Serco Group plc (SRP) Earnings Call Transcript & Summary

Good morning, all, and welcome to the Serco Full Year Results Presentation. I just want to introduce Mark Irwin, many of you would've saw -- would have seen him last year, but it's our habit of bringing along a Regional CEO to these events, and it also makes the point that one of the distinguishing features about Serco is our international footprint. And interesting enough, Australia has been -- is almost a proxy for Serco in terms of the journey that it's been on, and it's also had a particularly busy year this last year. So I thought it would be useful for Mark to come along again and give you an update. So for the results themselves, well, they're pretty as a picture, really, and very strong trading and financial performance. Revenue up 13%, of which 8% was organic, and I think that this move into organic revenue growth really is quite significant. It marks a real change in mood in the company. But that's also been accompanied by record order intake. I mean if you'd ever said to me any time in the last 5 or 6 years that we might have a book-to-bill ratio of 170%, GBP 5.4 billion worth of order intake. It's astonishing, and I'd just hasten to add, we don't think we'll repeat it for a good while. But it has been -- not only has the order intake been very strong, it's also been widespread, both in the U.K., U.S. and Australia. Our order input -- order book now stands at GBP 14.1 billion -- it would be helpful if I move the slide once, please. GBP 14.1 billion, which compared to revenues of GBP 3.2 billion, gives us a long -- a strong order book cover. We, of course, did -- this was the year we did the NSBU acquisition, which has added materially to the scale and capability of our U.S. defense business, but also more important is our defense business as a whole. It's taken us up a step and given us some very, very core capability and we've ended the year with a robust balance sheet. And for those of you who know, it's -- the net debt has ended up at significantly lower than we thought it would. And our covenant leverage is now 1.17x and the underlying leverage 1.3x, which is a comfortable place to be and also gives us the capability to have some ammunition if we want to do any more acquisitions. The 2020 guidance is for further continued growth both in revenue and in profit, and praise the Lord, praise the Lord, finally, we get to announce a dividend, and what a pleasure that is. Just to put the results into context, I mean, this is typical, you might call sort of hockey-stick recovery, and we all know that over a period of time, companies tend to revert to market. But this is clearly, in a market that's growing at 2% to 3%, to get this sort of revenue growth is exceptional, but we're also enjoying margin expansion at the same time. And there are not many companies in our sector who, over a 3-year period, are going to deliver nearly 28% compound annual growth in profits as we expect to go from GBP 69 million in 2017 and expect to be around about GBP 145 million in 2020. So that is very strong progression, as I say, partly through revenue growth and partly through margin expansion, and the pleasing thing for me is that this is in accordance -- when we stood in front of you on this very platform in 2014, we said, transform -- stabilize, transform and grow. And the grow phase was to run from 2018 to 2020, and we're -- more or less, that's what happened, which is obviously pleasing in itself. So I'm now going to hand over to Angus, who will take you through the numbers, and then I'll do the operational presentation later.

