Serco Group plc (SRP) Earnings Call Transcript & Summary

Good morning and thank you to everyone who's joined us for the presentation of Serco's 2026 half year results. Whether you're with us here in person today or joining via the live stream, you're very welcome. I'm Anthony Kirby. I'm the proud Group Chief Executive of Serco, and I'm delighted to be joined by Mark Reid, our Chief Financial Officer. I was very pleased that Mark joined the business, the executive team and the Board back in early March. This morning, I'll begin with an overview of our progress and performance. Then we'll take you through the financials in more detail with Mark, and then I'll return to discuss the outlook across our core geographies, the strong structural drivers that reinforce the need for trusted partners like Serco and how we are positioning the business to deliver safe, sustainable growth in an ever-changing external landscape. But before we go any further, I must refer you to the disclaimers in your pack. So let's start at the top. Thanks to my 50,000 colleagues around the world, we've delivered another strong performance in the first half, reflecting disciplined execution and continued progress against our strategy. Through good operational delivery, productivity improvements and disciplined cost control, we have increased profitability and delivered margin improvements that we can be proud of. We've continued to deliver good progress across our strategic pillars with retention once again north of 95%, a growing pipeline and a leaner, more efficient organization, supporting our ability to deliver against our '26 guidance. We also remain confident in the outlook across all of our core geographies. Whilst market conditions are evolving, underlying demand for the critical services that we provide continues to be underpinned by the same long-term structural drivers that we've been talking to you about for many years, the 4 forces as we describe them. During the period, we have continued to take deliberate action to better position Serco for the future. Building on the sector simplification announced at the full year, we're refining our operating model to drive greater focus, efficiency and long-term growth. As a result, we're increasing our share buyback to GBP 150 million for the full year following the GBP 75 million we announced and executed in the first half whilst reiterating our full year guidance. So turning to the numbers, which I'm proud to present. As you can see, we've delivered revenue up 4% on a constant currency basis, including strong organic growth of 10% in our Defence business. Free cash flow of GBP 65 million, keeping us on track for full year cash conversion of at least 80%. Order intake representing a book-to-bill of around 100%, underlying operating profit of GBP 157 million, delivering a 10-year high margin, which I'll come back to shortly. But these results demonstrate the resilience of our business and our ability to deliver sustainable growth over the years ahead. So I'd like to spend a few moments highlighting the progress that we've made against our 3 mutually reinforcing priorities of growth, competitiveness and operational excellence. As many of you will know, I'm absolutely focused on growth; safe, sustainable growth in our revenue, our profit and our margin. During the period, we've made good progress growing our pipeline to a record high of GBP 12.8 billion, securing around GBP 2.5 billion of order intake, maintaining strong retention rates across the group. This reflects both our ability to win new work and expand the great business that we already have. That gives me confidence in growing the business over the medium term. Turning to competitiveness. When I stood here last year, I said that while Serco was a very strong business, there were opportunities to make us simpler, more focused and more efficient. At the full year, I spoke about the changes we were making to simplify our sector structure and reduce unnecessary complexity. Since then, we've continued to embed those changes, helping to reduce our overhead costs. And this is about creating a business that can respond more quickly to customer needs, allocate resources more effectively and position ourselves to capture future opportunities. And on operational excellence, we've continued to deliver complex services reliably across our portfolio, while successfully mobilizing major programs and investing in capabilities that will support our future performance. Since January, mobilization activity contributed to strong organic growth, including 7% growth in the U.K. and Europe, whilst continued investment in technology and innovation is improving both service quality and productivity. Across the business, we have multiple live applications of AI supporting both customer solutions and internal process improvements. In Asia Pacific, we're using AI-enabled strategic workforce planning tools to improve resource allocation and predict future strategic requirements. In North America, we're using AI to help identify and qualify opportunities, strengthening our business development capability and supporting the growth of our record pipeline. And in the U.K., we're using AI services to automate asset monitoring, helping to improve operational efficiency and service performance. And we've also continued to make Serco a safer place for our colleagues with 15% fewer safety incidents resulting in time off work than we saw in the first half of 2025. But more importantly, that represents a 40% reduction over the past 3 years. And we've now had -- we now have more than 640 apprentices across our U.K. business, and we were exceptionally proud recently to be named U.K.'s top employer for veterans, reservists and military families. So whilst there is always more that we can do, there's been good progress across all parts of our approach to executing our strategy. One of the most encouraging aspects of our performance has been the continued improvement in margin despite a number of headwinds. This is the result of a deliberate strategy that has been executed consistently over a number of years. We strengthened the quality of our portfolio through disciplined contract selection, improved operational execution, a continued grip on governance, targeted acquisitions and an increasing focus on complex service lines. That, coupled with greater exposure to higher-value markets and stronger positions in Defence and North America. The result is a sustained improvement in our margin profile. Importantly, this progression has been driven by an improvement in the quality of our business rather than any single action or short-term initiative. I'm pleased with the progress that we've made, and our focus remains on sustaining and further improving that performance over the years ahead. So with that, I'll now hand over to Mark, who will take you through our financial performance in more detail. So grab your popcorn, sit back and listen intently.

