Serco Group plc (SRP) Earnings Call Transcript & Summary

Well, good morning everyone. I'm Mark Irwin, Group Chief Executive, and I'm joined this morning by Nigel Crossley, our Group Chief Financial Officer. Thank you to everybody here for taking the time to join us in person, as well as those who have joined us via the live webcast for this morning's presentation of our first half results for 2024. I also acknowledge John Rishton, Chairman of the Serco Board, who is with us today. As required, I ask that you note the disclaimer on the screen, which as usual appears in the booklets that you have with you in the room. Our plan this morning is for me to provide a brief introduction of where we are before handing to Nigel to take you through the detail of the first half financials. I will then come back and speak briefly on the defense sector before wrapping up and moving on to Q&A. We provided a pre-close trading statement on the 27th of June and the detail you will see in the stock exchange announcement released this morning and in this presentation is in line with that pre-close information. Coming into 2024, we focused our business agenda on the execution of initiatives which prioritized service excellence to our customers, the safety and productivity of our colleagues, actively managing our portfolio for performance and delivering profitable growth over the medium term. The work in all of these areas is ongoing, but we are pleased with the progress we've made so far and encouraged by the fact that as we execute, we're finding more opportunities to improve efficiency and effectiveness across our business. I wanted to touch on just a few examples of this progress to show you why we entered the second half with momentum and why we have the confidence to have upgraded our profit guidance for the full year to GBP 270 million, delivering a year-over-year improvement of 9%. The full year profit outlook includes a second half that is 25% higher than the same period last year. We flowed that profit improvement through to our cash outlook. And as you will hear shortly from Nigel, overall our financial position is strong and we are clear about the application of our capital allocation framework to create shareholder value. And in that regard, you will note the continuation of our share buyback program as well as the approval by our Board of an interim dividend of 1.34p, representing an increase of 18% year-on-year. In terms of our progress, when it comes to serving our customers well, we're never complacent, but our operational track record has been good across our international portfolio during the period. Our discipline on M&A extends to managing post acquisition outcomes. And during the period, we closed and are integrating European Homecare as it continues to grow through the first 4 months as a Serco business. We've also fully integrated Climatize in the Middle East. In the U.K. and Europe, the division managed previously announced contract exits extremely well, while also responding to ongoing demand for immigration services and successfully ramping up significant new work for the U.K. Ministry of Justice as well as for the Department for Work and Pensions. I wanted to highlight the mobilization of HMP Fosse Way, a new build prison in England, which against an accelerated schedule, is already operating at maximum safe capacity, in order to help the MOJ, with the capacity challenge you are familiar with from recent media coverage. I also wanted to note the transition to the new phase of our work in CMS, where our team was day 1 ready, not only to ensure the continued delivery of critical eligibility services for U.S. citizen health care, but also to continue the innovation which still sees CMS as a benchmark contract across the group for technology enabled productivity. Similarly, we've seen effective mobilizations for a number of other contracts across the divisions. As you will be aware, if you've attended any of these sessions before, the safety and well-being of my colleagues is a key priority. I'm pleased to say that compared to the first half of last year, we've seen a drop in serious safety incidents by 18% as we continually analyze and act to make think safe, work safe and home safe a reality for every colleague, every day, everywhere across Serco. We've also seen our vacancy levels reduce by more than 50% since its peak, and we are selectively deploying AI platforms like AutoGen and Synthesia to increase the value of colleague work. This takes me neatly to the third area I wanted to highlight, the work we've done on margin improvement. While we always understood the organizational and service impacts of high attrition, we cast an economic lens over that in the second half of last year. A data-driven approach to understanding and addressing the drivers of attrition has helped us to reduce voluntary attrition in our business by 30% from its peak, and the work continues to improve that further. We've implemented plans to remediate the underperforming contracts in our portfolio and we have going on at contract level across the group to target marginal gains, all of which has enabled the delivery of the 6% margins reported in the first half. And finally, we've had order intake of GBP 1.9 billion, with some key awards still pending. In the few weeks since period close, we've had some further awards, including a new USD 320 million contract for the U.S. Army Corps of Engineers to upgrade defense infrastructure in Greenland. You can see we've got a strong pipeline of opportunities that remains above GBP 10 billion. And of course, we remain mindful of the potential timing impact of elections in 2024. While the sheer number of elections in this single year is notable, we're confident that the fundamental drivers for demand for Serco capability remain strong. Our customers face challenges with fiscal constraints, demographic and social challenges, global migration patterns, aging infrastructure and geopolitical risk, amongst others. Serco's geographic and sector diversity means that we are well placed to respond to these demands by bringing together the right people, the right technology and the right partners. And just before I hand over to Nigel, I would like to extend my thanks to all Serco colleagues for the hard work, dedication and shared values that makes all of this possible. And with that, I'll hand over to our CFO.

