Pre-close trading update; Strong execution in 2023, profit growth in 2024

14 December 2023

Serco today provides its scheduled trading update for 2023, an initial outlook for 2024 and re-iterates medium-term targets.

Highlights

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

"Our strong focus on execution has delivered good performance in the second half, resulting in full year outcomes that are better than those expected when we initially laid out guidance.

For 2023, we will deliver growth in revenue, profit and cash, as well as an improvement in colleague safety and strengthened operational delivery of services to our customers.  We have also announced two strategic acquisitions, European Homecare, to accelerate growth in our immigration services portfolio, and Climatize, to deepen our advisory expertise in sustainable developments and operations.  We expect to enter 2024 with a strong pipeline of new business opportunities and a robust balance sheet.

As I approach the end of my first year leading Serco, I am encouraged by our progress, inspired by the commitment of my colleagues, grateful for the support of our shareholders and confident about our growth potential over the medium term."

Expected outcome for 2023

Revenue: We expect revenue to be at least £4.8bn in 2023, approximately 7% higher than the £4.5bn reported in 2022.  Organic revenue growth, which we originally expected to be flat in 2023, has been good and should be in the region of 4%.  Acquisitions, namely ORS, our European immigration services provider acquired in 2022, will contribute 3% and currency is expected to be a drag of 1%.  Revenue has increased organically as growth in the immigration and defence sectors, areas we have invested in significantly in recent years, more than offset Covid-related work.  Were revenue from our joint ventures to be included, it would add an estimated further 5% to the Group's organic revenue growth, as our VIVO Defence Services work for the UK's Defence Infrastructure Organisation continues to experience robust demand.

The second half is expected to see organic revenue growth of 2%.  This moderated as expected from the 6% level seen in the first half as our CMS contract moved into its new five-year contract agreement, immigration volume growth eased in the UK, and we exited, as previously announced, certain low-margin contracts in the UK in the health facilities management and transport sectors.

Underlying operating profit: We expect underlying operating profit of around £245m.  This would represent an increase of 3% compared to the £237m reported in 2022.  Ongoing demand for immigration services in the UK and Europe, operational improvement in our existing portfolio, as well as the successful ramp up of new business signed in prior years, has more than offset a 7% impact from Covid-related work as well as lower volumes in Asia-Pacific.

Financial position: we now expect free cash flow will be better and financial leverage lower than prior guidance.  Free cash flow is expected to be £170m, as the business continues to deliver strong conversion of profit to cash.  This means free cash flow will be more than 40% better than we expected at the start of the year, with cash conversion above 90%.  Adjusted net debt is expected to end the year at around £160m, £10m better than previous guidance of £170m, leaving net debt to EBITDA at around 0.7x.  We therefore expect to again have significant surplus capital at the end of the year.

NB: The guidance uses an average GBP:USD exchange rate of 1.24 in 2023, 1.26 in 2024 and GBP:AUD of 1.87 in 2023, 1.92 in 2024, which is based on currency rates as 30 November 2023.  We expect a weighted average number of shares for basic EPS of 1,111m in 2023, 1,100m in 2024 and for diluted EPS 1,130m in 2023, 1,115m in 2024.  Guidance includes EHC acquisition with the consideration paid in 2024.

Company-compiled analyst consensus for underlying operating profit is £246m in 2023 and £248m in 2024.

Acquisitions

Today we have also announced an agreement to acquire European Homecare (EHC) for a consideration of €40m.  EHC is a leading private provider of immigration services in Germany.  In conjunction with ORS, the Swiss-based business we acquired in 2022, this strategic acquisition will create a strong partner for European governments in immigration services and complement the support we already provide to government customers in the UK and Australia.

We have also agreed to acquire Climatize, a small but fast-growing business that operates in the United Arab Emirates and the Kingdom of Saudi Arabia offering 'zero-carbon' advisory and related engineering services.  The business will significantly boost Serco's sustainability advisory capability in the Middle East with possible scalability across the Group.

Both acquisitions are expected to complete in the first quarter of 2024.

Outlook for 2024

Our initial outlook for 2024 anticipates revenue will be similar to 2023, underlying operating profit will grow by around 6% and the conversion of profit to cash will continue to be consistent with our target of at least 80%.  Our pipeline of new business opportunities is expected to be strong as we enter 2024.

Revenue: We expect revenue to be around £4.8bn, similar to the £4.8bn expected outturn for 2023, with a 3% organic contraction, a 2% contribution from acquisitions and a 1% adverse impact of currency.  Revenue is expected to be lower organically due to our CMS contract now being in its new five-year agreement, the annualisation of our previously announced exit from certain low-margin contracts, and contract mix change in immigration, as we support the UK Government's efforts to reduce the number of asylum seekers being accommodated in hotels.  These factors will be partially offset by increased contribution from newer contracts ramping up, new business and growth in the existing portfolio.  EHC, the leading provider of immigration services in Germany we have agreed to acquire, is expected to contribute revenue of around £100m, subject to competition authority clearance being received and the transaction completing by the end of the first quarter.

Underlying operating profit: Underlying operating profit is expected to grow by 6% to £260m, including an expected currency drag of £5m, with good progress on margins.  The year will benefit from new contracts ramping up, operational efficiency improvements across the existing portfolio and a contribution from acquisitions.  We expect these to more than offset the mobilisation costs on new work, lower immigration volumes in the UK and Australia, and CMS operating in its new contract term.  Following our success in winning the Functional Assessment Services contract and electronic monitoring contracts in the UK in the fourth quarter, we expect around £13m of mobilisation costs relating to these in 2024.

Net finance costs and tax: Net finance costs are expected to be around £33m.  This is more than 2023 due to higher interest rates, increased volume of lease-related interest and acquisition spend.  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 £140m in the year, consistent with our ongoing expectation of converting at least 80% of profit into cash.  This is below 2023, which included the benefit of actions taken to structurally improve our working capital.  We expect adjusted net debt to end the year at around £85m, including the acquisitions of EHC and Climatize, but before any potential share buybacks.

Outlook for growth in the medium-term

Our expectation remains, as previously laid out, that the business will grow revenues at an average of 4-6% a year over the medium term and profits will grow faster than that, as governments, more than ever, look to the innovation, efficiency and skilled operational management that partnership with Serco can bring to their most pressing challenges.

Ends.

For further information, please contact:

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

Marcus De Ville, Head of Media Relations | +44 (0) 7738 898 550 | marcus.deville@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

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.

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