Serco Group plc (SRP) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to today's Serco Group plc 2020 Full Year Results Presentation. [Operator Instructions] I must advise that this conference is being recorded today, Thursday, the 25th of February 2021. I would now like to hand the conference over to your speaker today, Rupert Soames. Please go ahead, sir.

Good morning, everybody, Rupert here. I'm starting on Slide 5, which is the opening side. I'm joined by Nigel Crossley and also by Angus Cockburn. By way of introduction, 2020 has obviously been a very strong performance. And pleasingly, we see continued growth in '21. Revenue up 20% at constant currency, 16% organic. And of that 16% organic, obviously, quite a lot was related to COVID. So ex-COVID, the organic was about 4%, and there's about 5% from the impact of the NSBU acquisition in the U.S. Underlying trading profit up 37% in constant currency, and the margin increased from 3.7% to 4.2%. Very strong free cash flow, doubles to GBP 135 million, and that's brought the adjusted net debt down by GBP 157 million to GBP 58 million and leaves us with 0.5x leverage. A couple of points to point out would be that this now means that about 75% of our trading profit now comes from the -- from outside the U.K., and that's a point that we'll be returning to in terms of the geographic balance of our flow of profits. I'd also like to note that ROIC now, post-tax ROIC, has now hit 15% on a underlying after-tax basis. COVID itself, whilst it had a significant impact on revenues, had only marginal net impact on profits, less than GBP 2 million, and that was because we repaid all the furlough. It was because we have had businesses in our portfolio such as leisure, doing leisure centers for councils, and transport and air traffic control have had -- basically, they've had almost to shut. And then we have other businesses like health that have had significant costs. We paid out GBP 5 million to 50,000 employees as an ex-gratia payment. And the net impact of that is from about GBP 400 million of revenue, we've actually generated, net, about GBP 2 million of profits, less than 1% of our total profits. And of the GBP 43 million increase in underlying trading profit year-on-year, GBP 41 million of it came from sources other than COVID. It's been a very strong operational performance. I'll talk more about that, but the business has responded really, really fast to new opportunities and to the sort of disruption that we've all faced whilst maintaining discipline and control. Solid order intake, GBP 3.1 billion. A lot slower in the second half. It seems to be that the second lockdown has slowed up -- had a much bigger impact on slowing up tender adjudications. In the U.S. alone, that's GBP 2.8 billion of outstanding tender adjudications. We got large ones in the U.K. as well. And that's had the impact of increasing our pipeline, but our book-to-bill was 80% for the year, which compares to 160% the previous year. So we're still ahead across the 2 years. We are -- the reasons why we might not have proposed the dividend have now all fallen away, and we are proposing a dividend of 1.4p, which is about a 25% payout. And we are continuing with our GBP 40 million share buyback program, but we are confirming that about GBP 20 million of those shares will actually be canceled. In terms of 2021, we've increased our guidance from up to GBP 175 million, which will give us, on a constant currency basis, about 10% growth in UTP. And the reason for that really is that we've had a very strong start to the year. Moving on to the next slide, that is Slide 6, just to put this sort of profit growth into context. Between FY '17 and FY '20, we delivered compound annual growth of 33% in UTP and the margin's gone from 2.3% to 4.2%. If we extend that to a 4-year CAGR to out to '21, it's still a 26% CAGR. And this is, of course, all without the impact of WBB, an acquisition that we announced just over a week ago. And we will update guidance to reflect that when we have completed. But the fact is that the revenue growth and the profit growth indicates that we are outperforming we think the market by a meaningful degree, and we are delivering on our promise of taking our margins up towards 5%. I will now hand over to Angus, who will go through the first part of the financial report. Angus?