Thank you, Mark, and good morning to everybody. So I'm going to start off -- sorry, I'm going to start off with a financial overview of our results for the first half, which were stronger than we anticipated at the start of the year. Revenue was GBP 2.4 billion with an organic decline of 5%, reflecting the exit of a number of lower margin contracts as we have set out previously. And as these impacts drop away, we expect to see the improving trajectory in the second half and therefore ending the year down around 3% on an organic basis. And our acquisition of the German immigration business, European Homecare, accounts for most of the 2% acquisition revenue growth in the period. Margins in the first half of the year at 6% is at the top end of our medium term guidance of 5% to 6%, despite the impact of new terms on the rebid of the CMS contract in North America and lower volumes on our Australia immigration contract. And this margin has been achieved through actions to improve efficiency and productivity across our portfolio, which I'll cover in more detail in a few slides. Underlying earnings per share was down 9% compared to last year on higher interest costs and additional tax taken in the first half. For the full year, we expect the tax rate to return to 25% and EPS to report around a 6% year-on-year increase. And finally, our return on invested capital remains strong at over 20%. And this is after completing 2 acquisitions in the first half of the year. So let's have a look at the performance by division, and I'm going to start off with North America, which delivered a very strong margin in the first half. Organic revenue did decline 3% as we had expected, reflecting the new CMS terms in citizen services and the exit from some low margin work on Colorado Springs contract in transport. The division will return to growth in the second half as this impact passes through. The defense sector grew modestly with a strong comparator from 2023 and there was also a good growth from our employment services business in Canada. Underlying operating profit margin was 10.5% and we expect this to remain at around 10% for the full year. And this is particularly pleasing in the first full year, the CMS rebid contract with its new scope and terms. And this has been achieved through productivity gains across the portfolio with CMS and the Ontario driver examination contract being the standout performers. Order intake of GBP 0.8 billion delivered a healthy book-to-bill of 130% which will fuel the second half growth. In the period, we secured a further employment services contract in Canada and retained our next gen IT support for the U.S. Air Force. We successfully rebid our work providing customer support to the Pension Benefit Guaranty Corporation. And in July, as Mark has previously said, we won a USD 320 million full year contract to upgrade defense infrastructure in Greenland. And also importantly, the Americas pipeline remains strong at GBP 3.4 billion with defense accounting for most of those opportunities. So moving on to the U.K. and Europe, which has also delivered an excellent margin performance in the period. And as expected, there was a very modest decline in revenue as the business managed the exit of low margin work such as Caledonian Sleeper and Barts Health Trust. And this was largely offset by the acquisition of EHC, which has traded well in the first few months of our ownership, alongside strong performance in our existing European immigration business. Demand for U.K. immigration services was modestly reduced in the first half and this is expected to decline further in the balance of the year. And this will be partially offset in the second half by the ramp-up and mobilization of new contracts. Underlying operating profit increased 19% to GBP 83 million. Of particular note was the progress made on margin, which improved 110 basis points to 6.8% in the period. And this was achieved through improved efficiencies in our back office and overheads, the exit of lower margin contracts, better productivity in justice and immigration and profit improvement plans across our health portfolio. Order intake was GBP 0.8 billion with some good retentions and extensions, including HMP Ashfield and the DWP Restart contract. It was a quieter period for new wins, but importantly the pipeline remains healthy at GBP 4.5 billion with a good range of growth opportunities across justice and immigration, defense and citizen services. So moving on to Asia Pacific where the new management team has started to execute the plan to stabilize the business and to position it for future growth after a difficult 2023. The turnaround plan is on track with a number of successful activities delivered in the first half, which will contribute to improved financial performance in the second half of the year. Organic revenue declined 10% in the period, which reflected lower volume variable work, particularly in our immigration contract, as well as contracts ending in citizen services and facilities management as we had set out at the full year results. Underlying operating profit and margin both reduced, reflecting the lower revenue as well as the mix impact from immigration which has continued from the second half of last year. There's also been investment in the first half to transform the cost base of the division and to improve the performance of some of the division's largest contracts. Good progress has been made and we are starting to see some benefits come through in the monthly results. While there is more to do, we encourage this will deliver more benefits in the second half and going into 2025. And the pipeline for new work at GBP 1.4 billion pounds includes the defense-based services, which is a large integrated facilities management contract for the Australian Defence Force. And finally, the Middle East has delivered good growth, an excellent book-to-bill and further developed its strong pipeline of new opportunities in the first half. Organic growth was 5% and this was delivered through new business on contract organic growth and advisory