Serco Group plc · LSE:SRP
Serco — FY2019 Earnings Presentation
72 slides from Serco's earnings presentation, Feb 26, 2020
Slide 1: 2019 Full Year Results
2019 Full Year Results Serco Group plc 26 February 2020 1 Serco Group plc – 2019 Full Year Results
Slide 2: Disclaimer
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”, “ant
Slide 3: Agenda
Agenda Overview Rupert Soames, Group CEO Financial Review Angus Cockburn, Group CFO Operational Review Rupert Soames AsPac Update Mark Irwin, Divisional CEO Q&A Rupert Soames Angus Cockburn Mark Irwin 3 Serco Group plc – 2019 Full Year Results
Slide 4: FY19 Overview
FY19 Overview Rupert Soames Group Chief Executive 4 Serco Group plc – 2019 Full Year Results
Slide 5: FY19 – moving further into the 'Grow' stage
FY19 – moving further into the ‘Grow’ stage • Very strong trading and financial performance – Revenue £3,248m, up +13% at CFX; +8% organic, the first year of growth since 2013; +5% acquired – UTP £120m, up +25% at CFX; margin up 40bps to 3.7% – Underlying EPS 6.16p, up +15% at CFX – Free Cash Flow £
Slide 6: Profit: ~28% CAGR 2017-20
Profit: ~28% CAGR 2017-20 (~22% excluding NSBU contribution) Revenue: 8% 2019 organic @ CFX, ~4% 2020 ~£145m (inc. ~£20m for NSBU) £m £120m UTP (inc. £8.6m for 5 months ~4.2% margin 140 of NSBU acquisition) £93m 3.7% margin 120 100 £69m 3.3% margin the nadir 80 2.3% margin 60 40 20 0 FY17 FY18 FY19
Slide 7: FY19 Financial Review
FY19 Financial Review Angus Cockburn Chief Financial Officer 7 Serco Group plc – 2019 Full Year Results
Slide 8: Income Statement – Revenue and Trading Profit
Income Statement – Revenue and Trading Profit £m FY19 FY18 HY19 Revenue excludes share of JV&A revenue; Revenue 3,248 2,837 1,476 Trading Profit measures include share of JV&A PAT Trading Profit 133.4 116.7 50.6 Exclude: Contract & Balance Sheet Review adjustments (3.6) (23.6) - Contract & Balance S
Slide 9: Revenue divisional analysis
Revenue divisional analysis Revenue - growth composition FY19 vs FY18 First time Serco has FY18 FY19 HY19 reported organic growth Reported Acquisition/ Reported Constant Reported since 2013 £m Currency Organic Disposal FX TOTAL Currency Currency Currency Organic growth driven by UK&E 1,301 +2% +3% -
Slide 10: Underlying Trading Profit (UTP) divisional analysis
Underlying Trading Profit (UTP) divisional analysis Underlying Trading Profit and margin UTP increase led by FY19 UTP FY18 UTP FY change Americas, which includes Reported Constant Reported Reported Reported Constant Constant £8.6m from the NSBU £m Currency Currency Margin Currency Margin Currency Cu
Slide 11: Income Statement – EPS and DPS
Income Statement – EPS and DPS £m FY19 FY18 HY19 Net Finance Costs increased due to IFRS16 Underlying Trading Profit (UTP) 120.2 93.1 50.6 and repayment of Intelenet Net Finance Costs (NFC) (21.8) (13.9) (10.5) vendor loan note in 2H18 Underlying PBT 98.4 79.2 40.1 Underlying effective tax of Tax on
Slide 12: Exceptional items
Exceptional items £m FY19 FY18 HY19 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 (12.8) (32.3) (5.4) strategy, including SFO fine and investigation c
Slide 13: Dividends
Dividends • Background to Board’s recommendation of resuming dividends – 2019 has been a year of very strong operational and financial performance – 2019 was also the last year of significant outflows on OCPs and cash exceptionals – 2020 expectations are for further good progress in increasing under
Slide 14: Cash flow, net debt and leverage
Cash flow, net debt and leverage • Usual cash flow and net debt detailed tables are included at Appendix 5 & 6 • Free Cash Flow £62.0m (FY18: £16.3m) – Improvement includes higher UTP, lower working capital outflow of £0.1m (FY18: £21.6m) and lower OCP utilisation of £40.9m (FY18: £51.8m) – 84% conv
Slide 15: The OCP journey is materially complete
The OCP journey is materially complete • OCP liability of £447m at end of 2014, reduced to £17m end of 2019; therefore ~96% ‘done’; cumulative net release over 5 years within 2% of original liability • Dealing with OCPs has been an operationally complex programme, pulling on many levers: – Converted
Slide 16: FY20 outlook and modelling assumptions