Thank you, Anthony. And good morning to everyone. I'm delighted to be here standing in front of you presenting my first Serco set of earnings. The last 6 months have flown by. I've spent a great deal of time getting to know the business. And I'm very pleased with what I've experienced so far: great culture, dedicated colleagues and a huge opportunity with robust delivery, which I can hope you see as you go through these results. Let me start with a few observations. Firstly, Serco is underpinned by good market dynamics. You see this in the strong performance the teams delivered in 2025 and how that momentum has continued into half 1 2026. It has become more and more clear to me that the governments around the world need partners like Serco as they prioritize quality outcomes and value for money citizens demand. Secondly, I've been impressed by the depth and breadth of the operating excellence, and this has been clear in the outcomes we have delivered for our customers. Take the Electronic Monitoring service, for example. We have transformed this service, monitoring record numbers of users while delivering against all the performance measures that the customer set. Thirdly, working with the many fantastic colleagues I've met so far has been inspiring. I've been able to collaborate at pace with our leadership team. And hopefully, Anthony agrees, our CEO-CFO partnership has got off to a good start. Now turning to the strong half 1 performance. I'm delighted to present revenue increased by 4% to GBP 2.5 billion, including 2% organic growth. Underlying operating profit increased by 8% to GBP 157 million, with margin improving by 20 basis points to 6.2%. As Anthony noted earlier, our profit margin improved, has been an impressive long-term trajectory. Profit growth was delivered by a full period contribution from MT&S, improved contract outcomes, including Electronic Monitoring that I mentioned earlier, and lower corporate costs and wider efficiency actions. These more than offset the known headwinds from the exit of the Australian immigration contract, lower immigration in both U.K. and Europe and higher U.K. national insurance costs. Earnings per share increased by 6%, and the Board has declared an interim dividend of 1.6p per share, which is up 10% year-over-year. Cash generation continues to be a strength of the business. Free cash flow was GBP 65 million and trading cash conversion at 74%. We remain on track to deliver at least 80% trading cash conversion for the full year. And our balance sheet remains strong with leverage at 0.7x EBITDA even after significant progress on the share buyback by the half-end close. I'll reiterate the optionality this gives us on capital allocation shortly. Reflecting our confidence today, we have announced the doubling of our 2026 buyback to GBP 150 million with the additional GBP 75 million to be completed by the end of the year. Combined with dividends paid during the year, this will take our total capital return to shareholders in 2026 to just under GBP 200 million. Overall, this is a strong first half performance with revenue growth, further margin progression, good cash generation, a robust balance sheet and continued strong shareholder returns. I'll now turn to provide a bit more color around each of the divisions. First of all, to North America, which continues to be an important driver of growth and value creation for the group. Revenue increased 8% to GBP 775 million, supported by a full half year contribution from MT&S. There was good momentum in Defence which saw 4% organic growth, including additional infrastructure work for the U.S. Army and Space Force at the Pituffik Space Base in Greenland. This was partially offset by lower activity levels in our Citizen Services following the expected reductions in case management volumes on our CMS contract and the conclusion of an aviation contract in the U.S. Underlying operating profit increased by 10% to GBP 84 million with margin progression to 10.8%. The increase reflects a strong revenue growth, a focus on contract profitability and the benefit of contracts moving from mobilization to the operational phase. Order intake was GBP 0.7 billion with a book-to-bill ratio of around 90%. As expected, procurement delays across parts of the U.S. federal market continued into the first half and affected the timing of some of these awards. Win rates remain healthy at 46% and the new business were around 80% for retentions. We're seeing progress on a number of important opportunities. Several contract protests have now been resolved, and we have around GBP 3.2 billion of bids awaiting adjudication. This creates the conditions for an improving environment through the second half and into next year. Looking further ahead, the pipeline has strengthened significantly, increasing more than 60% to over GBP 8 billion. Defence accounts for the majority of these opportunities, reflecting sustained increases in Pentagon spending and national security priorities. As Anthony will outline, this underpins our confidence in the continued growth potential of the North American region. Moving now to the U.K. and Europe, which has an excellent organic growth of 7%. Growth was led by Defence with revenue increasing by 30%, reflecting the mobilization of our Royal Navy maritime support and vessel replacement contract, together with additional activity at the Defence Academy. Citizen Services also delivered good growth. And in the period, we were delighted to begin delivering BBC Audience Services. Progress was more limited in Justice & Immigration, where we saw reduced immigration activity, both in the U.K. and in Europe. Underlying operating profit increased by 7% to GBP 84 million, with margins remaining resilient at 6.2% despite around GBP 5 million of higher National Insurance costs and the expected headwinds from lower immigration activity. Profitability benefited from the strong ramp-up in Defence and improved outcomes with Justice, particularly on the Electronic Monitoring contract, where performance and productivity continue to improve. Order intake was GBP 1.2 billion with a book-to-bill ratio of around 90%. Retention rates were particularly strong at over 95%, including several sizable contract extensions in Citizen Services. We also secured a number of new business awards from the U.K. Ministries of Defence, Justice and the Home Office, reinforcing the continued demand for our services. Finally, the pipeline stands at