Serco Group Plc · LSE:SRP
Serco — H1 2020 Earnings Presentation
45 slides from Serco's earnings presentation, Aug 6, 2020
Slide 1: 2020 Half Year Results
serco 2020 Half Year Results For the six months ended 30 June 2020 Serco Group plc
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 Rupert Soames O&A p a Angus Cockburn Serco Group ple - 2020 Half Year Results serco w
Slide 4: Overview
Overview Rupert Soames Group Chief Executive 4 Serco Group ple- 2020 Half Year Results serco
Slide 5: Guidance reiterated after strong first half
Guidance reiterated after strong first half * Strong financial and operational performance — Revenue £1,822m, up +24% at CFX; +15% organic; +9% from NSBU acquisition — Underlying Trading Profit of £77.6m, up +53% at CFX; margin increased from 3.4% to 4.3% — ~15,000 people recruited to support govern
Slide 6: Profit: ~27% CAGR 2017-20
Profit: ~27% CAGR 2017-20 Revenue: 8% 2019 organic, ~9% 2020 fm UTP ~£143m Mid-point of guidance 160 ~3.9% margin £120m 0 £93m 3.7% margin 3 : £69m 3.3% margin 80 2.3% margin 40 FY17 FY18 FY19 FY20e * Inthe “Grow” stage of the strategic plan * Strong revenue and UTP growth anticipated in 2020, despi
Slide 7: Financial Review
Financial Review Angus Cockburn Chief Financial Officer 7 Serco Group ple 2020 Half Year Results serco
Slide 8: Income Statement — Revenue and Trading Profit
Income Statement — Revenue and Trading Profit fm HY20 HY19 FY19 Revenue excludes share of JV&A revenue Revenue 1,822 1,476 3,248 Trading Profit measures Trading profit 80.5 50.6 133.4 include share of JV&A PAT Exclude: Contract & Balance Sheet Review items (2.9) - (13.2) Contract @ Balemes Snack Und
Slide 9: Revenue divisional analysis
Revenue divisional analysis UK&E, Americas and AsPac all delivered good growth UK&E-AASC contract and Covid-19 work Americas — FEMA, Field Office Support and CMS AsPac — growth from AHSC and Citizen Services Middle East — decline due to Covid-19 impact on transport portfolio Revenue - growth composi
Slide 10: Underlying Trading Profit (UTP) divisional analysis
Underlying Trading Profit (UTP) divisional analysis UTP increase led by Americas and UK&E UK&E improvement driven by AASC contract moving from mobilisation to operational phase Americas driven by NSBU acquisition (£10m) plus high activity in CMS and FEMA contracts AsPac growth supported by AHSC Midd
Slide 11: Income statement — EPS and DPS
Income statement — EPS and DPS fm HY20 HY19 FY19 Net finance costs higher Underlying Trading Profit (UTP) 77.6 50.6 120.2 due to increased interest Net finance costs (NFC) (12.7) (10.5) (21.8) on lease liabilities Underlying PBT 64.9 40.1 98.4 Effecti Tax on UTP and NFC (17.0) (9.8) (24.4) increased
Slide 12: Exceptional items
Exceptional items Net exceptional credit of £13m Exit of Viapath JV is biggest component with gain on disposal and loan repayment This year saw no exceptional restructuring costs (2019: £5.4m), marking the end of our exceptional restructuring programme fm HY20 HY19 FY19 Exceptional (loss)/profit on
Slide 13: Dividends
Dividends * Background to Board's recommendation of resuming dividends in respect of FY19 — Followed very strong operational and financial performance — 2019 was also the last year of significant outflows on OCPs and cash exceptionals — Expectations were for increased underlying earnings and reducin
Slide 14: Free cash flow and trading cash flow
Free cash flow and trading cash flow Free Cash Flow was £32m excluding tax deferrals Capital repayment of lease liabilities higher than depreciation due to AASC contract Working capital had £45m benefit from tax deferrals FCF step up due to improved profitability and reduced OCP utilisation Average
Slide 15: Net debt and leverage
Net debt and leverage HY19 is presented on a pro forma basis to exclude the £139m net proceeds of the Equity Placing £143m closing adjusted net debt compares to a daily average of £283m (2019 £219m) Average and closing net debt difference due to: Mobilisation of Covid-19 work in advance of payment,
Slide 16: Guidance for 2020
