidance for growth in both Revenue and UTP (excludes any contribution from NSBU)
– Revenue ~£3.0bn; ~+4% organic growth, plus ~+1% annualisation benefit from prior acquisitions
– UTP to grow to ~£105m (~£100m pre IFRS16)
• Mobilisation and transition of large new contracts progressing well, and underpin the potential
for revenue growth to accelerate to ~5% in 2020 and strong profit progress
5 Serco Group plc – 2019 Half Year Results
Profit: ~20% CAGR 2017-19 (excludes any NSBU contribution)
Revenue: ~4% 2019 (organic CFX)
~5% 2020 (organic CFX) ~£105m
guidance (~£100m pre IFRS16 and comparable to
FY17 and FY18), with growth in Americas, UK
Health and further cost efficiencies, targeted to
£93m more than offset margin pressures eg MELABS,
after £4m of adverse FX impact, new contract mobilisation and transition costs.
but benefitting from £10m of ~3.5% margin
£m £69m non-recurring trading items.
the nadir. 3.3% margin
2.3% margin
100
80
60
40
20
0
FY17 FY18 FY19e
UTP Non-recurring
• On a two-year basis of FY17-FY19, expect to achieve ~20% CAGR (excludes any NSBU contribution)
• FY18 was stronger than anticipated, which in part dampens the FY19 YoY growth
• Despite a weaker market, our recent strong order intake means we believe Serco should still be able
to outperform for at least the next two years
– Expect to achieve organic revenue growth of ~4% in 2019, accelerating to ~5% in 2020 as contracts
such as Grafton/Clarence, Icebreaker, AASC and NGHS become fully operational
– This should also support margins and therefore the potential for further strong profit growth
6 Serco Group plc – 2019 Half Year Results
HY19 Financial Review Angus Cockburn Chief Financial Officer 7 Serco Group plc – 2019 Half Year Results
Income statement – Revenue and Trading Profit
£m HY19 HY18 FY18
Revenue excludes
share of JV&A revenue; Revenue 1,476 1,366 2,837
Trading Profit measures
include share of JV&A PAT Trading Profit 50.6 45.4 116.7
Exclude: Contract & Balance Sheet Review items - (7.8) (23.6)
Contract & Balance Sheet Underlying Trading Profit (UTP) 50.6 37.6 93.1
Review adjustments and
other one-time items UTP margin 3.4% 2.8% 3.3%
excluded from UTP
HY19 adopts IFRS16, prior Exclude: IFRS16 benefit (1.6) n/a n/a
periods not restated; UTP Underlying Trading Profit (UTP) pre IFRS16 49.0 37.6 93.1
excluding IFRS16 benefit
shown for comparison UTP margin pre IFRS16 3.3% 2.8% 3.3%
• Favourable currency impact in HY19: Revenue +£20.4m; UTP +£2.1m
• Translational FX sensitivity:
– FY18 £:US$ av. rate of 1.34; 5c move = ~£40m Revenue, ~£2.5m UTP (based on Americas + Middle East)
– FY18 £:Aus$ av. rate of 1.78; 5c move = ~£15m Revenue, ~£0.7m UTP (based on AsPac)
• Estimated FY19e currency impact: Revenue ~£30m; UTP ~£2-2.5m
– Assumes FY19e £:US$ av. rate of 1.28 and £:Aus$ av. rate of 1.82, based on applying YTD average rates and the
30 June 2019 spot rate for the rest of the year
– Sterling weakened against the US$ but marginally strengthened against the Aus$
8 Serco Group plc – 2019 Half Year Results
Revenue divisional analysis
Revenue - growth composition HY19 vs HY18
Organic growth driven by
HY18 HY19 FY18
Americas (predominantly
Reported Acquisition/ Reported Constant Reported
in our defence business, £m Currency Organic Disposal FX TOTAL Currency Currency Currency
particularly in Ship &
Shore modernisation task UK&E 635 (1%) +5% - +4% 658 658 1,301
orders) and in Asia Pacific Americas 305 +15% - +7% +22% 372 353 646
(largely from growth in
new and expanded Citizen AsPac 263 +9% - (3%) +6% 280 287 548
Services contact centre Middle East 163 (3%) - +5% +2% 166 157 342
and processing Total 1,366 +4.2% +2.3% +1.5% +8.0% 1,476 1,455 2,837
operations)
HY19 v HY18 +£56m +£33m +£20m +£109m
First time Serco has
reported organic growth
since 2013
• Organic growth of +4%, compared to -6% in 1H18 and flat in 2H18
• Constant currency growth of +6.5% reflects the improvement in organic
growth together with the acquisition contribution of the Carillion hospital FM
contracts which have now annualised (transfers occurred June-August 2018)
9 Serco Group plc – 2019 Half Year Results
Underlying Trading Profit (UTP) divisional analysis
Underlying Trading Profit and margin
UTP increase led by
HY19 UTP HY18 UTP HY change FY18 UTP
Americas, driven by CMS
Reported Constant Reported Reported Reported Constant Constant Reported Reported
new contract structure, £m Currency Currency Margin Currency Margin Currency Currency Currency Margin
phasing and unusually
high volume of variable UK&E 15.2 15.2 2.3% 14.2 2.2% +1.0 +7% 39.2 3.0%
work Americas 37.7 35.3 10.1% 19.1 6.3% +16.2 +85% 45.7 7.1%
UK benefitted from AsPac 11.8 12.3 4.2% 13.1 5.0% (0.8) (6%) 26.8 4.9%
Carillion acquisition, Middle East 7.4 7.2 4.5% 9.9 6.1% (2.7) (27%) 21.5 6.3%
largely offset by the AASC Divisions 72.1 70.0 4.9% 56.3 4.1% +13.7 +24% 133.2 4.7%
mobilisation and transition
costs and AWE lower Corporate (21.5) (21.5) (1.5%) (18.7) (1.4%) (2.8) +15% (40.1) (1.4%)
margin Total 50.6 48.5 3.4% 37.6 2.8% +10.9 +29% 93.1 3.3%
AsPac change includes
transition and mobilisation • Favourable FX of £2.1m increases the HY change from +£10.9m to +£13.0m
costs
• UTP growth of +29% at CFX increases to +35% at RFX
Middle East includes the • IFRS16 adoption in HY19 increased UTP by £1.6m; excluding this, UTP would
