Serco Group plc · LSE:SRP
Serco — FY2018 Earnings Presentation
62 slides from Serco's earnings presentation, Feb 21, 2019
Slide 1: 2018 Full Year Results
serco 2018 Full Year Results Serco Group plc 21 February 2019
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: Overview
Overview Financial Review Operational Review AsPac Update Q&A Rupert Soames, Group CEO Angus Cockburn, Group CFO Rupert Soames Mark Irwin, Divisional CEO Rupert Soames Angus Cockburn Mark Irwin w Serco Group plc— 2018 Full Year Results serco
Slide 4: FY18 Overview
FY18 Overview Rupert Soames Group Chief Executive 4 Serco Group ple-2018 Full Year Results serco
Slide 5: FY18 — an inflection point
FY18 — an inflection point Good trading and financial performance — Revenue £2,837m, -1.7% at CFX, predominantly on contracts that ended in 2017; H2 grew +2.5%, which was the first period of revenue growth since 2013 — UTP £93m, +40% at CFX, driven by strong operating performance, further good progr
Slide 6: FY17 FY18 FY19
100 80 60 40 20 0 FY17 FY18 FY19 • • • – –
Slide 7: FY18 Financial Review
FY18 Financial Review Angus Cockburn Chief Financial Officer 7 Serco Group ple-2018 Full Year Results serco
Slide 8: Income statement — Revenue and Trading Profit
Income statement — Revenue and Trading Profit Revenue excludes share of JV&A revenue; Trading Profit measures include share of JV&A PAT FY17 restated for IFRS15, the impact of which was not significant Contract & Balance Sheet Review adjustments and other one-time items excluded from UTP; No discont
Slide 9: Revenue divisional analysis
Revenue divisional analysis Organic decline driven by: Americas £54m impact from CMS lower volumes and new contract structure; AsPac £31m impact from the ACPB and WACSCS contracts that ended in 1H17; UK £57m impact from transfer of the Glasgow ACCESS contract in November 2017; partial offset from gr
Slide 10: Underlying Trading Profit (UTP) divisional analysis
Underlying Trading Profit (UTP) divisional analysis Underlying Trading Profit and margin Uili? inareese lengelly eliiven FY18 UTP FY17 UTP FY change HY18 UTP by strong operating Reported Constant Reported Reported Reported Constant Constant Reported Reported performance across all fm Currency Curren
Slide 11: Income statement — EPS and DPS
Income statement — EPS and DPS Small increase in net finance costs due to lower pension schemes credit Underlying effective tax rate reduced to 26% (see following slide) Underlying EPS up +55% Non underlying items reflects credit from Contract & Balance Sheet Review items; offset by exceptional cost
Slide 12: Tax
Tax FY18 Underlying ETR reduced faster than anticipated due to improved profitability and mix ETR remains higher than blended average of standard CT rates in our regions due to absence of tax credit on UK in-period losses UK deferred tax asset of £20m recognised on the balance sheet and therefore av
Slide 13: Exceptional items
Exceptional items Restructuring costs relate to Transformation stage of implementing the strategy, including redundancy and other incremental costs Adjustments re prior disposals resulted in exceptional credits; £13.9m for loan balance settlement on Serco GmbH 2012 disposal; £7.5m for early repaymen
Slide 14: Free Cash Flow and Trading Cash Flow
Free Cash Flow and Trading Cash Flow FCF turns positive after three years of outflows; year-on-year improvement of £32m driven by the increase in underlying profitability (UTP up £24m) and by lower cash outflows on OCPs (utilisation down by £17m) Average working capital days broadly unchanged: trade
Slide 15: Net debt and leverage
Net debt and leverage Cash exceptional items driven by timing of restructuring costs and include the final DLR pension payment Acquisition outflow reflects BTP and Carillion health FM contracts Closing net debt of £188m compares to a daily average of £235m; increase in closing net debt of £47m is ve
Slide 16: IFRS16 — background and FY19 estimated effect
IFRS16 — background and FY19 estimated effect * New accounting standard for leases is effective for the Group from 1 January 2019; therefore our FY19 guidance requires restating; note that the FY18 results as reported today do not get restated * Key impacts of IFRS16 are that Underlying Trading Prof
