Serco Group plc (SRP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Serco Group plc 2020 Half Year Results presentation. I must advise you that the presentation is being recorded today on Thursday, the 6th of August 2020. I shall now hand over to your speakers for today's call, Rupert and Angus. Please go ahead.

Good morning, everybody. This is Rupert here. And we will just go rattle through our results in the usual fashion, Angus through the numbers, and I will through the operational side. But it's been a extraordinarily strong first half, where a lot of the good things that happened in 2019 came to fruition in 2020. Revenue was up 24%, with 15% organic growth. And I think it's been many a year before one imagines these businesses could produce 15% organic revenue growth. Underlying trading profit up 53%. And our margin continuing its journey up to 4.3%. But I also want to say that whilst the COVID-19 has had actually relatively little impact on our underlying trading profit, in fact 0 pretty much, it's had quite a big impact on our revenues with GBP 130 million of additional were offset by 80 -- GBP 50 million of downside where we've lost revenue in contracts. So net about GBP 80 million, but the profit impact has been flat. But underlying that has been enormous operational performance going on to deliver huge mobilizations: 15,000 people recruited to support governments around the world, 7,500 tracers recruited and mobilized in a period of 6 weeks. And 2 days ago, we performed our 0.5 millionth test on the drive-through mobile testing stations. And the important thing for us is that our people, our processes, our system and indeed, our strategy and our organizational approach, which we described as loose-tight, actually responded very well to the challenges. Pleasing was that we, in the time when fairly customers were concentrating on other things, and there was a lot going on for them, we ended up with order intake slightly above revenues. So yet again, 100% book-to-bill, and our order book increased to 14.5 billion. Our balance sheet is very robust. We ended up with lower net debt than we were actually expecting, and Angus will explain why to you later. And we are reinstating our 2020 guidance, which you'll remember that we came out in late June in unscheduled updates to tell people that we were reinstating guidance. Going to the next slide, you'll see something of how this journey has been, and if we hit the middle of our guidance range for UTP, it will represent a 27% compound growth in profits between 2017 and 2020. So consistent progress on profits. I'm now going to hand over to Angus, who will take you through the numbers.