margin reset on MELABS have been £49.0m, growth of +25% at CFX (increases to 30% at RFX)
• Margin increased by +60bps, or +50bps excluding IFRS16
10 Serco Group plc – 2019 Half Year ResultsIncome statement – EPS and DPS
£m HY19 HY18 FY18
Net Finance Costs
increased due to IFRS16 Underlying Trading Profit (UTP) 50.6 37.6 93.1
and repayment of Intelenet Net Finance Costs (NFC) (10.5) (6.3) (13.9)
vendor loan note in 2H18;
Underlying PBT 40.1 31.3 79.2
Underlying effective tax
rate reduced to 24% (see Tax on UTP and NFC (9.8) (10.6) (20.6)
Appendix 7) Underlying PAT 30.3 20.7 58.6
Non underlying items - 7.8 23.6
Underlying EPS up +42% Amortisation of intangibles arising on acquisition (2.3) (1.9) (4.3)
(up +35% at CFX)
Non underlying tax 1.3 (0.6) 11.8
Non underlying items PAT before exceptionals 29.3 26.0 89.7
(Contract & Balance Sheet Exceptional items, net of tax (30.7) (11.4) (22.3)
Review items) net nil; Profit /(loss) after tax (1.4) 14.6 67.4
exceptional costs include Less: attributable to non-controlling interests (0.3) (0.1) -
SFO (see next slide) Attributable to equity owners (1.7) 14.5 67.4
As previously indicated,
the Board is not declaring Weighted average share count for diluted EPS 1,146.3m 1,117.9m 1,125.4m
an interim dividend; FY19 Underlying EPS, diluted 2.62p 1.84p 5.21p
is the last year of
Impact of non underlying items (0.09p) 0.48p 2.76p
significant OCP and
exceptional cost cash Statutory EPS before exceptional items, diluted 2.53p 2.32p 7.97p
outflows; policy under Impact of exceptional items (2.68p) (1.02p) (1.98p)
careful and regular Statutory EPS, diluted (0.15p) 1.30p 5.99p
consideration DPS 0p 0p 0p
11 Serco Group plc – 2019 Half Year ResultsExceptional items
£m HY19 HY18 FY18
Restructuring costs relate
to the last year of the Exceptional (loss)/profit on disposals - - (0.5)
Transformation stage of Other exceptional operating items:
implementing the Restructuring costs (5.4) (11.3) (32.3)
strategy, including
SFO fine and investigation costs (22.9) - -
redundancy and other
incremental costs Other costs re UK Government review (1.1) (0.3) 0.4
Acquisition costs re NSBU (1.7) - -
Investigation by the Reversal of impaired loan balances re prior disposal - - 13.9
Serious Fraud Office (SFO)
Cost of Guaranteed Minimum Pension equalisation - - (9.6)
concluded with a Deferred
Prosecution Agreement; a Reversal of impairment of other assets - - 0.8
fine of £19.2m together Increased legal and onerous lease provisions - - (4.6)
with £3.7m related to the Other exceptional operating items (31.1) (11.6) (31.4)
SFO’s investigation costs Exceptional operating items (31.1) (11.6) (31.9)
charged to the income
statement in H1 as a post Exceptional finance income re prior disposal loan note - - 7.5
balance sheet event, and Tax on exceptional items 0.4 0.2 2.1
will be cash-settled in H2 Total exceptional items, net of tax (30.7) (11.4) (22.3)
Memo: cash flow and net debt exceptional items (12.1) (24.1) (19.2)
12 Serco Group plc – 2019 Half Year ResultsFree Cash Flow and Trading Cash Flow
£m HY19 HY18 FY18
FCF restated for capital
repayment of finance lease Operating profit before exceptionals 48.3 43.5 112.4
liabilities; no impact to Net Share of profit of joint ventures and associates (13.5) (15.0) (28.8)
Cash Flow Depreciation and amortisation (excl. IFRS16 leases) 21.7 22.2 43.2
For HY19, IFRS16 Depreciation and impairment of lease ROU assets 29.4 n/a n/a
introduces two new lines Working capital movement (7.5) (27.3) (21.6)
which broadly net out: OCP utilisation (excl. accelerated OCP utilisation re IFRS16 leases) (29.5) (33.7) (51.8)
depreciation of lease ROU Accelerated OCP utilisation re IFRS16 leases (12.6) - -
assets; and capital Other movements in provisions 6.7 (9.0) (16.3)
repayment of all leases (ie Other non-cash movements 5.6 7.5 16.4
including previous Tax paid (17.2) (4.8) (10.6)
operating leases)
Net cash flow from operating activities 31.4 (16.6) 42.9
FCF turns positive: lower Dividends from joint ventures and associates 13.4 16.1 29.7
working capital movement, Net interest paid (10.5) (8.0) (18.1)
OCP utilisation and capex Capital repayment of lease liabilities (22.3) (5.0) (8.7)
Net capital expenditure (11.7) (17.5) (29.5)
Average working capital
Purchase of own shares net of options proceeds 0.1 (0.6) -
days broadly unchanged
Free Cash Flow (FCF) 0.4 (31.6) 16.3
No use of working capital Add-back: tax paid and net interest paid, as above 27.7 12.8 28.7
facilities across the Group Add-back: non-cash R&D, within other movements - - 0.1
Trading Cash Flow 28.1 (18.8) 45.1
Memo: UTP to Trading Cash Flow conversion 56% n/a 48%
13 Serco Group plc – 2019 Half Year ResultsNet debt and leverage
£m HY19 HY18 FY18
HY19 is presented on a
pro forma basis to exclude Free Cash Flow 0.4 (31.6) 16.3
the £139m net proceeds of Exceptional items (12.1) (24.1) (19.2)
the Equity Placing Net (acquisition)/disposal of subsidiaries (9.3) (14.9) (31.3)
Adjusted Net Debt Other movements in investment and loan balances 0.3 - 4.0
restated to exclude Cash movements on hedging instruments (7.0) 3.3 0.2
finance leases as IFRS16 Foreign exchange movement on net debt 0.3 (16.6) (22.3)
makes no distinction Movement in Adjusted Net Debt, pro forma (27.4) (83.9) (52.3)
between finance and Opening Net Debt (173.2) (141.1) (141.1)
operating leases Exclude finance leases in Opening Net Debt n/a 20.2 20.2