Slide 17: Contract nature and areas of indexation/inflation mitigation
Contract nature and areas of indexation/inflation mitigation + Around % 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
Slide 18: 2019 outlook and modelling assumptions
2019 outlook and modelling assumptions * Revenue of £2.9-3.0bn (2018: £2,837m) — Guidance increased to include recent contract wins; 3-4% organic growth now assumed; acquisition contribution of ~1%, driven by full-year impact of Carillion contracts; FX estimate is broadly neutral * Underlying Tradin
Slide 19: FY18 Operational Review
FY18 Operational Review Rupert Soames Group Chief Executive 19 Serco Group ple-2018 Full Year Results serco
Slide 20: FY18 highlights & lowlights
FY18 highlights & lowlights Highlights Lowlights * Strong UTP progress — ahead of guidance at start of year; on track for ~20% CAGR 2017-19 * >100% book-to-bill ratio; £2.9bn order intake; win rates by value ~25% for new business and 93% for existing business; order book now £12.0bn * OCPs ahead of
Slide 21: Order book and pipeline progress
Order book and pipeline progress Order book progress comes from existing work (ie rebids/extensions) as well as new work; cumulatively over last 6 years, mix of order intake has been roughly split 50:50 between rebids/extensions and new work For FY18, order book definition aligned to new IFRS15 disc
Slide 22: The OCP journey is nearing its end
The OCP journey is nearing its end * OCP liability of £447m at end of 2014, reduced to £82m end of 2018; therefore we are >80% ‘done’; cumulative net release of Contract & Balance Sheet Review items over 4 years is equivalent to 6% to the good * Peak utilisation £125m in FY15, reduced to £52m in FY1
Slide 23: Update on market backdrop
Update on market backdrop Weighted growth rate across all our sectors and geographies has slowed from 5-7% seen in 2010-14 to around 23% now; conditions in the UK, which represents ~40% of our revenues, are weak in large part because of Brexit diversion, and acting as a drag to aggregate market grow
Slide 24: Asia Pacific Update
Asia Pacific Update Mark Irwin Divisional CEO, Serco Asia Pacific 24 Serco Group ple-2018 Full Year Results serco
Slide 25: Asia Pacific: divisional overview
Asia Pacific: divisional overview Operations across: — 32 contracts ee oe — 22 customers mess — 8,600 employees Locket Valley TES Brisbane 2018 financial summary: > 22" — Revenue £548m > Tranepeth — UTP £26.8m — Margin 4.9% Auckland, New Zealand > ASCE (Wiri Kohuora) Henderson © Adelaide ITA (© Shar
Slide 26: Asia Pacific: FY18 financial performance
Asia Pacific: FY18 financial performance * Revenue decline of -1% organic CFX, or -£6m, to £548m; a tale of two halves: - H1-11% or -£33m: almost entirely accounted for by the end of Armidale Class Patrol Boats ACPB) which was an OCP, and Western Australia Court Security & Custodial Services (WACSCS
Slide 27: Asia Pacific: contract awards
Asia Pacific: contract awards + FY18: £0.5bn or 20% of the Group's order intake DHS and NDIA awards Victoria Police: two new call and web-based support services commenced in January 2019 Hong Kong: manage, operate and maintain the new Lung Shan and Cheung Shan Tunnels that become operational in 2019
Slide 28: Asia Pacific: current pipeline of ~£1bn
Asia Pacific: current pipeline of ~£1bn * Excludes NGHS (which was still recorded in the Group's £5.3bn pipeline at 31 December) * Six other opportunities meeting the external pipeline definition ie new bid (so excludes organic, extension and rebid opportunities), >£10m ACV, Gate 2 or beyond, due fo
Slide 29: Asia Pacific: building on success
Asia Pacific: building on success * Complete and embed our Transformation — IT, HR and Finance largely complete; strengthen remaining support functions — Implement WFM for all eligible employees — Deepen differentiated capabilities, including digitisation and applied technology partnerships * Delive
Slide 30: Summary & Outlook
Summary & Outlook Rupert Soames Group Chief Executive 30 Serco Group ple-2018 Full Year Results serco
Slide 31: Summary
Summary 2018 an inflection point Good trading and financial performance: revenue has ‘bottomed’, UTP +40% at CFX, Underlying EPS +55%, Free Cash Flow turned positive for first time since 2014 £2.9bn order intake; >100% book-to-bill; 80% from outside the UK; order book increased to £12.0bn Acquisitio
