Serco Group plc (SRP) Earnings Call Transcript

Good day and thank you for standing by. Welcome to the Serco Group Plc 2021 Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rupert Soames, Chief Executive. Please go ahead.

Good morning, everybody. Rupert Soames here, and welcome to our first half results presentation, which is the first without Angus Cockburn, who stepped down at the AGM. And my new responsible adult is Nigel Crossley who's been with Serco since 2014 and who has played an absolutely vital and central role in the transformation of Serco. He also speaks Queen's English. So no need for instantaneous translation from Angus' viking. Also on the call is our COO, Chief Operating Officer, Anthony Kirby, who joined Serco in 2017 as HR Director and was promoted to Chief Operating Officer a year ago. So I'm just going to chop through a couple of introductory slides, hand over to Nigel to cover the finances, and then I will come back for the operational issues. So continued strong growth. Interestingly, sort of doing all the right on the slide, right? Almost all the percentages are very similar to the ones that we achieved in 2020. And our scalable and agile government services platform has delivered what we believe is, by any standards, an impressive first half, with revenue up 20%, underlying trading profit up 62%. And our margin increased by -- from 4 -- sorry, from 4.3% to 5.7% and an exceptionally strong cash performance, with free cash flow of GBP 130 million. Net debt consequently is GBP 225 million, which is up only GBP 82 million year-on-year despite, during that period, having spent GBP 249 million on acquisitions and GBP 40 million on share buybacks. That leaves our current leverage at 1x, which is right at the bottom of our target range. But perhaps most encouraging and boding well for the future is a strong order intake of GBP 4.1 billion. That's 190% book-to-bill, and 60% of that order intake was represented by new work. Our pipeline also, which you would expect with that amount of order intake to have been really hammered, has actually been largely rebuilt and stands at GBP 5.8 billion compared with GBP 6.4 billion at the beginning of the year and is up 40% on the position a year ago. And this performance is not an accident. It's been the result of 7 years of investment in building our operating platform, our culture of loose/tight management, which has performed extremely well, allowing the business to grow and the people on the front line and the managers to do what they needed to do, but also within a strong compliance and governance framework. Our operating platform has proved to be extraordinarily scalable. We now have nearly 1/3 more employees than we had a year ago. That's 21,000 additional people and taking us to about 83,000 people. And that's sort of growth -- to achieve that sort of growth without any loss of operational control is, I think, quite a strong achievement. At the same time and looking forward to the second half, we are -- have stepped up the rate of investment further in our government services platform to increase our long-term competitiveness. Just spend a few seconds on the dividend. We're proposing an interim dividend of 0.8p. And just to put that a little bit into context, we had planned or hoped to pay both a final dividend in respect of 2019 and an interim in 2020. But because of COVID, we pulled both of them. But if you work back from the final dividend that we paid that we announced in -- with our results in respect to 2020 where we did pay a final dividend, will go on the basis of 2/3, 1/3, that 0.8p would imply a 15% increase over the 0.7p that we would have paid if we could last year. In terms of guidance for 2021, the UTP guidance remains unchanged, increase of 23% year-on-year and 200 -- around about GBP 200 million. And the free cash flow guidance has increased by GBP 20 million to GBP 120 million, and the net debt forecast was reduced by GBP 25 million. And we'll talk more about the drags in the second half and the slightly odd shape of the year with a very strong first half. But the important thing to note is that the GBP 4 billion of order intake sets us up well to manage what will be the inevitable reduction over time and hope for reduction over time of the COVID work as we come out of the pandemic. Turning over to the next slide. That's Slide #6 in the pack. This is, I think -- in 18 years of running public companies and doing presentations, this is about my happiest slide, showing consistent track record of progress over the last 4 years. For a government services company to achieve revenue CAGR since 2017 of 10% and underlying trading profit CAGR of 30% is, I think, pretty impressive. Our margins have gone from 2.3% in '17 to 4.7% based on our forecast for our guidance for '21. And over that period, between January '17 and June '21, we booked GBP 15 billion of revenue, but we booked GBP 19 billion of order intake. And I think that, that is a real -- a, it bodes well for the future; but, b, shows the strength and the solid nature of our recovery as we are in the growth stage of our strategic plan, which, those of you who've been following us since 2014, we set out as being stabilize, transform and grow. And I also think that the strong revenue CAGR and the profit growth rate tends -- and the order intake tends to indicate that we are performing well relative to peers in our sector. And at that point, I'm going to hand over to Nigel to take you through the financial review.