Closing Adjusted Net Debt (200.6) (204.8) (173.2)
Closing Adjusted Net
Debt compares to a daily Covenant adjustments (see Appendix 10) (11.5) (37.4) (8.3)
average of £219m; the Net borrowings, pro forma (212.1) (242.2) (181.5)
daily average increased Equity Placing net proceeds 138.7 n/a n/a
£26m on HY18, very similar Net borrowings per covenant (73.4) (242.2) (181.5)
to the closing movement
Covenant leverage of EBITDA per covenant LTM (see Appendix 10) 170.5 138.5 171.0
0.43x; on an underlying Exclude non-underlying items LTM (15.8) - (23.6)
pro forma basis (ie EBITDA underlying LTM 154.7 138.5 147.4
excluding OCP net
releases in 2H18 and the
placing proceeds), Leverage ratio per covenant 0.43x 1.75x 1.06x
leverage was 1.37x Leverage ratio underlying pro forma 1.37x 1.75x 1.23x
14 Serco Group plc – 2019 Half Year ResultsIFRS16 leases – reminder of background and effect
• New accounting standard effective for the Group from 1 January 2019; transition approach for Serco means
prior periods are not restated; our guidance for FY19 was updated for IFRS16 back in February
• Key impacts of IFRS16 are that Underlying Trading Profit (UTP) increases, but Net Finance Cost (NFC) also
increases; these increases fully net out over the life of each lease, but the ‘interest cost’ is higher in the early
years of a lease and lower in the later years, as the finance charge on the liability is on a reducing balance
basis whereas depreciation of the asset is on a straight line basis
• Importantly, IFRS16 has no cash flow impact, nor any covenant impact; net debt for covenant purposes will
continue to be calculated by lenders under the prior standard, IAS17; Serco’s guidance of Adjusted Net Debt,
which excludes all lease obligations, therefore closely matches the covenant definition
• FY19 estimated effect now updated principally for AASC:
– Opening balance sheet adjustments of a lease ROU asset of £104m, lease liability of £129m
– Asset ≠ liability on adoption due to transition methodology and impairment of ROU assets on OCPs
– Operating lease expense no longer charged to UTP: ~£60m; this is replaced by
– depreciation cost of newly recognised lease ‘right of use’ (ROU) asset charged to UTP: ~£55m
– ‘interest cost’ of newly recognised lease liability charged to NFC: ~£5m
• No change to previous impact on FY19 guidance: UTP and NFC each increase by ~£5m, so broadly net out
• AASC will have a bigger impact in FY20: net margin lower in earlier years, higher in later years; split of
increase in UTP and NFC will only be fully determined when lease lengths are more certain
• For the Caledonian Sleeper OCP contract, the ROU asset that would have been newly recognised in-year has
been immediately impaired by £12.6m of OCP accelerated utilisation; the residual OCP liability is therefore
now smaller, but there is a new lease liability; the cash outflow remains the same (split between OCP
utilisation and the cash outflows of interest and capital repayment elements of the lease liability)
15 Serco Group plc – 2019 Half Year ResultsRemaining OCP liability and effect of IFRS16
Onerous
Contract & Balance Sheet contract
Review OCPs originally £m provisions
charged in FY14 of £447m;
31 December 2018 (82.1)
OCPs liability reduced to
£27m by end of HY19 Opening adjustment of IFRS16 adoption to impair initial ROU assets 13.3
As at 1 January 2019 (68.8)
IFRS16 opening
adjustment and in-period Charged (3.9)
impairment totaling £26m; Released 3.9
remaining liabilities in
terms of future cash Utilised against in-period losses 29.5
outflows are the lease Accelerated utilisation to impair IFRS16 ROU assets arising in-period 12.6
liabilities together with the Unwinding of discount 0.2
OCP liabilities, therefore
~£50-55m in total FX (0.2)
30 June 2019 (26.7)
Phasing of future cash
outflows expected to be
2H19 ~£15-20m, FY20
~£15m, FY21 and beyond
in aggregate ~£15-20m
16 Serco Group plc – 2019 Half Year ResultsFY19 outlook and modelling assumptions
• NSBU acquisition excluded from Revenue and UTP guidance, but included in Adjusted Net Debt guidance
• Revenue of £3.0bn (FY18: £2,837m)
– Around top end of previous £2.9-3.0bn guidance; ~+4% organic growth now assumed; acquisition
contribution of ~+1%, driven by full-year impact of Carillion contracts; FX estimate ~+1%
• Underlying Trading Profit of ~£105m (FY18: £93m)
– Unchanged from previous guidance; includes ~£5m increase for the adoption of IFRS16; FX estimate
would currently add ~£2m therefore RFX of ~£107m
– Drag from £10m of non-recurring trading items in FY18 and margin resets (MELABS, AWE) are
expected to be offset by improvements in UK Healthcare business, other contract growth and further
cost efficiencies
– Final outcome, as always, remains sensitive to even small percentage changes in revenues or costs, as
well as movements in currency
– Outcome particularly sensitive to continued successful progress mobilising and transitioning large new
contracts
• Net Finance Costs ~£20m (FY18: £14m)
– Includes ~£5m increase for the adoption of IFRS16
– Includes ~£3m increase due to non-cash credits no longer earned following repayment of Intelenet
loan note
• Underlying Effective Tax Rate to reduce to below 25% (FY18: 26%), reflecting improving profit mix
• Weighted average number of shares for diluted EPS ~1,200m (FY18: 1,125m)