Thank you, Rupert. Good morning, everybody. I'll now take you through a brief review of the 2020 financials before handing over to Nigel, who will talk about debt, capital allocation, dividends and the outlook. Let's start with the income statement on Slide 8. Revenue of GBP 3.9 billion is up 20% on both a reported and constant currency basis, with organic revenue growth of 16%, being boosted by the full year impact of the NSBU acquisition. The net unfavorable currency impacts of GBP 24 million in revenue and GBP 1.4 million in underlying trading profit arose primarily from the weakening of sterling against the U.S. dollar. All the rates are in the appendix. UTP was up 36% to GBP 163 million. Like last year, UTP is lower than the trading profit of GBP 176 million, as it excludes nonrecurring and contract and balance sheet review items, namely the benefit of commercial settlements in the Caledonian Sleeper contract and a couple of OCP provision releases on our legacy PECS and Compass contracts, which together amounted to GBP 12.6 million. Underlying trading margin improved by 50 basis points to 4.2%. This ongoing improvement assisted to some extent in 2020 by reduced travel costs, has been generated by keeping a tight lid in SG&A costs as the revenue line has grown. The overhead leverage that our business model now delivers is illustrated by the fact that in a year when revenue grew by 20%, our administration expenses grew by less than 3%. The 20% constant currency revenue growth on Slide 9 consists of organic growth of 16% with the NSBU acquisition contributing 5%. ForEx reduced revenue growth by 1%. Approximately 12% of that organic growth was COVID related. UK&E and AsPac were the key drivers with organic growth growing by 31% and 18%, respectively. In UK&E, the net estimated impact on revenue from COVID was around GBP 400 million and supplemented by the full year impact of the AASC contract as well as the PECS and Gatwick immigration removal center mobilizations. These increases were offset partially by sharp COVID-related falls in demand in our Northern Isles Ferries and directly managed leisure trust. Growth in AsPac was largely due to recent contract wins, including our AHSC garrison healthcare contract, which commenced in 2019, and the Adelaide Remand Centre at Clarence Correctional Centre, which came online during the year. Revenue in AsPac was also boosted by additional demand in immigration services as well as COVID-related work for Services Australia. Organic revenue growth in the Americas was muted at 1%, with strong first half growth in our FEMA and U.S. pension benefit guarantee corporation contracts being offset later in the year by the loss of the Georgia Department of Transport contract as well as a significant reduction in the Ship & Shore modernization business during the second half, where activity levels had previously been very high. Organic revenue in the Middle East fell by 7%, mainly reflecting the impact of COVID on our airport services work in Dubai and air traffic control contracts in UAE and Iraq. These transport losses were compounded by a COVID-related reduction in revenue on our Saudi rail contract as well as the loss of a hospital FM contract in UAE. As Slide 10 shows, UTP for the group of GBP 163 million represents headline growth of 37% in constant currency. Underlying trading margin improved by 50 basis points to 4.2%. This means that over the last 3 years, Serco has grown its underlying trading profit at a compound rate of 33% and added 90 basis points of underlying trading margin. The net positive impact from COVID-19 was around GBP 2 million or 1% with some large offsetting impacts. All 4 divisions increased their underlying trading profit in 2020. The outstanding performers were UK&E and the Americas where constant currency UTP grew by 48% and 24%, respectively. Despite the strong growth in UK&E, this division still contributes only around 1/4 of Serco's profits, reflecting the higher margins earned overseas and illustrating the growing importance of Serco's international business. The early January acquisition of Facilities First in Australia, and once regulatory approval has been obtained, the recently announced acquisition of WBB Inc in the U.S., further underlines the growing importance to the group of [ both services internationally ]. UK&E had some big profit swings. Most notably, the contrasting impact of COVID in different businesses. Our immigration contract AASC benefited from no longer having the transition costs in 2019. Citizen Services delivered a very strong performance in large part due to additional COVID toll center and testing and tracing work. In transport, low ridership took a previously profitable Merseyrail contract into loss, whilst our health business was impacted by COVID-related absence and additional costs. In addition, our leisure business sustained a significant loss due to the closure of leisure facilities. Overall, however, UK&E performed very well, growing its UTP by 48% to GBP 57 million, and its margin by 40 basis points to 3.2%. UTP in North America grew by 24% in constant currency to GBP 101 million, with margin improvement by 50 basis points to 9.5%. Around half of this growth came from the NSBU acquisition. The rest of this growth came from across the contract base with notable contributions from the Pensions Guaranty Corporation, FEMA, and our garrison support contract in Goose Bay, Canada. This growth was offset by the reduced volume of ship modernization work, the loss of the transport contract in Georgia and the anticipated second half impact of the completion of the additional CMS volume in early summer. Going forward, the completion of the higher-margin WBB acquisition will help offset the full year margin impact from the end of the temporary uplift in CMS margins, and the lower margins of the recently secured ATFP bid. Also impacting margin are higher insurance costs, which have been felt across the group, but most notably in our U.S. air traffic control business. UTP in AsPac increased by 5% in constant currency terms to GBP 33 million. This increase reflects continuing strong performance in the Citizen Services business and partly due to COVID-related work for Services Australia as well as the full year impact of the AHSC garrison healthcare contract. Our Justice & Immigration business also performed well with higher volumes in immigration caused in part by COVID and the end of the mobilization on the Adelaide Remand Centre contract. Reported UTP margin reduced by 50 basis points to 4.5% due to the start-up of Clarence Correctional Centre and delays in the icebreaker given schedule slippage in part caused by COVID. Despite the fall in revenue, UTP in constant currency in the Middle East increased by 2% to GBP 14 million, reflecting strong growth in our Citizen Services business, notably our Mashroat contract in Saudi, offset by profit falls in health, compounded by the COVID impact in transport profits in Iraq and UAE. Turning to the bottom of the income statement on Slide 11. The increase in finance costs of GBP 4 million to GBP 26 million was largely due to a GBP 3 million increase in IFRS 16 lease interest, caused by the growth in properties rented for the AASC contract, together with increased utilization of the RCF in the early part of the year and a reduction in pension interest. The blended average cost of our debt in 2020 was 50 basis points lower at 4.01% as compared to 4.51% in 2019. The underlying tax rate was [ 23% ], 2 percentage points lower than in 2019. And underlying profit before tax generated from our overseas operations accounted for more than 80% of total underlying profits in 2020, thereby pushing up the effective rate relative to the U.K. statutory rate. Offsetting this, we have been able to use some of our historic U.K. losses and deductions against U.K. profits in 2020, which reduces our underlying tax rate. Over the medium term, we expect the underlying effective rate to be around 25%, with the cash tax rate a little lower due to the benefit of goodwill amortization in the U.S. Cash tax will also benefit in the longer term. And the GBP 560 million of U.K. unrecognized deferred tax assets with a current tax value of GBP 105 million that we expect to bring on to our balance sheet as U.K. profitability continues to improve. Underlying diluted earnings per share grew by 37% from 6.16p to 8.43p. The weighted average number of shares increased from 1.199 billion in 2019 to 1.254 billion in 2020, largely as a result of the full year effect of the May 2019 share placing relating to the NSBU acquisition. Statutory reported earnings per share on a diluted basis, which reflects non-underlying items and exceptionals, was GBP 10.67p as compared to GBP 4.21p in the prior year, which mainly reflects the strong growth in underlying profitability, together with the credit arising from non-underlying items and the exceptional profit in respect to the disposal of our Viapath joint venture. Nigel will talk about the dividend later. Turning to Slide 12. Exceptional items were a net GBP 12 million profit in 2020 as compared to a GBP 26 million loss in the prior year. The [ big success across ] the prior year related to the deferred [ profit ] agreement with the Serious Fraud Office. We said this time last year, there will be no exceptional restructuring costs in 2020, and we were true to our word with the costs relating to improving our HR processes running through UTP in 2020. The exceptional cash inflow was GBP 12 million as compared to the exceptional cash outflow of GBP 49 million in 2019, which reflects in both the SFO settlement and the significant restructuring cash cost. With both those CPs and restructuring behind us, the naturally strong free cash flow generation of Serco's business model will be fully reflected in net debt as the historic leakage from loss-making contracts and restructuring is now well behind us. Slide 13 has the usual detailed cash flow and net debt and cash flow. Now you can pick up more detail in the appendices on both net debt and cash flow. Here, I'll just pick out a few headlines. 2020 has delivered excellent free cash flow performance, which was significantly better than expected. Free cash flow generation improved from GBP 62 million in 2019 to GBP 135 million this year, which represents 127% conversion of underlying profit after tax compared to 84% last year with around 21 percentage points or GBP 12 million of benefit coming from COVID-related tax deferrals in the U.S., for which there is no early repayment mechanism in place and which will consequently be repaid in 2021 and '22. All other COVID-related cash deferrals were fully repaid during 2020. The increase in free cash flow was largely driven by higher UTP and strong cash collections in North America, notably, the catch up with FEMA. In addition, the end of the cash costs associated with our loss-making contract portfolio had a big positive impact on cash generation. We continue to have 0 receivables or payables financing in place. Our billed receivable days were 23, a 6-day improvement compared to 29 days of 2019, reflecting strong cash collection efforts, particularly in North America and the Middle East. And the continuing support provided by our government customers during COVID in terms of paying their bills in a timely fashion despite all the disruption. Our trade payable days decreased by 5 to 20 days, reflecting our focus on paying suppliers promptly and passing on the benefit of the prompt payment of our customers during COVID. Just before I hand over to Nigel, let me say a huge personal thanks to both the analysts, some of whom have had to suffer my chat for more than 20 years, and our shareholders for your support over the last 6.5 years. I will miss Serco and my colleagues enormously when the time comes, particularly Rupert, who it has been one of life's great privileges to work with, but I'm delighted to hand you over to my successor, Nigel Crossley, whose appointment ensures that Serco finally has a proper CFO in place. Having worked closely with Nigel during my time at Serco, I know that the company is in a very capable and safe pair of hands. Nigel?

