REG - Serco Group PLC - Serco Group plc 2016 Full Year Results <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
22/02/2017 07:07
- Part 2: For the preceding part double click ID:nRSV4908Xa ten contracts with annual revenue of over £5m within the UK Central Government division; in aggregate, these represent approximately 30% of the current level of annual revenue for the division. The largest of these are the Northern Isles Ferries operations that would become due for potential extension or rebid in 2018, PECS which is now assumed to be rebid in 2019 if further extension options are not exercised by the customer, and COMPASS also in 2019. Our pipeline of major new bid opportunities due for decision within the next 24 months includes the Defence Fire & Risk Management Organisation, the operation of an immigration removal centre, immigration escorting for the Home Office, and the Hades Programme to provide various support services to the Ministry of Defence. Over the longer term, we continue to expect reform and improvement to the prison system, and for further opportunities in Defence and other areas to emerge as the UK Government continues its efforts to save cost and improve public services. UK & Europe Local & Regional Government The UK & Europe Local & Regional Government division (LRG) includes our UK Health and UK and European Citizen Services sectors. The Health business provides primarily non-clinical support services to hospitals; the Citizen Services business provides environmental and leisure services, as well as a wide range of other front, middle and back-office services to Local Authorities, and IT services to European institutions. Revenue for 2016 was £696.5m (2015: £905.8m), a decline of 23%. At constant currency, the organic decline was 25%. The principal drivers of the revenue reduction were: the end of the Suffolk Community Healthcare and National Citizen Services contracts which had previously been heavily loss-making and were not rebid; changes to two health procurement contracts which are continuing but where we no longer recognise as revenue the cost of goods purchased on behalf of our customers; the full-year impact of the early exit from the Thurrock BPO services contract; the ending of certain infrastructure support services to private sector customers; and the reducing scale of the Child Maintenance Group operations. There was limited in-year revenue growth elsewhere to offset the effect of these planned contract ends and reductions. There was an Underlying Trading Loss of £6.5m (2015: profit of £4.7m), representing a margin of -0.9% (2015: +0.5%). There was a reduction in profit contribution from contract attrition, and certain areas of cost investment to deliver longer term efficiencies more than offset other contract profitability improvements and cost savings during the year. In addition, there were £3m of impairments and write-downs on a European agency contract. Within Underlying Trading Profit there was £23m of OCP utilisation (2015: £11m non-exceptional), with the increase reflecting the losses on the Lincolnshire County Council operations as costs peaked with the implementation of the new ERP system; the contract is running broadly in line with expectations and the major elements of the IT implementation are now in service. Contract and Balance Sheet Review adjustments resulted in a £7.4m net charge, reflecting a number of small adjustments in assumptions on OCP contracts. Separately, there was a one-time profit of £3.5m arising from a pension scheme settlement relating to the early exit from the Thurrock Council services in the previous year. After these adjustments and one-time profit, the Trading Loss was £10.4m (2015: Trading Loss of £14.5m). LRG represented around £750m of the Group's aggregate total value of signed contracts during the year. The largest award reflects the initial seven-year value, estimated at £450m, for new services to Barts Health NHS Trust to deliver facilities management services across their hospitals. Of other major new bid pipeline decisions during the year, Serco was unsuccessful on a smaller health facilities management opportunity and two bids for environmental services. Other new but smaller wins included contact centre services for the Department of Work & Pensions. Successful rebids or extensions included: the Anglia Support Partnership healthcare shared services operations; environmental services for Woking Borough, Charnwood Borough and Canterbury City councils; regional employment support services for the Skills Funding Agency; contact centre and digital services support for Public Health England; and our support to institutions such as the European Space Agency and CERN. For 2017, we expect a low-to-mid single digit revenue decline based upon the net effect of known contract wins and losses and other revenue movements including the change to the two health procurement contracts. Growth from the start of the major new contract for Barts is expected to be offset by other reductions. We expect that the division should though make progress on its profitability in 2017, as we see more benefits start to come through from actions to secure sustainable longer term improvements in efficiencies. Of existing work where an extension or rebid will be required at some point before the end of 2019, there are 12 contracts with annual revenue of over £5m within the LRG division; in aggregate, these represent approximately 20% of the current level of annual revenue for the division; this excludes Glasgow ACCESS which is an assumed expiry in March 2018. Our pipeline of major new bid opportunities due for decision within the next 24 months includes further tenders for environmental services and hospital facilities management bids. We continue to evaluate developments in the other sectors of operation within LRG, including other Citizen Services work and to expand our European business providing various operational support to government agencies. AsPac Operations in the Asia Pacific division include Justice, Immigration, Defence, Health, Transport and Citizen Services in Australia, New Zealand and Hong Kong. Serco's