REG - Serco Group PLC - Trading statement for 2024 & outlook for 2025

SercoAnnouncement

19/12/2024 07:00

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RNS Number : 6669Q  Serco Group PLC  19 December 2024

Full year 2024 trading update: strong second half performance and improved
cash flow providing resilient outlook for 2025

19 December 2024

 

Serco, the provider of services and support to governments internationally,
today provides its scheduled trading update for 2024 and guidance for 2025.

 

Strong 2024 performance anticipated, cash and net debt guidance upgraded

 ·           Revenue: ~£4.8bn in 2024, in line with guidance; an organic revenue decline
             of approximately 3%, with an improving trend as we moved through the year (H1:
             -5%, H2: -1%) led by North America.
 ·           Underlying operating profit: ~£270m, up ~9% in the full year, and an increase
             of more than 25% in the second half compared to the same period of 2023.
 ·           Margin: 50 basis point increase in full year margin to ~5.6% with ongoing
             focus on efficiency and productivity.
 ·           Order intake: much improved order intake in second half resulting in an
             expected book-to-bill for the full year of approximately 100%.  Pipeline of
             new business opportunities set to end the year at highest level in more than a
             decade.
 ·           Free cash flow: guidance increased by £20m to ~£170m, cash conversion
             guidance increased to ~90%.
 ·           Strong financial position: adjusted net debt now expected to be around £145m,
             £20m better than prior guidance, leverage c.0.6x net debt to EBITDA, below
             our 1-2x target leverage range.
 ·           Share buyback: £140m buyback programme completed, taking the total amount
             returned to shareholders through buybacks to £340m since 2021.

Resilient outlook for 2025

 ·           Revenue: expected to be in line with 2024 at around £4.8bn, despite c.7%
             revenue reduction from immigration contracts in UK and Australia.  Good
             organic growth anticipated in US defence.
 ·           Underlying operating profit: around £260m is expected.  Contract ramp-ups
             and further portfolio improvements anticipated to largely offset previously
             disclosed headwinds from our Australian immigration contract ending, lower
             activity levels within our UK immigration business and higher UK national
             insurance contributions.  Good margin of around 5.4%, within our medium-term
             target of 5-6%.
 ·           Well positioned: The fiscal and geopolitical challenges facing governments are
             creating opportunities to support our customers, as can be seen in our
             increased pipeline of potential new work.  Our strength in key areas of
             government need, positions us well for 2025 and beyond.

 

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

 

"We are proud of the progress throughout 2024, reporting a strong financial
performance and delivering important services to our customers in a dynamic
global environment.  We built stronger trading momentum in the second half of
the year, particularly in our North America business, and delivered good
margin gains through our relentless focus on performance improvement and
disciplined execution.  Our strong cash generation and balance sheet have
enabled us to complete our largest ever share buyback during the year.  We
have also seen significant improvement in safety outcomes and an increase in
colleague engagement this year.

 

The outlook for 2025 is positive, with continued momentum in North America and
new contracts mobilising, mitigating previously announced higher UK employment
costs and lower revenues in immigration.  Our European business has seen
significant growth over the past two years, and we are optimistic about
further growth opportunities across the EU.

 

Overall, we are confident in the Group's outlook, built on the innovation,
expertise and efficiency we bring to our partnership with governments.  Our
financial position is strong, which leaves us well positioned to actively
apply our capital allocation priorities of investing to support organic
growth, increase ordinary dividends, pursuing value-enhancing acquisition
opportunities and to return surplus cash to shareholders."

 

Expected outcome for 2024

Revenue: We expect revenue of around £4.8bn in 2024, a 2% decline on the
£4.9bn reported in 2023 and an organic decline of 3%, which is in line with
prior guidance.  Acquisitions, principally European Homecare which has
performed well, will contribute 3% and currency is expected to be a drag of
2%.  We have seen good growth from new and expanded contracts in defence,
justice and citizen services sectors.  The reduction reflects lower
volume-variable work in the immigration sector in both the UK and Australia,
our CMS contract being in its new five-year agreement and the annualisation of
our previously announced exit from certain low-margin contracts.

 

After the first half experienced an organic revenue decline of 5%, the second
half is expected to improve to a decline of c.1%.  The improving trend in the
second half is despite a c.5% impact from the expected lower revenue on our UK
immigration contract, with strong organic growth in North America after
securing new contracts in the defence sector.