Thanks, Angus, and thank you for those kind words, and good morning to everybody. First, I want to turn to net debt and leverage, which is Slide 14. In 2020, adjusted net debt closed at GBP 58 million, which represents a reduction of more than GBP 150 million from the start of the year. This is largely driven by strong cash flow performance that Angus has already explained, and to a lesser extent, the proceeds from the sale of our Viapath joint venture, along with some positive foreign exchange movements on our U.S. dollar debt. The average adjusted net debt during the year was GBP 209 million, which compared to the closing net debt is higher than we would normally expect. This is due to stronger cash collection performance across all divisions, which helped reduce our average net debt in the second half to only GBP 137 million. Our adjusted net debt excludes all IFRS 16 liabilities, which were GBP 403 million at the end of December. And as we've explained previously, a significant proportion of these lease liabilities directly related to delivery of our contracts, the costs of which are covered by our contract revenue and the leases have been structured to anchor [ termless-ly ] with our contracts. Net debt at the end of the year, including all lease liabilities, was GBP 460 million. As a result of the strong cash performance during the year, the December covenant leverage ratio was just under 0.5x net debt to EBITDA. So now turning to funding and capital allocation on Slide 15. We ended 2020 with a very strong balance sheet and available liquidity of GBP 582 million, which has enabled the 2 acquisitions we have recently announced to be funded from existing facilities. In October, we successfully raised $200 million from the U.S. placement market to refinance upcoming debt maturities. The new loan notes are spread over 5-, 7-, 10- and 12-year terms, with the cost of new debt lower than our existing debt. This will be the first time that Serco has been able to access investment-grade financing since 2013 and reflects the progress made in terms of financial performance and the strength of our balance sheet. In addition, we have recently secured a GBP 75 million 3-year loan term with our relationship banks. We will draw this at the time of the WBB acquisition closure, and we expect to be -- we expect to be in quarter 2, and this will ensure that we maintain strong liquidity. The group's revolving credit facility, which is currently undrawn, is also forecasted [ to be materially ] undrawn. Overall, our debt facilities have a broad maturity profile, and we are comfortable with the level of liquidity and financial flexibility that they provide to the business. As we consider the reinstatement of the dividend, I thought it would be helpful to remind everybody about Serco's priority for capital allocation. Serco's performance over the last 2 years has proven that it is now a cash-generative business. The cash drag of onerous contracts is behind us, and low levels of capital investment are required by the business with the most significant internal investment likely to be working capital to support revenue growth. Therefore we expect the group's trading cash conversion to be in the region of 80% to 90% over time. As we have previously set out, the group's target leverage is to be between 1 to 2x debt to EBITDA. While in December 2020, leverage is less than 0.5x, we expect this to increase to around 1.6x by June after the acquisition of Facilities First Australia and WBB in North America, which will still be well within our range and also as we have completed the share buyback program. However, we expect profits generated by these acquisitions and the business as a whole will result in leverage being towards the bottom end of the target range by the close of 2022. The group's capital allocation priorities are laid out on the slide. And the first priority is to ensure that we have -- the liquidity exists to fund all costs associated with operating the business and the investment required for organic profitable growth. We also plan to build to fund -- bolt-on acquisitions to strengthen and broaden Serco's position in markets it competes, at the same time as paying an annual dividend to shareholders. This surplus cash builds up, and leverage stays below 1x for an extended period of time; with no immediate investments or acquisition opportunities available, we will consider returning surplus cash to shareholders. So turning to dividends on Slide 16. In April 2020, when the scale of the COVID pandemic was becoming apparent, Serco, like many other companies, withdrew our recommended dividend. And this was for 2 reasons. First, we thought it was inappropriate to pay dividends whilst in receipt of government support. And second, we were understandably cautious at the start of COVID-19 about the potential impact it might have on the financial performance and the liquidity of the group. During 2020, as we've heard, Serco performed well, and our balance sheet and liquidity remains strong. In addition, all government support has been repaid, including GBP 38 million of U.K. VAT, which was repaid early. The one exception is the U.S. payroll taxes of GBP 12 million, for which there was no facility to repay early. Serco also paid, at GBP 100, ex-gratia bonus payment to each of its 50,000 front line workers in recognition of the commitment to performance while working challenging environments. On this basis, the Serco Board has recommended the final dividend should be paid for 2020 of 1.4p per share. This represents a 25% payout ratio, assuming 1/3, 2/3 split between the interim and final dividend. We're also planning to cancel around GBP 20 million worth of treasury shares purchased through the share buyback program announced in December, which is a similar value to a final dividend for 2019 and an interim dividend for 2020. The Board will keep the dividend policy, including the payout ratio, under review as we continue to implement the growth phase of our strategy. It will be mindful of the requirement to maintain a prudent level of dividend cover and the need to maintain a strong balance sheet, which is critical for Serco's long term. So finally, I'll turn to the guidance for 2021 on Slide 17. And you'll see that we've increased guidance compared to the initial view we gave in December, with UTP anticipated to be GBP 175 million and revenue around GBP 4.2 billion. This reflects a strong start to the year with performance on or above expectation in all divisions, and particularly in the U.K., which has benefited from higher levels of activity on COVID-19-related services. The new guidance accounts for recent foreign exchange movements, which has an approximate negative GBP 40 million impact on revenue and a GBP 3 million to GBP 4 million impact on underlying trading profits compared to 2020. On a constant currency basis, organic revenue growth is expected to be 4%, and underlying trading profit is expected to increase by 10%. The guidance includes the acquisition of Facilities First Australia, which is expected to add around GBP 6 million of underlying trading profit, but does not include the acquisition of WBB, which is still subject to regulatory clearance. We'll update guidance in quarter 2 to include WBB once we have clarity on the completion date. We expect performance in the first half of 2021 to be stronger than the second half, with volumes on COVID-19-related contracts forecast to drop off as the year progresses. The second half will also see the end of the AWE contract. But we do anticipate seeing improved demand returning on our leisure and transport businesses. The guidance for finance costs, tax rates, free cash flow and net debt remain unchanged from the guidance we provided in December. And on that point, I'm going to hand back to Rupert.

