2022 half year results

4 August 2022

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

Growth in many parts of the business more than offsets wind-down of Test & Trace and exit from AWE. Profits up 6% and trading margin increased. Interim dividend increased by 18%.

Highlights

Rupert Soames, Serco Group Chief Executive, commented:

We did much better in the first half than we expected in January, and as a consequence also expect to do better than we originally anticipated in the full year.  In the first six months we have maintained revenues year-on-year despite losing around £220m, or 10%, of our revenues as a result of the wind-down in Test & Trace.  Excluding Test & Trace, revenues grew by over 12%.  Profits increased by 6%, despite a £25m, or 21%, negative impact of the exit from AWE in June 2021 and Test & Trace.  Increased demand for case management in North America, employment services in the UK, immigration services in both Australia and the UK, as well as our acquisition of WBB in April 2021, more than offset the impact of Test & Trace and AWE on revenues and profit. 

Our order book remains very strong at £14.6bn, up £0.5bn over the prior year with the positive effect of wins, indexation and currency more than offsetting revenue earned over the last twelve months.  Order intake in the first half of £2.0bn represented a book-to-bill ratio of 94%, and would have been well over 100% but for unusually low levels of contract rebids and extensions being due in the first half.  New business wins, on the other hand, were above average levels.  The pipeline has reduced from the start of the year but at over £8bn stands at a very healthy level, and is up around 40% year-on-year.

Looking at the first half performance in the round - robust revenues despite the wind-down in Test & Trace, strong margins, large and growing order book, healthy pipeline, strong cash conversion and balance sheet - tells of the agility of Serco's Business-to-Government platform and the advantages of our differentiated business model and international footprint.

We employ around 57,000 people delivering services to governments and so the balance of supply and demand in labour markets is important to us.  It is our sense that the dislocation in labour markets we saw last year is beginning to ease, as more people return to work, and we have seen a reduction in our vacancy levels.  However, staff turnover remains high in some contracts, and unpredictable absence levels, driven by waves of Covid-19, mean that operational management of the business remains very demanding.

I am delighted to report that we have made significant progress on our diversity and equality strategy. Since 2017, the proportion of women in our senior leadership team (around 350 leaders) has increased from 17% to 33%, while the proportion of colleagues with a declared disability or health condition has more than doubled in recent years and now stands at 5%.  In the UK our median gender pay gap has fallen from 12.9% to 6.9%.

As a result of the recent surge in inflation we are increasing pay faster than we budgeted and we will be distributing an additional £9m in the coming weeks in one-off payments to all our colleagues outside management grades, recognising the pressure many people, particularly the lower paid, are under at this time.  Increasing pay is one of the reasons why costs are expected to be higher, and profits lower, in the second half than in the first.  We do have mechanisms in many of our contracts which will over time help us mitigate the effects of cost increases, but inflation that goes from 2% to 10% in 12 months, and is then forecast to fall back to 2% by the end of 2024 makes it hard for companies, customers and employees to balance their long term interests and expectations.

Guidance for 2022

We significantly increased our guidance for the full year in an unscheduled trading update on 26 May.  UTP guidance was raised by 15% from £195m to £225m, and today we are slightly increasing UTP guidance to £230m to reflect further FX movement since the last update and trading in May and June.  We also strengthen guidance for Free Cash Flow and Adjusted Net Debt.  For the year, we expect currency movements to contribute around £150m to revenues and £12m to profits.

NB: The guidance uses an average GBP:USD exchange rate of 1.25 in 2022 and GBP:AUD of 1.78, which is based on currency rates as 30 June 2022.  Adjusted Net Debt guidance includes the £90m share buyback programme.  We expect a weighted average number of shares in 2022 of 1,195m for basic EPS and 1,220m for diluted EPS.

Looking ahead

Serco's resilience and strong trading performance stands in sharp contrast to a geo-political and economic landscape which continues to be miserable and dominated by the malign influence of two "black swan" events.  In March 2020, Covid-19 up-ended the world.  Almost exactly two years later, the Russian invasion of Ukraine has brought death and destruction, nine million refugees, inflation, food shortages, and world-wide disruption of efforts to rebuild after the pandemic.