Thank you, Rupert. Good morning, everybody. Let's start with the income statement. Revenue of 1.8 billion is up 24% in both reported and constant currency. This comprises 15% organic and 9% from the acquisition of NSBU in August 2019. Of the 15% organic revenue growth, around 5% or GBP 80 million is COVID-19 related, comprising 130 million of new business offset by around 50 million of COVID-19 related revenue decline on impacted contracts. The net currency impacts during the first half were minimal and the detail and sensitivities are shown in the slide. UTP grew by 53% to 78 million. Of the GBP 27 million of UTP growth, GBP 10 million came from the NSBU acquisition in North America, in line with our expectations at the time of the deal. COVID-19's impact in UTP was almost net neutral, but as with revenue, there were large swings in different contracts across the business. Consistent with full year '19, UTP of 77.6 million is lower than trading profit of 80.5 million, reflecting the exclusion from underlying of 2.9 million of contract and balance sheet review benefits arising from OCP provision releases. This ensures that we continue to give an accurate picture of true underlying performance. Underlying trading margin improved by 90 basis points to 4.3% compared to the 3.4% in the first half of '19. The UTP margin improvement came from keeping a tight control on SG&A costs, which grew 4% in the previous period as compared to revenue growth of 23%. Contract margins also improved by 30 basis points as the new large contracts transitioned from mobilization to trading profitably. On the negative side, joint venture profits were 6.5 million lower, largely due to the impact of COVID-19 on the operations of Merseyrail, which equates to a 50 basis point reduction in group margin. Turning to revenue. Organic revenue of 15% was driven by strong performance in our 3 biggest businesses. The headliner was AsPac, where organic revenue grew by 25% coming mainly from recent contract wins, notably the contract to provide health services to the Australian Defence Force won in 2019 as well as other newly operational contracts, including the Adelaide Remand Center, a little bit of Clarence Prison and the Department of Human Services. Organic revenue grew by 19% in UKE, with 100 million of growth arising from the impact of COVID-19 related contracts, notably testing centers, test and trace and call center work supporting NHS 111 and Universal Credit, partially offset by revenue loss which occurred mainly on our leisure, rail and ferries contracts. Additional UKE growth was generated in the new AASC asylum seeker contract, where volumes also exceeded our expectations, and to a lesser extent, our recently won Gatwick IRC contract. In North America, organic revenue grew by 8%, with strong performance from the FEMA contract which started in the second half of '19 and further growth coming from higher CMS volumes, offset by lower revenues on our driver examination services contract in Ontario as the driving centers were closed during Q2 due to COVID-19, and finally, lower ship and shore modernization revenues. Organic revenue in the Middle East fell by 2% due to the impact of COVID-19 our air traffic control and airport FM businesses. UTP for the group of GBP 78 million represents both headline and constant currency growth of 53%. Underlying trading margin improved by 90 basis points to 4.3%. The strongest growth was recorded in UKE, where UTP grew by 11 million or 74% to 27 million. This growth arose from strong performance in our Justice & Immigration and Citizen Services business, with the biggest contributors being the AASC asylum seeker contract, COVID-19 testing and trace and COVID-19 test -- the mobile testing centers. These latter contracts are at lower than usual margins, reflecting the nature of the COVID-19 related work. This growth was offset by some negative COVID-19 profit impacts across other business units, notably health, transport and leisure, which all experienced disruption, whether through the closure of leisure centers, high rates of absenteeism or reduced passenger and service volumes on our rail and ferries contracts. In addition, financial support has been received from some of our customers to ensure the continuation of underutilized services which has come in the form of emergency measures agreements, reimbursing higher contract costs. The furlough benefit is around GBP 5 million in the first half, most of which released to our leisure center workers who were furloughed due to the closure of all our U.K. leisure centers. Some of our staff were able to be redeployed into other contracts, but in total, we have some 2,500 staff currently furloughed. 39 of our 49 leisure centers have recently reopened, and 650 of our furloughed staff have returned to work, with many more expected to return the next few weeks, subject to any change in government policy. As staff come back into employment, we are not applying for the GBP 1,000 per employee bonus that has been offered for reemploying furloughed staff. Furlough has worked in the way it was intended, from our perspective, and has enabled us to keep employees on the payroll that would otherwise have had to make redundant as we had no revenue stream with the leisure centers, which means that we have qualified and experienced staff to reopen leisure centers quickly and safely. Overall, our margin in the U.K. and Europe improved by 110 basis points to 3.4%, in large part due to the transition of our asylum seeker contract moving from mobilization into operating profit. The Americas also performed very well, growing UTP by around GBP 15 million or 40% in constant currency terms to GBP 53 million. Around GBP 10 million of this UTP growth came from the NSBU acquisition which completed in August last year. We're pleased with the progress we are making with NSBU and it remains on plan from a profitability perspective, with the Canadian business continuing to perform particularly well. During the first half, our CMS health insurance eligibility contract continued to benefit from unusually high volumes of variable work. This work was recently completed and we expect activity levels and profitability to be lower going forward. Beyond NSBU and CMS, the broader Americas business generally performed well, with the standout being our recently won FEMA contract where we continue to experience high activity levels. From a margin perspective, the Americas continued to have an underlying trading margin around 10%, a level not expected to sustain going forward given the nonrecurring nature of some of our CMS work. UTP in AsPac increased by 19% in constant currency terms to 13 million. This increase was largely the result of the first half contribution from the Australian Defence Force health contract, which was incurring mobilization costs in the first half of '19; as well as the continuing strong performance in Citizen Services, which was helped to a small extent by some extra COVID-19 work. Reported UTP margin was broadly similar to last year at around 4%. UTP in constant currency in the Middle East declined by 4% to 7 million, reflecting primarily the disruption caused by COVID-19 on air traffic volumes, leading to a 20 basis point margin fall to 4.3%. Turning to the bottom of the income statement. Finance costs increased by GBP 2 million to GBP 13 million, largely due to the additional lease interest from bringing on balance sheet the housing leases associated with our AASC asylum seeker contract. The blended average cost of our gross debt in 2020 was lower at 3.91% as compared to 4.51% in 2019, reflecting the higher utilization of the revolving credit and acquisition facilities, which have lower interest rates than U.S. private placement debt. The underlying tax rate was 26%, 2 percentage points higher than the same period in '19. This is due to the mix of where profits were made, primarily a higher proportion of taxable profits being earned overseas where the blended tax rate is higher than the U.K. at around 30%. Underlying profit before tax generated from these 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. Over the medium term, we expect the underlying effective rate to remain at around 25%, with the cash tax rate a little lower due to the benefit of the goodwill amortization in the U.S. Cash tax will also benefit in the longer term from the GBP 760 million of off-balance sheet losses in the U.K. Underlying diluted earnings per share grew by 47% from 2.62p to 3.86p. The weighted average number of shares increased from 1.15 billion in 2019 to 100 -- to 1.24 billion in 2020, largely as a result of the annualizing effect of the May '19 share placing of [ 111.2 million ] ordinary shares to finance the NSBU acquisition. Statutory earnings per share on a diluted basis, which