Guidance for 2020 Revenue £3.2bn ~£3.7bn Organic sales growth 8.2% ~9% Underlying trading profit £120m £135m-£150m Net finance costs £22m ~£27m Underlying effective tax rate 24.8% ~25% Free cash flow +£62m Broadly similar to 2019 Adjusted net debt £215m ~£200m NB. Full year cash flow and net debt gu
Slide 17: Operational review
Operational review Rupert Soames Group Chief Executive 17 Serco Group ple 2020 Half Year Results serco
Slide 18: HY20 highlights & lowlights
HY20 highlights & lowlights Highlights Lowlights * Response to Covid-19 (see following slides) + People, systems, processes prove to be scalable and agile; business and management model “fit for purpose” — Call centres: from Ugly Duckling to Belle of the Ball + Extremely strong financial performance
Slide 19: • • • • • • • • • • • • • •
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Slide 20: Absence trends - UK
Absence trends - UK Almost back to normal: 7.2%, of which 2.3% Covid-19 related 27.8% 15.8% 14.8% 3.0 3.4 2.5 7.2% 1.6 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Current mg Employees Absent ‘000 ——% of Headcount Absent 20 Serco Group ple ~ 2020 Half Year Results serco
Slide 21: Covid-19 has been a huge test of Serco's operational capability
Covid-19 has been a huge test of Serco’s operational capability Each sector presents different challenges Questions: by sector * Hospitals: what PPE? What shifts? What cleaning regimes? Food supplies? * Prisons: Lock down? Visitors? Control & Restraint? * Transport: to run or not to run? How much ca
Slide 22: Covid-19 has been a huge operational test for both Serco & governments
Covid-19 has been a huge operational test for both Serco & governments Setting priorities “Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can to protect our employees from harm and our shareholders from loss” Trading Update 2"4
Slide 23: Covid-19 will be net positive for our relationship with governments
Covid-19 will be net positive for our relationship with governments Long-term impact * Four Forces will speak with louder voice:- — Governments will have more debt — Citizens will be more aware of the importance of public services — Deficits will have to be stabilised — Increased taxation will conti
Slide 24: UK & Europe summary of HY20
UK & Europe summary of HY20 HY20 Revenue Sectors Justice, Immigration, Defence, Health, Citizen Services, £784m Transport * Revenue +19% organic CFX change: +£126m — Growth driven by: AASC contracts and additional Covid-19 work +19% — Negatives: Leisure, Northern Isles Ferry, some lost healthcare wo
Slide 25: Americas summary of HY20
Americas summary of HY20 HY20 Revenue Sectors Defence, Citizen Services, Transport £542m + Revenue +46%: +36% NSBU, +8% organic, +3% FX CFX change: — NSBU +36%: Acquisition performing in-line with our expectations +£159m — Organic +8%: main contributors new FEMA contract, PBGC and +43% temporary upl
Slide 26: AsPac summary of HY20
AsPac summary of HY20 HY20 Revenue Sectors Justice, Immigration, Defence, Health, Citizen Services, Transport £332m P + Revenue +19%: +25% organic, -6% FX +£70m — Organic growth driven by: strong growth in our Healthcare, Citizen +25% Services and Justice & Immigration sectors. Largest contributor A
Slide 27: Middle East summary of HY20
Middle East summary of HY20 HY20 Revenue Sectors Transport, Defence, Health, Citizen Services £4 65m + Revenue -1%: -2% organic, +1% FX — Covid-19: Largest negative impact from Covid-19; sudden reduction in activity in parts of the transport portfolio and limited Covid-19 response work to act as a c
Slide 28: Summary & outlook
Summary & outlook Rupert Soames Group Chief Executive 28 — Serco Group ple - 2020 Half Year Results serco
Slide 29: Summary and Outlook
Summary and Outlook * Very strong operational & financial performance * Serco people, processes, systems, strategic positioning and “Loose-Tight” business model have responded well to unprecedented scale of challenges presented by Covid-19 * We will revisit in Q4 decision on final dividend, withdraw
Slide 30: Q&A
O&A 30 Serco Group ple- 2020 Half Year Results serco
Slide 31: 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 32: Appendix — focus on five sectors across four regions