• Exceptional restructuring costs of ~£15m (FY18: £32m), with final steps of Transformation; £23m re SFO (1H
charge, 2H cash outflow); DFRP settlement is a £10m non-underlying credit and cash inflow both in 2H
• Closing Adjusted Net Debt (ie excluding lease obligations) ~£250m (FY18: £173m), reflecting completion of
NSBU acquisition; Underlying leverage of ~1.5x (FY18: 1.2x)
17 Serco Group plc – 2019 Half Year ResultsHY19 Operational Review Rupert Soames Group Chief Executive 18 Serco Group plc – 2019 Half Year Results
HY19 highlights & lowlights
Highlights Lowlights
• Strong UTP progress; on track for ~20% CAGR 2017-19 (excludes any NSBU contribution) • Delay to introduction of
Sleeper new rolling stock
• Acquisition of NSBU adds materially to the scale and capability of our US business;
7-9% accretive to Underlying EPS in FY20 • Management of COMPASS
overstayers
• Order intake very strong at £3.3bn; 60:40 new vs existing; order book now £14.0bn;
third year in a row that intake exceeds revenue and therefore order book grows • Continued high levels of
prison violence
• New wins included those for AASC UK asylum accommodation support, Australia
defence garrison healthcare, US Pension Benefit Guarantee Corporation field support, • Icebreaker delivery timetable
US Air Force NexGen IT, Adelaide Remand Centre, Windsor & Maidenhead now very tight
environmental services, and numerous US defence and FEMA operational support task
orders; strong performance on rebids and extensions • Tight labour market in US
• Mobilisations and transitions of large new contracts progressing well • Replenishing the pipeline for
new business will take time,
• OCPs on track; remaining liability now reduced by ~90% since 2014 to £27m (or £53m but expected to pick up in H2
pre IFRS16 adjustments and accelerated utilisation to impair leases)
• UK environment still weak
• UK Government continues to demonstrate support to outsourcing supply chain and a drag to aggregate
through Cabinet Office relationship and developments in procurement processes market growth, with Brexit
and political uncertainty a
• Numerous internal management moves completed, including internationally; culture of continuing challenge for the
collaboration and learning continues to deepen and deliver tangible results; 600 Civil Service, reducing their
applications for 12 places on Serco UK Graduate Programme bandwidth to launch major
• Operational Excellence: strong internal shared services; SAP upgrade, WFM and new initiatives; non-
procurement initiatives underway; continued development of management training discretionary projects still
programmes; recognised for Defence Reserves Support; numerous awards e.g. progressing
Merseyrail and Northlink Ferries; celebrated 30 years of Serco in Australia
• Conclusion of SFO investigation with DPA agreed; amicable settlement to DFRP dispute
19 Serco Group plc – 2019 Half Year ResultsOrder book and pipeline progress
Order book progress
• Order book progress comes from existing work (ie 13.6 14.0
rebids/extensions) as well as new work; cumulatively 12.6 12.0 14
Order book value (£bn)
over last 6+ years, mix of order intake has been roughly 5 10.7
Award value (£bn)
10.0 9.9 12
split 50:50 between rebids/extensions and new work 4 10
• Order book definition aligned from FY18 to new 3 8
IFRS15 disclosure of the revenue expected to be 6
2
recognised from the remaining performance 4
obligations on existing contractual arrangements; this 1 2
excludes unsigned extension periods, but the £14.0bn 0 0
would be £1.0bn higher at £15.0bn if option periods in FY13 FY14 FY15 FY16 FY17 FY18 HY19
our US business were included; adding Serco’s share of Rebid/extension award value (LHS) Order book value (RHS)
JV&A revenue would add a further £1.6bn New bid award value (LHS) IFRS15 future contractual
revenue (RHS)
• Acquisitions further enhance the order book progress; Acquisition TCV added to
£0.7bn added from Carillion transaction in FY18; NSBU order book (LHS)
will add ~$600m on completion in 2H19 IFRS15 definition change (LHS)
• Our new bid pipeline is an important component of New bid pipeline at 30 June 2019
revenue growth opportunity, but only part of the story;
pipeline at end of HY19 of £3.2bn excludes ~£1bn of ~6% ~9%
contractsOverview of NSBU acquisition Context • Over the last 5 years, Serco has been on a journey: Stabilise – Transform – Grow • Revenues now growing; Underlying Trading Profit CAGR 17-19E ~20%; FCF positive • Strategy review identified US Navy as a target for investment • Serco has been serving US Navy >30 years; US Defence revenues $453m in 2018 • Successfully completed BTP and Carillion Healthcare acquisitions in 2018 Investment rationale • NSBU has world-class capabilities in ship and submarine design, production, engineering and in-service support. Complements Serco’s existing US Navy ship-board and shore- based modernisation, installation and systems integration business • Makes us a top-tier supplier to the US Navy, one of the fastest-growing areas of public procurement. Improves mix of Group business • Significantly broadens the capabilities and increases the scale of both our North American and international Defence businesses • Opportunities to grow in existing Serco footprint: Canada, UK, Middle East, Australia • Enables us to generate synergies through sharing our fixed overheads across the wider revenue base in North America Transaction overview and financial effects • Consideration: $225m on a cash-free, debt-free basis • Financed by an Equity Placing that raised gross proceeds of £140m, together with a new committed debt facility of up to £75m • Expected to contribute FY20 revenue of approximately $370m (£285m1), EBITDA $28m (£21m) and UTP2 $27m (£20m); implied multiples of 0.6x, 8.1x and 8.3x, respectively; Underlying EPS accretion of 7-9% in FY20 • Financing structure produces attractive returns whilst keeping leverage well within our target range. 