reflects non-underlying items and exceptionals, was 5.66p as compared to a loss per share of 0.15p in the prior period which reflects the fact that we've pretty much completed not just the SFO settlement, but also the large historic exceptional restructuring costs. I'll come back to dividends later. For the first time in my tenure, turning to exceptional items, not only are OCPs conspicuous by their absence from the slide deck, exceptional items barely merit a mention. In fact, during the first half, these were a net GBP 13 million credit in 2020 as compared to a GBP 31 million cost in the prior period, largely arising from our GBP 23 million deferred prosecution agreement with the Serious Fraud Office. The exceptional credit arose from the disposal of our share in the Viapath pathology joint venture following the loss of a rebid. We have now completed the transformation stage of the strategy implementation. And as promised, there are no exceptional restructuring costs to highlight. Process improvement, however, continues at pace, notably in improving our HR platform and capturing the benefits of our own speedy boarding process for new employees, which we benefited from during the rapid sourcing and onboarding of 15,000 people in a matter of a few weeks for testing and tracing. We will continue to improve our systems, processes and structures, but we expect the costs associated with this to be charged to underlying trading profit. Our focus continues to be on operational improvement, reaping the benefits of our procurement transformation and completing the rollout of workforce management. The benefits of our extensive restructuring and transformation and the new shared service platform was illustrated clearly during the first half, not only from our ability to grow with minimal incremental overhead costs, but also from an operational perspective, which allowed us to respond in an agile way to both the opportunities and risks arising from COVID-19. Having said in February that for the first time in 5 years, the Board is recommending the payment of a dividend, who would have imagined that in a matter of a few weeks, we would be withdrawing the dividend resolution to pay a 1p per share final dividend for '19. This decision reflected our caution vis-à-vis the impact of COVID-19 as we withdrew guidance for the year. And the fact that it would, in our view, have been inappropriate to pay a dividend to shareholders, having utilized government liquidity support in the form of GBP 38 million of VAT deferment. Since then, the business has continued to perform well. We've reinstated guidance for the year, and our leverage ratio is below 1, even taking out the benefit of government liquidity support. However, significant uncertainty remains, and there is still a wide range of potential outcomes. And therefore, prudence dictates that we continue to utilize the government tax deferment support, probably into the fourth quarter when we hope to repay taxes earlier than required. If circumstances allow and we can sensibly pay back this liquidity support before the end of the year, the Board believes that we'll then be in a position to consider whether it should distribute all or part of what would have been paid as the final dividend in respect of '19. Under the same logic, the Board has also decided to defer a decision on whether to pay any interim dividend in respect to the first half of '20 until the fourth quarter as well. As the Board considers its position and dividend, timing and quantum, it will continue to be mindful of the longer-term requirement to maintain a prudent level of dividend cover, the potential to enhance value through bolt-on acquisitions and the need to maintain a strong balance sheet, which is key for Serco in the long term. I will now pick out some of the key moving parts, cash flow wise. Free cash flow benefited from GBP 49 million of government liquidity support in the form of tax deferment, most notably, GBP 38 million of U.K. VAT. Of this GBP 49 million, 45 million is in working capital, with 4 million coming through tax paid. If we exclude this GBP 45 million, we had a net working capital outflow of GBP 25 million on a revenue increase of GBP 346 million. Free cash flow for the period is GBP 32 million, excluding the tax deferment benefits of GBP 49 million, which compares to free cash flow of GBP 0.4 million in the first half of 2019. Underlying trading cash flow conversion after excluding the tax deferral benefit is 78%, higher than the 56% of the previous period. In terms of the rest of the cash flow, many elements are self-evident. However, a number require also commentary. The increases in depreciation and impairment of leased assets and the capital repayment of leased assets are a result of the new AASC contract being accounted for under IFRS 16, whereas last year at the same time, the predecessor Compass contract was accounted for as an operating lease as it only had a few months to run at 1 January '19, the adoption date of IFRS 16. CapEx in the first half was GBP 21 million, an increase of GBP 9 million in 2019. Almost all of this increase relates to the timing of the purchase of new vehicles as part of the mobilization of the new prisoner escorting contract in the U.K., which are still under construction. And once completed, they will be sold and leased back in the second half. Looking now at net debt and leverage. Adjusted net debt was GBP 143 million as compared to the pro forma June 2019 number of GBP 201 million, which excluded the GBP 139 million of equity proceeds subsequently paid out to complete the NSBU acquisition. However, it should be borne in mind that this net debt number benefited from the GBP 49 million of tax deferment, as previously discussed. Excluding this, adjusted net debt would have been GBP 192 million, which is GBP 23 million lower than the GBP 215 million at the end of '19. Daily average net debt was GBP 283 million, with a peak of GBP 356 million. The bigger than usual difference in terms of average to period end net debt was caused by 3 main items. First, towards the end of the half year, as I previously referred to, tax payments of GBP 49 million were deferred. Secondly, there was a material catch up in May and June in U.S. receivables, primarily relating to delays in payments in the FEMA contract caused by high activity levels and new billing processes. Thirdly, there were significant receipts towards right at the end of the period relating to our testing and our test and trace contracts, which have been delayed given both the customer and our focus on mobilization and early operation. Adjusted net debt excludes all lease liabilities, which were GBP 360 million at the end of June. With these lease liabilities included, reported net debt was GBP 503 million. Covenant net debt excludes these IFRS 16 lease liabilities and at June '20, the leverage ratio was 0.7x as compared to 1.4x on a pro forma basis in June '19. Excluding the tax deferment benefit of GBP 49 million, the underlying ratio was still below 1 at 0.9x. In terms of our liquidity, we remain in good shape. We have no off-balance sheet debt in the form of receivables or payables financing. Our pension is an accounting surplus and a very small actuarial deficit. The onerous contracts are close to ending. We continue to pay our creditors to government guidelines. Our deferred revenue is trading in nature, and our JVs are truly operational. On top of that, our available liquidity at the half year was in excess of GBP 360 million. Finally, let's look at the outlook and modeling assumptions. There are no changes to the guidance that we gave in June at the pre-close update. We expect revenue for 2020 to be around GBP 3.7 billion, which represents organic growth of circa 9%. In terms of underlying trading profit, we continue to guide to our broader range than normal of GBP 135 to GBP 150 million because of the uncertainty associated with COVID-19. Our COVID-19 related contracts are short-term in nature, with variable volumes which are difficult to forecast. And similarly, it is difficult to predict how the parts of our business which that have been negatively impacted by COVID-19 will continue to be affected by the virus. In addition, during the second half we will transition the new PECS contract and ramp up activities in the Clarence Correctional Center in AsPac and the Gatwick IRC in the U.K. We expect net finance cost to be around GBP 27 million, reflecting the full impact of AASC and IFRS 16 lease interest. We expect closing adjusted net debt, which excludes leases, to be around GBP 200 million, with covenant leverage at the lower end of our target range at around 1x. The rest of the guidance is there for your reference. And thank you for your attention, and I'll now hand you back to Rupert.