work, more than offsetting the impact of the successful retention of the MELABS contract with new scope and terms. And MELABS also contributed to the reduced overall levels of profitability margin in the period. We anticipate progress on margin in the second half as we continue to position the business for higher margin growth in the most dynamic markets in the region. Order intake of 125% book-to-bill was strong, particularly following last year's excellent performance and this included a further fire and rescue contract in Saudi Arabia. And the pipeline of new work remains healthy across all sectors, both in UAE and in Saudi Arabia. I now want to spend a couple of minutes talking about our margin progress in 2024 and over the last few years. And as you can see on the screen, since a low point in 2017, margins have more than doubled through to 2024, when for the first time we expect to close the year with margins in the top half of our target range of 5% to 6%. We've increased margins through various means, including turning loss making contracts profitable, leveraging overhead and shared service costs as revenues have increased from a low of GBP 2.8 billion to GBP 4.8 billion today, as well as our higher margin North America region growing as a proportion of the group. And as we have set out at the full year and Mark mentioned earlier today, we are focused on driving the productivity and efficiency culture across the organization, which underpins both the sustainability of future margins as well as supporting the growth of the business with competitive cost structures. This includes a broad range of plans and activities specific to each region. In North America, our CMS contract is our global benchmark for efficiency and work continues under the new contract structure, alongside retaining contracts at appropriate margins and controlling our indirect costs. In the U.K., work began in 2023 to improve the productivity and remove inefficiencies in our back office and shared service environments. This has been -- this has delivered some benefits in 2024 and there is more to do. We've also established a focus on continuous profit improvement plans across the portfolio and these have already delivered some benefits in the first half. In Asia Pacific, the new management team are optimizing the central costs and addressing underperforming contracts, both commercially and through self help measures. We see further opportunities to reduce the wider costs of the business, including operational measures such as reducing employee attrition. And the Middle East is actively changing the shape of its portfolio with greater opportunity to deliver services to customers' higher value, higher growth areas, as well as finding opportunities to deliver on contract organic growth. So overall, we have made good progress on margin and we continue to focus on a broad program of initiatives helping us to underpin our medium term margin target of 5% to 6%. Moving to cash. Our cash generation continues to be strong in the first half at GBP 75 million of free cash flow with minimum working capital outflow. We're on track to deliver GBP 150 million of free cash flow in the full year with a cash conversion in line with our medium term objective of 80%. Adjusted net debt of GBP 131 million resulted in a leverage of 0.6x EBITDA at the end of June. This comes after nearly GBP 60 million of the GBP 140 million share buyback being completed in the first half, GBP 90 million in net acquisition spend, as well as the final dividend for 2023. Subject to any further M&A in the second half, we expect the full year net debt to be around GBP 165 million, or around 0.6x leverage. And in the context of low debt and good cash conversion, there are no changes to our capital allocation framework. Our first priority is to invest in organic growth. And in the first half, there have been investments in growing our pipeline and in opportunities to improve efficiency and productivity across our portfolio. Second, we have announced today an interim dividend for 2024, which is an 18% increase compared to last year. Our third priority is acquisitions and we have the balance sheet capacity to execute further M&A if the right opportunities are available. In the first half year, we closed 2 acquisitions and we continue to look for the targets and opportunities that can support future organic growth, while always maintaining our discipline on business models and valuations, as Mark has already spoken about this morning. And our fourth priority is return surplus capital to shareholders. And there's still around GBP 80 million of the current share buyback to be executed in the second half of the year. So finally, on 2024 guidance, which is unchanged from the June pre-close statement where we upgraded our expectations on profit, cash and net debt by GBP 10 million for the full year. For revenue, we're expecting a stronger organic revenue performance in the second half as some of the contract exits fall away and material new contracts such as electronic monitoring in the U.K. and the defense opportunity in North America begin. We forecast revenue of around GBP 4.8 billion and an organic revenue contraction of approximately 3% for the full year. Underlying operating profit guidance of GBP 270 million equates to a 5.6% margin, which is 50 basis points higher than 2023. Margin in the second half will be materially stronger and up around 100 basis points on the second half of last year. This is driven by multiple factors, including the ramp-up of new contracts such as HMP Fosse Way and the Canadian employment services contracts, the acquisition of European Homecare and productivity and efficiency initiatives across the portfolio. And these will be partially offset by the reduced volumes within U.K. immigration. We expect cash flow to remain strong with guidance of around GBP 150 million and this is equivalent to 80% trading cash conversion in line with our medium term ambitions. And finally, both net finance costs and tax guidance remain unchanged. So on that, I will pass back to Mark.