Thank you, Rupert, and good morning to everybody. This morning, I'll be talking about the group and the division's financial performance. And we've slightly amended the way that we've organized our finance presentation to make it a little less dense. I want to assure everybody that the detailed finance slides that were previously used are still there and in the appendix to the presentation, which we're putting on the website. So we move to Slide 8, the financial overview. So the first half has been exceptionally strong as Rupert has said. Revenue grew 19% to GBP 2.2 billion. 5% of this growth has come from -- has been generated by 2 acquisitions of Facilities First in Australia, which we closed at the end of the year, and WBB, the U.S. defense acquisition, which closed at the end of April. Organic revenue growth was 15%, with the COVID-19-related work in Australia and the U.K. contributing most of this. And our 3 largest divisions have all grown in the period. I'll provide more information in a minute on the performance by division. Underlying trading profit for the period was GBP 123 million, an increase of 58% on the first half of last year and delivering a 5.7% margin, up from 4.3%. Part of the increase in margin was a result of operational leverage as our revenues grew more than twice as fast as our overheads, underlining the scalability of our government services platform. Acquisitions have contributed 8 percentage points of the 58% increase in the group's profit, where there's been a negative impact from foreign exchange. Underlying earnings per share was 6.75p per share. This is 75% higher than the first half of 2020 due to the strong trading profit performance, flat finance costs year-on-year and a tax rate of 23%, which is lower than last year, which is mainly due to the release of a tax provision that is no longer required. Free cash flow of GBP 130 million has resulted in cash conversion of 137% and leverage at the bottom end of our target range of 1 to 2x EBITDA. So turning to Slide 9, the U.K. The U.K. has been the standout performer in the group in the first half of the year, reporting 33% organic revenue growth, more than doubling profits, adding 2 percentage points to the margin as well as securing GBP 3 billion of order intake. Citizen Services revenue was up 73% in the period, and COVID-19-related work, particularly test centers and tracing contracts, contributed most of this growth. The leisure business is starting to show early signs of recovery after the pandemic, with both higher revenue and lower losses than last year. Our Citizen Services has also been successful, winning 2 regions on the DWP restart contract, helping long-term unemployed get back into the workplace. Mobilization of the contract has significant costs in the second half, but revenue and profits will start in full in 2022. Justice & Immigration had a strong first half, largely on the back of the successful start-up of the new prisoner escorting contract, which covers a larger region of South of England than the previous contract. This contract incurred significant start-up costs last year, and the swing from loss to profit has had a notable impact on the division's margin. In addition, we have seen higher volumes on the Asylum Seeker contract in the first half of the year. Transport and Health are the 2 sectors that have been most impacted by the pandemic. However, we are starting to see some early signs of recovery. Staff absence levels were high in the first quarter lockdown and our Transport businesses, particularly Merseyrail, has been hit hard by lower ridership volumes. The Defense business has traded in line with our expectations in the period. But the significant development in Defense is the contract wins in our VIVO joint venture with Engie, which will be providing facilities management to defense infrastructure organizations, where we have won 2 regions for both DIOs, estates and housing. The total value of these contracts awards is GBP 4 billion, of which GBP 1.9 billion is Serco share. The mobilization of the contracts and the setup of the joint ventures management and processes have already begun, but revenue does not start until quarter 1 of 2022. Despite the exceptional order intake during the first half of the year, the U.K. and Europe pipeline has largely been replenished and includes: Glen Parva, a new prison bid; and in Defense, with the further DIO opportunities; and the next generation of the Skynet contract. Moving to Slide 10, the Americas. It's clear that the Americas results have been impacted by a weaker dollar when translated into sterling. But on a constant currency basis, revenue has grown 6% with flat organic growth, and underlying trading profit is up a notable 15%. In the Americas, there's modest growth in the 3 sectors where we operate. Defense has benefited from the WBB acquisition, which has added GBP 30 million of revenue in the period. Although elsewhere, there's been a small organic decline in Defense, largely due to the delays by the customer in awarding new contracts. We currently have about $2.5 billion of tenders awaiting adjudication. Underlying trading profit was GBP 57 million, and then the Americas now accounts for almost 40% of the group's profits or over 24% of the group's revenue. The profit margins increased 95 basis points since last year, which is due to the higher margins and the WBB acquisition, stronger operational performance in a number of contracts and a GBP 3 million profit from the sale of our U.S. parking contracts. Order intake was GBP 1 billion. There are 2 important bids, which have been -- rebids, which have been secured from a Canadian air base in Goose Bay and the Anti-Terrorism/Force Protection for the U.S. Navy, along with a number of new contract wins, totaling GBP 250 million, which are largely in Defense. The Americas pipeline is the largest in the group, with Defense making up the bulk of the opportunities. As our customers return to their offices post the pandemic, we expect to see an increase in the rate of awards being made and a return to organic growth in the second half. So turning to Slide 11. In Asia Pacific, revenue has grown by 38% to GBP 458 million. 