Thank you, Nigel. And moving to Slide 19, highlights and lowlights. Well, perhaps the most important highlight and lowlight for the year for me was the lowlight when Angus came and said that he'd like to retire, which was obviously a lowlight. But the highlight is how well and he's managed that process and that he took the precaution of hiring an incredibly talented successor in the form of Nigel Crossley way back in 2014. And Nigel and I have been working together for a very long time. I have worked with Angus on and off -- almost continuously since 2003 with a brief 6-month gap when I jumped ship from Aggreko and came to Serco. Whilst at Aggreko, the share price, while we were there together, went from GBP 1.30 to GBP 17 when we left. We were in the FTSE 100. And during that time, as at Serco, we have seen both triumph and disaster coming back time and again. It's been a wonderful, fantastic journey. And Angus, as I say, in the -- there are not many stock exchange announcements that have a reference to the CEO being firmly what I believe that you are a prince amongst men and a giant amongst [ CEOs ], and we will miss you. It's also, I think, your 42nd results presentation. So that will be -- that must be getting on for a record. Moving on to our own highlights and lowlights of the years -- of the year, well clearly a strong operational performance. And we'll talk a little bit more about that. On the people front, 21,500 people recruited, 10,000 net new jobs increase. And perhaps, best of all, is that during COVID engagement increased, and we'll talk about that in a moment. In terms that we talked about the financial performance, Angus will be stepping down in the year in which we go and pay our first dividend since 2014, and also when the underlying post-tax rate, which was something that we all followed incredibly closely at Aggreko, is over 15%. I mentioned earlier on, the importance of this idea that the growth in 2020 was broadly based. It wasn't just COVID. The COVID impact was relatively small. But the ongoing underlying business did really well, as well. And the year has started out, yes, strongly because COVID test and trace is running very hot, but also the whole business across the world is actually doing pretty well in January. The fact that we're managing, after 33% compound growth for the last 3 years, to still continue to grow in '21. We were uncertain whether that would be the case, but -- last year, but the fact is that we're going to be growing about 10% compound -- sorry, 10% in constant currency in 2021. We've had some key wins, mainly in the first half, but I would like to point to Acacia Prison in Australia, which was as a foundational contract for the Australian business, and it's a long-term contract. I think one of the reasons for the book and bill being a slight low, is that most of our revenues are made up of long-term contracts. So when you renew them, you get 5 years' worth of revenue into the order book. But particularly with test and trace, this is stuff that's coming in and out of the -- into the order book through revenue and out the other side without building the order book. But the order book still remains very healthy. But the consequence of the -- a lot of decisions slowing up in the first -- in the second half has been that we have got a very strong pipeline coming into 2021. And it's one of the reasons why we think that we're going to be able to maintain and resist headwinds through the years that we've got a strong pipeline of opportunities. We have -- during this process, we've also managed to successfully integrate NSBU and do 2 acquisitions, which have been recently announced. And I think also another highlight would be the successful refinancing of our long-term debt. There are precious few companies in our sector who find this as an easy process. We went back to the USPP market, and we've got -- being offered tenors out to 12 years out. That's all done. We've just gone and raised another GBP 75 million yesterday to give us added financial flexibility. So we have masses of liquidity. In terms of lowlights, you have to start with the dreadful impact that COVID has on -- had on the lives of -- and welfare of many tens of thousands of colleagues we think of, I think, particularly the people listening to this call, the main experience would have been the perils of working from home, but 90% of our staff, their office is a prison. It's a hospital. It's a train. It's an air traffic control site. They have to turn up and the bravery, the courage, the resilience of people turning up to work. And it has been my challenge to be able to come to terms with the fact that -- I mean I have got out and about on the contracts. But I'm basically sitting at home doing my work. And knowing that people are having to go into very, very infectious COVID environments, and they do it and have done it really well through the year. In terms of bid losses, Viapath, which was a joint venture to do services for -- not forensics, what's it called? Pathology services. Air traffic control trading in the U.S., Wellingborough Prison we lost. We are pretty certain that we lost Dubai Metro, and we lost a bid for a new air force base in Canada. AWE has been taken back in-house in November, I think, took everybody by surprise. It was a -- it was not a surprise that they were considering taking it back in-house because we know they've looked at this every 2 or 3 years, they look at it, what took us by surprise was that the speed which they're doing it, and they will take over control at the end of June. So that will be about an GBP 8 million hit in the second half and then a full year effect in 2021. Not only have a lot of tender adjudications slipped, particularly there's a huge one in the U.K., which is DIO, which we would hope to hear in the next few weeks on this. But also the U.S. there have been a lot of bid protests. And you will know that we were kind of public and only #1 on test and trace in the middle part of last year. And the fact is that test and trace has been a huge success. I've been talking about it on Radio 4 today and explaining what these 2 major programs, one's vaccination and the other is test and trace. And actually, now they are both running really, really well. The difference being is that vaccination is something that the NHS does every year for about 14 million flu jabs, and they've had 9 months to plan before they had to put a single injection into anybody's arm. Test and trace, the government had to stand up on 4 weeks' notice, nothing of this scale has ever been put together by any country on the scale of this sort of test and trace, about 2.5 million people being tested every week. There are 1 million people traced in the first week of July, and it is interesting, but the level of angst and volume about test and trace has almost dropped away because it is now an incredibly good service, but