2019 closing leverage forecast3 increases from ~1.3x to pro forma ~1.5x 1. All figures translated at an exchange rate of £1:$1.30 for all current and forecast financials. 2. UTP as defined by Serco: IFRS Operating Profit excluding amortisation of intangibles arising on acquisition as well as exceptional items; UTP additionally excludes other material one-time items. 3. Leverage guidance excludes lease obligations newly recognised under IFRS16, which is consistent with the covenant measure for the Group’s financing facilities. 21 Serco Group plc – 2019 Half Year Results
UK & Europe Update Kevin Craven Divisional CEO, Serco UK & Europe 22 Serco Group plc – 2019 Half Year Results
UK & Europe: divisional overview
Operations across: Key financials: 2018
Revenue £1,301m
180 contracts (£1,674m inc. JV&As)
82 customers Underlying Trading Profit £39.2m
~24,000 employees
Margin 3.0%
Europe Mix of revenue by Defence
Business Unit
(inc. share of JV&As) Skynet
and key
customers/contracts
Euro Space Euro institution Defence base Management of e.g. FPMS: Satellite
front/mid/back front/mid/back facilities vital national Defence operational
office services office services management facilities marine services control
Transport Citizen Services
8%
13% 28%
Urban rail Lifeline freight Overnight Local Govt Central Govt Environmental
franchise via JV and passenger iconic rail front/mid/back front/mid/back and leisure
arrangement ferries service service 16% office services office services services
Health 19% Justice & Immigration
16%
Integrated FM Pathology Integrated FM Asylum seeker Prisoner Escort & Prison
services services services support services Custody Services management
23 Serco Group plc – 2019 Half Year ResultsUK & Europe: HY19 financial performance
• Revenue growth of +4%, or +£23m, to £658m
– Acquisition net contribution of +5%, or +£31m: Carillion health FM acquisition added +£36m in H1,
annualised revenue base now £70m+, successful transition of six NHS hospitals completed in
summer/autumn 2018; small disposal of part of Anglia Support Partnership to exit an OCP
– Organic CFX change -1%, or -£7m: small growth in contracts such as Barts Health NHS Trust FM and
DWP Citizen Services work, start of new environmental services for Hart DC and Basingstoke & Deane BC,
offset by early exit of East Kent Hospitals OCP contract, and lower revenue in European operations
• Underlying Trading Profit £15.2m, margin 2.3%; growth at CFX and ex IFRS16 of +3%, margin
held flat despite cost investment
– Positive profit contribution from Carillion contracts and other improvements within our Health business;
ongoing transformation and efficiency programmes
– Offset by two key areas of profit reduction: JV&A contribution lower, largely as a result of new three-year
pricing period for AWE; Mobilisation and transition costs on AASC
• OCP utilisation continuing to reduce
– HY19 of £23m, down from £30m in HY18; principally Caledonian Sleeper, COMPASS and PECS
– Utilisation/cash losses for FY19 expected to be ~£40m, and to drop further in FY20 toUK & Europe: financial turnaround
Revenue change has shifted from attrition and managed reduction, to growth
Revenue total change (%)
~+4%
5% ~+2%
0%
-5% -3% -2%
-10%
-15%
-14%
-20% -17%
FY15 FY16 FY17 FY18 FY19e FY20e
OCP utilisation has reduced each year, UTP has moved from decline to growth
UTP and OCP utilisation (£m)
80
UTP (with in-year losses offset by OCP utilisation)
40 ~£60m+
£58m £46m £39m ~£45-50m
£35m
0
£60m £55m £47m ~£40m ~£10-15m
-40 £79m
-80 OCP utilisation (representing in-year losses; FY19e and FY20e are before the effect for IFRS16 adjustments and impairments)
FY15 FY16 FY17 FY18 FY19e FY20e
UTP margin reached its nadir in FY17 and is now increasing appropriately
4% ~4.5%
3.5% 3.3% ~3.5%
UTP margin (%)
2% 3.0%
2.6%
0%
FY15 FY16 FY17 FY18 FY19e FY20e
Strong operational delivery, improving financial performance and an
inflection point following the drag from previous onerous contracts
25 Serco Group plc – 2019 Half Year ResultsUK & Europe: key contract developments
Caledonian Sleeper
• New rolling stock operational challenges, but good progress being
made: Lowlander service began May, now stabilised; Highlander expected
to launch by end September; passenger volumes up 9% YTD vs 2018,
continuing the strong growth since we began operating the franchise
• Trading within the OCP expectations: OCP increased in 2017 due to
rolling stock delay; traded within expectations since; utilisation now drops
significantly; Franchise Agreement mechanism for Transport Scotland to
bear 50% of contract losses from 1 April 2020; from 1 April 2022 Serco has
right to seek terms adjustment or to exit
AASC
• Serco’s largest ever contract award: ~£1.9bn/10yrs
• Supersedes COMPASS, which had revenue of ~£70m and losses of ~£15m p.a.
