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Trading update regarding Coronavirus

Published: 2 Apr 2020

Serco Group plc ('Serco' or 'the Group'), the international service company, today provides an unscheduled update on current trading and our approach to meeting the challenge of the Coronavirus crisis. 

  • Strong first quarter expected
  • Previous 2020 guidance withdrawn
  • Strong liquidity and leverage position
  • Dividend and Executive Directors’ cash bonuses deferred
  • Unwavering focus on helping governments sustain critical public services

Rupert Soames, Serco Group CEO, said: “Every crisis is different, and this crisis is no different. It presents business and logistical challenges, complexity and uncertainty, overlaid with illness, fear and dislocation to millions of peoples’ lives on a hitherto unseen scale. 

“Serco faces the Coronavirus crisis from a position of relative strength, with a record order book, a solid balance sheet, plenty of liquidity and secured sources of funding. Our customers, being governments in over 20 countries, are determined to do whatever it takes to sustain public services and we expect to see continued demand for many, but not all, of our service lines. 

“Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can to protect our employees from harm and our shareholders from loss. Profitability amongst our 500 contracts this year will be affected, some up, some down, and at this stage it is too early to tell how the overall result will net out. In the meantime, we will devote ourselves to doing whatever is required to support public services so that, when the crisis passes, our reputation amongst our customers will be enhanced and our operational capacity and capability will remain intact.

“Words cannot properly express the respect and admiration the conduct of our 55,000 employees deserve. They have stepped up to the challenges public services are facing with a level of commitment, energy and engagement which is extraordinary and proud-making.  Sustaining vital public services puts many tens of thousands of Serco people on the front line in hospitals, prisons, trains, metros, refuse lorries, asylum seeker accommodation, tugs, ships, contact centres and sites of national strategic importance. They are addressing customer requirements and available resources which change by the hour and often mis-match, and all the while protecting their families and communities. Our mettle is being tested as never before, and we are determined to rise to the level of events.”

Financial guidance

Although the financial results for March have not yet been consolidated, early indications are that Serco has had a strong first quarter for the 2020 financial year. Organic revenue growth is likely to have been around 10%, and Underlying Trading Profit for the quarter is anticipated to be at or slightly ahead of our phased budget. We expect to have achieved a book-to-bill ratio of over 100% as a result of order intake that included winning the Gatwick Immigration Removal Centre contract in the UK and signing the extension for Fiona Stanley Hospital in Australia.

In terms of leverage and liquidity, at the start of the year Serco’s leverage was 1.17x EBITDA compared with the covenant requirement to be less than 3.5x. Our Adjusted Net Debt was £215m, and the Group had £508m of committed credit facilities and committed headroom of £286m. The Board considers Serco to be conservatively financed and the next material debt repayment is not until May 2021, for £49m. We have a high degree of visibility of our revenues: at the start of the year we had an order book of over £14bn and around 75% of our anticipated 2020 revenues were in the order book; this visibility has already increased given the order intake and task orders received in the first quarter.

Customarily Serco gives financial markets detailed guidance on its expected financial performance, with clear numbers to back the words of its public statements. At this early stage of the crisis it is however impossible to foresee with any reliability what overall impact the virus will have on our business. To state the obvious, it all depends on how long the crisis lasts, and on the actions of our government customers, both of which are currently unknowable. Furthermore, with a book of around 500 contracts, each with its own particular terms and conditions, it will take some time to work out with our customers what opportunities and risks exist and what mitigation strategies are available. What is certain is that some contracts will deliver more profit, some less, but the net result of these “puts and takes” is currently unknown. We therefore no longer regard the guidance we gave at the time of our results in late February as being reliable within the normally accepted conventions of ranges of outcomes, and we are formally withdrawing it. We will update investors further as soon as we have a better-developed view of the likely outcome.

We can be more clear on liquidity. We had a strong liquidity position coming into this crisis, and the vast majority of our worldwide revenues comes from governments, who have both the resources and the need to keep funds flowing to their suppliers of essential services. The UK Government has issued guidance to departments that suppliers are to be paid promptly and is urging that common sense be applied to the approval of invoices; similar pragmatic approaches are being adopted by our customers in Australia and the USA. At present we can see no material threat to our ability to get paid by our customers, although as with all things in this crisis, this could change. Part of the quid pro quo for this is that we will continue to make timely payments through to our own supply chain, which of course we intend to do; again, we start from a strong position, with average creditor days of around 30 in 2019.