it's taken some time to get established. And I think investors were -- some investors were a bit unnerved by the scale of the vituperation. But that's part of our job. And the important thing is that the government has continued to give us business and extend our contracts. And we think that they're very pleased with us. Prisons and hospitals has all been challenging to run, but particular prisons. They've basically been under lockdown 23 hours a day for much of last year that's made that very difficult. And in recent weeks, we had a cyber attack. I think nearly every company in this sector has had a serious cyber attack. It was on the weakest part of our network that is actually completely separated from what you might call our secure central network in Europe. I'm glad to say that all systems are recovered. We've got all our data, quite a lot of data was stolen, but it wasn't destroyed. We still have it on our systems and our backups, and this had immaterial impact on service delivery and our cybersecurity teams have done an absolutely remarkable job of recovering that situation. Moving on to the next slide, Slide 20. I think that operationally, one of the things that we did was -- I mean I do think that the organization has risen to the level of events, and that's partly because right from the get-go, we set our priorities. And we did not say, as most companies did, that our priority is the safety of our staff. We said from the get-go that our priority in this crisis is to support the delivery of essential public services, and within that context, to protect everybody. And this actually has resonated really well within the business because it gave people a sense of purpose. They knew it wasn't that we didn't care about our people, but it made them realize the work that we were doing was of national importance. And I think that both culturally and organizationally, 3 things have enabled us to navigate our way through this crisis. The first is what we call our loose-tight management where we give operational responsibility for delivering contracts about as close to the customer as possible. But people have very strict guardrails. There's very strict control around bidding and risk management and the like. And we actually looked it up between the 1st of April and the end of December, the investment committee, which is basically Angus and Nigel and I and some -- the group General Counsel and other group people, we meet to look to review bids. It met 85 times between April and December. So all the controls and the process that we put in worked really well in terms of maintaining control through the process. Culture was really important and we'll look at that in the moment in the engagement scores. But we've also built a highly scalable operating platform as a result of the investment in IT systems and processes. And this has, broadly speaking, enabled us to significantly scale up the business at 50 basis points to our margin and 20% to our revenues. And as we say in the text, for a very large business, it's proved to be a surprisingly agile business. For a business that looks like a collection of lots of different contracts, we've been able to operate with common purpose and systems. And the -- for a business of any size, we -- it's proved to be remarkably resilient. On to the next slide, talking a little 2 slides about people, managing businesses. This is the absence rates from the U.K. In March '20, they peaked at nearly 28% absence rate with the first lockdown. And in January, they were back up to 20%. Managing as you imagine a hospital where from day-to-day you don't know how many people are going to turn up is extremely testing. But with the expansion of things like the COVID, the test and trace work, we've actually had to recruit 21,500 people in the last year and have created 10,000 net new jobs. Tragically, we've had 25 deaths amongst our staff and 3,000 COVID cases. Those statistics are terrible, but they are not unsurprising in a business that employs 55,000 people. On to the next side, please, that will be Slide 22. I think perhaps everybody knows I am much attached to our engagement scores and our Viewpoint scores. And this is a thing that personally I am proudest about of the year, in a year that has been absolutely a horrific experience for so many of our colleagues. The engagement score actually, I thought it was going to go down. I couldn't imagine it wouldn't go down. And it actually went up. It went up from 71 to 73 amongst all employees and from 73 to 75 amongst managers. And the things that I cling to here is that the experience of the managers in the business is very similar to the experience of the employees, the colleagues. And I think that's so important. And these are not trivial surveys in that they're done every year in September. There were 30,000 respondents who made 65,000 comments. And if you want to go and see just how rude people can be about the company that they work for, there are 1,000 randomly selected comments available on serco.com for people to go and have a look at. But we're not embarrassed that we have a very feisty and loyal colleagues who care deeply about the company. We've also had to deal with some very complex succession planning during this process. So Kevin Craven retiring from the U.K. So Mark Irwin, who's running AsPac Compass, come to the U.K. We've promoted Peter Welling to be Managing Director of AsPac. Anthony Kirby has been promoted to Chief Operating Officer. And with Angus Cockburn retiring, Nigel is going to be becoming the CFO. This is a nontrivial amount of senior management movement in a -- and I think it's been incredibly stable senior management team, but it has worked to do that in the middle of COVID has all worked quite smoothly. Onto the next slide, please. I'm not going to read out everyone. This is just examples of the sort of remarkable things that the business has done in Clarence prison between July and December, mobilizing that. We went from 0 to 1,000 prisoners between July and December. We mobilized Christmas Island, which is a detention center about 7 hours flight from Perth in the middle of the Pacific Ocean. And the customer asked us to remobilize. So we've got to mobilize on 6 days' notice. NHS Test & Trace mobilized 10,500 tracing staff in 4 weeks. 