The concatenation of these two catastrophes will shape public policy for years to come.  Governments are struggling to square promises to invest in energy transition and to "build back better" with the realities of materially increased levels of public debt incurred mitigating the impact of Covid-19; the need to increase defence expenditure; and inflation, with its outriders of unplanned increases in debt service and other costs - notably in pay for public servants.  In squaring these circles governments will need more than ever the innovation, efficiency and skilled operational management the private sector can bring to the effective delivery of public services.

We have got off to a much better start than we expected against the five-year plan we presented at our Capital Markets Day in December 2021.  Our expectation then was that, from a base year in 2022 of UTP of £195m and margin of around 4.7%, we would over the four years to 2026 grow revenues at an average of 4-6% a year, with margins rising to 5-6%.  Whilst it may be tempting to rebase our objectives to a higher 2022 starting point, any sensible plan has to allow for humps, when we do better than the average, and bumps, when we do worse; 2022 will clearly be a hump, and our margins in particular are stronger, at an earlier point in the plan, than we expected.  Overall, we believe that we remain on course, even if our strong start means that we are travelling towards our destination a little faster than we expected.  Importantly, the experience of the last two years, and the outlook for 2022, confirms our belief in the resilience of our model and the ability of our Business-to-Government platform to enable us to adapt to the changing requirements of governments, whilst delivering growing returns to shareholders, rewarding careers to our employees, and high-quality public services to our customers.

For further information please contact Serco:

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

Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email: marcus.deville@serco.com

Presentation:

A presentation for institutional investors and analysts will be held at Maitland/AMO, 3 Pancras Square, London,

N1C 4AG today, starting at 10.00am.  The presentation will be webcast live at https://edge.media-server.com/mmc/p/72gqvd9g and subsequently available on demand.  A dial-in facility is available on https://register.vevent.com/register/BI26239113466b42deba7b6d01a65ac9da.

Notes to financial results summary table and highlights:

(1) Revenue is as defined under IFRS, which excludes Serco's share of revenue of its joint ventures and associates.  Organic revenue growth is the change at constant currency after adjusting to exclude the impact of relevant acquisitions or disposals.  Change at constant currency is calculated by translating non-sterling values for the six months ended 30 June 2022 into sterling at the average exchange rates for the six months ended 30 June 2021.

(2) Trading Profit is defined as IFRS Operating Profit excluding amortisation of intangibles arising on acquisition as well as exceptional items.  Consistent with IFRS, it includes Serco's share of profit after interest and tax of its joint ventures and associates.  Underlying Trading Profit additionally excludes Contract & Balance Sheet Review adjustments and other material one-time items.  A reconciliation of Underlying Trading Profit to Trading Profit and Reported Operating Profit is as follows:

(3) Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects.

(4) Free Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group's Consolidated Cash Flow Statement, adding dividends we receive from joint ventures and associates, and deducting net interest and net capital expenditure on tangible and intangible asset purchases. 

(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS Alternative Performance Measure (APM) used by the Group.  This measure more closely aligns with the covenant measure for the Group's financing facilities than Reported Net Debt because it excludes all lease liabilities recognised under IFRS16. 

(6) Reported Net Debt includes all lease liabilities, including those recognised under IFRS16.  A reconciliation of Adjusted Net Debt to Reported Net Debt is as follows:

(7) Refers to non-UK Underlying Trading Profit as a proportion of group Underlying Trading Profit before corporate costs. Our Underlying Trading Profit before corporate costs in the first half of 2022 was £153.5m.

Reconciliations and further detail of financial performance are included in the Finance Review on pages 14-24. This includes full definitions and explanations of the purpose and usefulness of each non-IFRS Alternative Performance Measure (APM) used by the Group.  The condensed Consolidated Financial Statements and accompanying notes are on pages 28-43.

Chief Executive's Review

Summary of financial performance

Revenue, Underlying Trading Profit and Underlying Earnings Per Share

Revenue increased by 1%, or £10m, to £2,178m (2021: £2,168m).  An organic contraction of 3% (£70m) was more than offset by an acquisition contribution from WBB of 2% (£46m) and favourable currency movements that added 2% (£34m). The organic decline was driven by the wind down in Test & Trace, which ended in April, and the ending of the Dubai Metro contract in September 2021.  These contracts reduced revenue by around £280m, or 13%, year-on-year.  Most of this decline was offset by strong growth in other contracts, including immigration in Australia and the UK, case management in North America and employment services in the UK; excluding Test & Trace revenues grew by 12%, of which 8% was organic.