operations in Australia are by far the largest element of the division; the country represents approximately 20% of total Revenue for the Group. Revenue for 2016 was £619.7m (2015: £544.7m), an increase of 14%. In Australian dollars, the main currency for operations of the division, revenue for the year was equivalent to approximately A$1,140m (2015: A$1,106m). The movements in local currencies against Sterling increased revenue by £64m or 12%, while the impact of disposals (the Great Southern Rail business disposed in May 2015) reduced revenue by £10m or 2%; the organic growth at constant currency was therefore 4%. There were some increases in revenue in relation to the renegotiation of the Armidale Class Patrol Boat (ACPB) contract as well as scope increases to existing services such as Citizen Services contact centre operations and the expansion of Acacia prison. Revenue from Australian immigration services was broadly flat. Underlying Trading Profit was £24.9m (2015: £11.9m), representing a margin of 4.0% (2015: 2.2%). The improvement in profitability included: a favourable currency movement of £3m; a loss on the Mount Eden Correctional Facility contract in 2015 that was offset in 2016 by the subsequent OCP; and progress on cost efficiencies that more than offset other cost and margin pressures. Within Underlying Trading Profit there was £12m of OCP utilisation (2015: £20m), with significantly lower losses on the ACPB contract partially offset by increased utilisation on the Mount Eden contract. Contract and Balance Sheet Review adjustments resulted in a £9.3m net release, driven by revised assumptions on the residual period of operation of the ACPB contract, which concludes in 2017. After these adjustments, Trading Profit was £34.2m (2015: £58.8m). AsPac represented around £600m of the Group's aggregate total value of signed contracts during the year. The largest new order, valued at approximately £160m, was to project manage the design and build phase, and subsequently operate, the new 'icebreaker' Antarctic Supply and Research Vessel for the Australian Department of the Environment. There was also the extension of two corrections contracts with the Queensland and Western Australian governments, valued in total at approximately £200m, and the successful rebid of hospital facilities management services in Hong Kong. For 2017, our expectations are an approximate 10% revenue decline on an organic basis, based upon the net effect of known contract wins and losses and other assumed revenue movements. This is driven by the loss of the ACPB, Mount Eden and Western Australia Court Security and Custodial Services contracts. The estimated currency benefit based on current exchange rates would largely offset the forecast organic decline. Of existing work where an extension or rebid will be required at some point before the end of 2019, there are seven contracts with annual revenue of over £5m within the AsPac division; in aggregate, these represent approximately 50% of the current level of annual revenue for the division; this high proportion reflects that the Australia onshore immigration services contract requires rebid or extension at the end of 2019, with this accounting for over 30% of current divisional revenue. Our pipeline of major new bid opportunities due for decision within the next 24 months now includes three prison bids and additional opportunities in case management and defence support services. Looking beyond, further potential opportunities in Justice, Citizen Services, Defence, Transport and non-clinical health services are expected to be developed over time. Middle East Operations in the Middle East division include Transport, Defence, Health and Citizen Services. Revenue for 2016 was £324.8m (2015: £291.4m), an increase of 11%. The strengthening of local currencies against Sterling provided growth of £36m or 12%; the organic decline at constant currency was 1%. There was revenue growth from increased volumes on a defence logistics contract, expanded healthcare support services and at the Dubai Metro; these were broadly offset by reduced revenue on the Dubai Air Navigation Services contract and a small number of other operations reducing in scope or ending. Underlying Trading Profit was £16.6m (2015: £18.9m), representing a margin of 5.1% (2015: 6.5%). There was some improvement in profitability from higher defence logistics volumes and the £1.4m favourable currency movement; these were more than offset by the impact of other contract scope reductions and attrition, together with significant investment in business development and bidding the major rail opportunities in the region. Within Underlying Trading Profit, OCP utilisation was immaterial. Contract and Balance Sheet Review adjustments resulted in a £2.2m net release. After these adjustments, Trading Profit was £18.8m (2015: £27.4m). The Middle East represented over £200m of the Group's aggregate total value of signed contracts during the year. Although no major new bid pipeline decisions were due, smaller awards included a new contract to maintain and support a large part of Dubai Airport buildings and infrastructure, and further contracts for defence base support and healthcare facilities management in the region. Amongst rebids and extensions secured were further extensions for Middle East Logistics and Base Support (MELABS) to the Australian Defence Force in the region, healthcare facilities management in Saudi Arabia and Abu Dhabi, and Baghdad Air Navigation Services. For 2017, there is a relatively modest net effect expected from already known contract wins and losses. However, progress on retaining existing work, and particularly the cost to progress and the outcomes of the major new bid opportunities in the region, will ultimately determine financial performance in the coming year. Of existing work where an extension or rebid will be required at some point before the end of 2019, there are ten contracts with annual revenue of over £5m within the Middle East division; in aggregate, these represent more than half of the current level of annual revenue for the division. There is a high proportion of