Thanks very much, Rupert. Good morning, everybody. We will now go through the financial review. Let's start with the income statement. Revenue of GBP 3.2 billion is up 14.5% on a reported currency basis, 13% in constant currency, comprising 8% organic growth and 5% from acquisitions. The favorable currency impacts of GBP 42 million on revenue and GBP 3.7 million on underlying trading profit, or UTP, arose primarily from the weakening of sterling, and you'll find all the rates and the sensitivities in the appendix. Like last year, UTP of GBP 120.2 million is lower than trading profit of GBP 133.4 million, reflecting the exclusion from underlying of GBP 3.6 million of contract and balance sheet review benefits and the one-off defense and fire rescue services settlement, DFRMO, of GBP 9.6 million. This ensures that we give an accurate picture of true underlying performance. UTP margin improved by 40 basis points to 3.7%. This improvement primarily comes from keeping a tight control on SG&A costs as the revenue line grows. Going forward, our focus will be in managing contract cost more effectively through the rollout of workforce management, continuing to embed operational excellence and optimizing contract procurement, whilst keeping a lid on overheads. The 13% constant currency revenue growth, as I said, consists of 8% acquisitions -- 4% -- 4.8% from acquisitions; organic, 8%. Our NSBU acquisition, which completed in August, contributed 4% of this inorganic growth. The balance came from the Carillion health contracts that transferred individually to Serco last summer. Organic growth was largely driven by the Americas and AsPac, where organic revenue grew by 19% and 16%, respectively. In the U.S., our defense business was particularly busy, notably in Ship & Shore modernization and also in our new FEMA contract, where activity levels were very high. In AsPac, as Mark will talk about, continued growth in systems and services, combined with our new AHSC garrison health care contract, were the main drivers of the increased revenue. Encouragingly, UK & Europe grew by 2%, reversing years of decline, with AASC being the biggest contributor. Organic revenue in the Middle East fell by 2% due to a contract loss in Bahrain and the rebasing of the MELABS defense contract and rebid. UTP for the group of GBP 120 million represents headline growth of 29% and 25% in constant currency. UTP margin improved by 40 basis points to 3.7%. The outstanding performer was the Americas, where UTP grew by 70% in constant currency terms to GBP 82 million. This includes a 5-month contribution of GBP 8.6 million from the NSBU acquisition. This was slightly ahead of our expectations, largely due to an accelerated workflow in Canada. As we talked about at the half year, our CMS health insurance eligibility contract benefited from unusually high volumes of variable work, particularly during the first half. Whilst we are performing some additional variable work currently, this is short term, and we expect activity levels and profitability to be lower going forward. Beyond NSBU and CMS, the broader Americas business also performed very well, with all business units growing their profits. The implementation of IFRS 16 also led to a GBP 2.9 million benefit to the division. From a margin perspective, Americas reported margin increase of -- by 190 basis points to 9%, which, as we said at the interims, we do not expect to sustain given the one-off nature of some of our CMS work. Underlying trading profit in UK&E fell slightly year-on-year to GBP 38 million. This includes a reduction in profit of GBP 2.2 million in 2019 from IFRS 16. So excluding that, UTP was up 4%. Profit performance in our health business improved year-on-year due to the annualization of profits from the Carillion health contracts. This was offset by a decline in the profit contribution from joint ventures and associates, largely as a result of the start of a new 3-year pricing period at AWE and a weaker-than-expected performance in our leisure business. Reported trading margin at 2.8% was slightly lower than 2018. But with the AASC transition complete, we expect the margin to improve significantly in 2020. UTP in AsPac increased by 20% in constant currency terms to GBP 31.3 million. This increase reflects continuing strong performance in the Citizen Services business as well as the AHSC health care contract moving to its full operational stage quicker than anticipated with profit -- profitability in the second half more than offsetting the transition costs incurred in the first half. Reported UTP margin improved by 10 basis points to 5%. Overall, the implementation of IFRS 16 had a GBP 1.2 million positive benefit to group UTP in 2019. This is lower than our original expectation of circa GBP 5 million, due principally to the in-year losses in the Caledonian Sleepers contract following the rolling stock asset impairment. Turning to the bottom of the income statement. The increase in the finance cost of GBP 8 million was largely due to a GBP 7 million increase in lease costs caused by IFRS 16, with the balance being the repayment of the Intelenet loan in October 2018, resulting in no accrued interest income or discount unwind in the year. The blended average cost of our debt in '19 and was slightly lower at 4.51% as compared to 4.66% in '18. Average daily net debt of GBP 231 million was a little higher than the GBP 219 million of the prior year. The underlying tax rate was 25%, 1 percentage point lower than in 2018. This rate reflects the effective tax rate in overseas profits, which blend to a rate of just below 30%. Underlying profit before tax generated from our overseas operations accounted for more than 80% of total underlying profits, thereby pushing up the effective rate relative to the U.K. statutory rate. Over the medium term, we expect the underlying effective rate to remain around 25%, with the cash tax rate a little lower due to the benefit of the goodwill amortization in the U.S. Cash tax will also benefit in the longer term from the GBP 760 million of off-balance sheet losses in the U.K. Underlying diluted earnings per share grew by 18% from 5.21p to 6.16p. The weighted average number of shares increased from 1.1 billion in '18 to 1.2 billion in '19, largely as a result of the approximate 7-month effect of the May share placing of 111.2 million ordinary shares to finance the NSBU acquisition. Statutory reported earnings per share on a diluted basis, which reflects non-underlying items and exceptionals, was 4.21p as compared to 5.9p -- 5.99p in the prior year, which reflects a lower level of non-underlying profit arising from the contract and balance sheet review, together with increased average number of shares. I'll come back to dividends later. In terms of exceptional items, these were a net GBP 26 million in '19 as compared to GBP 22 million in the prior year. The biggest exceptional cost related to the deferred prosecution agreement with the Serious Fraud Office. This ruling concluded the SFO's investigation into Serco companies, as originally announced in '13. Following the DPA approval, total payments of GBP 22.9 million were made to the SFO, consisting of a fine of GBP 19.2 million and costs of GBP 3.7 million. Restructuring costs arising from transformation were GBP 13 million, down from GBP 32 million in 2018. We have largely completed the transformation stage of the strategy implementation, bringing to an end transformation cost charged to exceptionals. We will continue to improve our systems, processes and structures, but we expect the costs associated with this to be charged to trading profit. Our focus is now on operational improvement, reaping the benefits of our procurement transformation, completing the rollout of workforce management and using the power of the 11 Black Belts and Master Black Belts, 154 Green Belts and 3,471, exactly, Yellow Belts that we have trained on our operational excellence program. Offsetting these items was an exceptional credit of GBP 19 million from a provision release relating to the settlement of a commercial legal dispute in the U.S. which had originally been provided in 2014. The exceptional cash outflow was GBP 49 million, which was GBP 23 