11 percentage points of the growth is organic, while 17 percentage points came from the acquisition of Facilities First Australia, and FX has added a further 9 percentage points. The acquisition is included in the health sector results and accounts for most of the growth in the period -- most of our growth in period. Justice & Immigration has generated strong growth from the new build Clarence prison in New South Wales, which accepted its first prisoners in July 2020 and is still in the ramp-up phase, with the prison currently at around 2/3 of full capacity. There's been further growth in the Immigration revenue, arising from the reopening of Christmas Island and with additional variable work requested by the customer. The underlying profit margin for the period has increased by 1.5 percentage points to 5.5% due to the increased volumes on the immigration contract and operating leverage of higher revenue base on lower overheads, albeit overheads are weighted to the second half of the year due to some additional bidding activity. Despite strong revenue growth, our order intake in the period was low, with this year's revenue growth largely coming from wins in the prior year and the existing business. Encouragingly, the pipeline aspect is being rebuilt and includes the 2 largest opportunities in the group, the facilities management at Frankston Hospital and vehicle licensing in Victoria. The division also has the largest short-term rebid risk in the group, with the immigration contract scheduled to end later this year. But I'm delighted to say that we have recently received a letter of intent from the customer to extend the contract for a further 2 years from December. Moving to Slide 12. The Middle East division's results have been impacted by COVID-19, with revenue down 7% on constant currency basis and underlying trading profit broadly flat. The areas of the business that have been impacted by COVID-19 includes the air traffic control and other airport-related contracts due to the reduction in the volume of flights and passengers. Additionally, there's been lower project activity in our Citizen Services business. And we've seen limited COVID-19 response work in the region. However, we've just started a tracing program supporting one of the government's, drawing on our success and reacting to the customer demand in other regions. Despite the lower revenues, profit held up in the period, and this is largely because of above normal margins on contracts where the scope of work has increased and through good cost control on contracts where revenues have been negatively impacted. The division's pipeline is in the process of being built after the loss of Dubai Metro, which ends in September, where the negative impact on revenue will be greater than the loss of profit. Encouragingly, there have been some wins in the period, including Ras Al Khaimah air traffic control, Dubai Airport technical manpower as well as the mobilization of Dubai Airport customer services contract. So we can move on now to Slide 13, which is cash flow. Our cash flow was exceptional in the first half of the year, continuing our recent trend of strong cash generation. Trading cash conversion was 130%, largely due to positive working capital inflow of GBP 44 million during the period of significant organic growth. This is due to the collection of some older debts, customers paying early to support their supplier base during the pandemic and some favorable timing effects. We have not used any financing or efforts out of the ordinary to reduce period-end net debt. We continue to comply with the U.K. government's Prompt Payment Code, and 89% of our U.K. suppliers were paid within 30 days. In the second half of the year, we expect the favorable working capital to unwind as customers revert to more normal terms. And additionally, we will repay the payroll taxes deferred in the pandemic in the U.S. for which there was no mechanism to pay early. Overall, we expect cash conversion for full year to be around about 90%. The better-than-expected cash flow performance is also reflected in net debt, with adjusted net debt of GBP 225 million and leverage at 1x EBITDA, at the bottom end of our range. This has been achieved in a period when we've invested GBP 250 million on acquisitions, GBP 40 million in a share buyback program and paid our first dividend for 7 years. Turning to Slide 7, (sic) [ 14 ] tax. In the June 2021 balance sheet, we've recognized the U.K. deferred tax assets relating to historical losses in the U.K. -- in the Serco Group of U.K. companies. We've been able to do this because we now have confidence that there are sufficient future profits to be made by the U.K. business against which we can use these historical losses. For the purpose of modeling the impact of the deferred tax assets, you should know that the historical losses can be offset against approximately 50% of the future taxable profits, having the effect of reducing the cash tax payable. We expect there to be GBP 5 million to GBP 10 million per annum of cash benefit in the medium term. However, there will be no impact on the tax charge in the P&L because as the assets are utilized, the tax asset value is reduced and there is an equivalent charge in the P&L. And if anybody wants any more information on the subject, you can pick up with Paul or I after the call. I'll go to Slide 15. Finally, on guidance. The revenue, costs and profit guidance for 2021 is unchanged from what we communicated at the half year pre-close announcement. However, we have improved our guidance for free cash flow and year-end net debt, reflecting the strong performance we have seen in the first half. Revenue for the full year is expected to be around GBP 4.3 billion, which is 10% higher than last year, including 6% organic revenue growth. Within our full year underlying trading profit guidance of GBP 200 million, there was a strong weighting towards profit in the first half. In the second half, we will see the profits end on AWE and Dubai Metro and the lower COVID-19-related work, partially offset by some recovery of contracts adversely affected by the pandemic. We're also making a number of investments in the second half, including the mobilization of DWP restart contract, that will turn into a profit in 2022. We'll also be developing and implementing a new employee management system, people first, accelerating the rollout of our workforce management, implementing Serco workforce solutions to manage contingent labor, bringing our European business onto SAP, preparing for UK SOX and hardening the group's cybersecurity. The total investment is around GBP 10 million and is expected to be completed by the end of the year. As I've already referred to on the previous slide, we expect the exceptional working capital inflows we saw in the first half to reverse in the balance of the year, and our free cash flow is expected to be approximately GBP 120 million for the full year. This will result in net debt of around GBP 250 million at year-end and leverage at the bottom end of our target range of 1 to 2x EBITDA. Looking further ahead to 2022, and while we still have our budget process to work through, it is clear that the shape of next year will be quite different. We expect there will be much more -- much lower COVID-19 response work. But there will be some offsets against this drag, including the profits from the exceptional order intake we've seen in 2021 and the reversal of this year's mobilization costs. The recovery of business is negatively impacted by COVID-19 and increased rates of investments we've had in the second half returning to more normal levels. The absolute level -- the absolute scale of these offsets are difficult to predict without a detailed budget process, which we've been running in the second half of the year. And hence, we will provide more information on 2022 later this year. And I'm now going to hand back to Rupert.