 

Underlying operating profit: Underlying operating profit is expected to grow
by c.9% to £270m, despite a slightly higher than expected currency drag of
£6m.  There were also higher costs associated with mobilising our electronic
monitoring contract.  We more than offset these with our efforts to improve
the productivity and efficiency of the business and the positive contribution
from acquisitions.  We are pleased with second half progress, in which every
region is expected to deliver higher profits compared to the same period in
2023.  The outcome of this is we expect our margin to be 50 basis points
higher in the year as a whole and to increase by more than 100 basis points in
the second half alone.  We are confident these improvements pave the way for
additional opportunities in the future.

 

Financial position: Free cash flow continues to be strong and is expected to
be around £170m for the year, £20m better than prior guidance with a cash
conversion of c.90%.  As a result, adjusted net debt is now anticipated to be
£145m at the end of the year following the £140m share buyback, which has
been completed.  Net debt to EBITDA leverage is forecast to be c.0.6x, below
our medium-term target of 1-2x.

 

 Guidance for 2024 and 2025     2023     2024                                       2025
                                Actual   Prior guidance  New guidance  Initial guidance
 Revenue                        £4.9bn   ~£4.8bn         ~£4.8bn       ~£4.8bn
 Organic sales growth           4%       ~(3)%           ~(3)%         ~0%
 Underlying operating profit    £249m    ~£270m          ~£270m        ~£260m
 Net finance costs              £25m     ~£35m           ~£35m         ~£42m
 Underlying effective tax rate  23%      ~25%            ~25%          ~25%
 Free cash flow                 £209m    ~£150m          ~£170m        ~£135m
 Adjusted net debt              £109m    ~£165m          ~£145m        ~£60m

 

NB: Guidance uses an average GBP:USD exchange rate of 1.28, GBP:EUR of 1.18
and GBP:AUD of 1.93 in 2024 and for 2025 an average GBP:USD exchange rate of
1.27, GBP:EUR of 1.20 and GBP:AUD of 1.95, based on currency rates as 30
November 2024.  We expect a weighted average number of shares for basic EPS
of 1,060m in 2024, 1,015m in 2025 and for diluted EPS 1,080m in 2024, 1,035m
in 2025.

Company-compiled consensus for underlying operating profit is £270m in 2024
and £252m in 2025 for analysts who have updated forecasts since our
announcement on 8 November. Consensus including analysts who have not updated
since the announcement is £270m for 2024 and £263m for 2025.

Resilient outlook for 2025

As we enter 2025, our focus remains steadfast on reinforcing our market
positioning by concentrating on growth, operational excellence and cost
competitiveness.  The outlook for 2025 anticipates revenue will be similar to
2024 despite a potential 7% revenue reduction relating to the UK and
Australian immigration contracts, while underlying operating profit will
reduce only slightly despite cost pressures.  The conversion of profit to
cash will continue to be strong and our pipeline of new business opportunities
is healthy as we exit 2024.

 

Revenue: We anticipate revenue of around £4.8bn, with flat organic revenue
growth and a c.1% contribution from businesses acquired in 2024.  Having had
a success rate of more than 90% on rebids in 2023 and the first half of 2024,
it was disappointing to be unsuccessful in rebidding the contract for
immigration services in Australia.  In the UK, we expect to continue
supporting the UK Government's efforts to reduce the number of asylum seekers
being accommodated in hotels.  These two impacts are expected to reduce
revenue by approximately 7% in 2025, however the business is making good
progress elsewhere in the portfolio to offset this impact.  Growth is
anticipated to be strongest in the North American market where we expect
mid-single digit organic growth after securing new work in the defence sector
in 2024.  In addition, contracts mobilised during 2024 in the UK justice and
citizen services sectors will contribute further in 2025.

 

Underlying operating profit: Underlying operating profit is expected to be
around £260m, compared to the £270m anticipated in 2024.  This is a
relatively small reduction given the previously disclosed headwinds from our
Australian immigration contract ending, lower activity levels within our UK
immigration business and higher UK national insurance contributions.
 Significant progress is expected from the ramp up and reduced costs on newly
mobilised contracts, and continued opportunities to improve productivity and
efficiency across the portfolio.  This supports the expected margin of 5.4%,
which remains comfortably within our medium-term target range of 5-6%.

 

Net finance costs and tax: Net finance costs are expected to increase to
around £42m.  This is more than 2024 due to the increased volume of lease
interest, particularly in relation to immigration services in the UK.  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 again expected to be strong at around
£135m in the year, in line with our medium-term target of converting at least
80% of profit into cash.  This includes the one-off end of contract cash
costs of £20m in relation to our immigration contract in Australia, which
have already been expensed in previous years.  We expect adjusted net debt to
end the year at approximately £60m.

 

 

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 | +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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