Appendix 2 — focus on five sectors across four regions HY20 revenue mix, including share of JV&As* UK & Asia Middle fm Sector Europe Americas Pacific East Defence (233) @ Justice & Immigration 179) oS ® oS £320m 16% Citizen Services (310) (136) (73) (45) £564m 28% Total £971m £542m £332m £165m £2,01
Slide 33: Net debt 365-day average chart
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 £250m £200m £150m £100m £50m £0m (£50m) (£100m) (£150m) (£200m) (£250m) Key:
Slide 34: Appendix — cash flow breakdown
Appendix 4 — cash flow breakdown 1 & breakdown 2 fm HY20 HY19 FY19 Breakdown 1 — depreciation, amortisation and impairment Depreciation (excluding lease assets) 78 6.9 15.3 Amortisation (non-acquisition) 75 9.4 18.1 Depreciation and amortisation 15.33 16.3 33.4 Impairment of PPE (excluding lease ass
Slide 35: Appendix — cash flow breakdown
Appendix 5 — cash flow breakdown 3 fm HY20 HY19 FY19 Breakdown 3 - cash flow and net debt exceptional items Restructuring and costs related to Strategy Review (1.1) (11.1) (19.2) SFO fine and investigation costs - - (22.9) Other costs re UK government reviews (0.1) (1.0) (2.2) Acquisition costs re N
Slide 36: Appendix — leverage covenant calculation
Appendix 6 — leverage covenant calculation fm HY20LTM HY19LTM FY19 Trading Profit 163.3 121.9 133.4 Exclude: share of joint venture and associate post-tax profits (21.0) (27.3) (27.5) Exclude: foreign exchange credit on investing and financing arrangements (0.1) (0.9) (0.8) Include: dividends from j
Slide 37: Appendix — interest cover covenant calculation
Appendix 7 — interest cover covenant calculation fm HY20LTM HY19 LTM FY19 Net Finance Costs (24.0) (18.1) (21.8) Exclude: Finance charge on lease obligations recognised under IFRS16 9.1 2.2 6.6 Exclude: foreign exchange credit on investing and financing arrangements 0.1 0.9 0.8 Exclude: net interest
Slide 38: Appendix — balance sheet summary
Appendix 8 — balance sheet summary fm HY20 HY19 FY19 Goodwill 710.3 581.4 674.2 Other intangible assets (excluding leased assets) 91.3 58.5 96.5 Property, plant and equipment (excluding leased assets) 58.6 40.4 47.3 Contract assets, trade and other receivables 702.9 623.3 633.9 Inventories 20.3 18.9
Slide 39: Appendix — Return on Invested Capital (ROIC)
Appendix 9 — Return on Invested Capital (ROIC) fm HY20 HY19 FY19 Invested capital assets 1,603.0 1,343.6 1,531.3 Invested capital liabilities (701.3) (618.1) (667.2) Invested Capital (IC) 901.7 725.5 864.1 Average IC (two-point) 813.6 730.0 782.7 Trading Profit 80.5 50.6 133.4 Trading Profit for rol
Slide 40: Appendix — pension assets mix and IAS valuation
Appendix 10 — pension assets mix and IAS 19 valuation SPLAS, the main Group scheme, represents 90%+ of total assets and liabilities; ~90% of SPLAS assets historically allocated to LDls June 2017 ‘buy-in’: assets transferred to purchase a bulk annuity policy covering ~45% of SPLAS members Insurer fun
Slide 41: Appendix - currency rates
Appendix 11 - currency rates Spot rate for FY20e Average rates Closing rates 30 Jun 30 Jun 31Dec 30Jun 31 Dec 30Jun 31 Dec 2020 |} HY20 ~FY19 HY19 FY18 HY18 FY17{ 2020 2019 2019 2018 2018 2017 £:US$ 1.23 | 1.27 1.28 1.230 1.34 1.38 1.29 1.23, 1.32 1.27 1.28 1.31 1.35 £:Aus$ 179] 1.94 183 1.83 1.78 1
Slide 42: Appendix — Tax
Appendix 12 — Tax HY20 Underlying ETR increased slightly due to geographic mix Expect ETR to be ~25% in FY20 and remain at this level Cash tax rate higher than ETR due to timing differences re tax deductions UK deferred tax asset available to offset against future taxable profits HY20 underlying tax
Slide 43: Appendix - contract nature and inflation mitigation
Appendix 13 - contract nature and 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” reve
Slide 44: Appendix 14 — American Depository Receipt (ADR) program
Appendix 14-— American Depository Receipt (ADR) program Serco Group has a sponsored Level 1 ADR program, for which Deutsche Bank act as the depositary bank and custodian Ticker: SCGPY ADR key benefits Exchange: OTC ¢ Convenient means of trading/holding foreign shares CUSIP: 81748L209 e USD-denominat
Slide 45: Serco House Bartley Wood Business Park
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)1256 745900 E: generalenquiries@serco.com Serco