million higher than the exceptional charge, with GBP $19 million of this difference being due to legal provision release, which was noncash. Turning to a word not heard for several years at Serco, namely, dividend. I have stood here for 5 -- for the last 5 years and repeatedly said that the Board is committed to resuming dividend payments as soon as it judged it prudent to do so. The combination of improved profitability and cash generation, smaller cash outflow associated with loss-making contracts, leverage at the lower end of our target range and a positive outlook, has led the Board to recommend a final dividend in respect of 2019. Our policy going forward is to weight dividends approximately 1/3:2/3 between interim and final payments. The recommendation of the Board is to pay a final dividend of 1p per share, which equates to an underlying EPS cover of around 4x or a payout ratio of circa 25%. The cash outflow from this dividend, if approved, will be GBP 12 million. The Board will keep the dividend, including the payout ratio, under review as we continue to implement the growth stage of our strategy. It will be mindful of the requirement to maintain a prudent level of dividend cover, the potential to enhance value through bolt-on acquisitions and the need to maintain a strong balance sheet, which is key for Serco in the long term. The usual detailed cash flow and net debt slides are shown in the appendix. Here, I'll just pick up a few headlines, and a major headline in '19 was a strong free cash flow performance, which was better than expected. Free cash flow generation improved from GBP 16 million in '18 to GBP 62 million this year, which represents an 84% conversion of profit after tax compared to conversion of 28% last year. The increase in free cash flow was driven by higher UTP and better working capital despite the 14.5% growth in revenue, the U.K., which had a strong year of collections and benefited from the one-off GBP 10 million defense and fire rescue services settlement. We continue to have 0 receivables or payables financing in place. Our billed receivable days are 28, a day -- 1 day higher than 2018, whilst our trade purchases days increased by 6 to 36 due to North America returning to near its historical norm after an unusually low number last year, U.K. trade payable days improved from 30 to 29. Looking ahead to 2020, we expect a similar level of free cash flow with OCP-related outflows reducing. This will be offset in part by the reintroduction of share purchases for the Employee Share Ownership Trust to satisfy the share awards, which we expect to be around GBP 15 million in 2020. This approach will reduce free cash flow conversion, but we believe that given our stronger financial position, it is preferable to the dripping dilution suffered by shareholders by issuing new shares each year. Adjusted net debt was GBP 215 million, up from GBP 173 million at the end of '18. Daily average net debt, GBP 231 million compared to GBP 219 million in '18, with peak net debt of GBP 357 million. These numbers included the impact of the NSBU acquisition cost of GBP 184 million, and the related net placings proceeds of GBP 139 million. Adjusted net debt excludes all lease liabilities, consisting primarily of GBP 370 million of IFRS 16 liabilities, which are materially higher than the half year due to the transition of the AASC contract. Including this GBP 370 million of lease debt, reported net debt was GBP 584 million. Covenant net debt excludes the new IFRS 16 lease liabilities, and at the end of '19 was 1.2x as compared to 1.1x in '18. Excluding the non-underlying trading items, underlying leverage was 1.3x compared to 1.2x in '18. And therefore, in the lower half of our 1 to 2x guidance in terms of leverage. In 2019, we arranged a GBP 45 million facility to support the acquisition of NSBU with 4 of our key lending banks. Combined with our 5-year GBP 250 million revolving credit facility that we put in place at the end of '18, we have committed bank facilities of GBP 295 million as well as our GBP 213 million of private placement debt. In terms of liability stack, we remain in good shape. We have no off-balance sheet debt in the form of receivables or payables financing. Our pension has an accounting surplus and a very small actuarial deficit. Our payables days are in line with U.K. government supplier requirements. Our deferred revenue is trading in nature, and our JVs are purely operational. There's a Robert Burns poem entitled Epitaph to my own Friend (sic) [ Epitaph on my own Friend ], which has parallels with this OCP history slide. The OCP provision from the contract and balance sheet review started life with a balance of GBP 447 million, and by the end of '19, it has reduced to GBP 17 million. Remarkably over the 5 years, we're within 2% of the original provision. Rather than basking in the predictive brilliance of Nigel's crystal ball, we need to own up to the fact that this is a triumph of portfolio theory, as those who said we had taken far too much provision and those that said we had not taken nearly enough provision were, in fact, both right, but thankfully for us, by almost equal amounts. However, as you know, the OCP journey took many twists and turns and has cost Serco an astronomical amount of cash, which had to be funded by our shareholders. At the end of 2014, the OCP contracts had aggregate revenue of around GBP 600 million. But by the end of '19, this number has fallen to less than GBP 100 million, with the only material contracts left being Caledonian Sleeper and PECS, with our recent contract win, means we expect to be profitable over the term of the new contract. The advent of IFRS 16 means that the Caledonian Sleeper contract no longer is an OCP as the leased asset has been impaired, which reduces amortization and losses in future years. Any future losses will be shared with the Scottish government from April 2020, and at April 22, we will either exit or adjust the terms to carry on. The impact of the OCPs has been dire financially, but we've learnt the lessons of the past, and our bid governance is much more robust. Is it perfect? Absolutely not. Given that our business is essentially a portfolio of contracts, we will always have the odd OCP, but the governance and risk-focused culture means that it should not be endemic. Finally, let's look at the outlook and the modeling assumptions. We expect revenue for 2020 to be in the range of GBP 3.4 billion to GBP 3.5 billion, which represents total growth of 6% to 8%, comprising circa 4% organic growth, around 5% to 6% growth from the 7-month contribution from NSBU, and based on current rates, a negative 2% to 3% impact from adverse ForEx. In terms of underlying trading profit, we continue to expect a number in the range of GBP 145 million, in line with the guidance we gave in December. This number is helped by the annualization of NSBU as well as the AASC and AHSC contract wins. However, as we said last year, we expect CMS profits to be materially lower in the U.S. as the previous level of one-off project work is unlikely to repeat. In addition, we will have PECS transition costs of GBP 4 million and a currency headwind of around GBP 5 million. Amongst the key challenges in the year ahead will be our success in mobilizing and transitioning new contracts, notably icebreaker and Clarence Correctional Centre in our AsPac business. However, we always need to bear in mind the broad range of potential outcomes, particularly given the early stage of the year, and the sensitivity of profit to even small percentage changes in revenues or costs. We expect net finance cost to be around GBP 5 million higher than '19 with the increase from the GBP 22 million being primarily due to the full year impact of the AASC leases. We expect closing adjusted net debt, which excludes leases, consistent with how our lenders look at our covenants, to be around GBP 200 million, with covenant leverage at the lower end of our target range of 1 to 2x. The annualization of last year's placing means that we expect a weighted average number of shares of around 1.25 billion as compared to 1.2 billion in '19. The rest guidance is there for reference. I'll now hand you back to Rupert.