Thank you, Angus. So starting the operational review with the usual highlights and lowlights slide, I'm going to start with the lowlights, and start with the news that for our workforce, we've had 7 colleagues died related to COVID-19 out of a workforce of about 55,000. Not only is that a tragedy for the families and for them, but I think that it also serves to remind ourselves of the bravery of the people who turned up to work knowing that some of their colleagues who worked in prisons or hospitals have actually died of this ghastly disease. Moving on, bid losses. We lost a big pathology bid in our joint venture Viapath, but then managed to exit from that joint venture with a gain where we sold our interest to the other shareholders. We lost a big contract to do a traffic and trailer training in the U.S. for the Federal Aviation Authority, which was obviously a disappointment. More generally, the sum of the very largest tenders have been pushed back, and I would have to say that a lot of our customers are somewhat distracted at the moment. But that's not necessarily -- it pays us if we're the incumbent in terms to me that the contracts will get extended. The pipeline has got a bit weaker. We're not worried by that. That's the city pipeline. The grace pipeline, the one -- the wider one is actually still pretty robust. It's been -- we want to continuously improve all the processes in our businesses, and particularly as in the contracts, it's been difficult to maintain that continuous improvement at the time of lockdown and minimum travel. And the delivery of the ice breaker has been further delayed by there was an outbreak of COVID-19 at the shipyard, which has led to a further delay. And we have actually decided to tow her out of the shipyard, and she's now on her way down the Danube and out to the Black Sea to bring her to Europe to be finished off. But I think the customer is very understanding of what's being laid on them. We've been subject -- as is the case, you know we're pretty robust about this through a lot of negative press on particularly test and trace. I think that we are actually doing really well there. Of the people who we get to speak to, we are persuading 96% of them to isolate themselves, which is very good. The -- and I think that the customer is in no way displeased with what we are doing. But we have a double work to do on the PR firm. Health continues to be difficult, not only because we've had to put in a lot of additional resources to backfill people who were absent, but say there's been quite a lot of additional cost in the business. And the government is quite rightly winding up the efforts on its PFI auditing, which always results in a lot of work for us. So those are the main lowlights. Let's move on to the highlights. I'm going to do a 3 or 4 slides on COVID-19 as it might be of interest to you how seeing a little bit already how it does affect our business like ours. But I think for me, the highlight has been that our people, our systems, our processes have proved themselves to be incredibly scalable and agile. As I say, we still have 15,000 people during the period. And this idea of a highly flexible business model where we can move people from sector to sector. And in particular, maintaining presence in such as the onshore call centers that we had used to be regarded as something of the ugly duckling, and there are endless strategy review cases about saying how we should exit this if we can. It turns out she's the belle of the ball and has been -- enabled us to serve -- step up the level of service that we provide to government. Had we not kept that capacity and that presence in the onshore government-related call center market, we might not have been able to do that. We've talked about the very strong financial performance. One wonders whether it can ever get better than that, probably not. But it's very [ chatting ] to see both organic and inorganic growth coming together. And 100% book-to-bill on the order intake in a difficult environment, key wins being the extension against fierce competition and indeed a procurement challenge for Northern Isles Ferries. We not only won the Gatwick Immigration Removal Centre, we actually went and took it live during a period of lockdown. We've won a very long extension to the Fiona Stanley Hospital and GEODSS and finding those 2 important deep space contracts, 1 doing electro optical deep space exploration for the U.S. government, maintaining equipment for that, and the other is the RAF Fylingdales. I mentioned Gatwick's IRC, mobilizing that during lockdown. But of course, we also had Clarence, which went live in July, started taking prisoners in July. That's been very successful. And in August, we take live the new PECS contracts or that we've been busy on that front. In terms of the U.S., in NSBU and METS are performing in accordance with the plan. And interestingly enough, 40% of the pipeline for the U.S. business now comes from work for that unit. As Angus mentioned, FEMA's running better. We've done very well from additional volumes in the CMS contract, which carried over unexpectedly into the first few months of this year. On asylum seeker, accommodation we've looked -- had to find 2,700 additional places for people in -- since March, which has been quite a test. And we've also been doing, on the management side, we've had a series of new appointments to our exec, which is Kevin Craven retiring from the full-time role in the U.K. business; Mark Irwin coming from Australia; Peter Welling stepping up to run the Australian business. And then the other end of the scale, for our 40 graduate positions, we've had 7,500 applicants, which I think tells you something about Serco being an employer that has a good reputation. The other highlight has been the way that, necessity being the mother of invention, we've had to go and relook at a lot of our processes, including the interminable process of hiring somebody into Serco. That used to take weeks or months. We've now got a new process called speedy boarding where literally within weeks, we are able to recruit people. So we're pleased that with the -- despite all the issues to do with COVID-19, we have still continued to improve our processes, our central processes and make them run better. So next slide now, just talk a little bit about COVID-19, and I want to start it by saying that from the get-go, and I think that this was a very important thing to say to the outside world to our customers, but also to our colleagues within the business, is that it was our priority. Our top priority was to support the delivery of essential public services. These are not things that we can walk away from. And within that context, of course, we would do all we could to protect our employees and the interests of our shareholders. But throughout this, we have put front and center the need to support and sustain the delivery of public services. And this raised a series of questions, which you might call generic or group level, is: How the hell do we manage ourselves in this environment; would it be the same or different impact by different country; how many people are going to turn up for work; at what level of attendance do we find that we simply can't operate; how can we supply -- scale up the ability to provide secure IT in people's home; how long is the situation going to last; will our customer government be able to function at all; what would happen to our liquidity; and what PPE do we need and how fast do we need it? Now we have being fortunate to have actually done quite a lot of work on business continuity planning. And we have regular sort of emergency exercises where people turn up to work and suddenly find that all the networks have been disconnected or some terrible crisis has happened. So we did quite a lot of that thing. And the plans, the business continuity plans actually worked well, slightly to everybody's amazement. The loose-tight devolved structure worked really well. This is my favorite thing about managing. You devolve management responsibility as close to the customer as you can, but it is within tramlines of quite tight devolved authorities. And it's -- that has worked well because it's given people, contract managers, the ability to go and respond to customer requirements in the particular way that they need to, but in a way that we can have confidence it's not going to cause us [ from ]. 90% of our -- everybody worries about home working, but actually 90% of Serco employees work on the front line. They work in prisons and hospitals and in call centers. So we have to bear that in mind. The earthquake that was working from home actually only applied to about 10% of our people. Government has actually continued to contribute well. They've been paying their bills. Liquidity has been strong. And one day, we will write a story of all different war stories about PPE, including a containerload of sanitizer and PPE that had been painfully bought from China at vast expense, that then got stolen at the Port of Calais. Certainly [ all plans to null ]. So we've had the same sort of issues there. Moving over to just give you an idea of what happened on absence. I said that around about 30% of these people, businesses become really difficult to run. And in March, when it first broke and people were being told to isolate and to shield and everybody was nervous, we were running at about 28% absence rate, which was very hard to manage, particularly in our health care business. But that fell very rapidly. And we're now down where we are now, down to about 7.2%, of which 2.3% is COVID-related. So you say underlying 5%, which in the summer period is about normal. But it's been very interesting in that journey on how dire it was back in March. Moving on to each different sector. This was where the loose-tight comes into -- there were very few in [indiscernible] sectors where the question is exactly the same. In the hospitals it revolved around PPE, how we