Thank you very much, indeed, Nigel. And just moving to Slide 17, the usual highlights and lowlights slide. Well, obviously, I'm extremely proud of the operational delivery that my colleagues have produced. And whilst it has not been easy for anybody. The fact is, is that for the 90% or so of our employees who work on the front line in hospitals and prisons and on defense bases and in transport has been particularly hard. But what I think has been particularly pleasing this year, not only have we had the big swings and changes based on the upside and on the downside in our business from an operational point of view, we've also done 2 very substantial acquisitions, and those have been integrating well into our business. I'm going to talk a little bit more in sector size about both COVID-19 response and people. But I just want to reiterate this point about the platform that we have gotten built over the past few years. And just look at the impact that, that has had, where our overheads have grown at half the rate of our revenues. And that was a time when we've increased our headcount by 30% year-on-year. The order intake of GBP 4.1 billion key wins are one of the things that we pride ourselves in, is that we play nicely with other people in the market, and we've created this joint venture with Engie. And together, we have won a very large share of the DIO tenders, which is the largest tender that is run across Europe, let alone in the U.K., for many years. The DWP restart program is about retraining of people to come back into the jobs market. We're very proud to be associated with that and the gain to have a significant market share there. And Goose Bay in Canada, an important foundational business contract for our Canadian business, an important one. And Anti-Terrorism/Force Protection, which is a worldwide contract where we go and support U.S. bases around the world on their perimeter security, brings through a lot of chargeable work, less so at the moment, but as COVID lifts, that will grow in importance. And finally, NHS Test & Trace, I'll talk more about what we've been doing there in a second. Just -- we've talked about the pipeline growing. That's obviously, again, boding well for the future. And on the acquisitions front, as I said that the integration is going well, but we also went and did another small acquisition of a marine maintenance business in Belgium a few weeks ago, which is helping us build up our defense business in year. In terms of investment in the platform, I just want to pull out a couple of -- I'll talk a little bit more about people first later. But this, what we're calling as UK SOX, as many of you will be aware of the consultation on audit and governance, which is proposing to introduce a regime, not dissimilar entirely from the U.S. Sarbanes-Oxley program where there will be far greater requirements on Boards to go and validate the operational controls. This is going to be a huge investment for a lot of companies, and we're getting ahead of that curve. I think you might say that we're making hay while the sun shines because we want to get that work done. It was good news anyway. And we'll be spending about 2 -- between GBP 2 million and GBP 3 million in the second half, doing that work before even the final requirements are set because we think we know what the direction of travel is. And also, just mentioning in part the employment and learning services, which is a platform that we are building to provide integrated access to employment and learning services of our own bat. And we will -- we're at the early stages of that, but that may well produce an important new capability. And we're bringing our European business into -- onto the SAP system. And we are still investing money, and it is impacting the increased rate on cybersecurity. So in terms -- moving then to the lowlights. Well, the dreadful impact of COVID-19 on the lives and welfare of colleagues and families, and the dreadful truth is that for many of our colleagues, their home life actually did not offer a lot of respite from work life. But that is the same for many companies up and down the land, but particularly, we feel for Serco with its emphasis on frontline services. We mentioned this rather strange shape to the year where the UTP in the second half is going to be significantly lower than the first half as we get various drags of the AWE and Dubai Metro, the investment in the DWP mobilization, and we will see, we believe, a reduction in COVID-19 contracts through the second half and also increased investment, all of which -- certainly, the increased investments will set us up well for 2022. Bid losses. We lost Dubai Metro after many years of running that. We were sad to lose it. It wasn't our most profitable contract, but we were obviously sad to lose it. And we lost Dungavel Immigration Removal Center in Scotland. And also, we were hoping to bid for the Australian Defense Recruitment. And those were all losses. I would mention emerging inflation. Well, it's the subject to -- du jour, as we would say. And yes, there's quite a lot of it about. There's 2 particular areas that I would mention that will affect us. One is utilities because we are looking after around about 25,000 asylum seekers in houses around the country. And that requires water and electricity, and the prices of those are going up. We tend to buy our electricity on sort of forward -- had 12-month forward contracts, but we are watching that carefully to see how that goes. And I will also say the other sectors, in insurance, where we're yet again looking at a very significant increase in insurance rates in the business. We were very sad, too, that AWE was taken back in-house by the government, but we have put our shoulders to the way we take the view that you judge a company or you judge a regiment, in military terms, by how it leaves its barracks, not how it arrives at the barracks. And we are very pleased to say that the customers, I believe, are very pleased with the way that we work with them to hand AWE back. There's been a lot of slippage on tender adjudications, particularly in the U.S., where -- as Nigel said, I think, what, about $2.5 billion of stuff waiting adjudication. But these delays are also encouraging incumbents to appeal. I would say there's actually -- despite this, that the North American business actually had very strong order intake, but a lot of that came from Goose Bay, which is a very long-life contract. And finally, on the issue of staff, it's been difficult to recruit and retain staff