Thank you, Angus. So we will start the operational review with our traditional highlights and lowlights, but I just want to say that with these annual results, my own feeling is that we are finally slipping the surly bonds of reputational and financial carnage that we inflicted upon our shareholders some years ago. And as far as the OCPs are concerned, I'm minded about -- do you remember those things called spot the ball competitions? And they always said "Using your skill and judgment, say where the ball is." And I think that it's important that we don't understate the skill and judgment of Angus and Nigel in spotting that OCP ball and getting it to within 2% of where it is. Because it has been an enormous number. And yes, it has been portfolio, but at the end of the day, their skill and judgment put the ball into the right place. So looking at the highlights first, of the year, clearly, getting back into growth, organic revenue growth. It's not just the headline growth, it's the fact that actually on an underlying basis on -- we had organic growth of 8%. And as I said, that we're on track to increase the profits between 2017 and 2020, but at a compound rate of 28%. The acquisition of NSBU marked another milestone, the ability to do a proper grown-up acquisition in the U.S., again underlying our international footprint, was important. And we've spoken about the record order intake, but what are the things that I would draw your attention to? Is that it was not just in 1 region. We had really strong order intake in the U.K. with the AASC, equally strong in -- relative to the size of that business in Australia with the garrison health contract and our Adelaide Remand Centre, but also strong order intake in the U.S. with the U.S. Pension Guaranty Corporation (sic) [ Pension Benefit Guaranty Corporation ] and the U.S. Air Force TRIRIGA contracts, and large numbers of task orders from FEMA and from the Navy. So all those things were widespread. It was across the business. I also want to talk a little bit about the investment that we've been making in our platform, and whilst I think that on the one hand, Serco can sometimes be seen as a particularly unruly herd of cats in terms of all these contracts, actually, there is an underlying system and there are underlying -- strong underlying processes. And we spend a lot of time paying attention to and investing in these systems. And that's one of the things that, as we've transitioned from being a shrinking company to a growing company, we've had to go and start exercising new muscles again, muscles that we had forgotten. And one of those being to go and actually mobilize big new contracts like Clarence Correctional Centre, like the new regions on AASC, like the -- we will have to do on PECS. And on the whole, these mobilizations have gone really well. We find that those muscles still exist. On the people side, when Angus and I joined Serco, we were -- I was knocked over in the rush by people leaving, and we now have a situation where 1 million people applied to work for Serco last year. And for 14 graduate jobs in the U.K., we had over 1,000 applicants, which I think says something about our attractiveness as an [ employee ]. Being as well as CEO, the group's CIO, I'm delighted to tell you that we have achieved a rare achievement, which is getting our SAP, our core SAP ERP system, onto latest version. Very, very few companies do this. They drag along with old versions of SAP, but we're now up in the cloud. We're on the current version and that gives us a good platform. We've now got nearly 13,000 employees on workforce management at various stages of development, and I really feel that the platform that we've got here is capable of considerable operational leverage. It's also pleasing to have finally resumed David Eveleigh as our group General Counsel, a huge achievement in resolving satisfactorily the SFO investigation and also the dispute that we had with the Ministry of Defence on the DFRMO contract. Looking across at the lowlights. It appears that about half the people who travel on the Caledonian Sleeper have my personal e-mail address and telephone number, and they were not short of using it, it has to be said. Calls like saying, "Rupert, I've been stuck outside Milton Keynes for the last 2 hours, I thought you'd want to know." Well, what do you want me to do? Push? And we had a very, very torrid time with the Caledonian Sleeper in the middle of the year. It was like, in terms of technology, going from a Bakelite telephone to an iPhone over a weekend. And that, combined with a whole lot of network rail problems, and -- but the good news is, is that we're through this now. And we are in the middle of February. We would be expecting to have occupancy on the sleeper of somewhere around about sort of 30% midweek. We're now running at 60% to 70% and sometimes 80% occupancy in the middle of February, which is completely -- it's a much, much, stronger numbers than we thought, and the service is running much more reliably. So we think we're through the worst of that. Those of you who lived anywhere near Glasgow would have seen the torrid time that we've had with respect to asylum-seeker overstayers, but I actually believe that from -- we've done the best we could with the very difficult public relations hand on that. We -- Mark hopes to deliver his new icebreaker to Australia sometime whilst there's still ice in Antarctica, but it's a few weeks late. But we're hoping to catch some of that up. And of course, we have the challenge of replenishing our pipeline, which has been denuded, but exactly in the right way. We're impatient about contract productivity and efficiency. It seems to go -- it seems to be a dial that's hard to push, which is why we're putting so much emphasis on workforce management, but we've taken out hundreds of millions of pounds out of our central costs, and getting the productivity out of the contracts is a new -- an important challenge. And one of the people helping us do that is Anthony Kirby, our Group HR Director, and he is responsible for, I think, the -- one of the -- sort of part of the turnaround in our reputation as far as people service is concerned. And he has brought, I believe, some booklets at the back, which are aimed -- talk about our people experience in Serco, which I commend to you as a rattling good read. Well, that might be slightly overstating it, but it's a good -- worth looking at. Another -- so we have some big contract losses in Hong Kong. It's a small [indiscernible] exposed to contract losses and we had a poor year for that, but we now got some big bids in front of us. And in terms of the U.K., it remains a tough market. I mean people see the big order intake on asylum-seekers and on PECS, but arguably, this is not actually market growth. This is resetting the pricing on contracts that were losing the supply base money and replacing -- resetting it. So it's arguably not additional volume growth. The government is extremely still obviously involved and focused on Brexit, and -- but there is progress being made. I think that the new outsourcing playbook is a real advance, and there is much more -- there's real goodwill, I think, both between suppliers and government now, is both having looked mutually assured destruction in the eyes, actually coming to the conclusion that we both need each other, and that is a much better place to be. I just want to spend a few slides talking about the way that we work, and one of the outstanding things that has happened over the last 3 or 4 years is that the business, from going from being a set of disconnected regions, fiercely independent herds of cats and all that, have actually discovered the joys of working together. And I think that, that's largely as a result of the Oxford Management Program that we run. And actually, we've got huge momentum, whether it's tugmasters from Australia coming over to the U.K. to get trained, whether it's the U.K. benefiting from help from Australia on the Justice & Immigration bids. We've got, from the U.S., their expertise in artificial intelligence and robotic process automation on major case management contracts, helping Australia do bids. And it is a -- it is remarkable how much activity there is of -- going on and sharing across the business, completely undirected by Angus or me. It's just going on, and that's the way that it should be. I also want to just spend a few moments just talking about the order book and pipeline progress. This is a -- typically, this is a slide in the Ford style of making you really squint to be able to see it. But if you use a magnifying glass, all the words are true and wonderful. So you will be aware that we have a pipeline that we report -- new business pipeline that we report that goes and excludes a lot -- any contract, any opportunity below GBP 10 million. Those have now got, with particularly the METS acquisition and the NSBU acquisition and the increase of our framework contracts, we're getting more and more work that's just -- that is smaller than GBP 10 million. So we're including that now, and we will be reporting on our total new business pipeline in the future. And the difference is about GBP 1.6 billion. So that the -- on the previous basis, the pipeline is GBP 4.9 billion. On the basis including opportunities below GBP 10 million, it's GBP 6.5 billion. But there, you can see, very interesting, the shape of the progress that's been going on in the order book, which is clearly very chuffing. And we got a heightened pipeline that, whilst it might small, it's got some important opportunities. We are leading Skynet bid for the government secure communications contract. We have been a subcontractor to Airbus, and we've broken away from there and are leading a consortium at Lockheed Martin and Inmarsat and CGI and the others to provide government with clear satellite communications. We are -- Wellingborough Prison is in the pipeline, and we are also bidding for DIO, which is a Ministry of Defence FM contracts. And overseas, we've got Justice Health that Mark is going to be bidding for, a major opportunity in -- for training air traffic controllers in the U.S. and other marine opportunities. So we are -- although the pipeline is smaller than we would like, it's actually got some high-quality opportunities within it. This is the slide that I think that I would be most proud of over the last few years. It's -- every year, we do a viewpoint survey. And it is done on a massive scale. In 2019, we have 27,000 employees responding to this -- participating in the survey, and we gave them the opportunity to do free-text comments this year, which we haven't done before. We expected to get 1 or 2. Well, if anybody was under any question or doubt about how passionate and feisty Serco employees are, there were -- 50,000 comments came back. And how do we go and give feedback on that? It's impossible. So what we're doing is we've taken 1,000 of them at random, and they're going to go onto our website, so people can go and see and they genuinely are random, except those that relate to my body mass index. But -- so that people can see what people within the business are saying. But if you actually look at these, the cognoscenti of -- I mean, this is engagement score, which is a new word for what we used to call morale, and it's really interesting. If you see the lines, the blue line is the leaders, the gray line is people managers and the red line is all employees. The notable thing in 2011 is that there was a wildly different experience between the leaders of the business and the people within it. The leaders were, broadly speaking, okay. The people within it were pretty unhappy, and there's an old experience -- adage that says the customer experience will never exceed the employee experience. And I think there's some truth in that. And then you see what happens when we meet our troubles, and actually the employees kind of knew it was not very good anyway, but the leaders' morale crashes to a level that's almost unseen in terms -- you get a leadership that is a -- where their morale is lower than the employees as a whole is a remarkable and bad thing. And then you see it, since 2014, it's improving quite steadily. But what is remarkable about this is to see how closely it is aligned, and that is a very rare -- you don't often see that in large businesses. There's always quite a dispersion between the leaders of the business who are naturally happier and fatter and cattier than the employees. And there's always -- it tends to be 10 or 15 points of difference. But here, the experience of people, be they leaders of the business, people managers or employees is, broadly speaking, the same, and that is a very proud-making slide. Moving now to the regions. I'm not going to spend long on each region because it's there to read. But the UK & Europe had an astonishingly good order intake, particularly in Justice & Immigration. We've had the asylum-seekers order, the PECS order, and we have just received the orders you'll have seen for Gatwick. Revenue was up 5%, margin was -- was down a little, broadly flat. They've got a decent pipeline now of DIO, I mentioned Wellingborough and Skynet. And I would mention the fact that in all the harouche about Caledonian Sleeper, our joint venture with Abellio running Merseyrail was rated the top-performing rail franchise in the U.K. last year. They've won a lot of work now in -- for the skills and support for DWP, and we are also now clearing Her Majesty's dustbins, and the former Prime Minister's, Mrs. May's, dustbins, having won Windsor and Maidenhead for our environmental services business. The business benefited from the acquisition of Carillion, that's given us additional of the health care -- Health businesses, that's given us extra scale and helped the margin in that business. Moving on to the Americas, astonishing year. I mean astonishing year, 35% revenue growth, of which 19% was organic. I mean this really is a huge achievement, and again, is better than a lot of our peers in the sector. And the profit, 70% profit growth. Now a lot of that came from the CMS contract, and we don't think that, that will recur this year. So the falling away of the CMS profits, they were really very high last year, is being partly offset by the NSBU acquisition. They've done very well on the integration of that, NSBU is running to plan. They had GBP 110 million of revenues in the second half of 2019 at a 7% margin. And they continue to win business. I'm particularly pleased with the TRIRIGA, which is a large asset management system we're -- some improbable amount of billions of dollars' worth of assets we're managing for the U.S. Air Force. And we've got some big bids coming up to do all the air traffic control training for the FAA. We've also got rebids and extensions for Goose Bay and force protection coming up. AsPac, I'm going to leave Mark to talk about that, but suffice to say that they had a strong year, too, with revenue up 16%, and underlying trading profit up 20%. The Middle East has been -- the profits have gone backwards in Middle East, but we knew that was going to happen. They had a highly profitable contract, which is MELABS providing services to the Australian Armed Forces in the Middle East. And actually, they did better than we thought, both in terms of the margins they're getting on the new contract and on other contracts. They are in the midst of the rebid for Dubai Metro, but they've also won a highly strategic contract called Mashroat in Saudi Arabia, where Serco has been asked to go and create, as it were, the playbook, the book of process and procedures which will be used by every government department in the Kingdom to go and regulate how they manage their assets. And that's not only a great privilege, but it also gets us engaged with nearly all the major government departments of state. And they have just won a large contract with Dubai Airport to provide greetings services, that's worth about GBP 70 million over the next 5 to 6 years and is a major step forward, and they've got a real spring in their step now, the Middle East. So we're expecting that to grow again next year. At which point, I'm going to hand over to Mark, who will talk about the progress in his business in Australia.