were going to be able to practical, lots of people, the absences. How much of the hospitals, they actually wanted to continue services, will they be able to get food? In prisons, it was all about, do we go for lockdown? How are you going to stop it spreading within a prison, because there was experience in places like Italy where it spread through prisons incredibly fast. Would we be able to do driving tests? What about the leisure centers? And it had some really strikingly different impacts. So in our Environmental Services business, which is basically carrying your rubbish bins, we've had a 25% increase in rubbish volume. Because people have been at home, and they're consuming a lot more stuff. They're getting a lot more cardboard boxes through this. Driver and test examination in Canada, we had to completely close, as we did our leisure centers. On the other hand, the asylum seekers, because the home office stopped moving -- stopped ending people's support, we've ended up in a situation where we have a one-way valve and just people arriving but nobody leaving. Call centers, we have customers who insist that their work is done on a physical site connected to their networks and not from home, but those call centers now find themselves with capacity reduced by about 70% and now mostly normal customers are agreeing to home working. And when you have to shift a nuclear submarine out of Faslane, how can you be sure that you're going to have a tug available? The answer is you have to take 2 whole tug crews and isolate them for 14 days beforehand. The logistics have become immense. Our transport business, we've been running at much lower volumes on obviously Merseyrail, Caledonian sleepers and [ NorthLink ] ferries and the Dubai Metro, but also all the airport services businesses and air traffic control have also been hit. So moving to the next slide. It's been a huge operational test, not only for Serco, but also for governments. And our reaction when governments have said, can you help, the answer has always been, yes, of course we can. And we've helped in really diverse ways from setting up a field hospital in the World Dubai Trade Center to looking after about 1,300 people, Australian nationals returning from abroad in quarantine. And let me tell you, trying to keep 1,400 Aussies just back from holiday in a hotel where they can't drink was quite a challenge. The drain pipes were getting quite a lot of usage as people tried to climb up and down them. So we did that for the government of Western Australia. We've had increasing numbers of expedition cases where people coming out of prison, foreign national tenders can't be extradited. So we've got extra capacity being put in, in Australia to handle that. And then the U.K., as I mentioned, 0.5 million tests that we've done on the drive-through mobile test centers. We're doing 25 drive-through test centers, 64 mobile test centers and 19 prisons. It's a huge -- the extent of the mobilization that we have done. Overall, we think that, moving to the next slide, that COVID-19 will be a net positive for our relationships with government. We have formed really close working relationships with people throughout government on this. And I hope it's been a positive experience for a lot of them. I mean they -- I have utmost respect for governments here and elsewhere of how they've had to react to situations where the science was moving incredibly rapidly. Today's answer was not yesterday's answer and the consequences of taking wrong decisions were manifold. But I think what we've put in our statement is a quite a lengthy thought about the long-term impact of this. And our view on this is that the Four Forces that we first introduced as a concept back in '20 with our strategy review in 2014 and '15 is what drives governments to want to use private companies. Fundamentally, as get of the voices of this choir are going to be even louder, the choir that says that we need better health care. We've got demographic issues. We have to -- public services are a really important part of our life, and we expect them to be of high quality. Governments are being massively in debt with large deficits. And yet -- but also customer -- citizens not wanting to pay more tax. And all this is going to go and drive, with even fiercer need, the need to deliver more public services of higher quality for less money. And I think that also the response of the private sector has been really strong in ventilators, Dyson, Babcock, Maclaren and Penlon. We've got the Nightingale hospitals being built by Mitie, Interserve, Balfour Beatty, Kier, the British Army and with us the Louisa Jordan in Serco. I mean fantastically good cooperation and a greater expansion in hospital capacity in the U.K. than I think we -- has been seen almost anywhere in the world. As a whole, the public and private sectors have worked really well together. Moving now briefly to the regional summaries. The U.K. and Europe, 19% organic growth, fantastic [ for once ]. Now part of that is about GBP 100 million of that is carbon related, but we have the new AASC contracts flipping from the loss-making Compass contracts and the mobilization of AASC in the first half of last year, flipping to what is now a profitable contract. The Northern Isles Ferry, we won the extension, but promptly went into lockdown so that was a negative. But they've got over GBP 1 billion of awards in the first 6 months. In terms of pipelines, rebids and extensions, while the test and trace of contracts are being renewed on a kind of monthly basis, so that's a permanent job. We've got Herts County Council. The tug contract, the future maritime systems contract coming up for rebid, and we've also got the Skynet bid satellite communications for which we lead the consortium called Athena with Lockheed Martin and others. We've got a big bid that we're working on is a joint venture with ENGIE for the DIO defense infrastructure. We're bidding for new build prisons and also in Europe. Americas summary, they had a huge year. Revenue up 46%, but 36% of that's coming from NSBU. This is now our most profitable business. UTP growing by 42%. Quarter on the contract awards front in the first 6 months. But they've got a strong pipeline. And as I said, the 40% of that pipeline comes from net related work. Moving on to AsPac, 19% revenue growth, 25% organic and 6% of FX headwinds. And the largest contributor of that was the garrison -- defense garrison health care services, what we might call AHSC, which started in the second half of 2019, getting a full half effect of that. And the business has been doing well, and in particular, mobilizing Clarence. They've got a lot of extensions coming up, including the DIPP immigration contract. That is the third -- that comes to an end unless extended at the end of next year. So we'll have to see where they want to extend. They've got the right or not, the extension there. A lot of work in call centers, Department of Human Services. Acacia Prison is up for rebid. So they are busy on that. Middle East has had a difficult time, where a lot of their work is related to transport. And clearly, the volumes they just -- they had won just before COVID came along a large contract to go do work for Dubai Airport FM, which properly closed or about closed, and the volumes of air traffic control are clearly much reduced. And there's not been a lot to replace it. So they're doing really, really well. They're beating every bush and to try and create new business, but it's been quite tough for them. Moving on to the summary and outlook, frankly, this has been a very strong operational and financial performance, the people, the processes, the strategic positioning, the loose-tight has all served us well during COVID-19. We're going to revisit the decisions around dividend in Q4, both for the withdrawn final and for the interim. And that will be also partly be informed by whether we are in a position to repay the deferred taxes in Q4, which we hope to be. Short-term outlook. There's a wide range of UTP guidance for 2020 due to there being practice significant uncertainties, as you can imagine. And with that, we think it will persist into 2021. The government contracts that we got that are generating extra revenue and some extra profit are very short-term and quite volatile and could well disappear. And we need to get a balancing there. We hope that when they do, as they will inevitably disappear, that at the same time, the negative drags on our revenue such as the closure of leisure and others will correct themselves at the same time, but it's quite a balancing act to get right. And we've seen these recurring outbreaks, how serious they can be in Australia and the U.S. and now in the U.K. This is a highly infectious disease. Long term, we believe that the Four Forces will be stronger than ever. But on the whole, within our business, we've said that one of the good things about it we get, that this is not a business that's going to be disintermediated. I am confident that in 20 and 30 years' time, there will still be 2 people at night on G wing, that we will still have to have people cleaning up underneath people's beds and feeding people in a hospital. And I think that while a lot will change, our processes will improve further. We'll have more homeworking and the like. But more will stay the same than will change. And I remember the saying of Jean-Baptiste Karr, who said a year after the French revolution in 1848, "Plus ça change, plus c’est la même chose." And to just say Serco, I used to sign my e-mail saying Serco in private. I stopped doing it for some reason, not that I wasn't proud, but it did seem a little tired. And after this half, we are really rather proud of what Serco has done. Thank you, and let's move on to Q&A. The questions will be taken on the phone line so that we can hear your voices. I haven't been told quite what that means in English, I don't know. But anyway, let's have your questions, please.