8,800 testing staff, we recruited delivering 5.5 million tests. In asylum seeker contract, we've taken along 3,500 extra units, now looking after 25,000 people. And as you can imagine, the protocols for dealing that in a COVID environment are really complex. So the business has performed out of its socks in an operational sense. Moving on to the next slide. As just mentioned, not only has it done that, but we were able to do 2 important acquisitions, both of a very different size, but I think the point that it shows that even with all the disruption of COVID, we were able to do this WBB announced on the 16th of February. We hope it to close sometime in the second quarter. And Facilities First Australia announced in December. That's already closed. One is a low margin, but large-scale FM business in Australia, and it's just what the Australian business needs. It's not an acquisition that we would have necessarily done elsewhere, but it was right for that business. And WBB gives us now $1.1 billion defense business in the U.S. and gives us real heft in that market. Moving on to the divisional slides. I'm just going to chop through these quickly. We can spend more time if any of you want more detail. But in terms of Americas, now 49% of our UTP -- original UTP is in North America. It's got the highest margins in the group. The NSBU acquisition has settled in really well. There's been not a single senior management departure from NSBU since we bought it. And it's performing in line with our expectations. So we're pleased with that. The -- in terms of the organic revenue -- the revenue growth was 16%. It was only 1% organic, but you'll be careful there because there's quite a lot of revenue in the U.S. that refers to the -- is related to this CANES contract, where we are making large amounts of -- basically it's racks of communications equipment, we go and assemble it for ships. And it's very low-margin business, but a larger might have kept going through. And actually, we've just got and won a new CANES contract. It tends to bring a lot of revenue through with it. So that dropped off, but you'll see that that's why the organic revenue growth was only 1%, but the UTP growth was 13% was in part because the CANES contracts don't contribute a lot of profit. FEMA, which is a new contract. We stood up 2,000 people to provide services to the Federal Emergency Management Agency. And I would just say in passing that Texas is one of the areas that we look after for where [ we're subcontractors ] of FEMA. CMS has run well. The margins are stable. Volumes are going to be a bit lower this year. And in terms of contract wins, a Ground-Based Electro-Optical Deep Space Surveillance system. It's called telescope to you or me. But we've got the contract to go. And there's $3 billion of bids awaiting award. And the other thing is that lots of these bids now are being protested. But the business is in [route] shape, doing well, and started the year well. Going to the U.K. The U.K. has seen this tremendous growth, 31% organic growth, substantially all of that was COVID-19. About GBP 350 million of Test & Trace revenues, but then offset by -- in profit terms, by leisure and transport. But leisure and transport, most of the revenue doesn't come through the -- our own revenue line as it's in associates or JVs. The growth has been in UTP, largely delivered by AASC, the commerce contract as we mobilized the new contract. And at last, now after 10 years of losing money, it's now making money. And also our PECS escorting contract has mobilized successfully. Big contract wins with Northern Isles Ferry and then the NHS Test & Trace, which you've heard the story, I mean, amazing achievement standing up that. The biggest element in the pipeline is the DIO, defense and infrastructure bid, but we're also bidding for the Skynet Athena consortium along with Inmarsat and Lockheed Martin and CGI. We have the FPMS, which is the tug and shipping services to the Navy coming along. It was a big pipeline there, nearly GBP 8 billion on the wider definition, including rebids. Next slide, please. AsPac, 16% revenue growth, actually 18% on a organic basis. There was a 2% of FX headwinds. They're doing very well, the AHSC defense garrison. Health care contract, which is providing medical staff to the Australian military bases, doing very well and are profitable. And the business has done very well through. They've got big contracts providing call centers for the Australian tax office and for the Department of Human Services who services Australia. And they've had a good year with some good orders of Fiona Stanley extension of worth GBP 370 million and Acacia worth GBP 250 million for its first phase. Finally, the Middle East. The Middle East, it's a management conference today, and I went on to say, it is -- next slide, please. It is the smallest of our regions, but, nonetheless, valuable. It's been very difficult running that business, but they've risen to the occasion. It represents about 7% via UTP, but it's an important part of the -- important platform for future growth where we are pretty saddened that they've lost the Dubai Metro, which is, on the one hand, it was an iconic contract; on the other hand, it was barely profitable, and very, very complex to do. So we are not shedding a disproportionate number of tears about that. And it will help the revenues -- the margin -- percentage margin of the overall group. Moving on then to the summary and the outlook that is on Slide 30. Well, I mean, strong operational financial performance, and we expect continued growth in 2021. The pandemic has tested our mettle, and it's proven us, I think, to be an agile, resilient and a highly capable business, capable of standing up huge resources very quickly in response to government's need. Our investment in culture, the time that we spend talking about trust, care, innovation and pride has paid dividends as have the instinct for transparency and rigorous reporting. The acquisitions of FFA and WBB show that we can continue to advance our strategy even in the midst of the sort of disruption that you get in a pandemic. And I think that our decision to be an international business, but a highly focused business, a supplier of government services, has worked really well. We've got the international footprint with 50% of our divisional UTP now coming from North America, 30% from the U.K. And longer term, the outlook is that -- the 4 forces that we talked about in our strategy in 2015 and growing costs of health care demographics, the need now for more resilient public services, rising expectations of choice and service quality, the quality of public services coming more to the forefront of people's minds, but equally, now the whole financial situation that governments find themselves in is really going to be -- that pressure is going to be all greater. And basically, people's memories will be short, and they won't want to pay a lot more tax. So there is going to remain the fierce pressure that is the driver of demand in our business to provide -- to deliver more services of higher quality for better value, what we call more and better for less. So we think that will be intact. We're going to do a Capital Markets Day in H2 when we see the -- what the -- when the fog begins to clear on COVID. But in the meantime, we're still holding to our medium-term aspiration of 5% revenue growth, then 5% margins over the medium term. With that, I'm going to say thank you and open this up to questions.