Rupert, thank you, and good morning to everyone. In the next few minutes, I just want to give a brief update over the last 12 months, the progress in our business from what I shared with you a year ago when I was here. As Rupert indicated, the AsPac business really is a microcosm of the group. The journey that we've been on over the last 4 or 5 years really mirrors what we've seen across the rest of the company, the hard work put into the portfolio cleanup, strengthening our operational delivery, ensuring that our governance is robust and preparing this platform for growth, but making sure that as we pursue growth, we remain disciplined and also that compliance in terms of our contract delivery remains front and center in the minds of our people. So we spoke a year ago about FY '18 being that point of inflection and looking forward to 2019 being the year of growth. And you will see in our headlines that, that is what we have delivered. Revenue growth up 16%. It says on the slide, UTP at 19% or 20% in terms of that rounding and importantly, starting to move margin in the right direction, nudging it up slightly, but reaching that threshold of 5% for us in the year. We also saw significant growth in our employee base. So most notably, the addition of more than 1,400 health and allied care staff in our garrison health contract has meant my team has now grown to almost 11,000, and when we look across the contract portfolio, in addition to the wins mentioned by Rupert and Angus, we were also able to secure key extensions, particularly our Immigration services contract, which was extended for 2 years as well as the contract to operate and manage the South Queensland Correctional Centre, that's also going out 2 years. And we were able to successfully rebid other parts of our portfolio, like the traffic camera services contract we have with the Ministry of Justice in the state of Victoria. Really pleasingly for us, we were also able to organically grow some of the new contracts that we took on in 2018, like the work that we do with the Department of Human Services and Australia's National Disability Insurance Agency. So those contracts have grown organically during the year. Now as always, we have a number of key rebids that we actively work on, and in 2020, that will see the Acacia Prison contract. And while the Fiona Stanley contract, our largest health contract, still has about 18 months to run, we have already entered dialogue with the state of Western Australia to contemplate the next iteration of that contract. So generally, when you look across our revenues by sector, our pursuit of diversified growth is now starting to move the needle a little bit, and you can see that while our Justice & Immigration business has grown, the growth of other parts of our portfolio means that J&I now is about 45% whereas historically, that's always been well over 50% in terms of representation in our revenue. And finally, when we look at the portfolio, as indicated by Angus, we exited 2019 with no onerous contracts at all in the AsPac portfolio. Just a quick look at a couple of our key contracts. In our love of acronyms, ASRV is the Antarctic supply and research vessel, aka icebreaker referenced before, Rupert spoke about the fact that the project overall is delayed by a number of weeks. But I did want to highlight the fact that we've put significant effort during the design and build phase, the first 4 years, to ensure that Nuyina, which is what the ship is called, will not only be the state-of-the-art supply and research vessel that she was envisioned to be, but importantly, that we attain the highest quality standards, the highest safety standards, and also, based on the sensitive work that the ship will do, the highest environmental standards as well. Nuyina will enable Australia's Antarctic program for the next 20 years, and commensurate with that, we will have the responsibility to operate and maintain her through that life cycle through a 10-year contract and a contract that also affords 2 5-year extensions, so really covering the 20-year life cycle. Our expectation now is that the ship will achieve final acceptance in early September and then she will begin her maiden voyage to her home port of Hobart in Tasmania. The next contract to highlight there is the Clarence Correctional Facility. So this new prison is now about 6 weeks away from construction completion. The center will commence operations in July this year and will accommodate 300 female and up to 1,400 male prisoners, making it the largest operating prison in Australia when it is at full capacity. And we have just about a minute of drone footage just to bring this project to life and to try and help see the scale of it all. [Presentation] So what you see here is the main access road, the car park. This is the male maximum part of the facility, fully self-contained as a precinct, with industries, education, health, all of the services contained in this area. We then move across the site to the female facility, which is clearly separated but within the overall perimeter wall of the maximum-security center, and then you'll see we will migrate across to the minimum male security area, that is what you see there now on the screen, and that area, again, fully self-contained in terms of all of the services. The prison footprint, just the fabric of the prison, covers 65 hectares. The total site is 195 hectares. So a massive development for us. We've deployed the latest technology in everything from the core security of the prison, all the way through to how we will educate and train the people who will be in our care. The entire design, ground up, the operating model is all underpinned by structural, cultural and educational prompts that really support rehabilitation and effective reintegration into communities. So over the 20-year life of that project, we really are excited about the opportunity we have to deliver meaningful economic and social outcomes to the government. Very quickly then on the remaining contracts. The health services contract, for us, this has meant over a 4-month period of mobilization, deploying more than 1,470 health and allied care staff across 30 disciplines to 58 Defence Force spaces. That has been, as Angus said, really good in terms of its implementation, better than we planned in terms of the original time line. And what we've developed through that experience is real capability now in terms of recruiting, credentialing and managing a highly specialized workforce, something that we will apply to our own workforce, but also a platform that we see for further opportunity in the market. And then finally, the Fiona Stanley Hospital, still a reference for one of the most successful, fully integrated health services contracts where we do everything from IT, to facility services, to managing nonemergency patient transport for the state. We've been involved through the entire development of this project and the Fiona Stanley Hospital recently celebrated 5 years of successful health care delivery to the state of Western Australia in partnership with the WA Department of Health. Just some of the other key highlights for the year. As I said, a lot of focus on effective transition, effective operational delivery for my team as well as the preparation for the operationalization of our new contracts in 2020. We spoke about the numbers before, but really good conversion rates still, both from new business and our rebid rates, which sees us on track to meet our 5-year business plan. And from a people perspective, Rupert referred to the work done in our people plan, led by Anthony Kirby, our CHRO, really seeing that drive the performance of the business, our support for diversity, inclusion, learning and development. And true engagement with our workforce has really delivered a fantastic health in terms of the organization, and we promoted 400 of our people internally. And like the U.K., we started a graduate program, which saw almost 1,300 applications externally for just a graduate role. So really, a terrific attraction to the business. From a market perspective, just a couple of things to point out here. So both in-country and regional geopolitical matters driving policy, unsurprisingly by government. And so for us, par for the course in our business but really highlighting the need for us to continue to stay close to customer and market so that we can continue to grow. Positively though, the diversity of our geography sees that we've got governments at almost every point in the outsourcing maturity spectrum. And so we see opportunity there both with mature governments trying to solve really complex problems at one end, and also governments just looking for the first time to engage the public -- the private sector to deal with issues such as service and infrastructure deficits. And so we see that opportunity still evolving over the next couple of years. And then in terms of our competitive landscape, cognizant of the fact that we do see quite a bit of movement there, particularly in the Australian market over recent years with consolidation creating much bigger players. But for us, the opportunity that Rupert highlighted for us to really leverage our international capability, taking true depth in naval engineering out of the U.S., the experience that we've got in the health care system here in the U.K. and bringing that to bear in our markets to solve problems that our customers has, I think, gives Serco equally a very good competitive edge in that regard from scale and also from an ability to deal with that complexity. And then just finally, looking forward to 2020, an absolute focus for us to maintain our operating standards, maintaining high level of delivery in our existing contracts, and making sure that the new contracts that we've been preparing for that will come to fruition in 2020, that all of that work is executed well. We've done a lot of work on our overheads through our shared services framework over the last couple of years. We've moved our focus now to our operational support center and centralizing some of the support for our contracts, including how we manage our workforce. So about half of the 13,000 people on workforce management currently are in the Asia Pacific business, and we will continue to develop that platform for simplification and efficiency in how we manage our business. Diversify growth. We have to continue expansion. We're looking at adjacencies within our core sectors, but also beginning to explore geographic expansion now beyond Australia and New Zealand and Hong Kong, where our businesses historically operated. So 16% growth last year. We expect around 10%, so maintaining double digits in the division into 2020, but that also means that as we drive effective conversion, we have to continue to rebuild our pipeline. Bottom line for us, growth cost management, particularly through contract productivity, as Rupert mentioned before, and then a real eye and awareness on our working capital management, so that our cash conversion can be optimized in the business. So just in closing, we've built a really great team in Asia Pacific. I'm privileged to work with some really capable and talented people, and I'm genuinely excited about the prospects for our part of the company to do exactly what Rupert said, which is to move further into the growth stage of our longer-term plan. Thank you.