Even though our liquidity is strong, prudence dictates that we take every opportunity to increase our headroom. We will be using the UK Government’s deferral of VAT payments, postponing approximately £35m of VAT payments to early 2021, and the Job Retention Scheme which offers salary support for employees who are furloughed. We will also be applying for schemes in other jurisdictions which assist companies with liquidity, as appropriate.

At a time when the UK and other governments are helping Serco with its liquidity, it seems inappropriate to use that cash for anything other than its intended purpose of protecting the financial strength and resilience of our business. We are therefore withdrawing the resolution we had intended to propose at the Annual General Meeting authorising the payment of a final dividend in respect of 2019. This will have the effect of reducing cash outflows in June by £12m; the Board will recommend the reinstatement of a dividend as soon as it is appropriate to do so. On the same logic, it does not seem right to be spending cash on Executive Directors’ bonuses earned in respect of 2019 whilst government and shareholders are helping us to maintain financial resilience; therefore, these will be deferred, reducing cash outflows by around £1.4m. Long-term incentives will continue to vest for all participants, and we will fund these, as last year, by issuing shares to the Employee Share Ownership Trust rather than buying shares; this will preserve around £15m of cash. In aggregate these actions, along with the VAT deferment, will reduce cash outflows in the second quarter by around £60m compared to our previous plans.

Elsewhere we are taking initiatives to minimise operating costs on contracts where revenues are likely to be reduced, and, where practical, redeploying people between contracts which have spare resources and those which are stretched. In terms of investment, our capex budget is around £30m a year, or £7m a quarter. Much of this is planned to be spent on improving our internal systems and processes, and for as long as it is prudent to do so, we intend to preserve our rate of investment in the long-term competitiveness of the business. Likewise, having spent several years transforming our business and building capability, it is not our intention, if we can sensibly avoid it, to materially reduce our overheads, which represent important capacity and capability which will be needed to support the long-term growth of the business once the immediate crisis is over.  Indeed, we think that those companies that succeed in sustaining investment and organisational capability through the crisis will be faster to recover and be in a stronger competitive position. This approach is, realistically, time-limited; if the crisis lasts a long time, we will have to take decisive action, and we will not shrink from that. However, for as long as we can sustain investment and maintain our hard-won capability, we shall do so.


We thought it would be helpful to give investors insight into what we are currently seeing across the markets in which we operate. Serco is a Business-to-Government (B2G) business, providing essential support to governments in over 20 countries. Our Annual Results presentation provides analysis of revenues by geography and by sector, and in summary our 2019 revenues split as follows: the UK (45%), the USA & Canada (25%), Asia Pacific (17%), the Middle East (10%) and Europe (3%); the services we provide to governments are in Defence (32%), Justice & Immigration (16%), Transport (16%), Health (12%) and Citizens Services (24%).

The Coronavirus epidemic is testing governments across the world in ways which have not been seen before; they are trying to develop policy based on information which is often contradictory and changes from day to day, and at the same time civil servants and politicians are having to adapt to ways of working and decision-making which are very different from those used in previous crises. It is hardly surprising then, that all governments are feeling their way, taking decisions on the data they have in front of them, and often having to change direction on a moment’s notice. Just as we are. In addition, governments in different countries are taking very different approaches, and this means that across the world our businesses are reacting to rapidly changing requirements, standing resources up, then down, and relying greatly on the ingenuity, flexibility and commitment of our colleagues as we seek to support our customers as they work to sustain public services in the face of huge challenges.