Underlying Trading Profit (UTP) increased by 6%, or £7m, to £130m (2021: £123m). Excluding the favourable currency contribution of £4m, growth at constant currency was 2%.  Acquisitions added 4%, or £5m, of the growth, with an organic decline of 1%.  The organic reduction primarily resulted from lower levels of Test & Trace work and the end of our Atomic Weapons Establishment contract in June 2021.  These were offset by growth in a range of other areas, including in Justice & Immigration, Citizens Services and improvement across parts of the Transport and Health sectors that had been negatively impacted by Covid-19.  The Americas, Asia Pacific and Middle East regions all improved their Underlying Trading Profit margins, which offset the impact of lower margins in the UK & Europe division, meaning our UTP margin increased from 5.7% to 5.9%.

Diluted Underlying Earnings Per Share increased by 14% to 7.71p (2021: 6.75p).  The percentage improvement was higher than the increase in UTP due to a reduced finance cost, a decrease in the effective tax rate and a lower number of shares, due to our buyback programme.

The Revenue and Underlying Trading Profit performances are discussed in more detail in the Divisional Reviews, starting on page 9. 

Cash flow and Net Debt

Free Cash Flow was again strong at £96m (2021: £130m) and underlying trading profit cash conversion in the half was 101% (2021: 137%).  The first six months of 2021 benefitted from cash collections on some older receivables, shorter payment terms on Covid-19 related work and favourable timing effects.  Average working capital days reduced with debtor days of 21 (2021: 23 days) and creditor days of 21 (2021: 24 days).  85% of UK supplier invoices were paid in under 30 days (2021: 89%) and 94% were paid in under 60 days (2021: 95%).  No working capital financing facilities were utilised in this or the prior year. 

Adjusted Net Debt reduced to £164m at 30 June (31 December 2021: £178m, 30 June 2021: £225m).  The £14m reduction since the prior year end occurred despite £19m of dividend payments and £42m of share purchases, including those for employee share schemes, during the period.

The period end Adjusted Net Debt compares to a daily average of £201m (2021: £178m) and a peak of £258m (2021: £346m).  This is a typical range for our net debt over the first half of a year, with the period end number lower due to the timing of receipts; the difference between period end and daily average debt is in any case immaterial at around 1.5% of revenues in the period.  As usual, we have not used any financing or efforts out of the ordinary to reduce period end debt.

Our measure of Adjusted Net Debt excludes lease liabilities, which are included in Statutory Net Debt, and aligns closely with the covenants on our financing facilities. Lease liabilities totalled £433m at the end of June (2021: £426m), the majority being leases on housing for asylum seekers under the AASC contract. The terms of these leases are generally aligned to the contract we have with the customer.

At the closing balance sheet date, our leverage for debt covenant purposes was 0.5x EBITDA (2021: 1.0x).  This compares with the covenant requirement for net debt to be less than 3.5x EBITDA and our target range of 1-2x.

More detailed analysis of earnings, cash flow, financing and related matters is included in the Finance Review.

Capital allocation and returns to shareholders

We aim to have a strong balance sheet with our target financial leverage of 1x to 2x net debt to EBITDA, and, consistent with this, the Board's capital allocation priorities are to:

In 2022 we continue to deliver our capital allocation policy:

Contract awards, order book, rebids and pipeline

Contract awards

Order intake was £2.0bn in the first half, a book-to-bill rate of around 95%.  This was lower than in the prior two years, due to a low level of contract rebids and extensions being due in the period.  New business awards, on the other hand were strong.  There were around 30 contract awards worth more than £10m each and 3 with a total contract value of more than £200m. Around half of the order intake came from the UK & Europe, just over 40% from the Americas and 4% from both Asia Pacific and the Middle East.

Of the order intake, approaching 70% was represented by the value of new business and around 30% was rebids and extensions of existing work.  The win rate by value for new work, which has averaged around 35% over the last five years, was again at this level in the period.  Rebids and extensions on which we bid in the first six months totalled around £800m, compared to £1.9bn in the first half of 2020 and £2.3bn in the same period in 2021.  The win rate by value for securing existing work was within our normal range of 80-90%.