FY20 outlook and modelling assumptions • Revenue of £3.4-3.5bn (FY19: £3,248m) – Total growth of +6-8%, comprising: ~+4% organic growth; +5-6% acquisition contribution from 7 months of NSBU; -2-3% estimate of adverse FX • Underlying Trading Profit of ~£145m (FY19: £120m) – Benefit of full year contr
Slide 17: FY19 Operational Review
FY19 Operational Review Rupert Soames Group Chief Executive 17 Serco Group plc – 2019 Full Year Results
Slide 18: FY19 highlights & lowlights
FY19 highlights & lowlights Highlights Lowlights • Organic revenue growth after 5 years of decline; strong UTP • Introduction of Caledonian Sleeper progress, on track for ~28% CAGR 2017-20 new rolling stock, but performance improving in recent months • Acquisition of NSBU adds materially to scale an
Slide 19: Regions and Group centre collaborate on bids, operations, talent
Each of our regions and the Group centre collaborate on bids, operations, talent, capability development, and strategy to make good things happen Aviation Continuous Improvement (CI) Training European Patent Office Maritime Strategy Defence Partnerships Space Strategy Community Justice Strategy Data
Slide 20: Order book and pipeline progress
Order book and pipeline progress Order book progress 13.6 14.1 • Order book progress comes from existing work (ie 12.6 14 12.0 Order book value (£bn) rebids/extensions) as well as new work; cumulatively over 6 10.7 Award value (£bn) 10.0 9.9 12 last 7 years, mix of order intake has been roughly spli
Slide 21: Employee engagement: Viewpoint scores
Employee engagement: Viewpoint scores 2019 response rates: 27,000 employees responding, who also provided 50,000 individual comments 80 77 75 Leaders People Managers Employees 73 72 70 70 71 71 65 69 65 65 62 67 58 59 60 54 56 55 55 51 56 51 49 51 53 54 50 2019 changes: 51 Leaders: +8 45 People Mana
Slide 22: UK & Europe summary of FY19
UK & Europe summary of FY19 FY19 Revenue Sectors Justice, Immigration, Defence, Health, Citizen Services, Transport £1,362m • Revenue up: +5% CFX, +2% organic (ie excl. Carillion health FM contracts). CFX change: Growth from the AASC contracts (COMPASS rebid and expansion), Skills +£62m Support for
Slide 23: Americas summary of FY19
Americas summary of FY19 FY19 Revenue Sectors Defence, Citizen Services, Transport £916m • Revenue up very strongly: +42% RFX, +35% CFX, +19% organic. Very strong growth in US Navy ship mod task orders, albeit against a weak CFX change: comparative in 1H18; particularly strong demand on the CANES ID
Slide 24: AsPac summary of FY19
AsPac summary of FY19 FY19 Revenue Sectors Justice, Immigration, Defence, Health, Citizen Services, Transport £621m • Revenue up strongly: +13% RFX, +16% CFX and organic. H2 contribution CFX change: from start of AHSC defence garrison health services. Also strong growth in +£88m Citizen Services ope
Slide 25: Middle East summary of FY19
Middle East summary of FY19 FY19 Revenue Sectors Transport, Defence, Health, Citizen Services £350m • Revenue broadly flat: +2% RFX but -2% CFX and organic; growth from expanded services at the Dubai Metro and new contracts for airport fire & CFX change: rescue services and hospital support services
Slide 26: Asia Pacific Update
Asia Pacific Update Mark Irwin Divisional CEO, Serco Asia Pacific 26 Serco Group plc – 2019 Full Year Results
Slide 27: Asia Pacific: divisional overview reminder
Asia Pacific: divisional overview reminder Operations across: – ~30 contracts – ~20 customers – 11k+ employees +20% 2019 financial summary: – Revenue £621m +16% – UTP £31m +19% – Margin 5.0% +10bps Revenue by sector ~15% ~3% Major contracts: ~45% Contract BU ~23% Onshore Immigration Detention J&I <
Slide 28: Asia Pacific: key contract developments
Asia Pacific: key contract developments ASRV (‘Icebreaker’) Clarence Correctional Centre CONTRACT RSV Nuyina (Noy-ee-na) CONTRACT Operator led design and O&M under PPP CUSTOMER Australian Antarctic Division CUSTOMER NSW Department of Corrections TCV ~£160m (4 + 10yr) TCV ~AUD2.6bn/~£1.4bn 4yr D&B +
Slide 29: Clarence Correctional Centre video
Asia Pacific: Clarence Correctional Centre video PLAY 29 Serco Group plc – 2019 Full Year Results
Slide 30: Asia Pacific: key contract developments
Asia Pacific: key contract developments ASRV (‘Icebreaker’) Clarence Correctional Centre CONTRACT RSV Nuyina (Noy-ee-na) CONTRACT Operator led design and O&M under PPP CUSTOMER Australian Antarctic Division CUSTOMER NSW Department of Corrections TCV ~£160m (4 + 10yr) TCV ~AUD2.6bn/~£1.4bn 4yr D&B +
