REG - Serco Group PLC - Closed period trading update

SercoAnnouncement

15/12/2022 07:00

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RNS Number : 7621J  Serco Group PLC  15 December 2022

Closed period trading update; 2022 slightly ahead of previous guidance, 2023
expected to be in-line with consensus.

 

15 December 2022

 

Serco today provides its scheduled closed period update of trading for the
2022 financial year, together with its initial outlook for 2023.

 

Highlights

 ·    Revenue: expected to be around £4.5bn in 2022, slightly above 2021,
 despite a reduction of £480m of Covid-related revenues.  Revenue excluding
 Covid and currency expected to grow 10%.
 ·      Underlying Trading Profit: expected to be around £235m, up £5m
 on previous guidance.
 ·     Order intake: expected to be at least £4.0bn in 2022.  Our North
 American Defence business has had a particularly strong year for order intake.
 ·  Strong financial position: Adjusted Net Debt expected to be around
 £220m at year end, 0.8x net debt:EBITDA.
 ·    Employee support: significant pay increases and additional one-off
 payments made in 2022 to help with increased living costs, as well as further
 financial and non-financial support.
 ·    Initial guidance for 2023: Underlying Trading Profit expected to be
 similar to 2022 at around £235m, in line with analysts' consensus*.

 

Commenting on today's update, Rupert Soames, Serco Group Chief Executive,
said:

 

"2022 will turn out much better than we expected at the start of the year as
strong growth across the business largely replaced Covid contracts.  Revenue
is expected to be 8% higher and Underlying Trading Profit around 20% better
than we anticipated when we first gave guidance in December 2021.  To deliver
this in the midst of such a challenging geo-political and economic backdrop
underlines the strength of our business-to-government platform.  Customers
across the world continue, as they did during the pandemic, to turn to Serco
as a trusted and capable partner to help them deal with the challenges they
face delivering public services.

 

I will be retiring from the Board and standing down as Group Chief Executive
at the end of December, so this is the last trading update I will give as
Chief Executive of a public company, in which capacity I have served for
nearly twenty years.  Throughout that time, I have been privileged to lead
teams of outstandingly capable people who are deeply committed to the work
that they do and who take responsibility for making a difference.  They have
my respect and gratitude, and that of their customers and shareholders on
whose behalf they work so hard.

 

As announced on 12 September, Mark Irwin, currently CEO of Serco's UK &
Europe business, will join the Board and become Serco Group Chief Executive on
1 January, and I am delighted that the Board has chosen such an outstanding
executive and close colleague as my successor."

 

Expected outcome for 2022

 

Revenue.  Reported revenue for the year is expected to be around £4.5bn in
2022, slightly above 2021, despite the significant negative effect of our
Covid-19 work coming to an end.  The loss of Covid-related services is
anticipated to reduce revenue by 11% (£480m).  This is partially offset by
organic growth of around 6% in the rest of the portfolio, largely as a result
of volume growth on existing contracts, and acquisitions should contribute
3%.  Favourable currency movements will add 4%.

 

The second half is expected to see an organic revenue contraction of 6%, with
a £260m, or 11%, drag from Covid and growth of 5% in the rest of the
business.  Strong demand for immigration related services, one of the reasons
for our upgrade to guidance earlier in the year, has continued in the UK,
whilst moderating in Australia as Covid restrictions are relaxed.  Revenues
in North America are expected to decline organically in the second half as a
result of the seasonality of case management work and reduced volumes on the
CANES Navy fleet IT modernisation programme.  Volumes on our VIVO joint
venture, which delivers asset and facilities management services to the UK
Defence Infrastructure Organisation increased significantly in the fourth
quarter, following mobilisation at the beginning of the year.  However, as a
JV, these increased volumes do not flow through to revenue, but are reflected,
post tax, in Underlying Trading Profit.

 

Underlying Trading Profit (UTP).  We currently expect UTP of around £235m,
or 3% above 2021.  Reduced Test & Trace work and the ending of our AWE
contract in June 2021 together reduced profit by around £65m, or nearly 30%
of prior year UTP.  Underlining the resilience of our business, these impacts
have been offset by increased demand for immigration services, strength in our
case management work in North America as well as the positive effect of new
work secured in 2021 such as the DWP Restart Programme and the Defence
Infrastructure Organisation (VIVO JV) contracts.  There are a number of
commercial items still in the process of being settled before accounts for
2022 are finalised, the most material of which is a debtor in the Middle East;
for the purposes of this guidance, we are assuming this matter in particular
will be resolved in our favour in the coming weeks.  Inflation-protection
mechanisms in our contracts performed as expected during the year.

 

The first half of the year saw UTP increase by 6% year-on-year, while the
second half, as expected, is likely to see a 1% reduction.  In the second
half we made £9m of one-off payments to our colleagues outside management
grades, reflecting the pressure many people, particularly the lower paid, are
under at this time due to high inflation.  The period had the largest
negative impact from Test & Trace ending, with it being the first period
since 2019 to have no such work.  Excluding Test & Trace, the UK has
delivered strong growth.  The profit margin in the US business will be lower
in the second half due to the seasonality of case management work, which tends
to be heavily first-half weighted.

 

Net finance costs and tax: net finance costs are expected to be around £22m,
slightly lower than 2021.  The underlying effective tax rate is expected to
be around 24%, which is unchanged from guidance we gave in August.  This is
lower than the initial guidance of 25% and our expectation for 2023, as the
first half of 2022 benefited from a reduction in provisions following a review
of tax positions.