• Increased share: two large regions, ~20,000 asylum seekers, ~5,000 properties
• Contracts have improvements for Service Users and important changes to contract terms: introduction of
volume caps and other protection for surge events; greater graduation of volume charging bands; improved
inflation protection; mechanisms for handling certain other risk scenarios and change events
• Expect negligible effect on profitability in 2019 but materially positive to both profit and cash flow in
2020; mobilisation/transition tracked to plan in 1H:
– North West transitioned to AASC terms on 1 Jul, full permit to operate 1 Sept
– Midlands & East of England transitions from G4S (COMPASS terms) to Serco (AASC terms) on 1 Aug for IA,
1 Sept for DA; full permit to operate 1 Sept; sub-contractor transition in place with
– Scotland & Northern Ireland exits to Mears are ongoing; Serco’s COMPASS contract ends 30 Sept;
implementing strategy for overstayers in Scotland
Sleeper has some remaining challenges and risks, but good progress;
AASC is very significant for the division and the Group, and is on track
26 Serco Group plc – 2019 Half Year ResultsUK & Europe: Space & Security capability
Ballistic Air Emergency
Space Radars Defence Radars Technology Planning College
Space Operations 24/7/365 Space Operations Technical Capability Insertion Systems Engineering Emergency Response
High Security Environments Space Traffic Management Logistics Support Frontline Equip. Testing Cyber Resilience
Network Operations Space Analytics Radomes Support Software Development Business Continuity
Space Training Critical Infrastructure Availability Contract Life Cycle Support Specialist Training
Virtual Learning
UK
Spaceport
US Combined
Space Ops Centre
Early warning
(CSPOC) AD
radars
Squadrons
European
EPC Space Agency
F35 Squadrons
Global Skynet 5 & 6
Navigation
Satellite System Joint National Space
Ops Centre
• Serco manages a portfolio of complimentary capabilities across a range of critical Space & Security contracts
• Current opportunities under development include Skynet (rebid, with potential expansion) and new
operations such as Global Navigation Satellite System (GNSS), Space Port, and BMD Radar
• We are also exploring the emerging requirements around interconnected Space Operations Centres in the
UK, US and other regions
27 Serco Group plc – 2019 Half Year ResultsUK & Europe: Health citizen-centric solutions
Citizen-centric design Serco Cares
• Programme rolled out to Serco Health contracts to deliver
• Serco’s ExperienceLab designs
service improvements that amplify the beneficial impact
services and digital solutions
that hospital ancillary staff can have on patient care
that really work for people - for
journeys.
those that deliver them and for “The most impressive
those who use them. • Developed using our structured person-centred approach, training exercise for
with research undertaken across 6 UK hospitals, and frontline workers we
We are passionate about the involving extensive time with patients, carers, clinicians and have ever seen.”
value of person-centred design non-clinical staff. – Saïd Business
School, Oxford
to deliver sustainable and • The result has seen a re-definition of the role of hospital University
effective service improvements ancillary staff through the formal recognition of their
importance as positive support agents in the patient care
• Much of our recent work has and recovery journey.
been in our Health business,
where we are committed to
working with the NHS to Patient Discharge Suite
transform the delivery of
services and revolutionise the • Patient flow is a critical challenge for NHS,
patient experience. particularly during winter months where patient
experience and A&E wait time targets are
• Using our structured research, severely impacted.
design and implementation • In partnership with Norfolk & Norwich University
approaches, we deliver Hospitals NHS Foundation Trust, Serco designed,
innovative and ground- built and launched a new discharge suite.
breaking service improvements • Service design, analytics and people experience /
in hospitals across the UK. culture are core elements of the solution.
• As adoption across hospital wards rises, bed shortfall and
A&E performance is improving, with the new service already showing
real benefit to hospital performance and patient experience.
28 Serco Group plc – 2019 Half Year ResultsUK & Europe: current pipeline of ~£1.3bn
• Seven opportunities currently meet the external
pipeline definition i.e. new bid (so excludes organic,
extension and rebid opportunities), >£10m ACV, Gate 2
or beyond, due for adjudication within next 24 months
• Broad spread across most sectors
Defence:
• The Prison Framework will enable quicker and more Housing FM
efficient bidding. Two new-build prisons ~7 years
(Wellingborough and Glen Parva) expected to be
released to the market shortly. In subsequent years, Citizen
several Operate & Maintain (O&M) contracts for Defence: Services: Health:
J&I: Maritime Contact and
former PFI infrastructure will also likely come due support
Soft FM
Prison processing ~7 years
• Pipeline excludes rebids and extensions; Northlink O&M ~5 years ~5 years
Ferries decision is imminent (current Serco contract ~10 years
runs to 24 October 2019); PECS rebid offers Citizen
Services:
opportunity similar to a new bid given it is an OCP (runs J&I: Enviro services
to August 2020); Viapath has rebid/expansion IRC ~10 years
concluding in 2020 Management
Defence: ~8 years
• Continental Europe offers a platform for further Base FM
pipeline development; recently begun first Defence ~7 years
KEY: circles reflect approximate TCV and
base support contract in Belgium (Heverlee); supported therefore include an estimate for potential
the US division to win the European Patent Office contract length; where bids are by Joint
contract Venture, only Serco’s share is included
• Citizen-centric design opening further opportunities in
Health (e.g. care-coordination, patient flow solutions)
Reasonable pipeline and with some breadth; UK Gov remains challenged by Brexit
and political instability, restricting demand for new outsourcing and transformation
29 Serco Group plc – 2019 Half Year ResultsUK & Europe: securing the turnaround
• Complete and embed our Transformation
– UK & Europe division fully integrated; IT, HR and Finance functional transformations largely complete,
with Procurement implemented by March – early signs positive; strengthen remaining support
functions; employee engagement scores are strong
– WFM (Workforce Management) – over 7,000 by year-end on our new management system
– WoW Programme (Way of Working) launched; investing in the contract management community to