Your first question today comes from the line of Sylvia Barker from JPMorgan.

Firstly, on the short term guidance, unleash your thoughts into 2021. So obviously, tenders are probably pushed to the right a little bit, and we do understand the mix of short-term U.K. government work versus kind of potentially the longer-lasting impact of travel and leisure. So maybe can you give some thoughts around the relative importance of these elements within kind of the whole picture of uncertainty? And again, on 2021, could you maybe remind us what profit uplift we should be expecting from things like PECS, Gatwick and Clarence in 2021 or 2020? And then net debt to -- net debt was a little bit better; some of that seems to be timing. But could we maybe hope that the full year is a little bit better as well? Are you in a better position now than perhaps when you set the guidance in June? And then finally, just in terms of the long-term and where you are seeing the potential for kind of COVID-19 related, maybe further outsourcing would -- is that the U.K. mainly or would you say that there are other parts of the world where you're seeing a bit of a shift as well?

Well, let me start first of all, in terms of -- we don't want to give out clearly individual profit numbers by contract. But yes, you've identified 3 of the things that will get better next year. So for example, during transition, with IFRS 15, we will incur a small loss in PECS during the second half. We've incurred a bit of a loss in the first half as we've gone through transition. And that contract will move from being loss-making in 2020 into profit in '21. But just remember, Sylvia, we've not done the budgets yet. The budgets happen in quarter 4 so the -- so I can give you conceptual, but we're not going to go into the individual contract details. Gatwick can be similar. As Rupert said, they've done an amazing job of getting this contract up and going. But in the early days, we've got transition costs again. We'll get -- we should get a very good run at that in '21. And Clarence, we've been doing transition. We've had something with a very low level of profit to date. We'll begin -- as the prisoner numbers increase, we'll begin to make a little bit more in the second half. But again, there'll be a kick-up next year in that. But these are the 3 main new contracts. As you rightly point out, [ AAH ], AHSC, AASC will be lapping a full year as normal. They've been the big driver in H1. In terms of net debt, I'm just trying to get exactly the question. Our track record is not perfect on net debt. I own up to it, but it is extremely difficult to pinpoint a number when you've got 350 odd million every month, both in sales and in purchases almost, and government will pay at a point in time. So we'll always have a bit of volatility around the year-end. And you just have to look back at our pre-close guidance versus where it came out to be able to see that over the last few years. I think the consensus is somewhere sort of 180-ish. We said GBP 200 million, give us plus or minus on that. And let's see how the second half plays out. But the cash performance in the first half, that last couple of weeks was great because cash had been disappointing till then, but we finished the half really strong, great credit to our North American business. And also to the UKE business for -- and the customer for supporting us and getting that paid just before the year -- the half year end. In terms of the guidance, the ball is -- the crystal ball -- [ Notton's ] ball is not quite as transparent as it usually is. We're looking at the macros each day. And Rupert was -- Rupert, I think, during the outlook summed it up well. What -- the extra revenue, we've got big moving parts, GBP 130 million of extra COVID revenue and then GBP 50 million of revenue decline. How are these 2 elements going to play? And remember, the decline tends to be at a higher margin than the new revenue. The new revenue that we've got, we've consciously priced it to be supportive of customer and given the circumstances. So it's how these 2 interact and play out that gives us uncertainty as we look into 2021. One thing is for sure, it's not going to be a COVID-free year. Rupert, do you want to think about the longer-term around the world, the same dynamics?

Yes, I think the same dynamics do play. I think one of the interesting things you've got though is a difference between federal structures and non-federal structures in the -- in Australia, where actually we're multiplying the number of customers we have deal with because each state has its own government, and then there's the federal on top. So there are multiple consumers. The same thing of having to rely on and call on private sector quickly to come to the site, that has worked well. I would say in the Middle East, the impression we're getting is that customers are coming to remember that it's quite valuable to have, instead of having very low-cost operations with there, that actually there is a value to having more resilient operations supporting you. So I think that, that is -- and in the North America, I mean we are -- although it's a large part of our business, we're quite a small player there. But the Navy has just been, in particular, has just completely robust in saying you get down in the battleship and you go and fix it. And there's a step to the mission. So that's what everybody is doing. But I think more generally, this issue of large deficits and the need to have high-quality and resilient public services, and the state can't do all that, I think that that's a pretty worldwide kind of thing.

Our next question is from James Rose (sic) [ Rosenthal ] from Barclays.

I guess the first question is on FY '21 again. I know it's very hard to pinpoint a number for what it might be versus the FY '20 range. But if you could just give a bit more detail on what you think the most significant moving parts could be. I mean obviously, those element within COVID, we talked about those 3 contracts so far. I mean is there anything else you'd call out as being particularly variable? And then secondly, on the pipeline. Could you give us a bit more color on how the pipelines are evolving, perhaps by geography and by sector as well? And is there a reason for us to be more cautious on organic growth opportunities in FY '21, '22, or should we expect no change as to what we talked about earlier in the year?