in some custodial and escort settings. Particularly, we've struggled to get to the full muster, particularly in the health care side at Clarence. PECS has been -- the recruitment of escorting service has been difficult. And what we're seeing interestingly enough on test and trace is that a lot of the people who -- it was very easy to recruit into that service. A lot of them are beginning to return to their original jobs from which they left at the beginning of the pandemic. So just moving on to Slide 18 and talking a little bit more about -- a little bit more color on the support that we're giving to governments around the world on COVID-19. Well, our total revenues from -- direct revenues from COVID-19 has been about GBP 365 million in the first half, which compares to about GBP 130 million in the first half of 2020 when really COVID only got going in the second quarter, well, our COVID revenues last year. And this year, obviously, we've had a full 6 months of it. But the majority of that is spent in the -- arises from the U.K., but by no means all. But within the U.K., we have delivered huge -- the scale of the services that have been delivered under that, are enormous. We've delivered, in the first half, 12 million hours, the equivalent of about 14,500 full-time equivalents people to NHS Test & Trace. And since May 2020, we've made 24 million outbound calls, with 8 million tests conducted on test sites run by Serco, and we've distributed 6 million lateral flow devices. On tracing, we provided about 50% of tracing core handlers, and the numbers vary week by week in accordance with demand, from a low of 3,000 FTE, to over 10,000. And at the moment, we are running at about 13,000, but expect that to drop off really quite quickly in the coming weeks. In terms of testing, we got about 25% of the Pillar 2 testing sites, which was about 200 sites. We expect this to reduce late September to around about 20% market share. And it's a mixture of regional, local and mobile test sites. We've also had increased volumes in immigration, and we're now currently looking after about 25,000 asylum seekers, who we are providing accommodation too, which is an increase of about 7% year-on-year. In AsPac, we've been providing extensive call center support for lockdown and vaccination programs. Last year, we provided them with support on quarantine hotels for a brief period of time. But enduring is the temporary immigration and isolation facilities as part of our immigration contract and the reopening of Christmas Island to provide the customer with additional capacity. In the Middle East, we -- last year, we helped to mobilize a field hospital, World Trade Centre. And I'm delighted to say that we've actually may have been asked by one of the governments there to start providing tracing support. And as of now, we've got about 150 people providing tracing, and we hope that might increase in the coming months. So we've said all the way along, since we started doing this work, we put our hands up and said, look, this is ephemeral. We hope that this is going to go away as soon as possible. It doesn't mean that we are returning to normal life. I am asked on a daily basis, how much -- how long do I think it's going to last and how much -- the answer is we don't know. And the government doesn't know. What the governments have put in place, though, is an extremely flexible framework that allows them to flex their capacity to respond up or down. We've made our best guess for this year, which is part of our forecast of 200 -- well, our guidance of GBP 200 million for 2021, but whenever it comes off, it's going to leave an enduring legacy for our business. It's given a legacy of an enhanced reputation because I think the government believes that we've done extremely well for them. It's improved our systems, our skills our know-how and ability to respond to absolutely astonishing increases of scale. Like a year ago, we stood up 10,000 people in 4 weeks to provide additional tracing capacity. And as I say, this is going to -- has given us a legacy of knowledge, understanding and know-how and also reputation that will stand us in good stead in the future. Moving on to the next slide, Slide 19, and around people. I mentioned that we've increased our headcount by nearly 30%, which is 21,000 people year-on-year. Most pleasing though is that Serco has become a sought-after employer, which I have to say was not necessarily the case when I joined in 2014. In fact, I was knocked over by the rush of people out of the door. But if I tell you that, on an average basis each month, 30,000 people apply to work for Serco worldwide, and that's an increase of 22% year-on-year. Naturally, we've repaid all our further claims of them, and at any one time, we've got about 500 people who we keep on full pay whilst they are shielding. And part of our government services platform is People First. That is a significant amount of software, partly adapted existing systems such as ServiceNow, partly using tools like Boomi to go and integrate with the HR core systems and using a system called Appian to go and produce proprietary content for us to allow us to be really efficient in terms of recruiting and onboarding and managing people. We think that that's going to give us some efficiencies in our offshore back-office. We're, in fact, moving quite a lot of our back-office from India into -- back into the U.K. because the -- as more and more that gets automated, but that's not really the point. The point is, is for the managers, for themselves, the system is much easier to use and more attractive. We've set up Serco Workforce Solutions, which is an in-house contingent labor resourcing and management system, and we will have 5,000 people on the books of Serco Workforce Solutions by the end of this month. Workforce Management, we now have -- are covering 27,000 employees. And as I mentioned earlier, we're developing a new employment and learning services platform. But it's not been without its challenges. The restrictions on movement, at the moment, they're particularly severe in Australia. Not only can they not -- people can't come in, and that particularly affects the availability of nurses and other medical staff. But actually within Australia, the states have shut their borders. And we've seen several weeks now, where nobody can move really into Western Australia or the other states. It is locked down very tight. We've had the issue of EU workers who might have a right to work in the U.K. simply not returning. And within