Nigel, thank you. At our full year results presentation at the end of February, we highlighted migration and defense as 2 strategic sectors where we see structural growth drivers supporting long-term demand and the opportunity to grow. At this half year update, I wanted to spend just a few minutes to do a double click on defense to share some further insights on the sector. As we know, global defense spending has grown at a strong and consistent rate of around 6% a year over the last 5 years. In fact, defense spending is not just growing, but it looks like it is accelerating, and we can see the evidence of that in the '22 to '23 change, where spending jumped by 9% from USD 2 trillion to USD 2.2 trillion according to the International Institute of Strategic Studies. The underlying market drivers are significant and complex, framed by current conflicts, broader geopolitical risks and challenged by de-globalization of supply chains and the determination for sovereign capability. Some forecasts have global defense spending rising over USD 2.5 trillion by 2028, with spending in the U.S. alone to exceed USD 1 trillion around the same time. Beyond the U.S. in Serco geographies, this growth trend is equally evident. Canada has committed to spend CAD 73 billion in the forthcoming period. The new U.K. Labour government has said that it has a cast iron commitment to raise defense spending above 2.5% of GDP. And the AUKUS military alliance between the countries in Serco's 3 largest markets is expected to spend over AUD 350 billion in just Pillar 1 of that treaty. Modernizing defense capability is also a priority and the U.S. Department of Defense is again perhaps the best example of this intent, setting aside $145 billion to invest in research, development, test and evaluation in 2024 alone. Our range of capabilities span the defense sector value chain and means that we are in a unique position to partner with government as they work to maintain, modernize and grow across the defense domains of sea, land, air and space. From developing an Enhanced Space Track Processor at RAF Fylingdales for the U.K.'s space domain awareness mission to managing the logistics and assets of the Australian Defence Force across the Middle East and delivering the U.S. Navy's anti-terrorist technology support services at all of their bases around the world. There are these and many other Serco capabilities and contracts that perhaps go under the radar, if you pardon the pun. For example, I'm extremely proud of the work we do at HMAS Watsons Bay in Sydney, where we are training the next generation of maritime warfare officers for the Royal Australian Navy using the latest simulator technology. Our vital work here in the UK at RNAS Culdrose and Yeovilton, where we are delivering aircraft engineering and airfield services for the Royal Navy's Merlin and Wildcat helicopter fleet. And of course, our position as the prime on the shipbuilding acquisition management program for the U.S. Navy's Team Submarine, which is a crucial part of keeping the U.S. at the forefront of undersea systems. Through SHAPM, support will be given to submarine shipbuilding program officers, including the future Attack Submarine Office and the development of the COLUMBIA Class submarine Integrated Power System. And we continue to develop our capabilities and our customer base with new wins in 2024. As Nigel and I have both mentioned most recently this month, we've won the USD 320 million contract to upgrade U.S. defense infrastructure in Greenland. We've won a new contract to begin operations supporting U.K. military reservists through expansion of our VIVO operations, and we've continued our involvement in the U.K.'s Skynet program through a new contract awarded this year as a strategic partner managing key assets. This suite of capabilities is increasingly focused on higher technology solutions, as demonstrated by our award this year of a contract to deploy, sustain and enhance the next generation IT solutions for the U.S. Air Force's civil engineering activities. To close, I'd like to bring focus to the bottom right hand corner of this slide around next gen tech, and in particular to speak briefly to the capability we're developing in unmanned and autonomous ship design and operations. Unmanned surface vessels are a big part of the future for navies globally, and that future may be closer than most imagined. The U.S. Navy plans to operate a hybrid fleet with autonomous vessels within this decade. Some of the benefits are obvious. No crew means minimal risk to human safety, deployments can be longer and in less safe environments with recruiting shortfalls, xUSVs supplementing available mariners makes stronger fleets more possible and the cost to own and operate is a step change from conventional fleet options. Our work with the Defense Advanced Research Projects office or DARPA on the No Manning Required Ship or NOMARS program is central to this development capability. Serco is the prime contractor and single system integrator for Defiant, a first-in-class, long endurance, medium unmanned surface vessel. The prototype of the 55-meter, almost 300-ton vessel, which has been designed specifically to drastically reduce Navy's cost per mission hour with a reduced platform size, lower maintenance costs and ability to stay on mission longer, is currently in construction phase and we expect to do at-sea testing early in 2025. Our work on unmanned and autonomous systems enhances the deep legacy that Serco has in naval architecture and marine engineering. Serco, directly and through the acquisition of the maritime engineering and technical services business, has worked on every major naval platform for the U.S. Navy for more than 4 decades and we will continue to invest and grow that capability along with the customer relationships we have. But we particularly believe that unmanned and autonomous systems offers us an exciting opportunity for future international growth across our defense platform. And so, just to wrap up very quickly before we go to Q&A, we are pleased, as we said, with the progress that we've made so far in 2024 and the steps that we are taking to deliver profitable, sustainable growth aligned to our medium-term goals. We remain focused on execution, execution getting below the headlines to manage the performance of our portfolio, execution to position us for multi-year growth to achieve those medium-term targets and execution to leverage the global capability of the enterprise to create value for our shareholders. Thank you, again. And Nigel and I will now take questions.