[Operator Instructions] Your first question today comes from Sylvia Barker from JPMorgan.

A couple of questions on NSBU. It seems like you have had, again, a strong year. Could you maybe just talk about what growth you've seen in that business? And if we can extrapolate to WBB at all? And obviously, you've got some reasonable assumptions for its first year, but how did NSBU develop kind of after you bought it in terms of the revenue trends? And then secondly, just on central costs, could you maybe just remind us why -- I guess what the temporary savings are within that line and what the -- maybe the most structural savings are and where that might be going forward?

So I will take NSBU. And Nigel, will you take central costs?

Yes.

So NSBU, remember, it's got 2 parts of it. One is the U.S. business and the other is the Canadian business. The Canadian business did particularly well, had a very, very strong year, I would say. Revenues on that unit overall have been slightly lower than we thought because we've had -- we had a particular class of landing craft that had to go and get reworked. But in terms of its contribution overall with the synergies that we got were ahead of our cost of capital, and it is performing pretty much where we would hope for it, albeit that the profit is a bit higher, and the revenue is a bit lower. They've got -- they have been -- they have got a lot of protests out on bids that we -- that they have won but have subsequently been protested. So in terms of the growth that we can get out of that business, it is going to be very largely dependent on the outcome of these -- in the short term, on the outcomes of those projects. But we were happy that they've got a decent -- a strong pipeline with a lot of work that they've won that happens to be under protest at the moment. But basically speaking, we are delighted with that acquisition. It's given us a very strong position in Navy, and it's given us this platform from which we've now expanded the WBB. Nigel, central costs?

Yes. So the central costs, they came in at GBP 41 million this year, a little bit lower than we were last year. We've had travel savings as everybody has been grounded. And there's just been less project work, but we can always expect corporate costs to move up and down a little bit. And I think our guidance would be a number somewhere around the mid-40s is what we'd expect our corporate cost to be going forward.

And your next question comes from the line of Allen Wells, Exane.

Just a few from me, please. Can I just ask, I guess, as we think about 2021 and thus the phasing into '22 as well, could you just maybe talk a little bit about the assumptions behind or how you guys are thinking about the pathway to recovery and the likes of Merseyrail and leisure? And I guess maybe more broadly, do you expect them to get back towards sort of 2019 levels? Or do you think that, that just isn't possible now, given, I guess, kind of changing attitudes in -- over '21 and '22? Following on from that, I guess, the other one, the other key areas, obviously, which you've alluded to the fading down of Test & Trace and testing activity. Could you just remind us where we are in terms of visibility on this contract? I think I read that you now almost certainly will have those contracts through to the half year. But how are you thinking about the rebids and how that carries on beyond as vaccines are rolled out, sorry? And then finally, as I guess, I think about sort of the pipeline and rebids, and you kind of alluded to this. DIO ends up being quite a big opportunity that comes up this year. Could you maybe remind us how you guys are looking at the sort of the bull and bear case here on DIO, what that could mean for numbers as we look forward if you're successful?