Broadly speaking, across the five sectors of public services around which we organise ourselves, we would summarise as follows:

In Citizens Services, demand for contact centre capacity has vastly increased, as millions of citizens want to talk to their governments in the face of the turmoil that has entered many of their lives. However, the ability to scale up is being constrained in part by employee absence due to self-isolation, in part by the need to improve social-distancing and working-from-home regimes, and in part from governments’ concerns around privacy and data security. So far, in the UK alone, we have added over 2,000 people to our contact centre business, more than doubling our pre-crisis capacity, with a mixture of in-house and sub-contracted effort. Demand for additional capacity is strong in Australia where, like the UK, we also have a well-established contact centre business serving multiple government customers; volumes in the critical CMS healthcare insurance eligibility contract in the US are also holding up well. There are also many new areas where the governments are seeking our assistance, including testing for key workers, and providing quarantine facilities for returning citizens. On the other hand, our Leisure business in the UK, where we run about 45 leisure centres and sports facilities for local councils and sports bodies, employing some 3,000 people, has been completely shut down, and we will likely have to bear losses until citizens are allowed to use them again. We have also been instructed to suspend services in Canada for our Driver Examination Services contract.  

Across our other sectors, it is likely that short-term capital projects and similar ad hoc works which Serco support will be deferred as customers focus on managing the immediate crisis. In some cases this will be offset by other, unplanned, work.

In Defence in the US, UK and Australia, most of the work we do has been designated as essential to national security, and so far we have not seen significant diminution of demand.

In Justice & Immigration, authorities are still determining how to manage the operational implications of a highly contagious virus in prisons, and so far we have not seen any reduction in demand. In the UK, the Home Office has announced that all asylum seekers who have had their support discontinued will have this reinstated, as in the current circumstances they cannot be expected to leave the country. This is likely to result in a steady increase in the number of people we are caring for.

In Transport, of the major UK operations we have two profitable contracts (Northern Isles Ferries and our 50% JV in Merseyrail) and one unprofitable one, Caledonian Sleeper. We have not yet agreed with our customers how we will be compensated for the restrictions now being placed on services, but expect to do so in the coming weeks. In Dubai, we have been asked to increase manpower on the Metro, but decrease it substantially on our support services contracts at the airport; in the short term we have been able to redeploy some of the staff between these operations. In the Middle East and the US we may have exposure in our Air Traffic Control business.

In Health, demand is unprecedented, as are the challenges of meeting that demand. In every hospital we serve, from the Forth Valley in Scotland, the James Cook and St Barts in England, to the Prince of Wales in Hong Kong and the Fiona Stanley in Australia, we are being asked to increase our cleaning regimes, plan for increased patient flow, manage new equipment, systems and processes, and support additional temporary care facilities.  Managing employee absence in the UK, where 6,500 Serco people support the Health Service, is as challenging for us as it is for the NHS; at a time of year when it is normally high anyway with seasonal bugs, it is now compounded by the number of people self-isolating. Accordingly, there is likely to be additional cost as we backfill absent employees with overtime and / or additional staff, which will be only partly offset by additional work.

Annual General Meeting (AGM)

Serco confirms that it currently intends to progress with its AGM on 14 May 2020 as previously communicated. However, we continue to review the meeting format in the light of the Stay at Home Measures that were passed into law on 26 March 2020. Given that the situation continues to evolve, further communication will be provided to shareholders to confirm the meeting timing and format nearer the date.  In the meantime, shareholders are encouraged to submit proxy forms as early as possible since, under the Stay at Home Measures, public gatherings of more than two people are not permitted and therefore shareholders are not allowed to attend the meeting in person. Further information on submission of proxy forms can be found in the Notice of Annual General Meeting which is available on the Company’s website at www.serco.com/investors/shareholder-information. As noted above, the Board is withdrawing Resolution 3 in the Notice of Annual General Meeting, which was in regard to the previously proposed payment of a final dividend in respect of 2019.

Concluding thoughts

Our priority during this crisis is to support governments in sustaining vital public services and, within that context, do all we can to protect our employees from harm and our shareholders from loss. Profitability amongst our contracts this year will be affected, some up, some down, and at this stage it is too early to tell how the overall result will net out. In the meantime, we will devote ourselves to doing whatever is required to support public services so that, when the crisis passes, we will be standing with our reputation amongst our customers enhanced and our operational capacity and capability intact. With the same object in mind, while we are taking action to preserve Serco’s strong liquidity position, we believe it is in shareholders’ interests that we maintain our investment programmes and the hard-won capability embedded in our overheads for as long as it is prudent to do so. We will keep this approach under constant review, and we will not hesitate to take the swift and decisive action in which our management team have become well-practiced in the recent years.