Slide 31: Asia Pacific: key divisional achievements
Asia Pacific: key divisional achievements Executing brilliantly Successful AHSC and ARC transitions. DHS organic growth. Mobilisation for Clarence and ASRV Winning good business 7 new bid wins (TCV £0.7bn) 7 rebid / extension wins (TCV £0.4bn) Profitable and sustainable Revenue +16% CFX growth in FY
Slide 32: Asia Pacific: trends affecting our markets
Asia Pacific: trends affecting our markets KEY SOCIO-POLITICAL MARKET KEY COMPETITOR AND GEO-POLITICAL FACTORS TRENDS TRENDS • Continued momentum for • Maturing of outsourcing • Ongoing consolidation: infra build marketplace in ANZ Broadspectrum $3.5bn • Pacific pivot • Service-outcome focus for rev
Slide 33: Asia Pacific: delivering growth
Asia Pacific: delivering growth • Maintain absolute focus on operational standards – Delivery of all contract obligations, and the safety and security of our people – Ensure new contracts transition smoothly to full operational stage – Achieve the potential benefits of Workforce Management, Shared S
Slide 34: Summary & Outlook
Summary & Outlook Rupert Soames Group Chief Executive 34 Serco Group plc – 2019 Full Year Results
Slide 35: Summary
Summary • Very strong trading and financial performance • Record order intake and order book • NSBU acquisition materially adds to scale and capability of US defence business • Robust Balance Sheet • 2020 guidance for further growth in both Revenue and UTP • Dividend reinstated 35 Serco Group plc –
Slide 36: Q&A
Q&A 36 Serco Group plc – 2019 Full Year Results
Slide 37: Appendix – notes and definitions
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 disc
Slide 38: Appendix – market growth and drivers
Appendix 2 – market growth and drivers • Weighted growth rate across all our sectors and geographies has slowed from 5-7% seen in 2010-14 to around 2-3% in 2018-19; conditions in the UK, which represents ~40% of our revenues, weakened in large part because of Brexit diversion, and acting as a drag t
Slide 39: Appendix – Serco's focus on five sectors across four regions
Appendix 3 – Serco’s focus on five sectors across four regions FY19 revenue mix, including share of JV&As* UK & Asia Middle £m Sector Europe Americas Pacific East Defence 477 576 89 28 £1,170m 32% Justice & 312 - 279 - £591m 16% Immigration Transport 233 100 20 216 £569m 16% Health 303 - 95 30 £428m
Slide 40: Appendix – cash management normalisation
Appendix 4 – cash management normalisation FY13 FY14 FY15 FY16 FY17 FY18 FY19 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 Pre 2014, net debt at statutory B
Slide 41: Appendix – Free Cash Flow and Trading Cash Flow
Appendix 5 – Free Cash Flow and Trading Cash Flow £m FY19 FY18 HY19 FY18 FCF restated for capital repayment of Operating profit before exceptionals 125.9 112.4 48.3 finance lease liabilities; no Share of profit of joint ventures and associates (27.5) (28.8) (13.5) impact to overall Depr’n and amort’
Slide 42: Appendix – Net debt and leverage summary
Appendix 6 – Net debt and leverage summary £m FY19 FY18 HY19 Adjusted Net Debt excludes all IFRS16 lease Free Cash Flow 62.0 16.3 0.4 liabilities, which increased Exceptional items (see Appendix 8) (49.2) (19.2) (12.1) to £369.9m given AASC; Net (acquisition)/disposal of subsidiaries (193.2) (31.3)
Slide 43: Appendix – cash flow breakdown 1 & 2
Appendix 7 – cash flow breakdown 1 & breakdown 2 £m FY19 FY18 HY19 Breakdown 1 – depreciation, amortisation and impairment Depreciation (excluding lease ROU assets) 15.3 19.5 10.0 Amortisation (non-acquisition) 18.1 18.6 9.4 Depreciation and amortisation 33.4 38.1 19.4 Impairment of intangible asset
Slide 44: Appendix – cash flow breakdown 3
Appendix 8 – cash flow breakdown 3 £m FY19 FY18 HY19 Breakdown 3 – cash flow and net debt exceptional items Restructuring and costs related to Strategy Review (19.2) (32.3) (11.1) SFO fine and investigation costs (22.9) - - Other costs re UK Government reviews (2.2) (0.3) (1.0) Acquisition costs re
Slide 45: Appendix – leverage covenant calculation