businesses, people going -- who joined us on a temporary basis are going back to former careers. We've had -- are having to do a lot of refresher training because people have not been doing their jobs and most, obviously, that might be air traffic controllers who are having to retrain because there's just not been a lot of air traffic. But also, perhaps bizarrely, U.K.'s lifeguards were having to go through retraining in our leisure business. And custodial officers, who we've taken on and recruited during the crisis, used to working in prisons, where the prisons are basically locked down for 23 hours a day and now having to adapt to their first experience of having prisons with open -- with free association. The pingdemic that is called, and shielding, well, we're taking that in our stride. We're running in the U.K. about 7% to 10% daily absence rate in the U.K., which is compared to a normal rate of 5% to 6%. It is very annoying in some of our contracts, particularly in environmental services and to a lesser extent, transport. But I think that we are managing through that quite well. In terms of pay inflation, I think what I would say is I think that around the world, a lot of the labor markets are in sort of spasm at the moment because as restrictions get lifted, people are thinking about where they want to go. There is some big demands from some unions taking intransigent positions to make sure that people that they haven't seen remember that they are representing them. And -- but we think that we have paid pay increases. We paid them last year. And we paid them again this year for our staff. So it's not that we've been in a pay freeze. And this year, we've already paid to 2%. How that's going to work out in H2 and into 2022, we can't tell. We will have to play that one. But my feeling is, is as more and more people come back to work, with further coming off, the -- some of the stiffness in the labor market will start to ease. And you may have seen that we got surprised to find, in a part of our supply chain, people using -- some of our suppliers were using mini umbrella companies to reduce their employment costs, which was completely unacceptable to us. I think what I've been saying about that how fast we were able to react to that. And as soon as we got literally, some thousands of people were moved from out with the suppliers who were supplying through those MUC companies, into our -- into Serco Workforce Management Solutions or employed directly, whatever, but we got that tidied up within about 8 weeks of discovering it. Over on the next slide, Slide 20, my second favorite slide of all time is our engagement scores. You will remember that we do -- we test the engagement every September. We're just preparing for the next engagement scores. And over time, they've been improving. But I just want to make the point that we also do pulse checks, where we think -- where we want to check whether there's an issue. Pleasing me though, I would draw your attention to a couple of those ones. One is NHS testing, where we did and we had a huge response, over a 70% response, and a very high score from the NHS, that's in both in February when we did it and again, when we went back in June '21, we're still scoring 79, which is actually above the average for the company. And that's quite [ double the sort of ] how many people though have not been working for us for very long. Sharjah Airport and Victoria Police were ones where we were worried about the morale within those contracts. So we went and did some pulse checks there. But also particularly pleasing for me is we did a post-acquisition pulse check of facilities for us in April '21, which would have been sort of 4 months after the acquisition and got a very high score from that. So that is all quite pleasing. Moving to summary and outlook, and that is Slide 22. I mentioned 4 years of strong delivery, a 10% CAGR in revenue since 2017 and UTP of 30%, book-to-bill since 2017 of 126%. For the last 18 months' performance, as I say, it was not an accident. We've been working on transforming Serco to try and make it an agile and scalable government services platform for that time. Our loose-tight management philosophy has worked well. I think that we've shown that despite a lot of the press, we're still a trusted and valued by governments. And we've got a motivated strong and very highly experienced management team. Very strong 2021 in prospect, 10% revenue growth, 23% UTP and strong cash conversion. We mentioned that H2 '21 will be lower for reasons we've gotten into. I would point out that it's going to be partly offset, those drags by WBB and Facilities First, and also reducing drag from those areas of the business that would have been hit by COVID as the COVID contracts come off. And the GBP 4.1 billion of order intake will start to flow through in 2022, including just beginning to see revenue from DIO and DWP, and that sets up us well to manage the rundown of the COVID work. We're going to have a Capital Markets Day in the fourth quarter, probably end of November or beginning of December. We'll let you know the date as soon as we have them. But just to remind you all, in the future, we believe that the Four Forces, which we introduced them, [ just inspecting well through ] in 2015 when we announced our strategy for our turnaround plan, the Four Forces still rule okay and will rule even more okay going forward. That's -- our government is having to deal with growing costs of health care, aging population and investment in infrastructure, rising expectations of choice and service quality, and one of the things that COVID has brought, it has brought many more people into contact with government services. And it's also given people -- got them into the habit of comparing government services across different countries. People now know what the vaccination rate is in Germany or Australia or the United States. And this feeling that public services are important, not only for people who are less well-off and vulnerable, but also to the middle classes who's going to have a profound political impact, we believe. Governments will need to balance public income and expenditure and reduce debt. And voters are going to be no more willing to tolerate higher taxation than they ever were before. So that's going to lead to fierce pressure on governments to deliver more public services, better quality and greater resilience for less money, and that plays to what we offer government. Thank you all for your attention, and we'll now hand it over to Q&A.