work to secure in 2019, when the Dubai Metro, MELABS and Cleveland Clinic Abu Dhabi contracts each require extending or rebidding. Our pipeline of major new bid opportunities due for decision within the next 24 months includes three major light rail and tram operations in the region; in aggregate, these represent approximately 30% of the value of the Group's pipeline. There are other smaller opportunities in defence training and support services and in non-clinical health facilities management support in the current pipeline, and the Transport, Defence, Health and other Citizen Services including integrated facilities management continue to be potentially high growth markets in the region. Americas Our Americas division provides professional, technology and management services focused on Defence, Transport, and Citizen Services. The US federal government, including the military, civilian agencies and the national intelligence community, are our largest customers. We also provide services to the Canadian Government and to some US state and municipal governments. Revenue for 2016 at £691.4m was broadly flat (2015: £693.0m). In US dollars, the main currency for operations of the division, revenue for the year was equivalent to approximately US$944m (2015: US$1,061m). The strengthening of local currencies against Sterling increased revenue by £74m or 11%, with the organic decline at constant currency also being 11%. The principal drivers of the revenue reduction were the loss of the rebid for record processing at the National Benefits Centre and the transition back to the customer of the VDOT operations, together with a number of other smaller contract ends, or reductions in the volume of workload or task orders. There was limited growth elsewhere to offset these reductions. Underlying Trading Profit was £43.0m (2015: £44.3m), representing a margin of 6.2% (2015: 6.4%). The decline was driven by contract attrition and areas of cost investment, which was only partially offset by a £4.6m favourable currency movement and other cost efficiencies. Within Underlying Trading Profit there was £9m (2015: £10m) of OCP utilisation on the completed VDOT contract and the Ontario Driver Examination Services contract. Contract and Balance Sheet Review adjustments resulted in a £36.6m net charge. This was driven by the £29.5m revision to estimates of future costs and foreign exchange impacts associated with the existing OCP for the IT systems implementation and ongoing management of the Ontario Driver Examination Services contract; in addition to the increase in the OCP there was an £8.8m charge reflecting a reduction in the accrued revenue balance for the contract. After the Contract and Balance Sheet Review adjustments, Trading Profit was £6.4m (2015: £27.0m). Americas represented over £600m of the Group's aggregate total value of signed contracts during the year. Awards for new work included a US Air Force High Altitude Electromagnetic Pulse (HEMP) Protection of Ballistic Missile Early Warnings Systems radar facility upgrade contract at Thule Air Base in Greenland, and a support contract for the US State of Louisiana Department of Transportation (LADOT) Motorist Assistance Program. Defence task orders awarded during the year, driven by our ship and shore/base modernisation services, totalled over US$260m, which includes expanding our recently awarded support services to the US Naval Facilities Engineering Command (NAVFAC). Our bids to support passport processing for the Department of State and data reporting for the Department of Health and Human Services were unsuccessful. Amongst rebids, Serco secured its operations to continue providing site support services at the 5 Wing Canadian Forces Base in Goose Bay, Canada, valued at C$115m for the initial two-year period. For 2017, our expectations are low-to-mid single digit revenue growth on an organic basis, based upon the net effect of known contract wins and losses and other assumed revenue movements. The estimated currency benefit based on current exchange rates would increase this to potentially 10-15% growth. The outcome for 2017 could however materially change depending on developments affecting our contract supporting the US Affordable Care Act (ACA); these operations accounted for approaching 30% of divisional revenue in 2016, and we currently forecast them to be broadly flat in 2017; whilst margins on this contract are lower than the average for the Division, the contract recovers a material amount of overhead costs and large reductions in chargeable direct labour could create challenges to reduce overheads in line with revenues. At the time of reporting, apart from knowing that under the new Administration changes will be made, there is no consensus in either Congress or the Administration as to what form these changes will take, and what provision will be made for the more than 24 million people who have received health insurance coverage through the ACA. Of existing work where an extension or rebid will be required at some point before the end of 2019, there are eight contracts with annual revenue of over £5m within the Americas division; in aggregate, these represent around 50% of the current level of annual revenue for the division; this high proportion reflects that our contract supporting the ACA requires the final option year to be exercised though to 30 June 2018 and then would be required to be rebid; the Global Installation Contract covering areas of our defence ship modernisation work also requires securing in 2019. Our pipeline of major new bid opportunities due for decision within the next 24 months includes important opportunities to provide various support functions to the US Navy, as well as other bids in transport operational support, Citizen Services processing and immigration services that have been added over the year. Whilst particular uncertainty exists with regard to the future of the ACA potentially in 2017 and more so beyond, under the new US administration other areas of public service support may generate further improvement in market conditions over time. Dan Allen, Chief Executive Officer of the Americas