So Allen, I'll take -- in terms of the '21 phasing, I mean I think if I -- we are assuming revenues on Test & Trace to be pretty much the same this year in '21 as they were in '20, but just phase differently. So we had a much stronger second half and a weaker first half of '20, and we expect that to reverse this year. So we do -- we are assuming some ongoing business beyond the -- into Q2, but at a much lower rate. In terms of the phasing of the contract, there is an RFP in the market for the testing side of the business which probably would mean that the successful bidders will start picking up somewhere in June and July. So as you rightfully say, we'd be reasonably hopeful that we keep the testing business that we have got in some formal mix through to the half year. And then if we win part of the extension, that may continue. Nobody knows, I mean, who knows what it's going to be like when life returns to normal, how -- whether there will still be the need for test sites for people to turn up and get tested or will they all be absorbed into other local authority facilities. They will probably need to maintain some form of central tracing capability because they want to jump -- be ready to jump on any outbreaks that occur or new variants. But one of the things that we've proven to government is that we can flex this incredibly fast. So we started at 10,000. We went down to 5,000 in September traces. They then increased it to 9,500 again for December and January. And I think we'll be down to 5,000 again in March. And this ability to flex the scale of the tracing has I think given government a lot of confidence that they don't need to keep such a large standing army. So I think you're right, we've got pretty good visibility on Test & Trace through the first half, very little for the second half, but we're assuming that there will still be revenues of that in the second half. As for the pickup of Merseyrail and leisure, I kind of take the same view as you, which is, I think it's unlikely to get back to where it was in 2019. Merseyrail may, but I think Merseyrail is basically a commuter rail. And if more people are working for home, presumably, the rail -- there'll be less pressure on the rail. So I think it will come back. I mean it was between health, extra cost in health, leisure and Merseyrail, the hit was about GBP 35 million. And I didn't know how much of that's going to come back or how long it's going to take. But that gives you some for the -- it's a lot of -- there's quite a lot of headroom to come back. But I don't know how much is going to come back from. But I guess -- and it will take some time into '22 to come back. I'm not -- on DIO, I'm not going to go into all the different configurations. There are endless different regions. We could either win nothing. We could win very big or we could win a bit. But it is -- what you know -- what everybody knows is it is a huge contract to provide services to the MOD and is one of a number of very large opportunities that we have in the pipeline.

And your next question comes from the line of Paul Sullivan from Barclays.

Yes. Firstly, I mean, the win rate appeared to be higher than usual. I mean, other than you being very good, what do we read into that? And -- or are you being more selective in terms of what you bid for? And then just sort of following on from that, is the pipeline now at a stage, and is it fluid enough to sustain your 5% long-term growth target in its current form? And then I don't know whether you can provide a bit more color on the 4% organic guidance by division. And then just finally, free cash flow guidance is unchanged versus the higher profits. What's driving that?

So Nigel, will you take the win rate and the free cash flow, why that's changed? I'll talk about the scale of the pipeline.

Sorry, [indiscernible].

So the win rate.

So our win rate for the year was 35% on new business, and it was 90% of our rebid business, if we exclude the Viapath joint venture that we bid for, which was previously a loss-making business for us. So our win rates are strong. 35% is a little bit higher on our new bid win rate than we've seen in recent years. But we are consistently getting a rebid win rate in those 85%, 90% on an annual basis. And that's important because it keeps our base strong. So then the new business that we win is largely incremental to that base. So I would say we are pretty happy with the kind of win rates, rebid win rates that we have at the moment. And well, there's a lot of movement in and out of the pipeline. We would say that -- we feel confident enough that the size of the pipeline would support the growth that we're looking forward to.

And you might like to think and come back to whether the -- how the 4% organic growth splits by division. I'm not sure we've got that. But Paul, this issue about the -- you will be aware that I've made a complete idiot of myself over the years when talking about pipeline. My learned colleague, Ed Casey, when he was COO, used to say, we need a pipeline of 10 billion or else we'll be in the 6-cycle hell. It turns out that we don't. The other thing is it's a definition of what is in that pipeline. It is only new business. And as a definition, it's becoming increasingly as one that we'll need to go away from because we've always done it, but it's increasingly questionable how valuable it is because so much of our work now is rebids. So I think that we have -- last year, I think we had 160% book-to-bill. But we went into the year at something like sort of GBP 4.5 billion or GBP 5 billion of a pipeline. I'll have to get the exact number. Jamie will send it to you. But it produced an enormous amount of order book increase because there were some very big rebids that never appeared in the pipeline. So I note that the pipeline has got bigger, but that's actually a function of decisions that would have happened in the second half going into the first half. If you know a way of measuring a pipeline that is particularly useful, we're delighted to hear from you, but we don't think it's particularly predictive. And that you're better off on the whole, just looking at the rebids we got coming up, applying roughly somewhere around 85% to that, then we'll tell you what the new business is going by roughly 25% of that. And sometimes, it hits well and sometimes it doesn't. But the state, I don't look at GBP 6.9 billion of pipeline and say, well, GBP 6.4 billion pipeline and say that is always not enough to sustain 5% growth in the long term. We believe that we can sustain that 5% growth in the long term. And that will but it is dependent on us being able to win a lot of our rebids. It's really the rebid rate that is significant as the new business.

And Rupert, I'll just add a couple of numbers for Paul. We came into the year, Paul, with GBP 4.9 billion in what we call our investor pipeline. We come out of it at GBP 6.4 billion. And on top of that, we also have smaller bids, less than GBP 10 million in annual value, which at the end of '19, it was GBP 4.9 billion of the big bids and then add on GBP 1.6 billion to get GBP 6.5 billion and ended '20 at GBP 6.4 billion plus GBP 1.7 billion, which is GBP 8.1 billion. So improvement in pipeline in part reflecting the movement to the right towards the end of the year in terms of the COVID impact. And also worth noting that 28% of the U.S. pipeline is NSBU. Sorry, Rupert, back to you.

Paul, in terms of the 4% growth rate, I can say that we've got 4% growth rate organic. If we look across our 4 regions, we're slightly above that rate in the U.K. and in North America, slightly below in AsPac, but pretty clustered around the 4%. The one outlier we're going to have is the Middle East. Obviously, it has -- as we must define metro, which was a much bigger revenue contributor than it was profit contributor. Right. With that, Paul, are we done?

Just sort of that with free cash flow versus...