improve contract profitability and performance, alongside Operational Excellence initiatives to
support a Continuous Improvement culture
• UK Government outsourcing currently remains a challenging environment, BUT
– Serco’s transformation, focus on operational delivery and strength of financial footing are all
recognised and acknowledged by our customers
– Progress also made with UK Gov noting too much past focus on cost over quality, and transferring risk
to suppliers; the ‘Outsourcing Playbook’ is an important positive development
– New tenders are still emerging (e.g. prisons) and sufficient new bid pipeline; Brexit itself may yield
opportunities; strong operational focus should increase probability to re-secure existing work
• Moving to growth
– Complete the transition of AASC and deliver the target returns
– Maintain extension/rebid win rates – largest near-term are Northern Isles Ferries (current contract end
date of October 2019), PECS (August 2020) and Herts CC (March 2021)
– Increase and broaden further the pipeline, including: utilising the strength of our Centres of
Excellence (Health, J&I) and ongoing proposition development; leveraging US defence acquisitions
(BTP, NSBU); further enhancing the coordination with other international divisions; deepening
capability in continental Europe
Market retains long-term attractiveness; Serco’s position well-established
30 Serco Group plc – 2019 Half Year ResultsSummary & Outlook Rupert Soames Group Chief Executive 31 Serco Group plc – 2019 Half Year Results
Summary • HY19 has built on the inflection point delivered in 2018 • Good trading and financial performance • Very strong order intake and order book • NSBU acquisition materially adds to scale and capability of US defence business • Robust balance sheet • 2019 guidance for growth in both Revenue and UTP • Mobilisation and transition of large new contracts progressing well 32 Serco Group plc – 2019 Half Year Results
Q&A 33 Serco Group plc – 2019 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-tax ROIC 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. In 2018, the definition was aligned with IFRS15 disclosures of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements. This excludes unsigned extension periods as well as option periods in our US business (though an order book value including option periods is also noted). • 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 adjudicated 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. 34 Serco Group plc – 2019 Half Year Results
Appendix 2 – focus on five sectors across four regions
HY19 revenue mix, including share of JV&As*
UK & Asia Middle
£m Sector Europe Americas Pacific East
Defence 238 202 23 14 £477m 29%
Justice &
136 - 135 - £271m 16%
Immigration
Transport 110 50 10 105 £275m 16%
Health 154 - 48 15 £217m 13%
Citizen
Services 213 119 64 32 £428m 26%
Total £851m £371m £280m £166m £1,668m
51% 22% 17% 10%
* Reflects £1,475.5m reported revenue, adjusted to include Serco's share of joint ventures and associates revenue of £192.9m
35 Serco Group plc – 2019 Half Year ResultsAppendix 3 – UK & Europe summary of HY19
HY19 Revenue Sectors
Justice, Immigration, Defence, Health,
Citizen Services, Transport
£658m
• Revenue up: +4% CFX, -1% organic (ie excluding Carillion health FM
CFX change:
contracts). Growth at the Barts and DWP contracts, new enviro services for
+£23m two councils. Some other contracts ending (East Kent Hospitals, which was
+4% onerous), and lower revenue in some European operations.
• UTP margin flat: at 2.2% excl. IFRS16 effect (HY18: 2.2%), or 2.1% JV&A-
% of Group Revenue adjusted; JV&A contribution modestly reduced with new AWE pricing
period; mobilisation and transition costs on AASC; offsetting these were
45% positive contribution from the Carillion contracts as well as other
improvements, savings and efficiencies.
HY19 UTP • OCPs: £23m utilisation excl. IFRS16 effect (HY18: £30m); principally
offsetting losses on Caledonian Sleeper, COMPASS, PECS.
• Contracts awards: ~£2.1bn. AASC, the Group’s largest ever award, was
£15.2m ~£1.9bn, and was part rebid and part new. Other awards include: Skills
Support for the Workforce; new enviro services for Windsor and
CFX change:
Maidenhead, with extensions for 5 other councils; other extensions
+£1.0m including defence support services, contact centre services and support to
+7% European institutions.
• Rebids/extensions due before end of 2021: NorthLink Ferries, PECS and
% of Group UTP (before corp. costs) Hertfordshire CC.
• Pipeline: several defence support opportunities; others in enviro, health
21% 34%
FM and J&I operations; new prisons framework position awarded.
36 Serco Group plc – 2019 Half Year ResultsAppendix 4 – Americas summary of HY19
HY19 Revenue Sectors
Defence, Citizen Services, Transport
£372m • Revenue up strongly: +22% RFX, +15% CFX and organic (as BTP
acquisition had annualised in January). Driven by increased US Navy ship
CFX change: modernisation task orders, albeit against a weak comparative in 1H18;
+£47m particularly strong demand on the CANES IDIQ for network upgrade tasks
+15% on ships and submarines.
• UTP margin up very strongly: to 9.9% excl. IFRS16 effect (HY18: 6.3%).
% of Group Revenue CMS revenue broadly flat but profit up strongly on different contract
structure and phasing of profitability across the year, together with
25% 25% experiencing unusually high volumes of fixed-price variable work in 1H19;
much of the increase in profitability is expected to reverse in 2H19, and we
HY19 UTP don’t expect margins to recur at these levels in the future.
• OCPs: £4m utilisation excl. IFRS16 effect (HY18: £1m) required on Ontario
DES.
£37.7m • Contract awards: ~£0.5bn. New contract for field office services to the
CFX change: PBGC; new task order for TRIRIGA NexGen IT for US Air Force Civil
+£16.2m Engineering; new shore IT and engineering sustainment for US Navy; task
orders across ship modernisation frameworks and public assistance
+85% support to FEMA.
• Rebids/extensions due before end of 2021: FAA, GIC, ATFP, Goose Bay.
% of Group UTP (before corp. costs)
• Pipeline: defence support functions; ATC support; Citizen Services case
53% 25% management and processing to rebuild.
37 Serco Group plc – 2019 Half Year ResultsAppendix 5 – AsPac summary of HY19
HY19 Revenue Sectors
Justice, Immigration, Defence, Health,
Citizen Services, Transport
£280m
• Revenue up: +6% RFX, +9% CFX and organic. Particularly strong growth in
CFX change:
Citizen Services operations for contact centre and processing support,
+£24m including expansion of work for Department of Human Services and new
+9% contracts for Australia’s National Disability Insurance Scheme and Victoria
Police contact centre services for non-emergency incidents.