Thank you, Mark. Just in summary, so I mean, it's a very strong trading and functional performance in 2019 and also a strong outlook for 2020 of further growth as we go through this stage of revenues beginning to grow and margins still expanding a little. As well as a record order intake and order book, I think we're going to have a very respectable Q1 in terms of order intake. The pipeline may have been lower than we liked -- might have liked at the end of the year, but it's been pretty productive. You will have seen the announcement that Transport Scotland have removed all the objections to awarding us the Northern Isles Ferry Service, that's about GBP 450 million, and they expect to sign that contract in the first quarter. It may slip a little, but I suspect it will be there or thereabouts. We've just been awarded a GBP 200 million contract for Gatwick Immigration Removal Centre, and I mentioned in Dubai Airport, we won a contract for GBP 70 million. So who knows, we might even get, by the end of Q1, it will obviously depend on the timing, but we might even get a 100% book-to-bill in Q1, which will be great. I also want emphasize this point, is that this is not only a robust balance sheet, it is a relaxed or well-behaved balance sheet. There's no factoring. Our suppliers are paid on time, and we have -- our pensions is in -- are in good order, all of which is a good background to allow Mrs. Soames to sleep soundly at night knowing that the dividend has been restated. Thank you. Let's do Q&A.

James? At the front here, please, Kathy?