[Operator Instructions] Your first question is from the line of Paul Sullivan from Barclays.

3 for me. Just firstly, the enduring benefit from COVID that you speak of, Rupert, I mean, how should we think about that in terms of medium-term growth expectations? And are you seeing it starting to come through in the emerging pipeline in the conversations that you're having? Secondly, can you talk about the timing and conversion of the existing pipeline? And given the higher first half win rate, should we be expecting you to win more of it going forward? And then, finally, given the good progress on debt reduction, can you talk about your capacity for another deal and give us some color on the acquisition pipeline?

Thank you, Paul. Nigel, would do take the timing conversion of the pipeline? In terms of enduring our benefit, that -- it's hard to quantify, but I think it's going to make us a better competitor in the marketplace. And if you want evidence that participating in this has done us good, then only just look at the GBP 4.1 billion of order intake. I mean these were decisions that were taken at the time when we were in the middle of COVID and responding to it. And had the government been in any way cross or thought we weren't doing well, I don't think it would have happened. But we got -- we mustn't be complacent here. But I think that when we're saying that there's enduring benefit, I'm not going to say that we will grow faster than we would have done otherwise. But I think that it is the danger in just saying, oh, well, this is just a one-off, which it is, is going to go away, and then the company will be no different to what it was in 2019. Our company in 2022 is going to be a profoundly, I think, a more capable company than it was in 2019 as a result of what we've done in -- over the last year and will continue to do in the second half. Nigel, do you want to talk a bit about the timing and conversion of the pipeline?