Questions, David?

It's David Brockton from Deutsche Numis. Can I ask 2, please? Firstly, you talk about continuous progress improving underperforming contracts through the period. I appreciate underperforming contracts are much smaller part of the business these days than they were in the last sort of 5 or 6 years. But can you just touch on whether -- what are sort of the outstanding opportunities there and whether there are any particular ones that could move the dial? That's the first question. And then the second question just relates to discussions with the new government in the U.K. Can you just sort of touch on how those have progressed and whether that's thrown out any changes or opportunities for the business?

Let me take the first one. So, continuous improvement, underperforming contracts, they get a bit more focused. But I think the key data point here is we do -- our onerous contracts are very small now, less than GBP 15 million, of which most of that is a general provision, so very little cash outflow from loss making contracts. What we're saying here is there are contracts actually not doing quite as well as we'd like them to do. And that's our focus, that's our definition now of an underperforming contract. So that's a material step change from where we were. And the amount of progress, there's nothing that will move the dial in one contract that would be visible at a group level, but there are a number of contracts in each division that we can perform better on, and we're underperforming versus where we were when we put the bid together. There are a number of those and they're getting special attention. And there's a number of contracts in the first half that have seen material improvements in performance. I can pick out some in Australia with the -- we provide health professionals and for the military on all Australian sites. That was a contract I was trying because it was very difficult to get hold of medical staff in Australia. We have improved that and we no longer got the attrition rates or the vacancies. There's a number of contracts like that as we look across the group. So I think there's opportunities for us to go there. But our continuous improvement isn't just focused on underperforming contracts, it's across all of our contracts, just how do we get a slight step-up every year in our performance.

David, just to underline the point Nigel made, so a few years ago, we would have described underperforming as loss making. Now we look at underperformance relative to what we bid, our bid assumptions, and also relative to group average margins to identify those contracts where we expect better performance. Your second question around the government, I think recognizing it's only been a few weeks since government's taken power. A couple of points I can make. One, the consistency in engagement that we've seen in the lead up to the election and post-election has continued. It's been pragmatic and constructive and we will continue to engage on that basis across government. I think the second message is the consistency in the position of government around fiscal discipline, around the need to improve public services, but also to make public services more efficient, the challenges around infrastructure and how government will address that. I think all of that gives opportunity for partnership with government to help them deliver against the agenda that they have. And I think the final point is when we look at the work that we've got underway, our key motivation there is continue to deliver excellently to make sure that we keep the trust of our government customers and for that to allow us the opportunity to work with them going forward. So early days, but we're encouraged by what we've seen and aligned with our purpose, we're going to try and help in every way we can.