division, has informed the business of his intention to retire from work in mid-2017. Dan joined Serco in 2013 and we thank him for the successful leadership and direction he has provided, and wish him well for the future. Corporate Costs Corporate costs relate to typical central function costs of running the Group, including executive, governance and support functions such as HR, finance and IT. Where appropriate, these costs are stated after allocation of recharges to operating divisions. The costs of Group-wide programmes and initiatives are also incurred centrally. Corporate costs in 2016, before Contract and Balance Sheet Review adjustments, were £43.5m (2015: £51.3m), with the 15% reduction including the benefit of actions taken to deliver savings and improve the efficiency of our overall operating model. Contract and Balance Sheet Review adjustments resulted in a £3.2m net release. After these adjustments, Corporate Costs within Trading Profit were £40.3m (2015: £48.0m). Global Services (discontinued operations) The Global Services division consists of Serco's private sector BPO business, performing middle and back office functions across customer contact, transaction and financial processing. As part of Serco's previously announced strategy to exit non-core markets and to focus on the provision of public services, Serco has been exiting these operations. On 31 December 2015, the transaction to dispose of the majority of the offshore private sector BPO operations was completed; the businesses sold contributed over £300m of revenue and £23m of Underlying Trading Profit in 2015, and were sold for a gross consideration of approximately £250m. There were two smaller associated transactions relating to operations in the Middle East, both of which were completed in 2016. The remaining private sector operations, which are predominantly UK onshore operations, are being exited either by further disposals, transfers, early termination or running-off the contracts over their remaining contractual period. For statutory reporting purposes, the Global Services division is classified as discontinued operations, therefore only the post-tax result of these operations is included as a single line in the reporting of the Group's Income Statement. However, for consistency with previous guidance, Serco's underlying measures include the Revenue and Trading Profit of these discontinued operations. Revenue was £36.8m (2015: £337.6m), with the decline reflecting the disposals and exits in 2015 and 2016. The Underlying Trading Loss for 2016 was £4.6m (2015: Underlying Trading Profit of £14.3m). The loss in 2016 reflects the residual contract losses up to the point of exit together with the effect of 'stranded' shared service centre costs and other overheads previously absorbed by the Global Services division. Within Underlying Trading Profit, there was £3m of OCP utilisation. Contract and Balance Sheet Review adjustments resulted in a £0.8m net release. As the division included assets designated as held for sale, there is a benefit of not charging depreciation and amortisation of £0.5m. After these Contract and Balance Sheet Review adjustments and held for sale benefits, the Trading Loss was £3.3m. Over the course of 2016, we ran ahead of our plans to mitigate the losses and stranded costs, which were initially anticipated to be approximately £10m in 2016. The Freeman Grattan Holdings and BrightHouse contracts together with the associated Sheffield facilities were transferred to a new provider during the first half of the year; the Aegon contract together the associated Lytham St Annes facilities were transferred in the second half. Our only remaining contract is that for direct home shopping company JD Williams. For 2017, no material residual financial effect is therefore forecast. Finance Review For the year ended 31 December 2016£m 2015(restated*)£m Revenue from continuing and discontinued operations 3,047.8 3,514.6 Exclude revenue from discontinued operations (36.8) (337.6) Reported Revenue (continuing activities only) 3,011.0 3,177.0 Underlying Trading Profit* 82.1 95.9 Onerous contract and Balance Sheet Review adjustments 14.2 20.9 Benefit from non-depreciation and non-amortisation of assets held for sale 0.5 11.7 Other one-time items 3.5 9.0 Trading Profit on continuing and discontinued operations* 100.3 137.5 Other expenses - amortisation and impairment of intangibles arising on acquisition (5.1) (4.9) Operating profit before exceptional items on continuing and discontinued operations* 95.2 132.6 Exclude operating loss / (profit) before exceptional items arising on discontinued operations 3.3 (26.5) Operating profit before exceptional items* 98.5 106.1 Exceptional profit / (loss) on disposal of subsidiaries and operations 2.9 (2.6) Other exceptional operating items (59.2) (107.3) Exceptional operating items (56.3) (109.9) Reported operating profit / (loss)* 42.2 (3.8) Investment revenue 9.3 6.1 Finance costs* (21.9) (38.9) Exceptional finance costs - (32.8) Total net finance costs* (12.6) (65.6) Profit / (loss) before tax 29.6 (69.4) Tax on profit before exceptional items (15.8) (17.9) Tax on exceptional items 3.1 0.4 Tax charge (12.7) (17.5) Profit / (loss) for the year from continuing operations 16.9 (86.9) Loss for the year from discontinued operations (18.0) (66.2) Loss for the year (1.1) (153.1) * As explained below, profit measures down to reported operating profit have been restated following the change in accounting policy to exclude foreign exchange movements on investment and financing arrangements, including them instead in net finance costs. For the year ended 31 December 2016 2015 Underlying trading margin from continuing and discontinued operations 2.7% 2.7% Underlying earnings per share from continuing and discontinued operations 4.13p 3.44p Earnings per share before exceptional items from continuing and discontinued operations 6.12p 6.55p Loss per share from continuing and discontinued operations (0.11p) (15.47p) Change in accounting policy for foreign exchange movements on investment and financing activities In order to provide more relevant information about the impact