REG - Serco Group PLC - Guidance increased following good first half

SercoAnnouncement

27/06/2024 07:00

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RNS Number : 0559U  Serco Group PLC  27 June 2024

Full year guidance increased following good progress in first half

27 June 2024

 

Serco today provides its scheduled closed period update of trading for the
first six months of 2024, together with updated guidance for 2024 as a whole.

 

Highlights of expected first half performance

 ·             Revenue: Around £2.4bn, in line with expectations.
 ·             Underlying operating profit: Ahead of plan at approximately £140m, with
               progress in improving productivity and the underlying performance of our
               portfolio delivering a margin of around 5.8%.
 ·             Share buyback: ~£60m of £140m share buyback programme expected to be
               completed by the end of June.
 ·             Strong financial position: Adjusted net debt expected to be around £135m,
               leverage approximately 0.6x net debt to EBITDA.
 ·             Upgraded guidance for 2024: Underlying operating profit guidance increased by
               £10m, or 4%, to £270m, and we now expect free cash flow will be better and
               financial leverage lower than prior guidance.

 

Commenting on today's update, Mark Irwin, Serco Group Chief Executive, said:

 

"We have delivered a good performance in the first half, with progress in
improving productivity and the underlying performance of our portfolio
allowing us to increase our profit guidance for the full year by £10m, or
4%.  We now expect underlying operating profit of approximately £270m, 9%
higher than 2023, with margins increasing by around 50 basis points.

 

We continue to explore new ways to bring together the right people, the right
technology and the right partners to help governments around the world respond
to the complex and difficult challenges they face.  As we enter the second
six months of the year, while mindful of a potential impact internationally
from elections in 2024, we remain optimistic about the quality of our pipeline
of potential new work to support our medium-term growth targets."

 

Expected outcome for the first half of 2024 and guidance for the full year

 

Revenue:  Group revenue is in line with expectations at around £2.4bn, which
is 4% lower than the £2.5bn reported in the first half of 2023.  We see
continued growth in our international immigration services platform, supported
by the acquisition of European Homecare in early March, despite some reduced
volume variable work in Australia.  Along with growth in defence and justice,
this has partially offset declines in other areas, in particular lower revenue
from the new Centers for Medicare & Medicaid Services (CMS) contract and
our previously announced exit from some low margin contracts in the UK.  On
an organic basis, revenue is expected to be 4%-5% lower, while acquisitions
should contribute 2% and currency is a 2% drag.

 

The first half performance and our visibility of the second half means we are
on track to meet our revenue guidance for the full year.  We continue to
expect revenue of around £4.8bn, slightly below the £4.9bn outturn for 2023,
with a 3% organic contraction, a 2% contribution from acquisitions and a 1%
adverse impact from currency.  The organic revenue contraction will ease in
the second half as CMS and contract exit impacts reduce.

 

Underlying operating profit:  We expect first half underlying operating
profit to be better than plan at approximately £140m, which compares with
£148m delivered in the same period last year.  Currency is expected to have
an adverse impact of 2%, leaving a constant currency decline of 3%.  The
lower profit is due to the new CMS contract, immigration volumes in Australia,
mobilisation costs on new work, and the prior year benefiting from a £6m one
off settlement.  Our focus on productivity and improving the underlying
performance of our portfolio, which we discussed in our 2023 full year
results, has seen good progress at this early stage, and this has contributed
to the margin being ahead of our expectations.

 

The first half performance supports increasing our profit guidance for the
full year by £10m, or 4%.  Second half profit is therefore expected to be
nearly 30% higher than the same period in 2023.  The year overall will
benefit from new contracts ramping up, operational efficiency improvements
across the existing portfolio and a contribution from acquisitions.  We now
expect underlying operating profit of approximately £270m, 9% higher than
2023, with margins increasing by around 50 basis points.

 

Financial position:  We expect adjusted net debt to be around £135m at the
end of June and leverage approximately 0.6x net debt to EBITDA.
Approximately £60m of our £140m share buyback will have been completed in
the first half.

 

For the full year, we now expect free cash flow will be better and financial
leverage lower than prior guidance.  Free cash flow is expected to be
£150m.  This is below 2023, as the prior year included the benefit of
actions taken to structurally improve our working capital.  Trading cash
conversion is expected to be consistent with our medium-term target of
converting at least 80% of profit into cash.  Adjusted net debt is expected
to end the year at around £165m, £10m better than previous guidance, meaning
we now expect net debt to EBITDA to be approximately 0.6x.

 

 Guidance                       2023                          2024
                                Actual   Prior guidance           New guidance
 Revenue                        £4.9bn   ~£4.8bn                  ~£4.8bn
 Organic sales growth           4%       ~(3)%                    ~(3)%
 Underlying operating profit    £249m    ~£260m                   ~£270m
 Net finance costs              £25m     ~£35m                    ~£35m
 Underlying effective tax rate  23%      ~25%                     ~25%
 Free cash flow                 £209m    ~£140m                   ~£150m
 Adjusted net debt              £109m    ~£175m                   ~£165m

 

NB: The guidance uses an average GBP:USD exchange rate of 1.27 in 2024,
GBP:EUR of 1.17 and GBP:AUD of 1.92.  We expect a weighted average number of
shares in 2024 of 1,065m for basic EPS and 1,085m for diluted EPS.

 

 

 

Ends.

 

 

For further information, please contact:

 

Paul Checketts, Head of Investor Relations | +44 (0) 7718 195 074 |
paul.checketts@serco.com

Scot Marchbank, Group Communications and Marketing Director; tel +44 (0) 7958
675 706 or email: scot.marchbank@serco.com

 

 

About Serco

Serco brings together the right people, the right technology and the right
partners to create innovative solutions that make a positive impact and
address some of the most urgent and complex challenges facing the modern
world.

 

With a primary focus on serving governments globally, Serco's services are
powered by more 50,000 people working across defence, space, migration,
justice, healthcare, mobility and customer services.

 

Serco's core capabilities include service design and advisory, resourcing,
complex programme management, systems integration, case management,
engineering, and asset & facilities management.

 

Underpinned by Serco's unique operating model, Serco drives innovation and
supports customers from service discovery through to delivery.

 

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" or, in
each case, their negative or other variations or comparable terminology
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
(including under the UK Listing Rules and the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority), 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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