[indiscernible].

Can I ask 3 questions, maybe one at a time? Can we start off with the Asia Pacific margin and kind of where that can progress and over what time frame?

We should see some progress on that in the second half of the year. And so we'd expect to see that increase this year and again next year. I think [ working ] that eventually get to will be when we start to see the growth coming back into that business. And we've got to recognize that the lead time on growth there is taking a little bit longer. We're building the capability within the team. We're looking for new opportunities and then by the time we bid those and get the benefits, there is a lead time on that. So it could well be going into 2026 before we see a return to margins in line with group averages. But I see no reason why the Australian business can't get back to those levels.

And secondly, could you give us some indication of the profit growth you're seeing in EHC '24 over '23 and where that can head in 2025?

I think the profit growth is just coming from volume growth. So as we saw with the acquisition of ORS, acquiring a business that has a good footprint, a good platform in a growing market, and then helping that business to scale as quickly as possible in response to that demand signal was a plan that we executed successfully with ORS. We are looking at EHC to do the same. So initially we expected around GBP 100 million impact for the year. We expect that now to be more because of the support we're providing to the business in terms of top line. And we'll obviously pull that through at the margin levels that we currently see in the business. So it will be volume-driven profit growth as we help that business to grow.

And then finally for me, the first half organic growth looks [ to be ] down 5% in revenue. A number of factors behind that. Could you just pull some of those out so we can get to what the underlying business is doing?

I think the pieces that we've talked about really are -- we flagged that there were going to be some contracts coming to an end in the U.K. particularly, and those were contracts that came to an end in 2023. On the whole, they were lower margin contracts. So I think there's a hit there. And we've also had the CMS contract that's been rebid. We've won the rebid, we've been successful with that, but there was a reduction in scope on that contract, and there's an impact there. So I think you take those 2 pieces out and it more than accounts for the 5% negative revenue growth that we're seeing in the first half.

[indiscernible].

Two from me, building on the first question we had. On immigration, if the GBP 20 billion that Rachel Reeves has found, if 1/3 of that is overspend on immigration, is that an opportunity or is it a threat for you? And then the second question is on the margin slide, you showed, Nigel, you had 4 blobs explaining where it came from. Last one, I think you said it was more U.S. business. So just knowing as we do this, some 10% margin work in there, if we arithmetically assume that the weighting of profits and revenues increases towards North America, then shouldn't at some point, midpoint of your 5% to 6% guidance on the margin naturally just go up regardless of all the other blobs that you were doing in that diagram?

So, for immigration, the Chancellor also highlighted a key part of that overspend reduction is related to stopping the Rwanda program, with which we've had no involvement at all. There's been an ongoing program, previous government and continued with the current government to move asylum seeker accommodation from hotels into community. That's a program that we have been working on now for some time and will continue to work on. As we've explained before, it's balancing the implementation of government policy with the practical availability of housing in community. And so we're collaborating with the Home Office to try and optimize that as much as we can. Overall, as I said, the challenges that the government has in dealing with migration is an area where we can help when we look at our migration operations now across 6 countries. It extends from the provision of welfare services through to integration into community, through to enforcement in some jurisdictions. And as policy shifts, as plans are announced from government, I think we are well positioned to be able to respond again to help. So we don't see -- we understand the fiscal challenges, we understand the political importance of governments everywhere dealing with migration challenges, but we see that as opportunity for us to respond.

Mark [ your math is correct ].

The North America business, the market is operating at upper single digits to low double digits, and we don't see why we can't operate in that margin. We like the U.S. market. We'd like to be able to grow there further and we always look there for inorganic growth. We will keep that under watch about whether the 5% to 6% is still the appropriate margin if we do more work in North America.

Chris [indiscernible].

Chris Bamberry, Peel Hunt. Couple of questions if I may. What's the value of current major bids you have in at the moment? And what kind of major decisions are we expecting by the end of this year? And secondly, the pace of movement to disbursement in U.K. immigration, it looks like you've added quite a lot to leases and assets -- right of use assets. So it feels like that's maybe gathering a bit of pace now, is that correct?