of the underlying transactions of trading operations, the accounting policy regarding the classification of foreign exchange movements on investment and financing arrangements has been changed. These movements are now excluded from Trading Profit and included instead within net finance costs. As a result of this change in accounting policy, the prior year income statement and cash flow statement have been restated, together with the definition of Net Debt which now includes derivatives relating to Net Debt components. The impact of this restatement has been to decrease Trading Profit in the year by £1.2m (2015: decrease by £0.1m), with an equal and opposite impact recognised within net finance costs, decrease Free Cash Flow by £47.0m (2015: decrease by £19.3m), with an equal and opposite impact recognised below Free Cash Flow, and decrease Net Debt by £18.1m (2015: decrease by £14.6m). Alternative Performance Measures (APMs) and other related definitions APMs used by the Group are reviewed below to provide a definition and reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain the purpose and usefulness of each APM. In general, APMs are presented externally to meet investors' requirements for further clarity and transparency of the Group's financial performance. The APMs are also used internally in the management of our business performance, budgeting and forecasting, and for determining Directors' remuneration and that of other management throughout the business. APMs are non-IFRS measures. Where additional revenue is being included in an APM, this reflects revenues presented elsewhere within the reported financial information, except where amounts are recalculated to reflect constant currency. Where items of profits or costs are being excluded in an APM, these are included elsewhere in our reported financial information as they represent actual profits or costs of the Group. As a result, APMs allow investors and other readers to review different kinds of revenue, profits and costs and should not be used in isolation. Other commentary within the preliminary announcement, including the other sections of this Finance Review, as well as the Condensed Consolidated Financial Statements and their accompanying notes, should be referred to in order to fully appreciate all the factors that affect our business. We strongly encourage readers not to rely on any single financial measure, but to carefully review our reporting in its entirety. The methodology applied to calculating the APMs has not changed during the year for any measure, but the APMs do reflect the impact of the prior year restatement. Reported Revenue at constant currency Reported Revenue, as shown on the Group's Condensed Consolidated Income Statement on page 37, reflects revenue translated at the average exchange rates. In order to provide a comparable movement on the previous year's results, Reported Revenue is recalculated by translating non-Sterling values for the year to 31 December 2016 into Sterling at the average exchange rate for the year ended 31 December 2015. For the year ended 31 December 2016£m Reported Revenue at constant currency (continuing activities only) 2,823.0 Foreign exchange differences 188.0 Reported Revenue at reported currency (continuing activities only) 3,011.0 Organic Revenue at constant currency Reported Revenue may include revenue generated by businesses acquired during a particular year and/or generated by businesses sold during a particular year up to the date of disposal. In order to provide a comparable movement which ignores the effect of both acquisitions and disposals on the previous year's results, Reported Revenue is recalculated by excluding the impact of any acquisitions or disposals. For 2016, no adjustment is required as no acquisitions generated third party revenues and all disposals are included in discontinued operations. Therefore organic revenue growth is calculated by comparing Reported Revenue at constant currency with Prior Year Organic Revenue at reported currency. Prior Year Organic Revenue at reported currency is calculated as follows: For the year ended 31 December 2015£m Organic Revenue at reported currency 3,166.6 Impact of any acquisitions or disposals on reported revenue at reported currency 10.4 Reported Revenue at reported currency (continuing activities only) 3,177.0 Revenue from continuing and discontinued operations Reported Revenue, as shown on the Group's Condensed Consolidated Income Statement on page 37, reflects only that from continuing operations, with the post tax result of discontinued operations consolidated as a single line at the bottom of the Condensed Consolidated Income Statement. Discontinued operations reflect the former Global Services division which consisted of our private sector BPO operations. The alternative measure includes discontinued operations for the benefit of consistency with previously reported results and to reflect the overall change in scale of the Group's operations. The alternative measure allows the performance of the discontinued operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the post tax result. For the year ended 31 December 2016£m 2015£m Revenue from continuing and discontinued operations 3,047.8 3,514.6 Exclude revenue from discontinued operations (36.8) (337.6) Reported Revenue (continuing activities only) 3,011.0 3,177.0 Revenue from continuing operations, including share of joint ventures and associates Reported Revenue, as shown on the Group's Condensed Consolidated Income Statement on page 37, excludes the Group's share of revenue from joint ventures and associates, with Serco's share of profits in joint ventures and associates (net of interest and tax) consolidated within Reported Operating Profit as a single line further down the Condensed Consolidated Income Statement. The alternative measure includes the share of joint ventures and associates for the benefit of reflecting the overall change in scale of the Group's ongoing operations, which is particularly relevant for evaluating Serco's presence in market sectors such as Defence and Transport. The alternative measure allows the performance