Well, I'll let Angus talk about pipeline. But I would just say we are coming off absolutely extraordinary organic growth rate. So I mean, just to remind everybody, we think that this is a market where the long-term growth rate is around about 5%. So clearly, the organic growth rate is going to come down quite significantly. So I think that the -- that this issue trending, there are few enough companies that are giving guidance for 2020. And it is difficult. I mean we are not giving guidance yet for '21 because we haven't done our budgets. But in a normal year, we would be as it were beginning to give some greater clarity about '21, but it's really, really hard because nobody can tell when this -- the disruption to our business is going to -- and when we are going to get back into offices, the extent to which we get a second wave in winter and have to go back into lockdown. So I think that whilst I know that you love to have some hard numbers on this, all we can say is that it's clearly not going to be -- it's not going to be much better, but it's highly unlikely to be any better than 2020. It might be a bit up, but even a bit up would be pretty good. But in particular, I want to draw your attention to -- everybody's attention to a bit of a knife's edge, which is that in the first half, we -- and for the full year, we are, broadly speaking, able to say that we're going to make what we thought we would make way back in February when we did that. But the basis on which we get there has, at the top of it, a trapeze artist shaped like me, or rather tightrope, walking a tightrope consisting of the balance between the extra margin that we're making on the government extra work from COVID against the profit impact of those parts of our business that have been hit. In some fantastically pleasant world, those 2 will run off at the same time and we will continue at net 0 through to into '21. However, life being what it is, it is quite possible that the government contracts could roll off earlier or produce less margin, and we still be stuck with the negative impact of the GBP 50 million of revenue that we've lost and that's falling through to our bottom line at a higher rate. So I'm not saying it's going to end. But clearly, there is quite a -- it doesn't take a lot of imagination to say, that, that could move by easily by GBP 10 million either way. And within what you -- I think all the guidance, you want to have granularity down to a very tight range. So we're just -- we're not giving guidance for '21, we're just saying just don't go -- it's clearly not going to be a lot better than '20. And there is this risk there that you get a mismatch of timing between the additional revenue coming from government contracts and the hit that we've got. And that is as clear as I can make it. Angus?

In terms of the investor pipeline, James, it was sitting at GBP 4.9 billion at the end of the year -- at the end of '19. We're now at GBP 4.1 billion. And if you look at the total pipeline, the investor pipeline only includes bids with an annual contract value of over GBP 10 million. If we look at -- if we include the less than GBP 10 million, then the pipeline is GBP 5.9 billion, so GBP 4.1 billion of the investor pipeline and then GBP 1.8 billion of smaller contracts, so 5.9 versus 6.5 at the end of '19, and 6.6 at the end of '18. But let's go back to the investor pipeline. So the split of it geographically, U.K. is just a touch over half of it. And it's -- that is stronger as a percentage than it was, albeit around about the same amount than it was at the end of the year. The AsPac pipeline is down a bit. It's about 10% of the total. We have very good success in AsPac of late, and that just reflects the emptying out of it. The Middle East, a lot of their contracts are smaller. So it's only about 5% of the pipeline. And then the balance, just over 1/3 North America. And there, again, we had a very strong year last year, not quite as much in converting a couple of losses in the first half. And -- but still, we're positive in terms of the outlook in the U.S. The other way of looking at it is in terms of sector. So health -- again, most of these contracts are smaller, and so a lot of them will be in the total pipeline number as part of the smaller ACV, annual contract values. Citizen Services, enormous success with Andrew and Peter in the U.K. and Australia. And that's reflected in the fact that pipeline is down. A couple of hundred million health, about GBP 100 million, transport about GBP 100 million, and that's down again, the difference being NorthLink Ferries, which we won in the first half, if you compare it back to the investor pipeline at the end of December. And then the biggest element of it, defense, almost 3/4 of the pipeline. We've got a good pipeline down in Australia in the U.S., and as Rupert talked about with METS and SBU. And also in the U.K. with the VIVO work. And then the balance being J&I, clearly we weren't successful with Wellingborough. And that pipeline, we won Gatwick. So these are the 2 main moving parts there. About just 15% to 20% of the pipeline being in J&I. So pipeline is down a bit. Things have moved a little bit to the right. That's helped us in terms of our rebids, clearly, but a little bit tougher on the new work front. But we're still positive in terms of where the pipeline is in the shape of that.

[Operator Instructions] Next is from Joe Brent from Liberum.

I have 3 questions, if I may. Firstly, Rupert played generalist and raised mentioning to us a number of times about reputation and relationship with government. Can you talk about the contact tracing contracts specifically, how that affects your relationship, what the prospects are for that going forward? And then secondly, you haven't talked a lot about NSBU and the opportunities in U.S. defense, which I'd say is quite an exciting area. Could you elaborate on that? And finally, could you talk about whether there are some interesting acquisition opportunities that are emerging, given the economic carnage out in the real world?