So immigration first, I think perhaps the -- so, as I said, we continue to move people into community accommodation as effectively as we can. The total situation in terms of hotels and community accommodation is also influenced by the fact that the government invested significantly in processing resources. And we see also the determination of some of these asylum cases now accelerating, and so that impacting volumes. So the equation is rather complex between the mix impact that we have in terms of accommodation types and the ability of government to deal with the flow and the processing of applications that are coming in. Overall, when we look at our service user volumes, we expect those to remain relatively stable through the end of '24.

And on the pipeline, of the GBP 10.2 million pipeline, about GBP 4.5 million has already been submitted. Now, I will -- there is some of that work that will not get determined until next year. So some of the larger contracts take a period to assess. Decisions that we've got coming this year, we've got new prisons in the -- new prison in the U.K. We've got a number of more medium-sized contracts. The really big contracts that we've got in our pipeline are ones that will be determined in early 2025.

Yes. We have a range of [indiscernible] in defense which -- in the U.S. which have already been submitted and for which we are awaiting outcomes. And a number of projects in the Middle East as well, which are actually in line with Nigel said earlier in terms of higher value work, but also larger-sized contracts for us, so that we can have a blended portfolio there between the shorter cycle work that we now are building in advisory and the longer cycle contracts. So we've got a good balanced portfolio.

Sylvia?

Sylvia Barker from JPMorgan. Three, please. Firstly, on the U.S., you're obviously quite focused on the Navy at the moment. Could you maybe talk about kind of your plans to penetrate the rest of the armed forces and then outside of defense? Clearly, you're making double-digit margins on U.S. work outside of defense. So what are the plans to also penetrate other services within the government? Sorry, that was one. Two, vacancies are down a lot. How much of that is you having filled them more efficiently and how much is maybe replacing the need for those people with technology or in other ways? And then finally, just on the JVs, could you maybe talk a little bit about -- so, revenues are up, profits are down, dividends are up, could you maybe just talk a little bit about the movements within that?

So, from a U.S. perspective, Sylvia, exactly as you said, our focus is on diversification of our portfolio. So we want to continue to grow with Navy. I'll start there first. We see terrific opportunity there for us to continue to grow with Navy. We then want to grow outside of Navy into the other domains where we today have footprint, but not as significant as Navy. So the work we do with Air Force, we mentioned in the IT and technology side, the work we have for the U.S. Air Force on the F-35 program and others. So we have footprint that we're building from, prisons that we're building from, but a relatively small position overall. And we'd like to do the same with Army over time, and in particular Space Force. So we've got a small position with Space Force U.S., but we have real DNA when we look back at the work that we've done in the space domain, in defense, going back to 1965 here in the U.K., and we've continued to build on that. So we see opportunity there as well. So it's in line with our strategy, grow defense, diversify across the domains. And then you rightly pointed out the profitability from federal non-defense, or what we call federal civilian business, is also a target market for us. CMS sits in that portfolio. The work we do for FEMA sits in that portfolio. But there is significant opportunity to grow into the agencies where we have relationships. So CMS sits in the Department of Health and Human Services, which is the largest civilian agency for spend in the U.S. government. And then you can look across 3 or 4 others and you see significant opportunity. We see that starting to show in our pipeline now, in our non-defense pipeline. It's a healthier pipeline. The quality of the opportunities we see there is better than we did a year ago. We've changed about 70% of our business development team in the U.S. So we've got the right focus and the right expertise to pursue the fed-civ area.

And then on the JVs, you're right to point out, revenues up significantly. Merseyrail continues to operate pretty much in line with what we'd expect. The VIVO business has significantly grown. There's a lot of variable work on that contract that we've been handling. So that's why revenue is up. Why is profit down? You may remember there was a one-off settlement that we had last year on Merseyrail, which was GBP 6 million, and that basically is the difference. And then as far as dividends are concerned, the VIVO contract is still largely in ramp-up and really significant growth. They're getting to a position of good cash flow now. And I expect to see dividends start to come out of that JV in the second half.

And your question between around vacancies, so we don't muddy the waters. We actually look at operational vacancies and this metric is around operational vacancies to the extent that we have optimization. We don't cancel that out of the equation so that we've got a clean read on our ability to fill roles effectively to meet our contractual requirements.

James?