The largest award was our contract to manage the new HMP Fosse Way prison (previously known as HMP Glen Parva) on behalf of the UK Ministry of Justice, which we expect to generate more than £400m. Also in the Justice & Immigration sector, we secured an estimated £200m of additional immigration work, reflecting the large numbers of service-users having to be temporarily accommodated.  VIVO Defence Services, our joint venture with Equans, followed on from its success in 2021 by securing contracts from the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO) to deliver asset and facilities management services to the United States Visiting Forces (USVF).  These have an estimated value to Serco of around £60m over the initial three-year period.  Also in the UK, we successfully rebid our contract to provide facilities management services at Norfolk and Norwich University Hospital, with an estimated value of £130m over five years.  Our North American business won the Ship Acquisition Programme / Project Management (SHAPM) contract from the US Navy, which we expect to be worth £280m over five years and a £60m, 2.5-year contract for detail design, prototype construction and demonstration of a large and highly sophisticated unmanned ship as part of the No Manning Required Ship (NOMARS) programme.  In addition, since the period end, we have been notified we were successful in the rebid of our US Navy SEA21 contract.  The new contract is expected to be worth around $400m over five years, and will see us provide technical services related to international fleet support, surface ship modernisation, surface ship in-service readiness and surface training systems.

Bids for work that were unsuccessful in the period included a contract to deliver vehicle licensing and registration for the State of Victoria transport department, services as part of the redevelopment of Frankston Hospital, also in Victoria, and the contract to provide estate management and other services to the Ministry of Defence's Training Estate.  In addition, we withdrew from the competition to build three new Fleet Solid Support ships for the Royal Navy.

Order book

The closing order book stood at £14.6bn (30 June 2021: £14.1bn, 31 December 2021: £13.7bn) with the positive effect of wins, indexation and currency more than offsetting revenue earned over the last twelve months.  Our order book definition gives our assessment of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements.  This excludes unsigned extension periods, and the order book would be £1.5bn (2021: £1.2bn) higher if option periods on contracts in our US business, which always tend to be exercised, were included.  

Rebids

In our portfolio of existing work, we have around 80 contracts with annual revenue of £5m or more where an extension or rebid will be required before the end of 2024.  Contracts that will either end or need to be extended in 2022 have an annual contract value of around £0.4bn.  The annual value rises in 2023 to approximately £0.9bn, which includes our Centers for Medicare & Medicaid Services (CMS) in the US and our Immigration Services contract in Australia, two of our largest contracts, before reducing to £0.6bn in 2024.  The current CMS and Immigration Services contracts end, respectively, in July and December 2023, and we will be re-bidding both.  Because revenues from CMS tend to be first half weighted, and the Immigration services contract does not end until December 2023, we would expect outcomes on these contracts, positive or negative, to be more significant in 2024 than 2023.

Pipeline

Our measure of pipeline is probably more narrowly defined than is common in our industry. It includes only opportunities for new business that have an estimated annual contract value (ACV) of at least £10m and which we expect to bid and to be adjudicated within a rolling 24-month timeframe. We cap the total contract value (TCV) of individual opportunities at £1bn, to lessen the impact of single large opportunities. The definition does not include rebids and extension opportunities, and in the case of framework, or call-off, contracts such as 'ID/IQ' (Indefinite Delivery / Indefinite Quantity) contracts, which are common in the US, we only take the value of individual task orders into our pipeline as the customer confirms them.  Our published pipeline is thus a relatively small proportion of the total universe of opportunities, many of which have annual revenues less than £10m, are likely to be decided beyond the next 24 months, or are rebids and extensions.

Our pipeline was £8.1bn at the end of June, a reduction, as expected, from the record £9.9bn level at the end of 2021 but still around 40% higher than the £5.8bn at the end of June 2021 and almost double the level of two years ago.  It is pleasing to see the pipeline at such a healthy level given 2021 was a strong year for wins and with several large bids having exited the pipeline in the first half of 2022. The pipeline now consists of over 40 bids with an ACV averaging around £30m and an average contract length of more than six years.  The pipeline of opportunities for new business that have an estimated ACV of less than £10m has continued to increase, now totalling £2.5bn.  This is around 20% higher than the £2.0bn at the end of 2021 and approximately 50% more than 12 months ago.