Slide 32: Q&A
O&A 32 Serco Group ple-2018 Full Year Results serco
Slide 33: 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 34: Appendix — focus on five sectors across four regions
Appendix 2 — focus on five sectors across four regions FY18 revenue mix, including share of JV&As* UK & Asia Middle fm Sector Europe Americas Pacific East Defence 512) 338) Justice & Immigration Transport & © Health @ ©) (28 ) £398m 12% Citizen Services & 218) © £769m 24% Total £1,674m £646m £550m £
Slide 35: Appendix — UK & Europe summary of FY18
Appendix 3 —- UK & Europe summary of FY18 FY18 Revenue Sectors £1,301m CFX change: (£33m) (2%) % of Group Revenue ae FY18 UTP £39.2m CFX change: +£4.1m +12% % of Group UTP (before corp. costs) 30% PT Justice, Immigration, Defence, Health, Citizen Services, Transport * Revenue down: -2% CFX, -4% orga
Slide 36: Appendix — Americas summary of FY18
Appendix 4— Americas summary of FY18 FY18 Revenue Sectors Defence, Citizen Services, Transport £646m * Revenue down: -3% CFX, -5% organic (ie excluding BTP). £33m organic reduction, driven by £54m from lower volumes and new contracts structure for CMS, and fewer US Navy ship modernisation task order
Slide 37: Appendix — AsPac summary of FY18
Appendix 5 — AsPac summary of FY18 FY18 Revenue Sectors £548m CFX change: +£1m 0% % of Group Revenue x FY18 UTP £26.8m CFX change: +£6.1m % of Group UTP (before corp. costs) Justice, Immigration, Defence, Health, Citizen Services, Transport . Revenue flat: 0% CFX, -1% organic (ie excluding buy-out o
Slide 38: Appendix — Middle East summary of FY18
Appendix 6 — Middle East summary of FY18 FY18 Revenue Sectors £342m CFX change: +£3m +1% % of Group Revenue FY18 UTP Transport, Defence, Health, Citizen Services £21.5m CFX change: +£5.2m +30% % of Group UTP (before corp. costs) * Revenue modestly up: +1% CFX; volume growth in transport operations;
Slide 39: Appendix — costs analysis
Appendix 7 — costs analysis * Cost challenge: to match significant revenue reduction with an equivalent reduction in total costs — Ensuring direct costs volume-adjust for contract attrition and disposal impacts — Targeting shared service and overhead costs to also volume-adjust, or pursue approximat
Slide 40: FY13 FY14 FY15
FY13 FY14 FY15 FY16 FY17 FY18 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 31/12/18 250 200 150 100 50 0 (50) (100) (150) (200) (250) Key: Net debt 365-day average, indexed Difference between
Slide 41: Appendix — cash flow breakdown
Appendix 9 — cash flow breakdown 1 & breakdown 2 fm FY18 FY17 HY18 Breakdown 1 — depreciation, amortisation and impairment Depreciation 19.5 20.9 10.7 Amortisation (non-acquisition) 18.6 21.4 9.6 Depreciation and amortisation 38.1 42.3 20.3 Impairment of intangible assets 0.1 - - Impairment/(reversa
Slide 42: Appendix - cash flow breakdown
Appendix 10 - cash flow breakdown 3 fm FY18 FY17 HY18 Breakdown 3 - cash flow and net debt exceptional items Restructuring and costs related to Strategy Review (32.3) (18.7) (15.2) Break and exit costs re residual UK private sector BPO operations - (1.8) - Costs re legal claims previously provided f
Slide 43: Appendix — leverage covenant calculation
Appendix 11 — leverage covenant calculation fm FY18 FY17. HY18LTM Trading Profit 116.7 45.1 56.5 Exclude: share of joint venture and associate post-tax profits (28.8) (27.0) (27.4) Exclude: foreign exchange credit on investing and financing arrangements (0.2) 0.4 0.3 Include: dividends from joint ve
Slide 44: Appendix — interest cover covenant calculation
Appendix 12 — interest cover covenant calculation fm FY18 FY17. HY18LTM Net finance costs (13.9) (11.2) (10.1) Exclude: foreign exchange credit on investing and financing arrangements 0.2 (0.4) (0.3) Exclude: net interest receivable on retirement benefit obligations (0.8) (3.8) (2.6) Exclude: moveme
Slide 45: Appendix — balance sheet summary
Appendix 13 — balance sheet summary fm FY18 FY17 HY18 Goodwill 579.6 551.3 567.0 Other intangible assets 67.3 66.7 64.3 Property, plant and equipment 64.8 61.3 63.3 Contract assets, trade and other receivables 574.1 569.3 635.5 Inventories 22.9 17.4 20.8 Interest in joint ventures and associates 20.