of the joint venture and associate operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the post tax result. For the year ended 31 December 2016£m 2015£m Revenue from continuing operations, including share of joint ventures and associates 3,491.8 3,914.2 Exclude share of revenue from joint ventures and associates (480.8) (737.2) Reported Revenue (continuing activities only) 3,011.0 3,177.0 Trading Profit The Group uses Trading Profit as an alternative measure to Reported Operating Profit, as shown on the Group's Condensed Consolidated Income Statement on page 37, by making three adjustments. Trading Profit is a metric used to determine the performance and remuneration of the Executive Directors. Firstly, Trading Profit excludes exceptional items, being those considered material, non-recurring and outside of the normal operating practice of the Company to be suitable of separate presentation and detailed explanation. Secondly, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on judgements about the value and economic life of assets that, in the case of items such as customer relationships, would not be capitalised in normal operating practice. Thirdly, the Trading Profit of discontinued operations is included, since as with our alternative measure of revenue, this benefits from consistency with previously reported results, reflects the overall change in scale of the Group's operations and takes account of the performance of the discontinued operations themselves. This allows their impact on the Group as a whole to be evaluated on measures other than just the post tax result. For the year ended 31 December 2016£m 2015(restated*)£m Underlying Trading Profit* 82.1 95.9 Include OCP charges and releases 9.6 (3.0) Include Contract and Balance Sheet Review adjustments 4.6 23.9 Include benefit from non-depreciation and amortisation of assets held for sale 0.5 11.7 Include other one-time items 3.5 9.0 Trading Profit* 100.3 137.5 Include operating exceptional items (continuing operations only) (56.3) (109.9) Include amortisation and impairment of intangibles arising on acquisition (5.1) (4.9) Exclude Trading Loss / (Profit) from discontinued operations 3.3 (26.5) Reported Operating Profit / (Loss) (continuing activities only)* 42.2 (3.8) * Profit measures down to Reported Operating Profit have been restated following the change in accounting policy to exclude foreign exchange movements on investment and financing arrangements, including them instead in net finance costs. Underlying Trading Profit (UTP) The Group uses a further alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur within Trading Profit and remove the impact of historical issues. UTP therefore provides a measure of the underlying performance of the business in the current year. For 2016 and 2015 there were four items excluded from UTP. Firstly, the releases and charges on all OCPs are excluded. OCP charges and releases reflect the future multiple year cost of delivering onerous contracts and do not relate to the current year cost of operating the contract. It should be noted that, as for Reported Operating Profit, UTP benefits from OCP utilisation (of £84.2m in 2016 and £114.1m in 2015) which neutralises the in-year losses on previously identified onerous contracts, therefore it is only the initial or subsequent charges or releases of OCPs that are adjusted for. Secondly, those items relating to Contract and Balance Sheet Review are excluded as they arise from changing estimates on the outcome of historical issues which were originally identified during the 2014 review. Both OCP adjustments and Contract and Balance Sheet Review adjustments are identified and separated from the APM in order to give clarity of the underlying performance of the Group and to separately disclose the progress made on these items. Contract and Balance Sheet Review adjustments are expected to be insignificant in future periods and will no longer be reported separately in 2017 and beyond unless they are individually material. Thirdly, the benefit of depreciation and amortisation charges not being taken in the Group accounts in relation to assets held for sale are excluded. Such charges are still being taken in the subsidiary accounts to reflect the reduction in value of the underlying assets, and we consider it relevant to show the effect this would have on the Group performance measure. Finally, any other significant items that have a one-time financial impact are excluded, which for the periods under review are the benefit of a profit on early exit of a UK local authority contract in 2015 and the associated one-time pension settlement in 2016. These one-time items are distinct from exceptional items in that they have arisen from normal contract exit conditions. However, consistent with the treatment of the gain from early contract exit recorded in 2015, these items are adjusted through UTP to provide a comparable measure. Underling trading margin is calculated as UTP divided by revenue from continuing and discontinued operations. UTP at constant currency UTP disclosed above has been translated at the in-year average foreign exchange rates. In order to provide a comparable movement on the previous year's results, UTP is recalculated by translating non-Sterling values for the year to 31 December 2016 into Sterling at the average exchange rate for the year ended 31 December 2015. For the year ended 31 December 2016£m Underlying Trading Profit at constant currency 73.4 Foreign exchange differences 8.7 Underlying Trading Profit at reported currency 82.1 Earnings Per Share (EPS) from continuing and discontinued operations before exceptional items EPS from continuing and discontinued operations, as shown on the Group's Condensed Consolidated Income Statement on page 37, includes exceptional items charged or credited to the income statement in the year. EPS before exceptional items aids consistency with historical results and is a metric used in assessing the performance and remuneration of the Executive Directors. For the year ended 31 December 2016pence 2015pence EPS from continuing and discontinued operations before exceptional items 