Appendix 9 – leverage covenant calculation £m FY19 FY18 HY19 LTM Trading Profit 133.4 116.7 121.9 Exclude: share of joint venture and associate post-tax profits (27.5) (28.8) (27.3) Exclude: foreign exchange credit on investing and financing arrangements (0.8) (0.2) (0.9) Include: dividends from joi
Slide 46: Appendix – interest cover covenant calculation
Appendix 10 – interest cover covenant calculation £m FY19 FY18 HY19 LTM Net Finance Costs (21.8) (13.9) (18.1) Exclude: Finance charge on lease obligations recognised under IFRS16 6.9 n/a 2.4 Exclude: foreign exchange on investing and financing arrangements 0.8 0.2 0.9 Exclude: net interest receivab
Slide 47: Appendix – Tax
Appendix 11 – Tax • FY19 underlying tax of £24.4m, which, on UPBT of £98.4m (UTP of £120.2m less net finance costs of £21.8m), is a 25% effective tax rate (ETR) due to the composition of UPBT and ETRs by tax jurisdiction: – UK in-year losses have reduced, and while still not yet taking a deferred ta
Slide 48: Appendix – Balance Sheet summary
Appendix 12 – Balance Sheet summary £m FY19 FY18 HY19 Goodwill 671.2 579.6 581.4 Other intangible assets (excluding leased assets) 96.5 63.7 58.5 Property, plant and equipment (excluding leased assets) 47.3 44.3 40.4 Contract assets, trade and other receivables 674.4 574.1 623.3 Inventories 18.3 22.
Slide 49: Appendix – Return on Invested Capital (ROIC)
Appendix 13 – Return on Invested Capital (ROIC) £m FY19 FY18 HY19 Invested capital assets (see Appendix 12) 1,531.3 1,305.2 1,343.9 Invested capital liabilities (see Appendix 12) (667.2) (603.9) (618.1) Invested Capital (IC) 864.1 701.3 725.8 Average IC (two-point) 782.7 686.3 732.6 Trading Profit 1
Slide 50: Appendix – OCP and other provisions movement
Appendix 14 – OCP and other provisions movement Onerous Employee, Total Contract & Balance Sheet contract Property reported Review OCPs originally £m provisions and other provisions charged in FY14 of £447m; 31 December 2018 (82.1) (157.3) (239.4) OCP liability now stands at just £17m at end of FY19
Slide 51: Appendix – pension assets mix and IAS 19 valuation
Appendix 15 – pension assets mix and IAS 19 valuation £m FY19 FY18 HY19 SPLAS, the main Group scheme, represents 90%+ Scheme assets at fair value: of total assets and liabilities; ~90% of SPLAS Liability driven investments (LDI) 447.4 580.7 488.8 assets historically allocated Bonds except LDI 302.2
Slide 52: Appendix – IFRS16 leases: background and effect
Appendix 16 – IFRS16 leases: background and effect • New accounting standard effective for the Group from 1 January 2019; transition approach for Serco means prior periods are not restated; guidance for FY19 was updated for IFRS16 back in February 2019 • Key impacts of IFRS16 are that Underlying Tra
Slide 53: Appendix – contract nature and inflation mitigation
Appendix 17 – 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” reve
Slide 54: Appendix – currency rates
Appendix 18 – currency rates Spot rate for Average rates Closing rates FY20e 31 Jan 31 Dec 30 Jun 31 Dec 30 Jun 31 Dec 30 Jun 2020 FY19 HY19 FY18 HY18 FY17 HY17 2019 2019 2018 2018 2017 2017 £:US$ 1.31 1.28 1.30 1.34 1.38 1.29 1.26 1.32 1.27 1.28 1.31 1.35 1.30 £:Aus$ 1.96 1.83 1.83 1.78 1.78 1.69 1
Slide 55: Appendix – American Depository Receipt (ADR) program
Appendix 19 – 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-denominat
Slide 56: Slides from proposed acquisition of NSBU
The following slides were part of those presented as part of the proposed acquisition of the Naval Systems Business Unit (‘NSBU’) from Alion Science & Technology Corporation as announced on 23 May 2019. The full presentation and webcast can be found at: https://www.serco.com/investors/results-report
Slide 57: Overview
Overview • 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 Defenc
Slide 58: US Navy fleet build and sustainment: long-term sustainable growth
US Navy fleet build and sustainment: long-term sustainable growth Proposed shipbuilding plan represents largest build-up in fleet since the 1980s • US Navy plan to expand fleet from around 280 ships to 355 by 2034 – Shipbuilding budget grows from average of $20.3bn per year in 2020-24 to $26-28bn pe
Slide 59: Driver of fleet expansion: increase in the perceived threat
Driver of fleet expansion: increase in the perceived threat 59 Serco Group plc – Proposed acquisition of NSBU May 2019
Slide 60: NSBU core capabilities