about GBP 3.8 billion. While lower than the GBP 5.8 billion at full year as a result of adjudications, we have sight of several large deals that are set to be qualified. Demand remains very robust in the U.K. and in Europe. Turning now to Asia Pacific, where the first half performance reflects the Australian immigration contract exit alongside progress in strengthening the platform for future growth. Revenue was down 14%, primarily driven by previous year impacts, namely the conclusion of the immigration contract and disposal of our Hong Kong business. This was partially offset by growth in Defence, progress on a number of Citizen Service contracts and the commencement of the Justice Transport Services contract in Victoria. As expected, underlying operating profit declined in the period with the immigration contract exit reducing profit by around GBP 9 million on its own. Further operational efficiencies and workforce optimization mitigated some of this impact. We're encouraged by the progress we have made on growth. Order intake for the period was GBP 0.6 billion, resulting in a very strong book-to-bill ratio of just shy of 190%. We signed 2 significant extensions for the Adelaide Remand Center and Acacia Prison in Western Australia, where we secured a significant expansion of our services. We also retained the Australian Defence Force Health Services contract for a further year to mid-2027. These outcomes help demonstrate both our improved customer relationships and our ability to retain strategically important work. The pipeline remains stable at approximately GBP 0.7 billion with a number of opportunities progressing across all 3 sectors. Now let's turn to the Middle East, where the first half performance was resilient in a challenging environment. Revenue was GBP 67 million, down 25% compared with the prior period. The reduction was driven by several elements, including transition of contracts into the Mubadala strategic partnership and volume-related impacts of the regional conflict. Underlying operating profit reduced by 12% to GBP 6 million. However, despite the lower revenue base, margin improved by over 100 basis points to 8.5%. This reflects the Mubadala partnership and benefits of target operational efficiencies, which is better positioning the business for profitable growth as the market conditions improve. Order intake in the first half was low and was inevitably impacted by the regional disruption. That said, we are very pleased to see the Mubadala partnership secure several contracts worth almost GBP 60 million, and the pipeline currently stands at approximately GBP 0.3 billion. While this is lower than last year, this reflects the reductions largely because of adjudications and several larger opportunities removed or delayed related to canceled bids. Importantly, the Mubadala partnership continues to broaden our access to future opportunities and provides an attractive platform for sustainable long-term growth in the region. Now if we turn to cash flow and the balance sheet. Cash generation remained good with free cash flow at GBP 65 million and trading cash conversion of 74%. While this is lower than the exceptionally strong comparable period last year, it was in line with our expectations and keeps us on track to deliver at least 80% trading cash conversion for the full year. Working capital was an outflow of GBP 41 million in the period compared with an outflow of GBP 14 million in the first half of 2025. This primarily reflects the effect of the strong outperformance at the end of 2025 as we set out at the time and is not indicative of any change in underlying cash performance. Turning to the balance sheet. Adjusted net debt was GBP 228 million, only GBP 22 million higher than the position at the end of 2025 despite returning significant capital to shareholders during the period. This included GBP 58 million of the GBP 75 million share buyback program completed by the 30th of June and GBP 30 million of dividend payments. Strong cash generation has therefore substantially funded those shareholder returns while maintaining a very robust financial position. Leverage was around 0.7x EBITDA at the period end and remains below our target range of 1x to 2x. The balance sheet continues, therefore, to provide substantial capacity to support organic investment, disciplined bolt-on acquisitions and further shareholder returns under our capital allocation framework. Our framework is unchanged and supported by the 3 core strengths of Serco: significant cash generation, a capital-light business model and a strong balance sheet. Our first priority is investing in organic growth. During the year, we have continued to strengthen our business development capability through expanded specialist sales teams and refreshed [Technical Difficulty] confidence in the business and outlook, the Board has declared an interim dividend of 1.6p per share, up 10% year-on-year. And third, we continue to evaluate bolt-on acquisition opportunities that enhance our capabilities and our organic growth potential. We have increased focus, resource in this area and have a strengthened pipeline of opportunities. As always, we will maintain the same financial discipline in this area. Finally, we have surplus capital. We will return it to shareholders. Consistent with that, we have announced a further GBP 75 million buyback for the remainder of 2026. Let me finish with our guidance for 2026. Following the strong first half performance, we are reiterating our guidance for revenue, profit and free cash flow. The only changes are to net finance costs, which are now expected to be slightly lower than previously guided and the year-end net debt position, both of which reflect the additional GBP 75 million buyback announced today. Overall, we enter the second half with good visibility from our order book, a record pipeline, excellent retention rates, strong momentum across our strategic priorities. And as a result, we remain confident in delivering our full year expectations. Finishing my first 6 months, I'm very pleased with the state of the business. Markets continue to be supportive. Our teams execute with professionalism and precision that delivers great customer outcomes. I see multiple opportunities to support our growth and ambition, including cost efficiencies, self-funded organic investments and bolt-on M&A, which I'm sure will continue to drive strong investor returns. And with that, I'll hand over to Anthony.