End of Deferred Prosecution Agreement

In July 2022, the Serious Fraud Office (SFO) announced the expiry of the Deferred Prosecution Agreement (DPA) with Serco Geografix Ltd, one of Serco's UK subsidiaries, and of the obligations under the Letter of Undertakings with Serco Group. The DPA, agreed in July 2019, arose from issues concerning Serco's Electronic Monitoring contract which were reported by Serco to the SFO and the UK Ministry of Justice in November 2013.  The SFO confirmed that Serco has co-operated fully with the SFO and has fulfilled all its obligations agreed as part of the DPA, including reviewing, improving and enhancing aspects of our Group-wide compliance programme related to internal controls, compliance policies, and procedures.  

Market outlook

We set out a comprehensive description of our views on the market in our Capital Markets Day in December 2021, and in our Annual Report for 2021.  Since then, Russia has invaded Ukraine and that has brought with it intensified inflationary pressures on government expenditure, which may result in government expenditure on outsourced services growing faster in the next few years than the 2-3% nominal growth-rate we suggested at the Capital Markets Day.  Inflation adjustments should also have a positive impact on our revenues.  However, whilst we believed that we could grow our revenues at twice an assumed market rate of 2-3%, were nominal government expenditure to grow much faster as a result of inflation, for example 5%, we would not expect to grow our revenues twice as fast on a nominal basis but we would expect to grow faster than the market in real terms.

Guidance for 2022

The business traded strongly in the first half of the year, with all four regions performing above their budgets, leading to us to upgrade guidance in May.  Despite a significant drag on revenue and profit from our work on the UK Test & Trace programme ending, and on profit from the ending of the AWE contract, we have largely replaced these contracts with other government work around the world.  It is hard to forecast the precise impact of inflation on revenues and costs, but most of our contracts have some form of inflation protection although there will be timing differences between cost increases and receiving the benefit of indexation.  Guidance for the full year is set out below.

Revenue: we expect revenue to be £4.3bn-£4.4bn, similar to the £4.4bn in 2021.  This assumes a 1% contribution from acquisitions and a 3% benefit from currency.  We expect an organic contraction of around 5%, with lower demand for Covid-19 related services in 2022 reducing our revenue by around £480m, or 11%, partially offset by organic growth on non-Covid work of around 6%, ahead of our medium-term growth targets. 

Underlying Trading Profit (UTP): we expect UTP of around £230m.  As well as the impact of reduced Test & Trace revenues noted above, UTP will be reduced by the ending of the AWE contract in June 2021; we also expect the increase in employers' National Insurance contributions in the UK to cost around £5 million on an annualised basis.  The impact of these factors is largely offset by increased demand for immigration services in the UK and Australia, a full six months impact of the increase in employers' National Insurance contributions in the UK, strong trading in our case management work in North America, the positive effect of new work secured in 2021, such as the DWP Restart Programme and the Defence Infrastructure Organisation contracts, moving into profitability. 

Second half profit is expected to be lower than the first six months due to our Test & Trace work having ended, usual seasonality on some contracts including our CMS healthcare eligibility contract in the US, lower volumes on our immigration services contract in Australia, above-budget pay increases and one off payments to non-management staff.  The first-half second-half split of profits in 2022 is expected to be similar to 2021.

Net finance costs and tax: net finance costs are expected to be around £23m, slightly lower than 2021.  The underlying effective tax rate is expected to be around 24%, although this is sensitive to the geographic mix of our profit and any changes to current corporate tax rates.  This is lower than the prior guidance of 25% as the first half benefited from a discrete reduction in provisions for uncertain tax positions.

Financial position: free cash flow is expected to remain strong at around £140m, with underlying trading profit cash conversion continuing to be above 90%. We expect Adjusted Net Debt to end the year at around £190m.

Returns to shareholders: although it is anticipated earnings will be broadly stable in 2022, it is our intention to continue on our path of increasing dividends to shareholders as part of our policy of progressively reducing dividend cover towards 3x over the coming years.  We will continue to execute the £90m share buyback announced in March, of which we executed £25m in the first half.  The Board will keep future buybacks under review in line with our capital allocation framework and target leverage of 1-2x net debt to EBITDA.