NSBU core capabilities: world-class naval systems engineering and design; ~1,000 people; involved in every major US Navy ship class • Core skills of naval architecture; hull design; systems engineering and integration. Vessel and systems design Supported by state-of-the-art tools such as simulation-
Slide 61: Order book ~$600m; new business pipeline >$2bn
Order book ~$600m; new business pipeline >$2bn Key customers: US Navy, US Army, Coast Guard, Royal Canadian Navy Key contracts SEA 21 In-service support, managing critical lifecycle maintenance and (Surface Warfare Directorate) modernisation to non-nuclear US Navy surface ships SEA 05 Ship design se
Slide 62: Strategic fit and rationale; people
Strategic fit and rationale; people The acquisition of NSBU brings world-class naval design and architecture, production support and in-service sustainment capabilities, which are highly complementary to Serco’s existing skills in ship and shore-based modernisation, hardware integration and naval lo
Slide 63: Strategic fit and rationale – improving our mix
Strategic fit and rationale – improving our mix The acquisition of NSBU significantly advances our aim of increasing our exposure to the US defence market. Serco Group’s revenue mix from Defence will increase from 30% to ~35%, and the Americas division as a proportion of the Group will increase from
Slide 64: Financial performance and effect
Financial performance and effect • Revenue: Y/E Sept 2018 $336m (£250m); FY20 expected to grow to ~$370m (~£285m) – Forecast growth largely already contracted for in order book – Standalone medium-term CAGR of ~5% projected; potential for revenue synergies to accelerate • UTP: Y/E Sept 2018 $20.2m (
Slide 65: Funding overview; completion arrangements
Funding overview; completion arrangements • NSBU is to be acquired for $225m (£173m) on a cash-free, debt-free basis, and subject to customary working capital and other relevant adjustments up to the date of completion • Financed by a combination of an Equity Placing expected to raise gross proceeds
Slide 66: Summary: a highly attractive transaction for Serco
Summary: a highly attractive transaction for Serco • Strategically compelling: – US Navy one of the most attractive segments of our portfolio, combining long-term sustainable growth with balanced risk-reward – Very good fit with our existing business – Significant step up in our engineering capabili
Slide 67: Slides from Capital Markets Event 2017
The following slides were part of those presented at Serco’s Capital Markets Event on 13 December 2017. The full presentation and webcast can be found at: https://www.serco.com/investors/results-reports-events 67 Group plc Serco Capital – 2019Event Markets Full Year 2017Results
Slide 68: Reminder: our strategy as described in Q1 2015
Introduction Reminder: our strategy as described in Q1 2015 Our Ambition To be a superb provider of public services by being the best managed business in our sector 2014 Stabilise 2015-17 Transform 2018-20 Grow Planned Outcome • Hire new • Rationalise portfolio • Build out management • Strengthen Ba
Slide 69: 3 steps to achieving our trading margin ambition
Introduction 3 steps to achieving our trading margin ambition Difficult Our planned market conditions outcome of a are likely to delay ~5-6% margin On track with opportunity for remains intact, but Status cost reductions; organic growth timing is developing robust dependent on update plans to market
Slide 70: Overhead savings to date driven by transformation
Savings to date and current cost base Overhead savings to date driven by initial stages of transformation of shared services and organisational design • Cumulative three-year reduction of >£100m or Three-year cumulative savings and ~23% of overheads and CSS costs % cost reduction by area • Within th
Slide 71: Transformation to Growth
Transformation to Growth Over the last 3 years we have delivered on our promises. We remain confident we can deliver long-term goals Our drivers: What we do: How we add value: Values… Efficiency & commercial nous Trust Care Innovation Pride Justice & Public service ethos Immigration Transferable glo
Slide 72: www.serco.com
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 72 Serco Group plc – 2019 Full Year Results