 

Financial position: free cash flow is expected to remain strong at around
£140m, with underlying trading profit cash conversion continuing to be above
80%.  We expect Adjusted Net Debt to end the year at around £220m, which
updates prior guidance to include the acquisition in September of ORS; net
debt to EBITDA at the year-end is expected to be 0.8x.  The £90m share
buyback announced at the full year results in February has been completed, and
the number of shares in issue at the end of the year will be 5% lower than at
the start.  In the second half of the year, we successfully refinanced our
revolving credit facility for a five-year term.

 

Guidance for 2022 and 2023

                                2022                           2023
                                Prior guidance   New guidance  Initial guidance
 Revenue                        £4.3bn-£4.4bn    ~£4.5bn       At least £4.6bn
 Organic sales growth           ~(5)%            ~(5)%         ~0%
 Underlying Trading Profit      ~£230m           ~£235m        ~£235m
 Net Finance Costs              ~£23m            ~£22m         ~£25m
 Underlying effective tax rate  ~24%             ~24%          ~25%
 Free Cash Flow                 ~£140m           ~£140m        ~£120m
 Adjusted Net Debt              ~£190m           ~£220m        ~£130m

 

NB: The guidance uses an average GBP:USD exchange rate of 1.24 in 2022, 1.20
in 2023 and GBP:AUD of 1.78 in 2022, 1.78 in 2023, which is based on currency
rates as 30 November 2022.  We expect a weighted average number of shares for
basic EPS of 1,195m in 2022, 1,162m in 2023 and for diluted EPS 1,220m in
2022, 1,188m in 2023.

* Company-compiled analyst consensus for UTP is £232m in 2022 and £236m in
2023.

 

Outlook for 2023

 

Our initial outlook for 2023 anticipates revenue will increase slightly and
UTP will be similar to 2022.  We expect some known headwinds to be
compensated for by increased contribution from newer contracts ramping up and
improvement across the existing portfolio. We expect to enter 2023 with a
strong pipeline of new business opportunities.

 

Revenue: the outturn for revenue will be affected by inflation-related
adjustments on contracts, which, given macro-economic volatility, is hard to
predict at this point.  However, we have planned on the basis that revenue in
2023 will be at least £4.6bn, which would be 2% higher than the £4.5bn
expected outturn for 2022 on a reported basis and stable organically.  We
expect the negative impact of Test & Trace and other contracts ending or
reducing in size, to be offset by new business wins.

 

Underlying Trading Profit: UTP is expected to be around £235m, similar to
2022.  The year will benefit from the annualisation of new contracts from
2022, continued ramp up of the VIVO and Restart contracts, efficiency
improvements across the existing portfolio and the exit from our loss-making
Barts Health FM contract.  These should offset the drag from Test &
Trace, known contract losses, the initial impact of our CMS rebid and at least
£8m of mobilisation costs in the first year of our contract to run HMP Fosse
Way, a new prison in the UK.  In our budgeting we assumed cost inflation of
around 4%.  The inflation protection in our contracts means we would not
expect a material impact on UTP if the actual rate differs from this.

 

Net finance costs and tax: Net finance costs are expected to be around £25m.
This is slightly higher than 2022 due to higher lease-related interest, the
currency impact on our dollar-denominated debt and higher interest rates on
the portion of our debt that is floating.  The underlying effective tax rate
is expected to be around 25%, although this is sensitive to the geographic mix
of our profit and any changes to current corporate tax rates.

 

Financial position: Free cash flow is expected to be around £120m in the
year. This is lower than 2022, reflecting the timing of new contract
mobilisation costs, but is consistent with our ongoing expectation of
converting at least 80% of profit into cash.  We expect Adjusted Net Debt to
end the year at around £130m.

 

 

Ends

 

For further information please contact:

Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or
email: paul.checketts@serco.com (mailto:paul.checketts@serco.com)

Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email:
marcus.deville@serco.com (mailto:marcus.deville@serco.com)

 

About Serco

Serco is a leading provider of public services. Our customers are governments
or others operating in the public sector.  We gain scale, expertise and
diversification by operating internationally across five sectors and four
geographies: Defence, Justice & Immigration, Transport, Health and Citizen
Services, delivered in UK & Europe, North America, Asia Pacific and the
Middle East.

 

More information can be found at www.serco.com (http://www.serco.com)

 

 

Forward looking statements

This announcement contains statements which are, or may be deemed to be,
"forward-looking statements" which are prospective in nature.  All statements
other than statements of historical fact are forward-looking statements.
Generally, words such as "expect", "anticipate", "may", "could", "should",
"will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" and
similar expressions identify forward looking-statements.  By their nature,
these forward-looking statements are subject to a number of known and unknown
risks, uncertainties and contingencies, and actual results and events could
differ materially from those currently being anticipated as reflected in such
statements.  Factors which may cause future outcomes to differ from those
foreseen or implied in forward-looking statements include, but are not limited
to: general economic conditions and business conditions in Serco's markets;
contracts awarded to Serco; customers' acceptance of Serco's products and
services; operational problems; the actions of competitors, trading partners,
creditors, rating agencies and others; the success or otherwise of partnering;
changes in laws and governmental regulations; regulatory or legal actions,
including the types of enforcement action pursued and the nature of remedies
sought or imposed; the receipt of relevant third party and/or regulatory
approvals; exchange rate fluctuations; the development and use of new
technology; changes in public expectations and other changes to business
conditions; wars and acts of terrorism; cyber-attacks; and pandemics,
epidemics or natural disasters.  Many of these factors are beyond Serco's
control or influence.  These forward-looking statements speak only as of the
date of this announcement 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 announcement 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 announcement, or to keep current any
other information contained in this announcement.  Accordingly, undue
reliance should not be placed on the forward-looking statements.

 

LEI: 549300PT2CIHYN5GWJ21

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