Okay. So I'll take it. Look, in terms of our rep on the tracing contract, we've actually got a good story there. We are shoulder to shoulder with the government on this government, that I can tell you the reaction I've had from government to that interview I gave on today program this morning has been really excellent. And the issue is this, I will try to put it into a -- 96% of the people that we talk to agree to self-isolate. The problem is that the people, about 20% of the people that have taken tests and tested positive have deficient contact details. And when you get to talk to them, they say I've met 10 people in the last 48 hours, but one was -- someone was sitting in a bus, I don't know who they were. And one of them was a somebody my brother-in-law brought around to the house, I don't know who they are. So there's about 20% of contracts where the index contact has no contact details to give us. So that is what is causing a deficiency in the number of people we are subsequently being asked to contact. But I can assure you that the system is working well. It is getting better every time. One of the things you're hearing on stories is large numbers of contact tracers with no work to do. Well, that is on the same genre of why we've got 10 Nightingale Hospitals lying empty and 30,000 more ventilators than we need. We got to start somewhere. The government has probably overprovided in terms of the initial pool of contact tracers and will want to cut the number back. That is something easily cured. But equally, they are having -- they have an eye on rising levels of infection rate, higher, there are more. We're getting better at getting the contact details of those people that are wrong or not available. So volumes into the call centers are increasing. And I suspect that what they will do is they will start cutting back the volume, but they want to err on the side of caution. So we are very robust. We're going to be going around, I think, being more public about our defense of this. There are 218,000 people who have been told to self-isolate in a period of 8 weeks. And that is a -- that's a nontrivial number. When people say that the mathematical models say you've got to get to 80% for it to be effective, that is not a binary number. It's that 75% isn't as good as 80%, but it's better than 70%, and 70% is better than 0%. It's for every person that you get to self-isolate, that is a reduced level of exposure. And if anybody wants a real teach-in on all the numbers and the percentages and the numbers we refer up to Tier 1, I'm happy to give it because I am now a world expert on this. But if you think that this is causing a problem with our relationships with government, please don't. They are absolutely. We are side -- we are linked at the hip on this. In terms of a...

Briefly, can I just follow up on that? Do you expect that work to therefore continue maybe at a lower rate for the rest of the year and onwards?

The government is -- the current contract runs out in August. The government, I think, is going to be minded to extend it month-on-month. And they will be there in the numbers so my expectation is that, that contract will be at a lower run rate post August than it was in the first half. Whether it runs through to October and November, I have no idea. But they will be wanting to flex the numbers up and down. That priority of the first contract was to get a whole lot of people out and trained. The priorities in the subsequent one is going to have a more flexible model, whether they can flex it up or down. I would be amazed if we did not get any extensions beyond August. I don't think there will be a drop, but I suspect it will be at a lower rate as August. So as of that, who knows. So as far as NSBU is concerned, as I said to you, it's 40% of the U.S. pipeline. It is very exciting. We've got a particular -- the trouble is all the opportunities come in with incomprehensible initials. There's a thing called [ FMS Fox ] which is a large contract to go and support secondhand military vessels that have been sold overseas. There's a contract called [ GAP CS2 ], which is again a design and maintenance contract. We've got the Goose Bay extension coming up. That's not for METS. And we've got the FAA towers rebid coming up. But we are, as I say, I -- we're very happy with the way that METS is performing. It's performing in line with our original expectations. And there is a lot of that -- remember that a lot of the METS pipeline is task order work, where you've got an existing contract on platform and you give them task orders. So it doesn't really come into the pipeline or while it goes into the pipeline and exits straight out. Is that okay? Does that do for you, Joe?

It does. There was a third question that wasn't there, about acquisition opportunities.

Oh, sorry it's not -- about M&A, M&A. Well, beaten to the draw by Phil Bentley of Mitie and Interserve, not, but the -- it was good. I think that, that was really good what Phil and Interserve did there. There is a degree of distress around. But everybody knows that we are in the market to do acquisitions. I would say that the situation remains as absolutely normal, which is that we are on the look. There is a flow of opportunities inbound, but who knows what's going to come of it. Our balance sheet is in very good form to be able to do something if we did want, but we're not -- it's not -- it's an opportunistic part of our strategy rather than the -- our strategy being dependent on it. And if you have any suggestions, Joe, we're always happy to take your call.

We have another question. It comes from the line of David Brockton from Numis.

So most of my questions have been answered, but I do have a few sort of contract questions. Firstly, in respect to the Viapath JV, I just wanted to understand, did the JV not stack up without beds being involved. One would have thought that, that would be a growth market going forward. Secondly, in terms of Wellingborough, I think Angus, you mentioned that you weren't successful there. Any sort of thoughts on where you may have fallen short? And what that means for your future prison work? And then finally, just on CMS volumes, are those already coming back and declining, which sort of underpins your more cautious outlook for the second half?

So shall I do Wellingborough? I'd just say that no result has been announced on that. Yes, this made for a firm bidder, but we hear rumors that somebody else is -- want it, and I don't think it's appropriate really to -- we haven't had any feedback yet from the customers to where our bid was. But put it this way, we think it unlikely that we've been successful based on what we read in the BBC. But there's lots of others coming along and there's Harbor and others and there's opportunities also in Australia, and we win some, we lose some. So we are disappointed, but not disheartened if that turns out to be the case on Wellingborough. On Viapath, the situation there is that Viapath, the Bedford contract was a relatively small part of the overall -- the main contract was providing pathology services to Guy's and St Thomas', a hospital in London. That -- we were not successful in that Viapath was not. We had a 30% shareholding in it. But Guy's and St Thomas' and [ Cadence ], who were the other shareholders, were also the buyers and they wanted to retain the Viapath JV structure and to perform with the new supplier of the contract under that structure. So we set it on farewell. We executed the JV, and I think, on very fair financial terms. But it now means that we are no longer operating in the pathology space. But as you know, we have -- we said that we prefer not to be near any needles. When it comes to health care, we prefer the nonclinical space for that. So it's been -- Viapath was in a much worse shape than when we first were on it. It owed us quite a lot of money. It had quite a lot of debt. We got it back with our partners into a position where it was solvent, but with no exit strategy. As far as CMS is concerned, yes, it's quite a seasonal business. We expect volumes to decline, as they always do, over this year. We had a particular lift in the first few months of the year because there was a particular processing issue they had with inbound stuff coming into us that involved us having a whole lot more paid-for processing, which we had automated to a very high degree. So the drop-through of that into our margin was very strong, and we don't think that this is going to stay into the second half. And it's going to be a very tough comparator for next year.

And there are no further questions at this time. I will hand back to the speakers for closing remarks.

Thank you all very much, indeed, and meet you on the road, no doubt. If you have any more questions, please contact either Paul or Angus or Nigel, or, in desperation, me. Thank you all.

Thank you, everyone.

Bye.

Bye.

Thank you very much. Ladies and gentlemen, that does conclude the call. Thank you all for joining. You may now disconnect.