6.12 6.55 Impact of exceptional items (6.23) (22.02) Reported EPS from continuing and discontinued operations, basic (0.11) (15.47) Underlying EPS from continuing and discontinued operations Reflecting the same adjustments made to Reported Operating Profit to calculate UTP as described above, and including the related tax effects of each adjustment, an alternative measure of EPS is presented below. This aids consistency with historical results, and enables performance to be evaluated before the unusual or one-time effects described above. For the year ended 31 December 2016earnings£m 2016per share 2015earnings (restated*)£m 2015per share (restated*) Underlying Trading Profit* 82.1 7.54p 95.9 9.72p Investment revenue, continuing and discontinued operations 9.3 0.85p 8.2 0.83p Finance costs, continuing and discontinued operations* (21.9) (2.01p) (40.1) (4.07p) Tax on underlying profit after finance costs (24.4) (2.24p) (30.5) (3.09p) Non-controlling interests (0.1) (0.01p) 0.5 0.05p Underlying EPS, basic 45.0 4.13p 34.0 3.44p Include OCP charges and releases 9.6 0.88p (3.0) (0.30p) Include Contract and Balance Sheet Review adjustments 4.6 0.42p 23.9 2.42p Include benefit from non-depreciation and amortisation of assets held for sale 0.5 0.05p 11.7 1.19p Include other one-time items 3.5 0.32p 9.0 0.92p Include amortisation and impairment of intangibles arising on acquisition (5.1) (0.47p) (4.9) (0.50p) Include tax impact of non-underlying items 8.5 0.78p (6.1) (0.62p) Remove impact of exceptional items, net of tax (67.8) (6.23p) (217.2) (22.02p) Reported loss per share from continuing and discontinued operations, basic (1.2) (0.11p) (152.6) (15.47p) * Profit measures down to Reported Operating Profit have been restated following the change in accounting policy to exclude foreign exchange movements on investment and financing arrangements, including them instead in net finance costs. Free Cash Flow (FCF) We present an alternative measure for cash flow to reflect net cash inflow from operating activities before exceptional items, which is the measure shown on the Condensed Consolidated Cash Flow Statement on page 41, but adjusting this IFRS measure to include dividends we receive from joint ventures and associates and deducting net interest paid and net capital expenditure on tangible and intangible asset purchases. FCF is considered relevant to reflect the cash performance of business operations after meeting usual obligations of financing and tax. It is therefore a measure that is before all other remaining cash flows, being those related to exceptional items, acquisitions and disposals, other equity-related and debt-related funding movements, and foreign exchange impacts on financing and investing activities. FCF is therefore a measure to assess the cash flow generated by the business and aids consistency for comparison to historical results. FCF is a metric used to determine the performance and remuneration of the Executive Directors. For the year ended 31 December 2016£m 2015(restated*)£m Free Cash Flow* (33.0) (35.5) Exclude dividends from joint ventures and associates (40.0) (32.5) Exclude net interest paid 18.7 31.3 Exclude capitalised finance costs paid 0.3 1.4 Exclude purchase of intangible and tangible assets net of proceeds from disposal 31.6 72.5 Cash flow from operating activities before exceptional items* (22.4) 37.2 Exceptional operating cash flows (39.9) (56.6) Cash flow from operating activities* (62.3) (19.4) * Free Cash Flow has been restated following the change in accounting policy to exclude foreign exchange movements on investment and financing arrangements. UTP cash conversion FCF as defined above includes interest and tax cash flows. In order to calculate an appropriate cash conversion metric equivalent to UTP, Trading Cash Flow is derived from the FCF by excluding tax and interest items. UTP cash conversion therefore provides a measure of the efficiency of the business in terms of converting profit into cash before taking account of the impact of interest, tax and exceptional items. For the year ended 31 December 2016£m 2015(restated*)£m Free Cash Flow* (33.0) (35.5) Add back: Tax paid 5.6 2.7 Non-cash R&D expenditure 0.4 0.7 Interest received (1.4) (3.4) Interest paid 20.1 34.7 Capitalised finance costs paid 0.3 1.4 Trading Cash Flow* (8.0) 0.6 Underlying Trading Profit* 82.1 95.9 Underlying Trading Profit cash conversion* ** N/A 0.6% * As explained above, FCF and UTP have been restated, resulting in a restatement of Trading Cash Flow and the Underlying Trading Profit cash conversion. ** No Underlying Trading Profit cash conversion is given in 2016 as a negative Trading Cash Flow has arisen. Net Debt including assets held for sale We present an alternative measure to bring together the various funding sources that are included on the Group's Condensed Consolidated Balance Sheet on page 40 and the accompanying notes regarding loans receivable and funding sources within assets held for sale. Net Debt is a measure to reflect the net indebtedness of the Group and includes all cash and cash equivalents and any debt or debt like items, including any derivatives entered into in order to manage risk exposures on these items. For the year ended 31 December 2016£m 2015(restated*)£m Cash and cash equivalents 177.8 323.6 Loans receivable 22.9 19.9 Loans payable (299.9) (381.9) Obligations under finance leases (28.2) (43.8) Derivatives relating to Net Debt 18.1 14.6 Net Debt (excluding assets and liabilities held for sale)* (109.3) (67.6) Net Debt balances within assets held for sale - 4.7 Net Debt (including that for assets and liabilities held for sale)* (109.3) (62.9) * Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt. Pre-tax Return on Invested Capital (ROIC) ROIC for the year ended 31 December 2016 is a measure used to assess the efficiency of the resources used by the Group and is a metric used to determine the performance and remuneration of the Executive Directors. ROIC is calculated based on UTP and Trading Profit using the Income Statement for the year and a two point average of the opening and closing balance sheets. The composition of Invested Capital