Mark, thank you. At the full year, I talked to you about our strategy to simplify and focus the business around our core sectors of Defence, Justice & Immigration and Citizen Services. Today, I'd like to take a similar approach but through a geographic lens, focusing on our core markets. But before I turn to our first geography, I'd like to spend a few moments on why governments around the world continue to partner with the private sector and why we believe that those structural drivers will remain in place for many years and decades to come. So whilst the specific challenges facing governments may differ from country to country, the underlying pressures remain remarkably consistent the world over. For many years, we have used our 4 forces framework to explain why demand for publicly controlled and privately operated partnerships continue to grow. The first is growing costs. Governments around the world continue to face inflationary pressures and rising demand for public services. The second is voter intolerance of higher taxes. Citizens remain resistant to higher taxation with the tax burden in many parts of the world already at an all-time high. Third, expectations keep rising. Whether it's in Defence, Justice & Immigration or Citizen Services, people increasingly expect services to become more responsive, more personalized and more digitally enabled. And finally, governments must continue to balance the public expenditure against competing priorities. Collectively, these forces create intense pressure on governments to deliver more and better for less. So whatever the policy environment, decisions ultimately need to balance service quality, operational resilience and value for taxpayers. Faced with these pressures, governments increasingly look for ways to access specialist capability, improve productivity and importantly, deliver better outcomes whilst retaining control of critical public services. In fact, the [Technical Difficulty] additional cost, reinforcing the importance of assessing delivery models on the basis of outcomes, efficiency and value for money. Governments have long partnered with the private sector to help address exactly these kinds of challenges. At Serco, we bring operational expertise, innovation and global best practice to help customers improve productivity, manage risk and deliver better public services on their behalf. Importantly, this is about value rather than cost alone. Independent research continues to demonstrate that publicly controlled services delivered by the private sector are often up to 15% more cost efficient [Technical Difficulty] that customers seek is why organizations like Serco remain well placed to support governments around the world. And when you combine that with our ability to develop, deploy innovation and technology at pace, it is clear why this delivery model will remain important over the long term. So those structural drivers underpin a geographically diverse portfolio of ours spanning more than 20 countries and a total addressable market of over GBP 900 billion. We believe the demand created by those 4 forces will continue to grow over the long term, which is why we have been taking deliberate action to simplify our business and position Serco to capture those opportunities. Our geographic footprint provides resilience. It gives us exposure to different governments, different spending priorities, different procurement cycles and a broad range of opportunities across our core sectors. Last year, we sharpened our focus of our sector structure, and we're taking that one step further by combining our Asia Pacific and Middle East operations under a single leadership structure. This creates a stronger regional platform, expanding opportunities and strengthening our ability to serve our customers across both regions. It also allows us to bring the expertise, capabilities and lessons learned from the successful transformation of our Asia Pacific business to the Middle East while exporting agility, innovation and pace throughout the broader division. I really do believe that this will help accelerate growth across the region. So to North America, the largest government services market in the world, our largest by profit contribution. Underlying demand for our services remains strong, although procurement delays have continued to affect some timing of awards. We continue to see significant opportunities across our key markets. This is reflected in our record pipeline of over GBP 8 billion, reinforcing our confidence in the region's long-term attractiveness. We're now starting to see some early signs of procurement environments moving again, although we are mindful of the midterms approaching in November. But in recent weeks, we've seen a number of opportunities progress through the procurement process. We now have more than GBP 3 billion of awards submitted and awaiting adjudication, and several long-running protests have now been resolved. So let me bring that and our growth pillar to life with an example. In June, we secured the Comprehensive Error Rate Testing, or CERT for short, contract with CMS. The contract extends the relationship with the Centers for Medicaid and Medicare services that builds on more than a decade of supporting the largest eligibility healthcare administration program in the world. Through CERT, Serco helps identify improper payments and tackles fraud, waste and abuse across a healthcare program that supports more than 70 million Americans and oversees more than $1 trillion of annual spending. Importantly, this is not simply contract expansion. It builds on the technology-enabled capabilities we've developed over many years in our Citizen Services business, combining specialist medical expertise, artificial intelligence and intelligent document processing to improve both outcomes for citizens and efficiency for the government customer. For me, this award is a good example of the direction we're taking the business. It demonstrates our ability to win and retain complex services, deepen long-term customer relationships and apply technology and domain expertise to solve increasingly important challenges for governments. Turning