James Rose from Barclays. Two from me. First is on the pipeline and how we grow from here. Where do you see the main opportunities could be to refill it over time? And then secondly, I know you touched on, in the AsPac region, a consolidation theme amongst customers, is that something you see more globally? And how do you think that may affect the competitiveness of bids going forward?

I'll do the pipeline. So on the pipeline as well as -- so you've got GBP 6.5 billion of total opportunities at what we call Gate 2, which is the point at which they are pretty well developed, and we are either about to put in a tender or have done. So that's pretty well developed. If you take our total pipeline of opportunities, it's nearly GBP 10 billion. So it's bigger than that. We don't always talk about that number because it's a -- it's quite difficult to pin it down, but we've got a decent pipeline of things behind the ones that are developed to Gate 2. They are well-spread across the business, which is again, the encouraging thing, and also now what we've got, I think in, particularly in the U.S., we've got things like FEMA and CANES and the sort of work that the NSBU business do. A lot of that is framework contracts where work comes in and out during the day and we'll be seeing -- during the year, so we'll be seeing more of that. Sorry, and the other question was?

What we're seeing in AsPac in terms of the consolidation.

In the supply base, yes.

And then maybe we could do globally just after Mark talks about AsPac.

So from an AsPac perspective, we've seen this primarily in the Australian market with infrastructure players buying out service companies and looking to do sort of full value chain delivery, and that's happened now over a couple of years, and we believe that, that consolidation is probably coming to an end now. We have not seen that in other regional markets as yet. And as I said earlier, our response to that is clear. We're partnering effectively internally to leverage Serco globally because this consolidation is happening within the markets of these Australian companies. We believe that we can respond to that by leveraging our international footprint on the one hand, but also by effectively partnering with other companies in industry and in technology to be able to respond to that. But as I said, we haven't seen that certainly through the rest of the Asia Pacific geography at this time.

I mean it's worth noting in Australia we used to have 2 or 3 companies that were in the public markets who were in our space. They've all been swallowed up and disappeared from the public markets. But what is really not happening is where you see this pattern of consolidation has been particularly strong in the U.S. in the defense field. It's all within their own territories. It's consolidating players within -- and what we've not so much seen is are companies able to consolidate across border.

One thing, James, in terms of pipeline, then we'll come to Sylvia behind, is we're going to, over time, move from our -- the pipeline definition is very strict and very clear and if it's less than GBP 10 million of annual contract value, it doesn't meet the pipeline. With the change in nature of the business, given the growth of U.S. defense, the acquisition of NSBU, we're seeing more and more task orders, which tend to be less than GBP 10 million. And so we're going to drop -- we'll give you both numbers. We'll give you the above GBP 10 million, and we'll give you below [ GBP 10 billion ]. So if you look at it this year, we were somewhere about GBP 6.5 billion. So an extra sort of GBP 1.2 billion, GBP 1.3 billion above the -- our historic pipeline number but we'll give you both numbers for the next few. Sylvia?

Sylvia Barker from JPMorgan. Three, please. Firstly, on growth in North America in 2019. Could you talk about the organic growth of NSBU and defense overall within that? Secondly on M&A, could you maybe update us on your thinking around defense versus Justice, and what does the pipeline look like? And then finally, it seems like, I guess, in AsPac, and you've probably seen that in the U.K., within the Justice contracts, you're using more technology, you're investing more in people and tech. To what extent is the customer willing to finance that? And to what extent you might need to work with partners around that as well?

Let me start with the U.S. in term -- or the Americas in terms of last year. So defense business was the outstanding performer even excluding NSBU. It's had growth of just under 40%. So we saw a lot of ship, shore modernization work and generally right through it, everything really, really strong. In terms of the business as a whole, I think the really encouraging thing in the U.S. was the fact that all the BUs were up versus the previous year with growth across the piece. In terms of NSBU, we hit the numbers. We were marginally ahead of what we said. So if you look at revenue for the 5 months in '19, GBP 110 million; UTP, including the synergies, about GBP 8.6 million. In terms of '20, we said at the time of the acquisition, somewhere about GBP 20 million for UTP, and we'd expect revenue somewhere in the GBP 260 million, GBP 285 million sort of range, depending on how quickly protests get resolved, because that's part of that U.S. marketplace in terms of work that you win. But very pleased with NSBU and its performance so far and very excited about what it will bring us over the next few years.