Yes. So Paul, a pipeline of GBP 5.8 million, within that, we've talked already about the U.S. and this backlog of decisions to be made. Our expectation is that's going to get made in the next quarter or so, and we would expect that to come through relatively quickly. And there's also some decisions still to be made on DIO work, which are relatively near-term, in the next 6 months. The other stuff that we've got -- big stuff we've got in the pipeline, the ramp of the [ present ] Frankston Hospital, Victoria Road, are a bit further out. It's going to be a 2022 decision. And in some of those, it's even 2023 before the revenue starts to kick in.

So the big stuff in the pipeline tends to be quite further out. In terms of capacity for M&A, well, clearly, we have a balance sheet that has -- is in a pretty -- a good position, and that's pleasing. I think that we have shown ourselves winning and capable to do acquisitions. But I just want to say we are pretty -- we're pragmatic, opportunistic. We don't chase stuff around the market. We are not a sort of M&A engine. We see it as being a useful addition. I think we're getting quite good at it, and we have a strong internal capability. But we don't, as I say, go around drumming up M&A, but we do keep our ear to the ground, and people know that we are in the market. So I think it's sort of, yes, we're there, but we're not desperate to do it and we don't run to a time scale. Paul, does that answer your questions?

Yes. That's great. And just a quick follow-up on the deals you've done so far. How should we think about the progress you're making and the performance there?

Yes. I think -- I mean, they're both -- I would say, that following our experience with the previous acquisitions, BTP and METS, we've moved to integrate them faster than we did the others. And in terms of FFA, that means quite a big systems challenge. We're having to bring them on to SAP. We're having to do a lot. But it's going well. And that their contribution so far has been kind of where we thought it would. WBB, likewise, is doing pretty well. We have promoted the #2 in that business to be running it. And Robert Olsen, who was the CEO, has left. We're -- but they were very impressed by both the people and the business that we have found. So we're happy with that. And we're getting already quite a lot of synergies between the overlap between them and our sort of other military businesses. So I think we're pleased, but it's early days still. Next question...

It comes from the line of Kean Marden from Jefferies.

I've got 3 as well. Just first of all, expanding a little on your People slide. Just looking at resourcing in the U.S. I think Biden recently suggested that anyone operating in the public sector would need to have a double jab. I'm wondering how that affects your business and the potential resourcing complications that, that may present. Secondly, you mentioned People First, which I think has been in the pipeline for quite some time. As it's just starting to implement, can you maybe share some initial insights into the sort of savings that, that might produce over the next few years? And then, thirdly, on the in-house contingent labor pool, is there a trade-off between higher costs and flexibility here? Or is that not part of the equation?

Thank you, Kean. And for all those, I'm going to hand over to Anthony Kirby for his first limelight on the conference call. Anthony?

Okay. Thank you. In terms of the jab sort of federal order for the double vaccination, that hasn't trickled down into commercial operations at the moment into commercial businesses. Our policy is that we are not insisting on vaccinations to enter the workplace until it becomes a requirement by law. So in the U.S., we were currently about 84 -- between 84% and 86% of our population have received the first jab and a slightly lower number of employees have received their second jab. If you quickly then just take the view in Asia Pacific, the Australian government have insisted that if our employees are working in age-care environments, that they are to receive the jab before they get into the workplace. So again, we're following the legislation in each of those different jurisdictions. In the U.S., we don't think it's going to impact our ability to recruit on the basis, that in the high -- in the mid- to high 80s is a really good position to be in at the moment.

People First?

So People First, yes, the system is due to operate in -- well, it's gone live. Actually, we've had a soft launch. We've launched it in all of the divisions around the world, outside of the U.S., purely for security reasons. At this stage, we're going to follow into the U.S. in due course. And it's due to be live in all of our contracts from about January 2022. And the third question, sorry?

What sort -- sort of how is it going to save us money? I mean not without quantifying, but why is it going to make us any different...

Okay. So it's going to reduce duplication. We've had a -- over a number of years, we've built system on system on system. The People First is integrating all of those back-office processes. It's taking process steps out by automation, and it's reducing unnecessary nonvalue-added processes that we are currently operating in the contract. So it's becoming more efficient, less process, more automation.

Okay. And in-house contingent labor, what are we doing that for?

So we're doing it for 2 real reasons, which is quality, to improve the quality of the folks that we're able to send into our contracts; and actually, by offering people more work on a regular basis. We hope that, that will retain people in the organization for longer, so the workforce becomes less transient. And overall, it will actually save us cost because we're no longer paying the agency margin to third-party providers.

Kean, does that do it for you?