to the U.K., our second largest market. The structural drivers that we've already discussed are particularly evident here, reinforcing the importance of productivity, innovation and getting more from every pound spent, areas where trusted partners like Serco can add real value. Defence is a good example. Across the region, governments are increasing investment in national security and military readiness capability, whilst operating within constrained fiscal environments. Through the U.K. Defence Investment Plan, priorities are becoming increasingly clear with growing focus on personnel readiness, digital transformation, autonomy and next-generation capability. These are all areas where Serco has deep and strong international track records of delivery. That's reflected in our performance with Defence revenues growing by around 30% in the region during the period, as Mark alluded to earlier, driven by operational excellence, and I'll bring that to life now. We're currently mobilizing the Royal Navy's GBP 1 billion DMSNG program, delivering critical in-port services across the U.K., bringing 24 new vessels into service while maintaining operational readiness. Importantly, this is about managing complex defence operations and ensuring that the infrastructure is in place to enable frontline capability. The trust our customers place in us is also reflected in the additional opportunities that we continue to secure. Earlier this year, we were awarded a new 7-year contract to support the British Army's fleet of more than 500 vessels, further strengthening our position in higher-value defence support services. These awards also reinforce a broader point. As the geopolitical environment becomes more volatile and more threatening, governments continue to invest in national security and military capability. The demand for trusted partners that can help deliver those ambitions efficiently and with operational excellence remains strong. Turning now to Asia Pacific and the Middle East. ASPAC is a market where we have a long and established track record of service delivery and trusted customer relationships. Demand remains strong across Justice and increasingly attractive in Defence. Partnerships such as AUKUS and the Five Eyes alliance continue to support investment in capability, infrastructure and long-term readiness. That's reflected in our recent expansion -- extension to continue improving health outcomes for more than 80,000 Australian Defence Force members and reservists. In Justice, governments continue to face capacity pressures and increasing demand, creating opportunities for experienced providers like us. That's reflected in our performance during the first half, including the exceptional order intake of GBP 600 million, demonstrating the strength of the market. Our longstanding presence, operational expertise and established customer relationships positions us well as governments address the challenges they face. Alongside this, we continue to see attractive opportunities emerging across the Middle East, and we're pleased, as Mark said, about our partnership with Mubadala continues to perform well, strengthening our position in that region. For me, ASPAC is a good example of how the actions we have taken over recent years have made us a stronger and more competitive business. The performance we're delivering today looks very different to what we were delivering just a few years ago, and this can be seen in the justice sector in Australia, where we will now be operating 2 of the largest prisons in the Southern Hemisphere. At full year, I shared our win of the Justice Transport Services contract in Australia and having recently visited the operation and met with both our colleagues and the customer, I'm really pleased that that contract has mobilized so successfully. Momentum has continued in the first half, resulting in more than GBP 400 million of awards across the Justice business. For me, the wins at Acacia in Western Australia, Adelaide Remand Centre and now Christchurch Men's Prison in New Zealand are about much more than contract value. They demonstrate the strength of our customer relationships, the quality of our operational delivery and importantly, the actions that we've taken over recent years translating into improved results. Across all our core markets, the structural drivers we've discussed today remain firmly in place. We've deliberately positioned Serco for success with leading positions in attractive government services markets across the geographies in which we're both proud and passionate to serve and operate. At the same time, we've simplified both our sector and divisional structures, creating a more focused, competitive and agile business to achieve our growth ambitions over the long term. So with that, let me just leave you with a few key messages. We've had another good first half performance: revenue growth, profit and margin progression underpinned by strong cash generation. Importantly, that performance has not been driven by a single contract, market or initiative. It reflects the strength of the business that we have built and the quality of the execution across the group over many years. We've also continued to make good progress against our strategic priorities of growth, competitiveness and operational excellence. Strong retention rates, a growing pipeline, a leaner, more efficient organization support our confidence against our 2026 guidance. At the same time, our customers continue to face increasingly complex environments and growing demand. And as a result, the need for trusted partners like us that can deliver more and better for less remains. We stand ready to support them in that endeavor. And that gives me confidence in the opportunities ahead, confidence in our ability to continue to execute our strategy and confidence that Serco is well positioned to deliver safe, sustainable, long-term value for our customers, our colleagues and our shareholders. So thank you very much for listening so intently. And Mark and I will now take some questions. So if you just say who you are, where you're from, a -- put your hand up a microphone should be with you.