Summary and concluding thoughts

It seems that "black swan" events behave like buses and taxis: ages pass without seeing one, and then two arrive at the same time.  The concatenation of Covid-19 and the Russian invasion of Ukraine has set back almost every positive aspect of global development.  But they stand as reminders that governments matter, and that they have enormous resources and the power to do immense good, and immense harm.  It has been governments who mobilised and organised healthcare and social services to defang Covid-19; it is a government that is responsible for attacking Europe and bringing misery to millions; it is governments who have cooperated to help the Ukrainians stop the invaders.

It is also a reminder of the sheer scale and breadth of what we expect governments to deliver - whether it be running health services, collecting our rubbish, managing justice and immigration, defending the realm, or building and maintaining vital infrastructure.  To do all these things governments need the private sector to help them, and for those companies who are prepared to invest in satisfying the very specific requirements of delivering public services it is a huge and resilient market.

Companies that thrive in this sector need to be agile, resilient, have deep expertise and capability in public services, strong management, and effective governance. These are all attributes which we work hard to excel at, as do our peers.  But Serco has a number of points of differentiation from the majority of our competitors:

First, we serve only governments, so we are specialists and completely focused on governments', often unique, requirements.  Culturally, we have public service in our corporate DNA, with a set of values and a public service ethos that comes from the fact that many of our colleagues come from careers in public service.

Second, we have an international footprint which allows us to access many more opportunities than would be the case if we operated in a single jurisdiction.  In the first six months of the 2022, almost three-quarters of our profits arose from outside the UK.

Third, we have the scale to have developed a unique Business-to-Government platform which allows us to drive agility, efficiency and resilience.  

Serco's strong performance over the last few years has been largely due to these differentiators, and we work daily to build and strengthen them.  In so doing we can thrive in a very large and growing market, and be able to deliver growing returns to shareholders, rewarding careers to our employees, and high-quality public services to our customers.

Rupert Soames

Group Chief Executive

Serco - and proud of it.

Divisional Reviews

Serco's operations are reported as four regional divisions: UK & Europe (UK&E); the Americas; the Asia Pacific region (AsPac); and the Middle East.  Reflecting statutory reporting requirements, Serco's share of revenue from its joint ventures and associates is not included in revenue, while Serco's share of joint ventures and associates' profit after interest and tax is included in Underlying Trading Profit (UTP).  As previously disclosed and for consistency with guidance, Serco's UTP measure excludes contract & balance sheet review adjustments, which were, in any case, immaterial in the period.

The trading performance and outlook for each Division are described on the following pages.  Reconciliations and further detail of financial performance are included in the Finance Review on pages 14-24.  This includes full definitions and explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group.  The Condensed Consolidated Financial Statements and accompanying notes are on pages 28-43. Included in note 2 to the Group's Consolidated Financial Statements are the Group's policies on recognising revenue across the various revenue streams associated with the diverse range of goods and services discussed within the Divisional Reviews.  The various revenue recognition policies are applied to each individual circumstance as relevant, taking into account the nature of the Group's obligations under the contract with the customer and the method of delivering value to the customer in line with the terms of the contract.

UK & Europe (45% of revenue, 24% of Underlying Trading Profit⁽⁷⁾)

Revenue declined by 5% to £992m (2021: £1,039m), with the reduction being almost entirely organic.  The lower revenue was due to our Covid-19 Test & Trace services coming to an end part way through the first half.  In total this was a drag on revenue of around 21%, with the net reduction being significantly less as we saw growth in other Citizen Services work, Justice & Immigration, Transport and Defence.  We experienced particularly strong demand for immigration services and, from a revenue perspective, our contract to provide accommodation for asylum seekers is now the largest in the group.

Underlying Trading Profit reduced to £38m (2021: £56m), representing a margin of 3.8% (2021: 5.4%).  The step down in profit was due to lower levels of Covid-19 work, the cessation of our Atomic Weapons Establishment contract in June 2021, which together were a drag of £25m, as well as broader market related challenges such as higher utility costs in our asylum seeker accommodation and driver shortages impacting our prisoner escorting work.  These factors contributed to the margin reducing by around 160bp compared to the first half of 2021, although it was around 40bp higher than the same period in 2020.