So in terms of M&A, I think it's a mistake to believe that our strategy is so defined that we just want to do defense. We'll just -- and a lot of this, you have to -- we love all of our children equally in our sectors, and what you have to see is available. Now defense is a priority because long term, we want to invest in our defense business. So those would have a priority. But if other -- acquisitions came up in other sectors, we wouldn't say no, that we won't look at them, and as I've said before in other contexts, that we tend to take the drunken man theory of marketing, which is that you lean up against lots of doors and eventually 1 opens. But you have to be present because you can't force companies. Well, if you try and force companies to be for sale, they nearly always become too expensive. So I think what we would say is that we -- yes, we like defense, but we like J&I, and we have to be driven by what opportunities there are out there. And the same goes for which territories. I mean I'm ambivalent as to whether we would have an opportunity in Europe or Australia or the U.S. It's an interesting question about technology, really interesting question about the technology in the Justice space on the basis that is this a marketplace where it's the lowest bidder gets -- or actually no, is that the -- that if you look at the specification, what the customer wants at Wellingborough, I mean, they are very, very determined to get a genuinely new approach in high quality and technology. They want that in there because this is an investment that they're going to have for the next 20, 30 years. If you go to Grafton, I mean, I was absolutely -- my jaw hit the ground. It was the first time I've been around a prison, and there's not a single bar. Why? Because glass now is tough enough. So you go into these cells that have full-sized windows that are glass. It's a completely different feel and that means that the prisons and all the technology around the security, you ought to be able to run the prisons with fewer people and less violence. You're more on top of the drugs and stuff like that. So I don't think that this idea of saying, are we faced by mean customers when it comes to technology, we're actually faced by customers who are thirsting for new and innovative ways to go and bear down on the crushing rates of prisoner violence in U.K. prisons, in particular. And one of -- we've got the Serco Institute, which is sort of like a think tank, and one of the first bits of work they are doing is trying to do some academic work to work out why the rates of prisoner violence are so much higher in the U.K. than they are in Australia, in part, to learn the lessons, so we can stop that violence in Australia. So we'll talk more about that, but it's interesting.

David, and then we'll come to Joe.

It's David Brockton from Numis. Can I ask 2 fairly broad questions? Just firstly, in respect of the U.K. outsourcing environment, there have been some recent reports of a renewed focus on reducing waste generally across the market. I just want to understand whether you could see any risk in respect of existing activities and really how the nature of that sort of conversation's evolving with government. That's the first. The second question relates to ESG. There's clearly now a very strong sort of social and sort of governance ethos within the business. I just wanted to understand to what extent is it influencing the potential opportunities that you're looking at, and how you are pricing and also leading the customer in respect of that.

So can I -- I'll take this. In terms of outsourcing in the U.K. and the situation in the marketplace, I mean, the government has gone and said to the departments they want to see 5% efficiency cuts because they want this part of the leveling up and they want to take 5% from central departments and send them on to the north. I think that the problem, dare I say, government is going to find is the bits that it has ring-fenced, and this is exactly what happened when the Cameron, Osborne government came in and they went and ring-fenced education, they went and ring-fenced health, they went and ring-fenced social security and then say, "Everybody, we would need 5% cuts. [ So everybody has to stay at 40. ]" So we've been down the -- there remains continued pressure on government for extra efficiency and cost savings, and I think that, that is actually an opportunity for us because they need to have services run efficiently and for value for money. And that, on the whole, favors the continued involvement of the private sector. And I have to tell you, you go and talk to senior people in the government, they are absolutely, under no shadow of a doubt, they cannot achieve what they need to achieve without massive help from the private sector. In particular, what I call the national in-sourcing of regulation, having outsourced it to Europe, it's now being in-sourced back to the U.K. That is going to be the principal focus of civil servants for years to come, doing what they are good at, which is policy and regulation and the like, and leaving the execution and delivery up to the delivery partners. So yes, there is pressure on spend, as there should be. And no doubt, Mr. Cummings is going to be. It's -- there are very real questions to be asked, but nobody's pretending the government procurement over the last 10 years has been a paragon of success or of efficiency. So the fact that somebody is pushing and asking questions is actually something that is good. On the issue of ESG, I commend to you our statement and our CRC report. It was a bit at the end of my statement where we talk about it. I mean the fact is, is that we have a relatively low environmental footprint. Our biggest producer of CO2 across the business are the Northern Isles Ferries, which we don't actually run. We don't own them, we just crew them. So that -- so on the environmental side, we have a full -- where we -- the most important things for us are the social and the governance, and we think that we score -- should score highly on this. We've had a strong social purpose ever since we've been running this, to provide high-quality public services. We have a strong governance regime, and we welcome the fact that business -- that investors are interested in businesses that are going to be sustainable and not suffer the sort of catastrophic events that ours did a few years ago. So we have the scars on our backs to prove what happens when you go wrong on governance. What I would say is that we slightly feel that the intensity of focus now is on one particular part of it, which is on CO2 emissions. And which is slightly for us -- which is less important to us than the S and the G. Joe?

Joe Brent at Liberum. Three questions if I may. Maybe just one at a time, it'll be easier. Firstly, on the contingent liability note you talk about tagging. Could you just tell us what you see as the risks there and how we get comfortable with those risks?

In terms of the lawsuit that in -- it's very...

Did you say tagging?

It is on tagging, I think, isn't it? The contingent liability note?

Well, the 2013 -- it relates to 2013 and a potential class action about the share price fall. It's in as a contingent liability. It is very early stage. We feel we've got a very robust defense and answer to it. But it's -- it will take its time as it goes through, and we'll keep you updated.

Second question, a very good working capital performance. Could you give us some indication of what working capital might look like going forward?