and calculation of ROIC are summarised in the table below. For the year ended 31 December 2016£m 2015(restated*)£m 2014£m Non-current assets Goodwill 577.9 509.9 541.5 Other intangible assets 83.6 89.8 118.8 Property, plant and equipment 69.3 73.2 38.4 Interest in joint ventures and associates 14.4 13.8 1.6 Trade and other receivables 44.4 50.2 38.1 Current assets Inventory 22.4 26.4 31.2 Trade and other receivables 543.5 519.7 498.8 Assets classified as held for sale - 39.8 564.7 Total invested capital assets 1,355.5 1,322.8 1,833.1 Current liabilities Trade and other payables (524.5) (548.8) (581.9) Assets classified as held for sale - (32.5) (219.9) Non-current liabilities Trade and other payables (16.8) (18.3) (29.7) Total invested capital liabilities (541.3) (599.6) (831.5) Invested capital 814.2 723.2 1,001.6 Two point average of opening and closing invested capital 768.7 862.4 Trading Profit* 100.3 137.5 ROIC%* 13.0% 15.9% Underlying Trading Profit* 82.1 95.9 Underlying ROIC%* 10.7% 11.1% * Profit measures have been restated following the change in accounting policy to include foreign exchange movements on investment and financing arrangements in net finance costs. As a result, TP, ROIC, UTP and Underlying ROIC have been restated. Overview of financial performance Revenue Reported Revenue declined by 5% in the year to £3,011.0m (2015: £3,177.0m), an 11% reduction in constant currency. Revenue including that arising from operations classified as discontinued declined by 13% in the year to £3,047.8m (2015: £3,514.6m). Commentary on the revenue performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews sections. Trading Profit Trading Profit for the year was £100.3m (2015 restated: £137.5m), a 27% reduction year-on-year which includes the Trading Loss arising on discontinued operations of £3.3m (2015: profit of £26.6m). Commentary on the trading performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews sections. Underlying Trading Profit UTP was £82.1m (2015 restated: £95.9m), down 14%. At constant currency UTP was £22.5m lower than 2015 at £73.4m, with a movement of £18.9m relating to the results of discontinued operations. Commentary on the underlying performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews sections. Excluded from UTP were net releases from OCPs of £9.6m (2015: net charges of £3.0m) following the annual reassessment undertaken as part of the budgeting process. Also excluded from UTP were net releases of £4.6m (2015: net releases of £23.9m) relating to other provisions and accruals for items identified during the 2014 Contract and Balance Sheet Review. UTP also excludes the benefit arising from the non-depreciation of assets classified as held for sale. In 2016, depreciation and amortisation of £0.4m and £0.1m respectively (2015: £10.0m and £1.7m) was not charged to Reported Operating Profit on assets held for sale. Other one-time items excluded from UTP relate to the early exit of a UK Local Authority contract in 2015 in lieu of anticipated profits in future years, net of direct costs, impairments and other charges. During 2016 the other one-time profit recorded relates to a pension scheme settlement in respect of the same contract that was agreed in the year. Discontinued operations The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in 2015. The completion of the sale of the majority of the offshore private sector BPO business occurred in December 2015. Disposal of one of the two remaining elements of the offshore business was completed in March 2016 and the final element completed in December 2016. The residual UK onshore private sector BPO operations have been sold, or have been exited early with the exception of one business where completion is expected within the next twelve months. The results of discontinued operations were as follows: For the year ended 31 December 2016£m 2015£m Revenue 36.8 337.6 Underlying Trading (Loss) / Profit (4.6) 14.3 Onerous contract and Balance Sheet Review adjustments 0.8 0.6 Benefit from non-depreciation and non-amortisation of assets held for sale 0.5 11.7 Trading (Loss) / Profit (3.3) 26.6 Amortisation and impairment of intangibles arising on acquisition - (0.1) Operating (loss) / profit before exceptional items (3.3) 26.5 Exceptional (loss) / gain on disposal of subsidiaries and operations (2.8) 5.4 Other exceptional operating items (11.4) (83.0) Exceptional operating items (14.2) (77.6) Operating loss (17.5) (51.1) Investment revenue - 2.1 Finance costs - (1.2) Exceptional finance costs (0.4) - Total net finance costs (0.4) 0.9 Loss before tax (17.9) (50.2) Tax on (loss) / profit before exceptional items (0.1) (18.7) Tax on exceptional items - 2.7 Tax charge (0.1) (16.0) Net loss on discontinued operations (attributable to equity owners of the Company) as presented in the income statement (18.0) (66.2) Joint ventures and associates - share of results In 2016 the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited, Merseyrail Services Holding Company Limited and Northern Rail Holdings Limited, with dividends of £19.6m (2015: £17.8m), £7.3m (2015: £7.2m) and £10.0m (2015: £5.9m) respectively received from these companies. Total revenues generated by these three businesses were £968.1m (2015: £978.3m), £150.3m (2015: £155.1m) and £132.7m (2015: £585.3m) respectively. The Northern Rail franchise ended on 31 March 2016. From September 2016 there was a change in the AWE Management Limited shareholding structure, with the Group's shareholding reducing from 33.3% to 24.5% by way of a return of shares, for which the Group was paid an amount equal to the reduction in the net investment held of £1.6m and therefore no profit or loss on disposal was made. While the revenues and individual line items are not consolidated in the Group's Condensed Consolidated Income Statement, summary financial performance measures for our proportion of the aggregate of all joint ventures and associates are set out below for information purposes. For the year ended 31 December 2016£m 2015£m Revenue - More to follow, for following part double click ID:nRSV4908Xc
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