It's David Brockton from Deutsche Numis.

I didn't say it was going to work, but I did say we'll come to you. Could we get that? I get that.

Yes. David Brockton from Deutsche Numis. Can I ask 2, please? I think it is working now. Firstly, in respect of the U.S. procurement cycle. Is your sense that we need to wait for the midterms to be out of the way before that market now fully opens up? I guess you gave sort of somewhat noncommittal response in terms of the recent levels of activity you're seeing there. And then the second question, in respect to the buyback, should we infer from that that the -- there is a low likelihood that there's going to be any bolt-ons in the imminent future? And can you talk about what that pipeline does look like?

Shall I take the first one and you take the second one, okay? So in terms of the procurement environment in the U.S., we are seeing some decisions now starting to be made. There are a number of protest awaiting decision, which have now come through in terms of decisions. So CMS CERT, as an example, was protested. We've seen that move along. I think we anticipate the procurement environment becoming slightly better as we move through the second half and into the first half of '27. But we are also mindful that the midterms are approaching in November. But we remain confident. I think what I would draw your attention to is where decisions are being made. Our retention rates on current business are as strong as they've ever been and also our win rates on new business decisions are also keeping pace with where they've been over the last 3 years. So where decisions are being made, we're still fortunate enough to win our fair share of both new and retention businesses. And we will look to see what happens over the second half of the year. The point I would just make is that we've got about GBP 3.5 billion -- GBP 3.2 billion actually of awards awaiting decision submitted. And the final point I would make is that our '26 guidance doesn't rely on the movement of the U.S. procurement framework.