Underlying Trading Profit includes the profit contribution of joint ventures and associates, from which interest and tax have already been deducted. If the proportional share of revenue from joint ventures and associates was included and the share of interest and tax cost was excluded, the overall divisional margin would have been 3.5% (2021: 4.7%).  The joint venture and associate profit contribution was lower at £3m (2021: £6m), as a result of the Atomic Weapons Establishment contract ending in June 2021, partially offset by some recovery in Merseyrail and the start of contracts with the UK Defence Infrastructure Organisation, which are delivered by our VIVO joint venture.

Order intake was around £1.0bn, a book-to-bill ratio of 1.0x and around 50% of the total intake for the Group.  New wins were approximately 75% of the order intake.  Agreements signed included a contract with the UK Ministry of Justice to run HMP Fosse Way, a new prison in the UK, previously known as Glen Parva.  The new contract has an estimated value of more than £400m over the initial ten-year term.  Also in the Justice & Immigration sector, we secured an estimated £200m of additional  immigration work, reflecting the large numbers of service-users having to be temporarily accommodated.  VIVO Defence Services, our joint venture with Equans, continued its success of 2021, being awarded four of the five contracts being tendered to deliver asset and facilities management services to the Defence Infrastructure Organisation (DIO) at the UK military establishments that host US Visiting Forces. We estimate the work will have a value of around £60m over the initial three-year period.  We also successfully rebid our agreement to provide facilities management services at Norfolk and Norwich University Hospital, with an estimated value of £130m over four years.

The pipeline of new opportunities in the UK & Europe remains healthy, with significant new opportunities across Defence, Space, Justice & Immigration and Citizen Services.

Americas (29% of revenue, 49% of Underlying Trading Profit⁽⁷⁾)

Revenue grew by 18% to £622m (2021: £529m), with organic growth of 3%, an acquisition contribution of 8% and a 7% favourable translational effect of currency.  The acquisition growth came from WBB, a leading provider of advisory, engineering and technical services to the US Department of Defense.  This acquisition completed at the end of April 2021 and contributed £42m to revenue growth in the first half of 2022 at constant currency.  The two main sectors for our Americas business are Defence and Citizen Services.  Excluding WBB, our Defence business saw a modest decline in revenue as some work programs approached their planned end and growth continued to be held back by delays in the award of new contracts.  Citizen Services, however, saw good growth supported by increased demand for our case management services and recovery in driver examination activities, which had been negatively impacted by Covid-19.

Underlying Trading Profit grew faster than revenue, increasing by 33% to £76m (2021: £57m).  Excluding the favourable currency movement of £4m, UTP growth at constant currency was 26%, of which 20% was organic. Margins increased from 10.8% to 12.2%, due to the good growth in our Citizen Services sector and better profitability in Defence, despite lower revenues.

Order intake was strong at £0.9bn, approximately half of the total for the Group and a book-to-bill ratio of approaching 1.4x.  New business wins represented around 60% of the order intake and included important programmes such as the Ship Acquisition Programme / Project Management (SHAPM) contract from the US Navy, under which we will deliver design, acquisition and programme management to the US Navy's submarine build and sustainment programmes; we expect this contract to be worth £280m over four years.  We also won a £60m, 2.5-year contract from the Defense Advanced Research Projects Agency (DARPA) for detail design, prototype construction and demonstration of a large and highly sophisticated unmanned ship as part of the No Manning Required Ship (NOMARS) programme.  In addition, since the period end, we have been notified we were successful in the rebid of our US Navy SEA21 contract. The new contract is expected to be worth around $400m over five years, and will see us provide technical services related to international fleet support, surface ship modernisation, surface ship in-service readiness, surface training systems and inactive ships.

The pipeline of major new bid opportunities due for decision within the next 24 months in the Americas has increased from £2.2bn at the end of 2021 to £3.1bn at the end of June, meaning it now represents approximately 40% of the Group total. A combination of new opportunities joining the pipeline and award decisions being delayed has driven the increase.  Defence makes up the bulk of the Americas pipeline, with a broad spread of types of work, while Citizen Services opportunities represent the remainder.

Asia Pacific (22% of revenue, 21% of Underlying Trading Profit⁽⁷⁾)

Revenue increased by 3% to £472m (2021: £458m).  Organic growth was 3%, the FFA acquisition from 2021 contributed 1%, while currency reduced reported revenue by 1%.  The growth was driven by Justice & Immigration, where we saw increased demand for our immigration services, and Citizen Services.  This more than offset lower revenues in Health, as some services at Fiona Stanley Hospital were taken back in-house in the second half of 2021.

