12th Aug 2014 10:16
LONDON (Alliance News) - Serco Group PLC Tuesday reported a poor first-half performance on lower contract wins as the company continues to suffer from reputational damage in the wake of its recent government contract woes, but new Chief Executive Rupert Soames has hired former Aggreko PLC colleague Angus Cockburn as the company's chief financial officer.
In its first-half results for the six months to June 30, 2014, the struggling outsourcing company said it swung to a pretax loss of GBP7.3 million, tumbling from a GBP106.1 million profit last year. Revenue also declined, down 5% to GBP2.02 billion from GBP2.11 billion in the comparable period.
Operating profit dropped to GBP9.9 million from GBP125.1 million last year.
"As expected, trading was poor in the first half. Profits were in line with our revised expectations, and cash flow and net debt were better. We are making good progress with our Strategy Review, and in rebuilding trust and confidence with the UK Government. Many challenges remain, and we have a lot of work to do, but I am confident that, in time, we can restore the Company's fortunes," said CEO Soames.
Despite poor trading in the period, the company has retained its dividend per share at 3.10 pence per share.
The struggling outsourcing company also said Tuesday that it has appointed Aggreko interim CEO Angus Cockburn as group chief financial officer as from the end of October 2014. He will also join the board.
Cockburn, Aggreko's long-time CFO under Soames, had become interim CEO of the temporary power supplier when Soames moved to Serco. However, Cockburn told Aggreko he didn't want to become full-time CEO and was ready to seek new challenges.
The hire of Cockburn comes just months after Serco poached Soames, one of Winston Churchill's grandsons, who took the helm June 1. The appointment was a coup for Serco; Soames had led Aggreko for 11 years, overseeing the temporary power unit company's steady but relentless growth over that period. It does particularly well in years where there are big events, providing the temporary power units to run events like the Olympics or football World Cups, but has also been reporting strong growth outside those peak use events.
Upon his departure, Aggreko appointed CFO Cockburn as its interim chief executive as Carole Cran stepped up to be interim CFO, a role she was officially appointed to in May. Cockburn has been with Aggreko for 14 years, before this he held roles at Pringle and PepsiCo.
Serco's current Chief Financial Officer, Andrew Jenner, will remain in the role until September 30, 2014, said the company.
In May Aggreko hired Chris Weston from Centrica PLC where he served as the head of British Gas, to join as chief executive, taking over from Cockburn. At the time, Aggreko said Weston is expected to join the company next year and said that Cockburn will continue in his interim CEO role in the short term, before stepping down from the group later in the year.
While financial results came in line with the FTSE 250-listed company's expectations, Serco faced a number of challenges throughout the first-half, costs increased particularly to improve performance on operationally-challenged contracts; previously higher-than-average margin work reduced in volume or was lost on re-bid; and Serco has won less new work, it said.
Serco achieved contract awards of GBP2.5 billion in the first-half, including the Caledonian Sleeper rail franchise, as well as the retention of a number of important existing operations such as Northern Rail. However, the value of new awards has been low - of its pipeline of around 40 major opportunities at the start of 2014, Serco said eight have been lost and only two have been won. The company said it is working on improving win rates and that the pipeline itself requires replenishment. Over the next two years the estimated total value of new larger bid opportunities is GBP8 billion, said Serco down from GBP12 billion six months ago.
In July the company lost out to French transport group Kelois Amey Docklands on a new franchise from Transport for London to run the Docklands Light Railway in London. Serco had operated the DLR franchise since 1997 under two franchises, in a contract that generated revenue of approximately GBP90 million, or 2% of the group's overall revenues in 2013, at a margin that was significantly below the average level the group achieves on its contracts, it said.
At present, order book visibility is around 70% for next year, said Serco, low by historical standards. While there are still bid opportunities that can add revenue in 2015, there are also further rebids to secure and volume-related pressures, most notably Immigration Services in Australia, said the FTSE 250-listed firm.
Looking ahead the company has maintained its guidance for the full-year, though stated that many challenges and uncertainties remain. "To meet this guidance we anticipate benefiting in the second half from cost savings as well as corrective action on underperforming contracts," said Soames.
"We have had a poor first half, and we have not won as many new contracts as we would have liked, but there is some good news. We expect financial performance in the second half to be much stronger than that in the first," Soames added. "We have strengthened our balance sheet with a successful equity placing; made good progress in Corporate Renewal and in re-building trust with the UK Government; our Strategy Review is running to plan; we have made some strong senior management appointments; and we have taken action to rationalise the structure of the business and save cost. All these things are important steps forward on what will be a long journey to restore the Company's fortunes. But restore them, we will."
At the beginning of the year Serco warned that 2014 profits would be well below current expectations as recent unfavorable currency moves and a bigger-than-expected drop in volumes in its Australian immigration contract added to the ongoing costs of its corporate renewal in the wake of its UK government contract issues.
The company can now bid for new UK government contracts after a six month ban, after the company ran a significant restructuring and "corporate renewal" programme at the company.
Serco said Tuesday that the renewal programme and strategy review are proceeding according to plan. "We have now largely completed the first phase of fact-gathering and establishing a clear picture of our current markets. We are now moving on to assessing market attractiveness and value propositions. At the same time we are at the early stages of a review of contracts, focusing on those which have low or negative margins. Our Corporate Renewal Programme is also running to plan, with the few remaining actions scheduled to be completed by the end of August," said the company.
The plan, which includes improving governance, management and transparency, creating a separate unit for its UK government work, establishing an ethics organisation that reaches throughout the company, and re-training employees, was brought in after issues were found with two contracts Serco had with the government.
Serco and rival G4S PLC were placed under investigation by the UK government in July and all their government contracts were placed under review, after details from an audit emerged showing that they had been over-charging on criminal tagging contracts, claiming for people who were dead, who had never been to prison, or never tagged in the first place. In November, the Serious Fraud Office opened a criminal investigation into the tagging contracts.
Additionally, the government last August called in police to examine claims of fraudulent misreporting of data on Serco's contract to transport prisoners to court in London and East Anglia.
In December, the UK Government said Serco would repay GBP68.5 million for the charging errors it made on a criminal tagging contract.
The issues hit the company hard, preventing it from moving forward on potential new UK government contracts and weighing on potential business elsewhere as its reputation took a battering.
The outsourcing company saw its shares jump Tuesday, trading amongst the top gainers on the FTSE 250 for much of the morning. The stock trades 4.29% higher at 343.00 pence per share.
By Alice Attwood; [email protected]; @AliceAtAlliance
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