% of Group Revenue • UTP margin down: at 4.2% excl. IFRS16 effect (HY18: 5.0%). Decline in
profit largely result of non-recurring commercial settlement benefits in
25%
19% 1H18 and expensing in 1H19 mobilisation and transition costs for the new
defence healthcare provision contract in Australia and Adelaide Remand
HY19 UTP Centre (ARC).
• OCPs: £2m utilisation (HY18: £2m) required on Hong Kong transport
operations.
£11.8m • Contracts awards: ~£0.6bn. Major new contract for defence health services
CFX change: at garrisons across Australia, valued at AU$1.01bn. New win to operate ARC
(£0.8m) for South Australia Department of Correctional Services.
(6%) • Rebids/extensions due before end of 2021: DIBP due at end of 2019 for
extension or rebid; ATO, Fiona Stanley Hospital, SQCC, Acacia Prison and
a defence marine services contract all potentially coming due 2020-21.
% of Group UTP (before corp. costs)
• Pipeline: Significant rebuild of the pipeline anticipated in 2H19; relatively
34% 25%
16% broad spread across J&I, Defence, Citizen Services, Transport and Health.
38 Serco Group plc – 2019 Half Year ResultsAppendix 6 – Middle East summary of HY19
HY19 Revenue Sectors
Transport, Defence, Health, Citizen Services
£166m • Revenue broadly flat: +2% RFX but -3% CFX and organic; growth from
new airport fire & rescue services in Saudi Arabia as well as expanded
CFX change: services at the Dubai Metro. Revenue reduced on the rebid MELABS
(£5m) contract, loss of Bahrain air navigation services and a reduction in Saudi
(3%) rail operations.
• UTP margin down: to 4.4% excl. IFRS16 effect (HY18: 6.1%); decline
% of Group Revenue driven, as expected, by significant reduction in margins on the MELABS
contract following the successful rebid.
25%11%
• OCPs: no OCPs.
HY19 UTP • Contracts awards: ~£0.1bn (excludes signing of two-year extension of
Dubai Metro as the signed LOI was included in 2H18); new advisory
service to support Mashroat, public infrastructure programmes in Saudi
Arabia; Jeddah hospital FM and patient-facing services; further extension
£7.4m of Air Navigation Services (ANS) and training in Iraq.
CFX change: • Rebids/extensions due before end of 2021: ANS in Dubai and Iraq;
(£2.7m) Saudi rail; Dubai Metro due again in 2021.
(27%)
• Pipeline: includes a small number of Transport and Health opportunities;
effort ongoing to rebuild a stronger pipeline across all current sectors of
% of Group UTP (before corp. costs) ME operation.
34% 25%10%
39 Serco Group plc – 2019 Half Year ResultsAppendix 7 – Tax
• HY19 underlying tax of £9.8m, which, on UTP (£50.6m) less net finance costs
HY19 Underlying ETR (£10.5m), is a 24% effective tax rate (ETR)
reduced due to improved – Absence of deferred tax credit for in-period losses in the UK is key
profitability and mix driver of high ETR
ETR remains higher than – Tax charge on overseas profits blends to ~30%, reflecting the mix of
blended average of Australia, US and Middle East local rates
standard CT rates in our – Calculation affected by proportion of JV&A profits which are
regions due to absence of consolidated within Underlying PBT but on an after-tax basis
tax credit on UK in-period
losses • Rate lower than 34% in HY18 due to the increase in and mix of profitability
UK deferred tax asset of • Expect Underlying ETR to reduce further over the longer term assuming
£20m recognised on the further improvement in UK profitability; expect below 25% for FY19
balance sheet and • The ETR will still remain higher than a fully normalised blended rate of ~20%
therefore available to until all UK tax losses can be recognised based on IAS12 technical
offset against future requirements, and therefore credit can be taken for any in-period loss
taxable profits; total
potential asset in relation • To date, the improved outlook of future profitability has resulted in
to UK losses is £131m; recognising £20m of UK deferred tax asset. There is a total potential
recognition dependent on deferred tax asset of £131m in relation to UK tax losses; recognition of more
further improvement of UK of this balance is contingent on further improvement in the UK outlook
profitability
40 Serco Group plc – 2019 Half Year ResultsAppendix 8 – cash flow breakdown 1 & breakdown 2 £m HY19 HY18 FY18 Breakdown 1 – depreciation, amortisation and impairment Depreciation (excluding lease ROU assets) 10.0 10.7 19.5 Amortisation (non-acquisition) 9.4 9.6 18.6 Depreciation and amortisation 19.4 20.3 38.1 Impairment of intangible assets - - 0.1 Impairment of PPE (excluding lease ROU assets) - - 0.7 Amortisation of intangibles arising on acquisition 2.3 1.9 4.3 Total depreciation, amortisation and impairment (excluding lease ROU assets) 21.7 22.2 43.2 Breakdown 2 – other non-cash movements Share-based payment expense 5.6 6.9 14.7 Loss on disposal of PPE and intangible assets 0.1 0.6 2.0 Other non-cash movements (0.1) - (0.3) Other non-cash movements 5.6 7.5 16.4 41 Serco Group plc – 2019 Half Year Results
Appendix 9 – cash flow breakdown 3 £m HY19 HY18 FY18 Breakdown 3 – cash flow and net debt exceptional items Restructuring and costs related to Strategy Review (11.1) (15.2) (32.3) Break and exit costs re residual UK private sector BPO operations - - - Costs re legal claims previously provided for - (0.3) 0.7 Costs re DLR pension deficit settlement - (8.3) (8.3) Costs associated with UK Government reviews (1.0) (0.3) (0.3) Exceptional items cash costs (12.1) (24.1) (40.2) Loan balances re prior disposal – reversal of impairment - - 13.4 Loan receivables re prior disposal – increase/gain on early repayment - - 7.5 Other cash flow exceptional items - - 0.1 Cash flow and net debt exceptional items (12.1) (24.1) (19.2) 42 Serco Group plc – 2019 Half Year Results
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