Underlying Trading Profit increased by 26% to £32m (2021: £25m), representing a margin of 6.7% (2021: 5.5%). Currency had only a minor negative impact, leaving growth at constant currency also 26%.  The biggest driver of the increase was our immigration services work.

Despite an active period of bidding in the first half, order intake was just £0.1bn, 4% of the Group total, as we were unsuccessful in bids to run driver licensing and vehicle registration at the transport department in Victoria, and facilities management at Frankston Hospital.  We did however have a very high rate of success in retaining existing work, including our contract to provide contact centre services to the Australian Tax Office, which has been extended to June 2023.

Our pipeline for new business reduced in the period, due to the lost bids mentioned above, but contains significant opportunities in the Defence, Justice & Immigration, Citizen Services and Transport sectors.

Middle East (4% of revenue, 6% of Underlying Trading Profit ⁽⁷⁾)

Revenue fell by 35% to £93m (2021: £143m).  An organic reduction of 38% was modestly offset by favourable currency moves adding 3% to revenues.  The end of our contract to operate the Dubai Metro, which we exited in September, led to a large reduction in revenue for the division, which outweighed growth in other parts of the Transport sector including Dubai Airport and air traffic control services in the region.

Despite the sharp revenue contraction, Underlying Trading Profit improved to £9m (2021: £7m).  This favourable profit outcome was supported by improvement in parts of the Transport sector, as demand recovered following a reduction in Covid-19 cases.  This, plus a successful exit from the low-margin Dubai Metro contract, meant margins increased from 5.1% to 9.4%.

Order intake was around £0.1bn, or 4% of the total for the Group. Just over 60% of this was rebids, which included our contract to provide air traffic control services to Dubai Air Navigation Services (dans), the organisation responsible for Air Traffic Management at airports in Dubai and the Northern Emirates. New business included a £10m, five-year contract to provide a facilities management managing agent service to Riyadh International Airport.

Our pipeline of new bid opportunities in the Middle East includes work in the Citizen Services, Transport and Defence sectors.

Corporate costs

Corporate costs relate to typical central function costs of running the Group, including executive, governance and support functions such as HR, finance and IT.  Where appropriate, these costs are stated after allocation of recharges to operating divisions.  The costs of Group-wide programmes and initiatives are also incurred centrally.

Corporate costs increased by £1.3m to £24.0m (2021: £22.7m).  The higher amount resulted from increased spending on travel, as Covid-19 restrictions were eased, and other activity that had been put on hold as a result of the pandemic, such as our in-person management training courses. 

Dividend calendar

Ex-dividend date: 8 September 2022

Record date: 9 September 2022

Interim dividend payable: 6 October 2022

LEI code: 549300PT2CIHYN5GWJ21

Forward looking statements

This announcement contains statements which are, or may be deemed to be, "forward-looking statements" which are prospective in nature.  All statements other than statements of historical fact are forward-looking statements. Generally, words such as "expect", "anticipate", "may", "could", "should", "will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" and similar expressions identify forward looking-statements.  By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements.  Factors which may cause future outcomes to differ from those foreseen or implied in forward-looking statements include, but are not limited to: general economic conditions and business conditions in Serco's markets; contracts awarded to Serco; customers' acceptance of Serco's products and services; operational problems; the actions of competitors, trading partners, creditors, rating agencies and others; the success or otherwise of partnering; changes in laws and governmental regulations; regulatory or legal actions, including the types of enforcement action pursued and the nature of remedies sought or imposed; the receipt of relevant third party and/or regulatory approvals; exchange rate fluctuations; the development and use of new technology; changes in public expectations and other changes to business conditions; wars and acts of terrorism; cyber-attacks; and pandemics, epidemics or natural disasters.  Many of these factors are beyond Serco's control or influence.  These forward-looking statements speak only as of the date of this announcement and have not been audited or otherwise independently verified.  Past performance should not be taken as an indication or guarantee of future results and no representation or warranty, express or implied, is made regarding future performance.  Except as required by any applicable law or regulation, Serco expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this announcement to reflect any change in Serco's expectations or any change in events, conditions or circumstances on which any such statement is based after the date of this announcement, or to keep current any other information contained in this announcement.  Accordingly, undue reliance should not be placed on the forward-looking statements.