Hi, there. It's James Rose from Barclays. I've got 2, please. The first is on global defense, and the slides you put out there. Would you expect this business to grow ahead of global defense spending longer term? And then secondly on staff attrition, 30% below peak. It's already very good. I mean, is there much further to go on that and the cost savings you get from lower attrition, is that already within the numbers or is that more to come through into the second half of next year?

I'll take the second one there.

On defense, so because we're not at the front end of defense spend, i.e., hardware procurement, we help to procure these assets, but we don't actually provide them, perhaps with the exception in the future of our unmanned capability. And so I expect that we will have years where we are above average defense spend and years where we are below, just as we work through those cycles. But we do see specific opportunities where our growth can be accelerated. So I made reference to AUKUS. When you think about AUKUS operating across our 3 key markets, if you think about the position we already have on the U.S. nuclear submarine program and our ability to transfer expertise in support of bringing that alliance to life, understanding that the first U.S. nuclear sub is scheduled to be on base in Australia in 2027, which is not far from now. The infrastructure requirements, the technical requirements around that, the nuclear medicine requirements around that, the sustainment requirements around that, are all areas that we are exploring with government, mindful of the obligations we have to the U.S. government around our security arrangements.

And then on staff attrition, we've set a target for ourselves over 3 years to reduce staff attrition by 50%. So we are -- we've reduced that by 30 so far. And all our employees are rewarded for achieving that. So everybody's going to go. So there is further to go. Attrition is definitely a big cost for us. It's not just the recruitment cost, but it's the training, the vacancy that we have, the inability to sometimes deliver on some of our commitments to customers. So there's a big cost associated with it. I think it's just part of the continuous improvement that we see in our business. I think we've made a big step forward through a much more scientific, diagnostic approach to attrition. I think we had a good short term, but there's further to go and we'll continue to chip away at it and think of it more as continuous improvement.

Arthur [indiscernible].

Arthur from Citi. So, 3, if I may. So, first question, so the U.K. book-to-bill was 0.7x, I guess maybe a little bit lower than we might have thought. Is that primarily a delay factor or is it more that some big contracts haven't been won? And I guess my question would be, which contracts haven't been won and how much is there to play for in the second half? Second question, in North America, I think if I heard correctly, you said you think you can do 10% on a full year basis. I think historically you've talked about high single digit. Do you think you can do double digit long term there? And then third question is just on the 5.6% margin you think you'll do this year. I'm just trying to get a feel for how far you think you are through your efforts on margin in terms of improving things and some sort of idea as to how far you think those can go.

So, on the U.K. book-to-bill, Arthur, 2 things. We had 2 significant losses early in the year. One was HMP Millsike, so a new build prison in the U.K. we were unsuccessful, and the other was a contract to do some case management work for the DWP. I believe the larger impact really is the timing of the process of government, right? There were a number of decisions that were due right about the time that the former Prime Minister called the election. And the process of government just means all of that stops until things resume, which we expect in the coming months, as Nigel said. So there are several awards pending between now and year-end. And it's always difficult when we look at this in a really short period. I think we've got to look at it over the full year and see where we end up.

Would you expect that to go to over 1x in the second half then in terms of book-to-bill in the U.K.?

We certainly have a target for every division to be at that level. As I said, we'll just have to see how we work through timing here through the rest of the year.

And then your other 2 questions relating to margin, I think, on North America, you're right, we did talk about that margin coming down to upper single digits. We've actually done a really good job on the CMS contract and finding further opportunity to use technology to get further efficiencies in automation and productivity of that contract. That's helping us. So this year we are going to be at 10%. There's always a little bit of a dependency on North America, is mix, how much of that is cost-plus versus fixed price work? But I sit here feeling confident and comfortable with certainly very up single digit to a 10% margin is, I think, where we'll level out. But there's always a variable in there. And then you had a question on margin that we have made good progress on margin in the first half and some good activities that have come in which will give us a bigger benefit in the second half. But we've not finished. And this is not a one-off 1-year 2024 program of work. This is something that we're trying to instill in the organization as part of our culture, and it's ongoing, it's continuous improvement. So we'll always think we've got further to go. Clearly, there's more low hanging fruit when you first start on this, but we have got a long way to go yet.

I hand back to Mark and Nigel.

Can I then just thank everybody. We appreciate, as always, your interest and certainly the time you've given to the update today. And we look forward to letting you know how we've gone on a full year. Thank you.