Yes, David, thank you for the question. So maybe first of all, I'll start off with really great first half performance, right? Left the balance sheet in a great position. I think I often get this question in terms of our capital allocation strategy. I think it's very sound. I'm very pleased with it, and I think we've been very consistent with it. So we found ourselves in a very strong position first half. I think consistently, we thought it was the right thing to do to return the additional buyback. That being said, we're still in a very strong position in terms of the free cash flow that we'll generate in the second half of the year. And so the balance sheet still gives us optionality, right? We still got capacity. In terms of where we are with M&A, I think Anthony and I are spending, I'd say, more time on that. We've put a bit more resource, specifically in some of the regions where we thought strategically that makes more sense. And so we're working fast, but you know how these things are, right? It's a bit more art than science about when these things land. And so we'll see what -- and be assured, you'll be first to know when we've got something buttoned down. But we're working vigorously towards evaluating the right bolt-on acquisitions, and we've got a great balance sheet to help us out.

Chris Bamberry, Peel Hunt. A couple of questions. You mentioned that you expect to see an increase in the U.K. pipeline in the second half. Could you just give us a flavor of some of the opportunities that might come in then? And secondly, you also talked about within the margin about the increasing complexity of some of the work you're doing. Is that primarily Defence? Or could you give us some examples of other areas as well?

Yes. So do you want to take the first one, and I'll take the second one?

Yes, sure. So I mean, I think, Chris, we've got -- we continue to see strong demand for our services, right? I think that's been clear. I think we've got some nice opportunities from Defence on the facility side primarily. And then equally on Justice, again, we've got some nice opportunities coming through in the U.K. So again, we feel fantastic first half performance. We'll see that flow through to the second half on the U.K. And as I said, we expect to continue the strength in both Justice and Defence pipeline as we go into the second half of the year.

And then your second question, Chris, in terms of higher value services, if you look at the services that we're now delivering complex Defence services, support services, asset management and maintenance on vessels, the contract we had won with the Army for those 500 vessels, again, is moving us up the complex chain, which generally drives greater value. In terms of the things that we see in the pipeline, they are weighted more to Defence. I think 60% of our pipeline is in Defence. And in North America, which represents 60% of the total group, 75%, 80% of that is also in Defence. So we see higher value, more complex services, but also in things like our complex case management businesses in Citizen Services as well as our Electronic Monitoring contract in the U.K. and elsewhere around the world.

Arthur from Citi. First one for me. I just wondered what the environment was like now that Andy Burnham has taken over. So in terms of contract adjudications, is that all kind of going to plan? And within that, just kind of what's the government's ability to break U.K. migration and what's the new music coming out of that? And then second question, obviously the margin in the U.K. over 6%. That's your sort of group upper end of guide. How much better do you think this could get in a sort of blue-sky scenario? And how much of it to do with sort of management action, how much to do with the business mix improving?

So let me take the U.K. political landscape and then Mark can take the margin question. So look, this is a new government with new Secretaries of State appointed. The point I would make rather robustly, Arthur, is that we've worked in the U.K. for over 60 years with many different parties of all political persuasions with different policy outcomes. We deliver complex mission-critical services. So we're not in the area of particularly security or cleaning without that being a wraparound other contracts. So first and foremost, we are operating critical mission important services. But look, we're always aligned to helping the government customer of the day deliver their policy objectives. If you look at the announcement that was made only yesterday, actually, by the Cabinet office, which we were proud to support the increase in social value scoring in contracts, I'm really pleased about that because that's something that Serco holds dear in terms of our social impact that we have in the communities that we're proud to operate in. Fundamentally, that moving up to 20% rather than 10% of the scoring criteria now, I welcome. We're doing very, very well in that under the current contracts. And as we move forward, our ability to showcase what we do to help socio-economic disadvantaged individuals into career paths, what we do with our work with veterans and reservists, what we do with people with experience of homelessness, et cetera, is something that we hold dear. So overall, the structural drivers and the structural demand for our services remain. So look, like I say, we employ just under 30,000 people in the U.K. We're very proud of the work that we do, and we continue to expect to deliver those as we move forward.

On the U.K. margin, I think we're particularly pleased with that given there are various puts and takes in there, right? So I think we've highlighted the Royal Navy, good progress on that. Electronic Monitoring is one specifically where we've made some great progress. The team have really driven operational improvements, not only from a margin perspective, but also a customer outcome perspective. So that's very, very pleasing. I think, obviously, we've still got U.K. Immigration, which is -- will continue to be a headwind. And then obviously, National Insurance in half 1 was a headwind, which will lap itself into half 2. So I think without predicting exactly the margin, I think those are the puts and takes, but we'll continue to see positive progress on Electronic Monitoring on the Royal Navy. National Insurance will drop off, and then we'll see how immigrations continue its progress into the second half.