Slide 46: Appendix - Return on Invested Capital (ROIC)
Appendix 14 - Return on Invested Capital (ROIC) fm FY18 FY17 HY18 Invested capital assets 1,329.3 1,285.7 1,370.8 Invested capital liabilities (603.9) (584.9) (610.9) Invested Capital (IC) 725.4 700.8 759.9 Average IC (two-point) 713.1 7219 747.2 Trading Profit 116.7 45.1 45.4 Trading Profit for rol
Slide 47: Appendix - FY14 Contract & Balance Sheet Review
Appendix 15 - FY14 Contract & Balance Sheet Review (Note: slide as presented in March 2015) Total impact of Contract & Balance Sheet Review broadly in line with November 2014 expectations All charges represent . necessary revisions to accounting estimates rather than errors arising from prior years
Slide 48: Appendix — FY14 Review items
Appendix 16 — FY14 Review items (Note: slide as presented in March 2015) Onerous Total Total impact of Contract & See ee Balance Sheet Review fm impairments and charges ° profit broadly in line with . . November 2014 Items charged to Trading Loss: expectations OCPs for future year contract losses (4
Slide 49: Appendix — FY14 OCPs and related charges
Appendix 17 — FY14 OCPs and related charges (Note: slide as presented in March 2015) £447m Onerous Contract Provisions (OCPs) represent the estimated cumulative future losses for 2015 to end of contract, and have a future cash flow impact £133m of related impairments and charges, non-cash one contac
Slide 50: Appendix — FY17 provisions movement
Ap pendix 18 — FY17 provisions movement (Note: slide as presented in February 2018, prior to IFRS15 restatement) Overall net provision movement was in line with expectations for FY17 Contract & Balance Sheet Review OCPs originally charged in FY14 of £447m; OCPs liability reduced to £168m by end of F
Slide 51: Appendix — FY18 provisions movement and future profile
Appendix 19 — FY18 provisions movement and future profile Contract & Balance Sheet Review OCPs originally charged in FY14 of £447m; OCPs liability reduced to £82m by end of FY18 OCP movements in FY18 better than expected, with utilisation of £52m and a £13m net release Onerous Employee, Total contra
Slide 52: Appendix — pension assets mix and IAS valuation
Appendix 20 — pension assets mix and IAS 19 valuation ~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 opposi
Slide 53: Appendix — Pensions very strong funding position further de-risked
Appendix 21 — Pensions very strong funding position further de-risked (Note: slide as presented in February 2018) * Serco has pension schemes with gross assets of ~£1.4bn; SPLAS is the main DB scheme * Long term objective of eliminating balance sheet and cash flow risks in a cost effective manner —
Slide 54: Appendix 22 — Pension 'buy-in' impact
App (Note: slide as presented in February 2018) The premium paid for the bulk annuity was £12m less than the valuation of the transferred liabilities under the actuarial approach (equivalent to gilts +40bps) IAS19 surplus reduces (non-cash reserves movement) as liabilities discounted at equivalent o
Slide 55: Appendix — currency rates
Appendix 23 — currency rates Spot rate for FY19e | Average rates Closing rates 30 Jan 31 Dec 30Jun 31Dec 30Jun 31Dec 30Jun 2019 | FY18 HY18 FY17_ HY17_ FY16 HY16] 2018 2018 2017 2017 2016 2016 £:US$ 1.32] 134 1.38 1.29 1.26 1.37. 144) 1.28 1.31 1.35 1.30 1.23 1.35 £:Aus$ 184] 178 178 169 168 184 1.9
Slide 56: Appendix - American Depository Receipt (ADR) program
Appendix 24 - 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 e USD-denominat
Slide 57: Slides from Capital Markets Event 13 December 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 57 Serco Capital Markets Event 2017 serco
Slide 58: Introduction
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 * Hire new management * Develop strategy and plan * Identify issues * Undertake Contract
Slide 59: Introduction steps to achieving our trading margin ambition
Introduction 3 steps to achieving our trading margin ambition Confidence in Status operational . performance and update: rebid plans; margin benefit is back-end weighted OCP contracts expire and revenue falls out. ~50% estimated to be retained but at appropriate positive margin On track with cost re
Slide 60: Savings to date and current cost base
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 ~23% of overheads and CSS costs * Within this, we will have achieved our FY17 target of ~£20m savings
Slide 61: Transformation to Growth
Transformation to Growth Values... Justice & Immigration Purpose... Citizen Services "4 Forces”: long-term structural growth drivers... Voters unwilling to tolerate Deliverables... higher taxation nce public income and , and reduce debt Rising expectations of service quality Growing population and i
Slide 62: Serco
Serco www.serco.com Serco Group ple Serco House 16 Bartley Wood Business Park Bartley Way, Hook Hampshire RG27 9UY United Kingdom For general enquiries contact: T: +44 (0) 330 109 8628 E: generalenquiries@serco.com